Free Gas

This topic has not come to light yet, as I have seen.

What are the pros and cons on this subject?

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Permalink Reply by Peter Pagano on June 10, 2010 at 11:25pm
Thomas,
I saw an educational roadshow televised on PBS a couple of years ago. One of the featured speakers said that the free gas clause was useless for marcellus wells as the gas pressure was so high, it was not feasible to have it piped into a home. I think his words were to the effect of "nobody has figured out how to get it done." That may have changed since then, but he recommended a lease clause for free gas that gave the landowner the choice of xxx cubic feet of free gas or an annual payment in lieu of free gas, equivalent to the market value of xxx cubic feet of gas.
Peter
Permalink Reply by Sam Douglass on June 11, 2010 at 5:49am
Historically, free gas for one dwelling house has been a popular inducement to get landowners to sigh O&G leases in this part of the country. It has been valuable to homeowners but it is not a guaranteed supply so it is wise to have othe gas supply on standby. Many Marcellus leases offer it, often with a long clause that provides for substituting cash for gas at the end. These clauses are an nuisance for gas companies and pose threats of liability to them, particularly if the flow of gas would suddenly go up or down, an old line breaks etc. By giving up the traditional clause, it is likely that you can get something else. Gas companies do not like them - for good reason. sam
Permalink Reply by John Reed on June 12, 2010 at 9:25am
Another possibility is to receive an annual payment from the gas company in lieu of actually receiving the free gas. I would prefer this. Also, historically, if one chooses to receive free gas, once the well is no longer producing the onus has been placed on the land owner to make the necessary changes regarding piping etc. Basically the gas company capps the well but does nothing else. This has happened in other plays. Probably a better choice just to get the annual payment.
Permalink Reply by Sam Douglass on June 12, 2010 at 2:36pm
Not just the piping. If the producer finds the lessor willing to take on responsibility for the well just for receiving the free gas, the landowner may end up owning the well with responsibility for spending the many thousands of dollars required by law to seal up the well.
Permalink Reply by John Reed on June 12, 2010 at 4:37pm
Good points Sam. Very true.
Permalink Reply by Terry W. on June 15, 2010 at 5:37am
Thanks Janice. Will just wait the see if anything comes of the Marcellus Gas in this area.
The royalties, IF things go as we would like them to go, would help greatly with the heating
bill. Time will tell.!!
Permalink Reply by Sam Douglass on June 15, 2010 at 1:47pm
How true. The royalties are very likely to be good - particularly at 20% - or so. But there is probably enough Marcellus to drill for the next 15, 20, 30 or more years. The question is when will they drill where you are. The producers are likely to concentrate on areas that are most promising first and areas where there is infrastructure and market for the gas. Other places they will drill enough wells to hole the property in units and come back and do the real drilling later. Wouldn't you?
Permalink Reply by Terry W. on June 15, 2010 at 1:51pm
Sam:
Righ on with the drilling and coming back later. Something has to be put into your contract for monies lost. Not your fault they are not taking the product to market.
Permalink Reply by Sam Douglass on June 15, 2010 at 4:12pm
The shut-royalty can be helpful but only for those wells that are drilled and then shut in for lack of current market etc. Something more would be required to induce more drilling - perhaps a minimum royalty. Typically a minimum royalty guaranties a minimum payment each year and the minimum royalty paid is credited against the first production royalties due there after until the operator recovers minimum royalty payments - but in any event paying the minimum. A good lease can be good in the eyes of the particular "beholder." Janice may be talking about a minimum development clause in which Lessee must drill a certain number of wells in any given period to hold onto the entire leasehold [or unit]. All of the leases are "standard" in the eyes of the landman who offers them, but each company has a different lease. Most of them are terrible from the lessor's standpoint, but a very few approach fairness. Once again an "excellent lease developer" may be in they eyes of the beholder. They are all motivated to get as much land under lease as possible for as little outlay of money as possible and with as few commitments as possible. And who can blame them.
Permalink Reply by Terry W. on June 16, 2010 at 6:05am
Janice: I don't think that I want to hear any more!!
It just seems to go on and on; getting more complicated.
And age doesn't help either!! I go downstairs to get something
and have to go back upstairs and start over to remember what I
went down for. Second time seems to work.
Just hope to get a good attorney if and when the time comes to sign
a Marcellus Shale Gas contract. Maybe a couple, so they can check each
other!!
Your point about one well, and then extending out like an octopus
is my understanding also. But there is so much talk about drilling
more than one well at the same site....maybe for future Utica drilling, and nobody is telling us!! secrets, secrets, secrets!!!
Permalink Reply by Sam Douglass on June 17, 2010 at 10:41am
I have some of the same experience your are referring to. Of course you go for the bonus and the royalty - as much as you can get. However, if they get you tied up with one or two wells in a unit beyond the primary term, a minimum royalty starting at that point might be a possible alternative to the lack of income you will see for maybe 10 or 20 years until they really start drilling.

The bonus is sometimes referred to as a front end payment of the rental for the first 5 tears - a paid up lease. I was looking for something that might assure income beyond that if the productive drilling should be delayed further.

The underground octopus is really a regular pattern of horizontal lines. Think of a foot ball field - except that the parallel lines might be 500 feet apart [not 10 yards and extend for a couple of thousand feet or so.
Permalink Reply by John Reed on June 25, 2010 at 8:29am
You can also try to include a continuous development clause in your lease agreement. This puts the onus on the gas company to develop a unit with specific time frames involved.

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