Shallow Well -Deep Shale Drilling

I originally posted these questions in the "Blog" and got no response. A member graciously suggested I post it on the Shale site. I hope I am in the right place now.  Thanks,

'Being new to the group, I have some learning to do.  I am selling my surface land and retaining all mineral rights. I want to allow the buyer to have rights for a gas well for his home use and to share half of the royalties if any from that well. There are no wells on the property at this time. I understand that the deep well/shale drilling production does not present gas usable for surface owner use. If that is correct, would allowing him to pursue drilling of a shallow well  for his purposes affect my ability to sell or to lease deep well gas rights?  Also, if no well is drilled on the surface property but gas is drawn from horizontal legs from the property, I understand that royalties for that gas taken from adjacent property is not paid on a metered basis but on a percentage of acreage included in the rectangular drilling space. Am I correct?  If someone would enlighten me , I would be appreciative. Thanks..'.

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Permalink Reply by Finnbear on April 18, 2012 at 3:40am

You need to consult with the best oil and gas attorney you can buy before you enter the convoluted mess you just described. You'd be better off to just sell the land and keep all the oil/gas/mineral rights.

Permalink Reply by Kathleen on April 18, 2012 at 5:18am
When it comes to the royalty part lets say it's 20%. The unit is 640 acres and you have only 10 in. You would get 20% of the gas based on your 10 aces in that unit. On the bottom of this or any page on this site you can go to shale biz royalty calculator.
Free gas money from a horizontal well is given (if the lease you sign calls for it) a certain amount of money (mine is 3 thousand)'a year since like you know they can not tie a house into these wells due to pressure, but only the landowner that gets that money is the one that has the unit pad on it. Are you big enough to hold a pad? Many leases reserve upper layers where the Clinton would be located so yes I guess it would be possible to drill the more shallow well for the free right to the house gas.
Everything depends on your lease
You clearly need a lawyer but there is ways to divide the royalties. This would be done in divorce situations or family trusts, you just need someone with the right knowledge to word it correctly.
In the wet gas dry gas area I've been told they do meter it.
Good luck and talk to your neighbors to find a good gas a and oil lawyer.
Permalink Reply by William A Thorman Jr on April 18, 2012 at 6:48am

Kathleen:  Your comments are most helpful.. I think I understand your point of "free gas money from a horizontal well is given (if the lease...calls for it" to mean this is compensation for the inability to tie the well into the house. Am I correct? This compensation is above and beyond the royalty for the portion of gas being pumped, I assume.  I understand that the "free gas money" described would only be for the well on the property and such a well would provide for "spud fees" payable to the surface land owner.  The land size I have is 50 acres.  I am trying to be cooperative with the buyer of the land while maintaining my rights to gas/oil/ coal and whatever other minerals might be usable. While you and Finnbear have advised I try to find a knowledgeable attorney, I will try to do that.  I appreciate that you took the time to address my specific questions. If my interpretation of your comments in any way is incorrect, please let me know.  Thanks, once again. 

Permalink Reply by Kathleen on April 18, 2012 at 12:07pm
The one constant here is what is says in the lease for "your minerals and surface rights" since each lease can be so different.. I'm assuming right now you do not have a lease.
Your right that the free gas will only go to the landowner who's house has the pad but if you get a good lease you are also paid a separate spud fee. Some are lets say 7-10 acres for 25-30 thousand dollars. My lease has a much higher acre amount of up to 17 acres for 25 thousand but we have other landowner friendly language I feel that makes up for that. My parcel is not big enough for a pad so that didnt apply to me anyway. 19 acres is too small.
Some leases don't break it down to 2 or 3 thousand dollars for the free gas they go by the average usage so if the price goes up or down (it can't drop that much further) they only pay what they have too.
Some leases out there give you nothing, no gas, no spud fee but anyone paying attention now knows to get that added hopefully.
I'm not sure where you live but to think about it it shouldn't matter since in 20 years who knows what else a oil co. could find below your current land so to me it would be a hard decision to give up these minerals. We let some go in Arkansas without knowing much about this stuff. The family took the bonus and sold the rights.
Have you looked at a few different leases? If not let me know and I can link you to a few and share mine with you.
You really need to read a few to see what everyone is talking about as you look around the board. After you learn as much as you can ultiimately only a lawyer can decide the language and draw up the paper work to protect both parties.
I guess your buyer will only buy if he gets some rights? I think the time is here or coming that this area will be like out west, the minerals are separate from the land, period.
Permalink Reply by William A Thorman Jr on April 18, 2012 at 2:03pm

