Drilled, but not leased. What now?

I have an interesting situation. Through a long chain of events, my family recently learned that my Grandfather owned the O&G mineral rights to several hundred acres in Bradford County, PA, which we now own. With some effort, we have found two other families that also have mineral rights in the same properties. It seems our three grandfathers knew each other, back in the day.

Together we own 50% interest in these properties.

These plots are in units with planned or existing wells. We have seen the well maps. In some cases, the well bore goes under our property, and the well is bottomed on one of them. None are producing yet, but we believe production is expected to start this summer when a pipeline is put in.

So here’s the issue: we don’t have any leases. Chesapeake Energy, who is developing the units, never tried to find us that we know of. We contacted their offices many times to ask for a lease. We are on our sixth contact at the company. There must be an incredible turnover there.

We were finally offered $1000/acre and 18%, but it was withdrawn before we could accept. A second offer was then made for $0/acre and 18%, which we thought was low. They also refused to include any modifications to the leases.

So here we are, holding O&G deeds in the heart of Bradford County with wells drilled on the property, but no leases.

It appears that Chesapeake signed up some partial owners at market rates when beginning development and when the rest of the owners show up later and asked to be leased, they are offered rock-bottom terms with a take-it-or leave it approach. That sounds like a clever way to lock-up a unit cheaply and is unfair to those that were never contacted. Has anyone else had this happen to them? 

I would like to get some opinions here. Do we have a position to negotiate? Do we have to take whatever they offer us? If they do decide to make us an offer, what should we expect? We’ve thought about just keeping a working interest. Any comments will be appreciated.

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Permalink Reply by DOUG on April 30, 2013 at 2:52am

Thanks Jesse.

We have already done some of these. We will certainly look into the others. I wasn't aware that owners could force a permit to be withdrawn.

Permalink Reply by Been There on May 2, 2013 at 5:34am

First, second and third suggestions above are valid; however, fourth and fifth do not apply until the portion of the wellbore that penetrates the subject tract has been perforated and the well is producing. If the operator has an undivided interest in the tract leased (meaning any interest, regardless of quantum), the operator has the right to drill through the tract so the permit is valid. Absent perforations and production, there are no damages so injunctive relief is not available. It is extremely unlikely that other owners in the unit are receiving part of "your" royalties as their lease likely included an express pooling authority provision or they executed a pooling agreement, either of which provided for royalties to be based on surface acres included in the unit. In this instance is the operator/working interest owners that are claiming your share of royalties. Very very few pooling provisions/agreements provide for royalties to be based on net pooled (rather than surface) acres.

PA is a "Rule of Capture" state. Marcellus wells can be drilled through your minerals if any interest is leased and the portion of the wellbore that penetrates adjacent tracts (in which you have no interest) may be perforated within inches of your tract and the operator is allowed to drain your tract from that wellbore. The implication of Rule of Capture in this instance is that you are free to develop your own minerals and have equal opportunity to drill your own well and drain the neighbors....

This strikes many mineral owners as unfair. It is a severe consequence but is not entirely unfair. Put yourself in the shoes of the owners of the other undivided mineral interest in your tract who did lease. One could argue that it would be unfair for your refusal to lease would preclude the other owner from enjoying the benefit of their bargain, meaning the potential to receive royalty from their mineral interests.

This is an unfortunate yet excellent example of why mineral owners should know what they own and who are their co-owners, stay informed of activity, negotiate as a group if possible, hire an experienced attorney early in the process, and never operate under the assumption that the last deal made is always the best. Good luck.

Permalink Reply by Jesse V. on April 30, 2013 at 2:29am

I'm not sure how CHK has been granted a drilling permit for a well bore that passes through property that is not 100% under lease. Most companies would not even try to get that permit because it is clearly trespassing. You clearly do not have much choice in who you can lease with however you do have a right to a fair lease. Your top priority should be to get a royalty without deductions of any kind. And tell them to not even bother with their "market enhancement" clause because it allows deductions. 

I'm a bit confused by your post. Do you own the surface in question but only a portion of the OGM's or is this a different property all together? As stated by Jesse Drang you all collectively should hire an oil and gas attorney and get the title cleared and insure that you do not sign something you will regret. I'm sure CHK is trying to push you to sign as quickly as possible, tell them that simply you would like this to be done right and that it should be in their best interest for the title to be as clear as possible. These things take time. If you do not own the surface than obviously surface clauses will not be of interest to you. A few things you should require is the ability to audit, no warrant of title by you, waive the arbitration wording, and require 45 day written notice if they assign any interest in the lease. Just to mess with them tell them if they won't pay a bonus payment tell them you'd like them to send your wife flowers in your name at the beginning of each month and get it in writing. I'm kidding of course. But certainly speak with an attorney.

Permalink Reply by DOUG on April 30, 2013 at 3:03am

Thanks for the advice Jesse. We own only the O&G mineral rights, not the surface. One would think CHK would be anxious, but despite repeated contacts, they seem reluctant to get this resolved. We do have excellent legal representation. From your post, it sounds as if you think we have a strong negotiating position. What would you consider a "fair" lease given that and current market conditions?

