Question about Queenston Clause

Hello, wonder if anyone has any insight to our situation. My family has 40+ acres in Trumbull County. A lease was signed in 1972 with a major gas and oil player. It was the standard one-sided lease of the time, rights extending down to the center of the earth in exchange for free gas and a monthly pittance. But it is what it is. The well was drilled and continues to produce today, the family still gets free gas and the royalty. A few years later the big gas company assigned the lease to a smaller company, specifying the assignment was "down to but not below the top of the Queenston formation". The way I see it, they assigned the shallow rights and kept the deep rights.

My question is this. Since Company "A" maintained deep rights and does to this day, and since Company "A" has never done anything with the deep rights (it has been over 30 years), can my family attempt to revert the rights back under Ohio Dormancy law. The producing well would seem to be clearly only covered by the "Down to the Queenston" clause.

Any help, comments, or answers would be much appreciated.

Thanks.

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Permalink Reply by Corey Hendricks on December 19, 2011 at 9:06am

Mark,

We are going through the same situation, my guess is your lease was with EOG; I agree with you on the point of dormancy law however, the way I understand the current feeling in the courts is that if EOG had any well drilled on the property and it is currently HBP then the original lease is still enforced. Also, on the EOG assignments for the Clinton sand wells they typically reserved something like 1/32 of 7/8 royalty on all wells drilled in the future but, that may get washed away if the primary lease is deemed invalid below the Queenston formation. The position on our property seems to be that it will continue to be HBP however, EOG appointed tons of leases to CHK in our area recently, which means we can be in the running for a unit . . .especially with a well permitted directly across the street. Also, You may be able to renegotiate the terms of the lease w/CHK . .. no bonus payment or additional royalties but some things you can do to help protect yourselves in the future.

My best suggestion . .. find a good oil and gas attorney

Also, check into production numbers, if on the state report the well was not in production for 2 or more consecutive years you may be able to get the lease terminated.

 

Permalink Reply by Mark on December 19, 2011 at 9:53am

Thanks Corey,

 

Yes, it is EOG. Hardly seems fair, does it? I guess EOG needs the money more than we do. I don't believe they reserved any portion of the rights but you are right, we will need to consult a lawyer...

Permalink Reply by James Kerns on December 19, 2011 at 10:14am

Mark, Why not this week, consult that lawyer, that is. You have brought up a very interesting dilema. I would not be doing you any favors to coment further, please update us after you consult with that attorney. I would for one would be very interested to see how this pans out.

Permalink Reply by BICS on December 19, 2011 at 4:11pm

Mark/Corey,

In this new scenario do you, the lessor, currently have two separate leases and two different G/O lessees or do you still have the original lease with only one O/G lessee?   If you still have the original lease then it sounds like the large O/G company assigned/sold the lease to a smaller O/G company and then the smaller company subleased the deep strata back to the large O/G company.  Subletting does not break most leases so they do not have to renegotiate with the lessor and it keeps all strata HBP.  But from what I have been reading, the older leases will require addendums to make them usable for horizontal drilling.  For example horizontal drilling requires large drill units and many of the old leases have no pool clause or have a small pool size so the lease will have to be changed.  Hopefully this change is an opportunity for the lessor to renegotiate.  It would be good to hear for others who have already been thru this. 

Permalink Reply by Corey Hendricks on December 20, 2011 at 5:04am

BICS,

The lease I'm dealing with was assigned by EOG to United for drilling "from the surface to the top of  but not below the top of the Queenston formation"  It is all under the original 1959 lease. You are absolutely correct the original lease has converted into a secondary lease as United drilled it before the original had expired. I definitely see the logic in arguing the fact that the original lesse only assigned a well to be drilled to xxxx depth and no more. If, the lesse only intended to drill to that depth, which they did by assigning to United and drilling before the 20yr lease expired, then everything above that depth is HBP. However, (the courts see things differently)  if the deep rights were not drilled  by EOG, and assignee or HBP in some fashion before the expiration of the primary term one could argue everything below the top of the Queenston formation should be released from lease upon 20 years to the date of execution of the original lease. 

While EOG signed a 20 year lease from the surface to the core and HBP'd due to assignment and drilling everything above the Queenston, the assignment would indicate that EOG only HBP'd the strata above the queenston during the PRIMARY TERM.  Therefore, EOG would have had to HBP everything below the top of Queenston formation during the primary term; EOG never drilled below the top of the Queenston or assigned in the primary term to another driller to go  below the top of the Queenston. In which case, you may argue that the assignment to drill only to the top is a ratification of the lease and everything below that formation which was not drilled  should be released from lease after the primary term.

That being said, I am by no means a legal expert! For that matter even a legal novice! I have looked for some benchmark cases in this area but have not found any that seem to be similar enough. I think there may be a good argument but; legal cost and time frame to release the lease is likely undesirable. What do you guys think?

The unitization clause is currently the best foothold we have to renegotiate terms of the lease; from the preliminary footwork we have determined that no bonus monies or additional royalties will likely be attainable but protecting the land for ourselves and our families is just as important in this situation. Also, with the potential royalty income being discussed 12.5% is tolerable to us, whether its 12 or 20% we stand to gain significantly more money than we otherwise would have.

Permalink Reply by Finnbear on December 20, 2011 at 6:45am

I think you need to consult a GOOD oil and gas attorney. Not just any attorney, but one of the few who specialize in oil and gas law.

Permalink Reply by Finnbear on December 19, 2011 at 4:49pm

What are the specifics on that "producing" well? Permit#, total depth, etc., who drilled it and under which lease?

Permalink Reply by Gunner Ostergard on December 20, 2011 at 2:59am

I agree that you should contact the state agency for production reports.  Do not believe them just because they say it is producing and sending you royalty checks.  Also even if it truely is producing,  your 1970's lease probably did not contain a unitization clause.  This means for anyone to develop your deep gas rights they will probably ask you to sign a new lease with a unitization clause which puts the ball back in your court  a little. 

Permalink Reply by Corey Hendricks on December 20, 2011 at 7:24am

The problem with checking completion/production reports is that the are self reported to the state, so eenie meennie minie 10bbl oil this year? ok sounds good. The state does not verify the numbers in any fashion based on their  current system.

Permalink Reply by Gunner Ostergard on December 20, 2011 at 8:23am

I am not saying Corey is not right,  but you might be suprised to find back in the 70's  or 80's some time were they actually had a number of years with no production records.  It is free to check and that is always a good start.  You can also hire an independent inspector to see if it is currently producing.

Permalink Reply by Sylvester Deal on December 20, 2011 at 8:23am

Your lease is held by production by the shallower (Clinton) well.  To you it may not seem right but that is how it is in Ohio.  An attorney familiar with oil and gas transactions in Ohio will tell you the same.

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