Novel Method of Terminating HBP

Good people of GMS,

 

A friend and I were discussing novel methods of terminating the dreaded HBP, specifically, under the following fact pattern:

 

In the 1980s, Company A  drills a shallow well; for one reason or another, they decide to sell it to an unaffiliated third-party, Company B. In the Bill of Sale and Assignment, Company A reserves the "deep rights." This is a classic Belden & Blake scenario.  

 

Fast forward 30 years, that shallow well is still puttering, producing just enough to be considered "paying quantities."

 

Jonny Landowner enters a lease with a "deep driller," but at the conclusion of due diligence, he gets a defect letter rather than a check. Ouch, he is HBP--that old shallow well. Of course, Jonny is not happy, but he is not one to give up. He knows that Company A (the holder of the deep rights) has not done anything to perpetuate the lease other than piggyback on the shallow well. Therefore, if that shallow well were to be plugged and abandoned, his property would be free and clear.  

 

Jonny decides to contact Company B (shallow well owner/operator), and he offers to pay them an amount equaling the plugging costs, plus the well's projected production for the next 10 years. Company B agrees and the well is plugged. Jonny signs a new lucrative lease with much better terms.

 

Thoughts?

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Replies to This Discussion

Permalink Reply by Gunner Ostergard on February 1, 2013 at 1:30am

Becareful to make sure that old shallow well really is still producing.  There should be records on file for every year since the well was drilled with your state.  Also make sure the lease was duly recorded in your court house.  In PA any lapse in production means the lease has ended.  And don't believe the gas company if they tell you it is producing,  believe it or not,  they have been known to lie. 

 

Permalink Reply by Oliver Eastern on February 1, 2013 at 3:36am

JR,

 

Many of the better leases contain a "depth severance" clause, specifically stating what stratas and formations are being leased.

 

 

Permalink Reply by Sticky Fingers on February 1, 2013 at 2:17pm

The problem is that many of the old leases holding production on someones land did not have those clauses. Unfortunately, one clause they did have was that lessor (mineral owner) agrees to Warrant and Defend title and that no implied covenant, agreement, or obligation will be read into the agreement. Without the clauses, the granting language usually conveyed the right to produce and remove ALL oil, gas, and their constituents for a term of ___ years and so much longer thereafter as oil, gas, or their constituents is produced in paying quantities. 

I'm not saying the situation is right, just in my opinion I feel there is little that can be done. Fang, your attorneys know more about the situation than I do. I hope they are able to release your deep, non productive rights and you are able to enter into a contract that will make you a lot more money and protect the rights that you deserve as the mineral owner.

Permalink Reply by p umpjack on February 1, 2013 at 2:35pm

what some of the issues are is proving intent to drill strata at time of signing

did you sign that lease in good faith for all gas and oil most of the time is yes -did the driller have the same INTENT ahh no they had no clue what was under the clinton berea sand upper devonian

most landowners only wanted free gass and some royalty

hbp will be a long ongoing issue greed will  be the deciding factor 

Permalink Reply by Bill Drill on February 5, 2013 at 8:35am

If you look into this matter, we have a shallow well lease with Cobra who sold the deep rights to Carrizo and held on to a big percentage of royalties from the deep minerals.  I feel this is stealing from us.  Cobra drilled one well, promised 3, but the one they did drill is full of water and has not produced for more than a year.  They sent "Delay of Rental" payments to hold the property.  Lawmakers need to address this.  Cobra is stealing our royalties.  I've hired 2 law firms at a huge cost and nothing can be done.

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on February 5, 2013 at 10:59am

You signing a bad contract is a you problem, which is likely why two law firms couldn't weasel you out of your obligation.  Man up and own it.

Permalink Reply by Bill Drill on February 5, 2013 at 1:59pm

Well, the shallow well agreement was signed long ago when there was no knowledge of deep wells.  We signed a good contract for the time period in which it was signed.  We were promised free gas...which was never provided.  3 wells...which only one badly failed well was drilled.  They are done trying, so why are they entitled to our royalties if and when the deep well comes.  Just because they pay a small delay of rental payment...that entitles them to millions of future royalties.  I never weasel out of anything.  There needs to be a law to protect people from scams like Cobra Resources is pulling.  Mr. Grayson must have connections to Cobra.

Permalink Reply by Sticky Fingers on February 5, 2013 at 4:59pm

Bill, from the sounds of it the situation might be deeper than you think. Do you know if your lease was consolidated? Was there a declaration of pooled unit filed involving your lease? If not the way I understand it a good attorney should be able to get you out of that lease.

Most of the leases have a term stating how long the delay rentals can be paid without production. Also, if you had a continuous development/pugh clause in the lease (3 wells must be drilled in a certain time) that must be honored. If there are no wells producing in PAYING QUANTITIES, either there is more to the situation or you need to get another attorney. Or the lease is still held by the primary term.

Permalink Reply by Bill Drill on February 5, 2013 at 5:21pm

In 2010 they came to my elderly parents and had them sign updates to the lease for one dollar.  They fast talked them into signing while they knew they would sell the lease to Carrizo and then to Halcon.  Cobra knew the deep drilling was coming but landowners didn't.   My parents had no idea they were being lied to.  If you know a GOOD lawyer, I would appreciate the name and phone number.  Thanks JR.

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on February 5, 2013 at 5:55pm

And there it is, folks.  Anyone who disagrees is connected to the problem, proof of such allegations is not needed.  I've read their leases.  They're abysmal.  But people signed them anyway.  Now they're upset because someone else is making money.  Welcome to free markets the hard way.

Permalink Reply by william r rinehart on February 7, 2013 at 6:40am

I have 50 acres, and a well pad sitting right right next to me property line, Devon energy.

They want to sign on on but we are HBP from a shallow well a mile down the road, across the street. The property was split up and sold, we purchased 50 acres of the orginal farm. In 1971 a shallow well was put in and now holds the entire 246 acres hostage. The well head was leaking, so we called ODNR, they inspected, and told the driller to repair, to relieve head pressure, they went to shut the pump station down, the pump was not even working. I was told the driller fills in the production numbers, it is not audited by anyone. The well produces $8 dollars a day according to the production report. How could you have production when the pump station was not working? Also the lease was purchased by another shallow well driller in 1974 that does not even drill wells. The orginal lease stated mutiple wells, there is only one leaking well. Is this grounds for terminating a lease?

Bill

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