Permalink Reply by Jesse V. on April 30, 2013 at 3:39am

Actually, you don't have options in who you can lease with so they have the upper hand in that regard. You do have or are proposed to have a well bore pass through your interest so that alone gives you some leverage. I'm sure they will try to tell you they will just not drill that well. That is bull. They may choose to hold off on that well bore for years. Many companies drill one hole and hold all leases by "production" with plans to come back and complete the unit in the future. The gas market is not great but given your property is Bradford County you are in an area where the results have been good. I'm surprised they offered 18%. I've heard current offers from different areas around 15%. I think I read that Southwestern was offering $500/15% over in Susquehanna County. The lease is really only worth what someone is willing to pay you for it. Unfortunately, I doubt you don't have any other companies vying for your lease. I'm sure you know that they will offer you the least amount. Your job is to try to maximize that amount the best you can. Good luck 

Permalink Reply by Ernie Stewart on May 2, 2013 at 4:32am

This seems simple enough. If Jesse is right, and a knowledgeable attorney would know, then you simply have DEP withdraw their permit. Chessie has a terrible rep in this area and will bluff you if they can get away with it. These pads and wells cost millions and they can't begin to recover the costs if their permit is withdrawn. You contacted them, so they probably think you are naive and desperate. Just the kind of land [or mineral rights] owners they like to deal with. 

By all means contact an O&G attorney and don't sign a thing until he{or she} says it is ok.

Permalink Reply by Thomas Brownlee on May 2, 2013 at 6:17am

Doug,

My associate has been working with a family with the same issue - hired attorneys, etc... he can compare notes if you want - email me brownlee-thomas@usa.net  and I can put you in touch with him.

 

Tom

Permalink Reply by Richard M on May 2, 2013 at 12:32pm

This was your grandfather who bought these mineral rights? Was he in the business of drilling for natural gas? Did he leave these rights to you or maybe your parents iin his will?  What have you done to develop your interest? And the royalties and interest for the people who have been paying taxes on this property for how many years?  God  knows your heart, Pulease, unless all of these things are true you should have taken the18%  but it won' t do you any good.

Permalink Reply by John OBrien, landowner advocate on May 2, 2013 at 4:51pm

I guess being from Ohio (by no means a flatlander) I'm fairly confused about PA law.  You say you have a 50% interest in the minerals.  In Ohio, that would mean, under the "old standard", that you are entitled to 1/16 of the production from a well.  Then you go on to say that they offered you 18% ( in Ohio it seems to be 18.75% or 3/16) but how can this be if they gave 18% to the landowner.  You can't mean that the producer is willing to give up 36% of the loot.  To me it seems like the landowner needs to cough up 9% to you and keep only 9% for themselves.

Am I missing the point here or what?

Permalink Reply by DOUG on May 2, 2013 at 5:58pm

As I understand it, we own 50% of the minerals below the surface. Others own the other 50%. The surface owner may or may not be one of those mineral rights owners depending on whether he or a previous owner sold the rights. 18% is the royalty the gas company would pay the mineral owners to take their gas. The royalty is split proportionally based on owner percentage of the mineral rights.

The surface owner doesn't get a royalty unless they retained ownership. He is like a next door neighbor who sells you a parcel of land. They give up all rights to farm, rent, develop, etc the parcel. The only difference is that the surface owner is a vertical neighbor instead of a horizontal one.

Permalink Reply by Jim Litwinowicz on May 3, 2013 at 3:38am

John O;  Having a 50% interest means that you have 50 net acres for every 100 acres leased.  So if 1/8 or 12.5% royalty of the well's production is paid out, then the owner of the 50% interest will get half the royalty or 1/16th or 6.25%. 

In this case they may be able to get a higher royalty so they may get more. So one landowner may get 1/12 and another may get 18%. Each one's payment will also depend on what fraction or percentage of the total acreage of the unit. Payment = Total production x %acreage of unit x royalty rate.

Example;  a 100 acre unit with two owners.  One with 75 acres at 12.5% and another with 25 acres at 18%. If the well produces $100,000/month then one owner will get $100,000x .75 x .125 or $9375 and the other will get $100,000 x .25 x .18 or $4500.

If deductions are permitted in the lease then it gets way more complicated. If the owner of the 25 acres has a no deduction royalty and the other does not, then the owner of the 25 acres may get a bigger royalty check than the owner of the 75 acres.

Permalink Reply by John OBrien, landowner advocate on May 3, 2013 at 1:05pm

Jim,

If I am not mistaken, in Ohio, the two leases would read the same way.  One party cannot, by Judicial proclamation, (terminology might be wrong) get less than another.  This is also true of immediate neighbors unless production is by separate wells, separate producers.  This is why I get confused about PA law, it seems in Ohio there might be more equal treatment.  Sure, not all areas are worth the same to the producers, but they cannot get away with just taking advantage of a less knowledgeable landowner.  I may get quite a shock and find out the hard way that I am mistaken, but this is the scuttlebut. 

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