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Permalink Reply by Dodge Charger on May 28, 2014 at 3:45am

John,

I know of one lease that added Pugh clauses for both horizontal and vertical and Eclipse accepted the added language.  Three year extension (making total lease eight years), $1250/acre/year with two years paid up front and 16% gross.  The Pugh clause did have "at least 60%..." in the wording on which they would not budge (this on 50 +/- acres).  Also, 640 acre unit, reduced from 1280.  Word was given (from landman, so FWIW) AEP is wanting to swap so they wanted the deal done and agreed to pay in 30 days instead of 60.

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Permalink Reply by John B Gustavson on May 28, 2014 at 4:17am

Correct Dodge Charger. I have seen the same "at least 60%..." in at least one Chesapeake lease in Jefferson County for an 800-acre lease over near the Ohio River. Sixty percent is good for the operator, but does not help the landowner.

An operator will take his time to evaluate production over a number of years from his first set of wells. The orphan portion of the lease is still Held-by-Production. Imagine 100% of the lease less 59% in the unit resulting in 41% orphan acreage, so the Pugh Clause would not be of any help!  

At some point in the future the operator may decide to drill more wells, but would he expand into the orphan acreage? Probably not! An operator is more likely to develop additional horizontal wells from the same well pad and with existing equipment than to generate new units alongside the original unit. Such additional wells will most likely be drilled above and/or below the original set of wells in the original unit.

Further, totally new drilling units, if any, may be positioned in any one of four directions adjacent to the original unit to include (therefore a one-in-four probability) or to exclude (three-out-of-four probability) the orphaned portion.

In my appraisals for landowners I have used a nominal value of $100 per acre of mineral estate for such orphan acreage. This is supported using a multiplier of two times the current lease bonus of $50 per acre, which is found elsewhere in Ohio for lease of acreage outside the Utica play and of unknown favorability.

John Gustavson, Certified Minerals Appraiser

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Permalink Reply by The Hiker on May 28, 2014 at 3:51am

John:   I don't know the answer to your question w/o looking at a copy of the lease, which I don't have (neighbor).  I do remember the shut-in clause was beefed up, but I don't know about the Pugh.    If I get another look at it, I'll answer your question.   You are correct on the Pugh clause, however if the acreage "left out" is small, no one is going to drill a vertical well on it anyway (if left out, it would be too small for a horizontal well).   I've only heard of one lease negotiated (with a flipper) that contained language requiring the driller to include all of his acreage in any unit he became a part of (but it's probably not a huge problem for flipping the lease because he's in a hot area.....and judging from the map posted, his land is already planned for a unit).  I've never heard of his clause being approved by one of the "legitimate" drillers, but the Pugh clause has been almost universally included in all the leases I've read.  It's really not much skin off their nose if they are intent on drilling.

HIKER

Certified B.S. Artist lol....

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