Well, Utica Shale:  You put it pretty succinctly.  My intentions were to retain all mineral rights. Trying to be magnamous about it,, I wanted the buyer to be able to pursue a shallow well for his purposes and if there were any royalties with it, I would split those with him.  It seems I have gotten into a bit of a quandry here.  The questions you posed are cogent and unfortunately,, I don't have enough knowledge to answer them.. I suppose I better seek some legal advice on this.  You have helped me to at least see this leasing is complicated.  Years ago ,, I did have a shallow well lease which the buyer did not keep beyond the original three month period. The royalty for that was a very nominal,, $15 to $30 .. Yes,, you read correctly.  He released it to me and I have that in writing.  I then had a coal lease when the first energy crisis in the 70's , as I recall, occurred and Gulf Oil was buying leases.. That , too, was released when the energy crisis subsided.  There has been a phenomenal growth in this Gas/Oil science and the leases have done the same thing.  Thanks for your advice.. I still have one other basic question,, when is pumping of the product determined to be oil rather than gas.. I know that is probably a commonly understood concept but the terms Wet Gas and Dry Gas make me wonder when does Wet Oil become the issue thereby negating Gas Pumping?   Thanks , again.

Permalink Reply by Jack Straw on April 18, 2012 at 4:33pm

I feel the need to chime in.

When the time comes to negotiate a lease, your life will be sufficiently complicated - you will not want any further complications.

You would like to sell the surface; yet retain control of the subsurface.

The only sensible way to maintain this control is to retain 100% of the subsurface.

Any less than 100% and you relinquish control.

Should a minority owner not "see" things the same way as you, they would have veto power.

Should a minority owner be greedy, an otherwise desirable deal can go down the drain.

In trying to be generous, you run a very real risk of shooting yourself in the foot (with both barrels).

 

With regards Dry Gas, Wet Gas and Oil:

Dry Gas = Methane = Natural Gas, the most simple (basic) hydrocarbon molecule.

Wet Gas is primarily Methane + Natural Gas Liquids.

Natural Gas Liquids are Gases at normal atmospheric pressures, but liquids under modest pressure: propane, ethane, butane, etc.

There is something that is between Natural Gas Liquids and oil - Condensate, a liquid at atmospheric pressure = but barely so. Condensate is essentially gasoline.

Oil is a liquid at atmospheric pressures and consists of more complex hydrocarbon molecules.

 

These is a continuum between Dry Gas at one extreme and Oil at the other. This is not necessarily simple; but I will try to explain it in simple terms.

Dry Gas will be almost pure Methane (with only very small amounts of Natural Gas Liquids).

Wet Gas will be mainly Methane, but will have a sufficient percentage of (valuable) Natural Gas Liquids - such that it is economic to strip out these Natural Gas Liquids.

Oil (in the ground) typically also contains Methane (as solution gas - Methane dissolved in the oil at reservoir pressures) and perhaps also some Natural Gas Liquids (depending upon the makeup and history of the oil deposit).

 

The presence of Natural Gas Liquids in Natural Gas is usually a plus and does not negatively effect the production; but is instead a valuable plus. 

 

All IMHO,

                 JS

   

Permalink Reply by William A Thorman Jr on April 18, 2012 at 5:20pm

Wow,, Jack, that is so clear and helpful.. I feel fortunate to have you and some of the other members take time to educate this "newbie."   I must think carefully and revisit this issue with the buyer.  I feel he will work with me on this and I think anything short of a complete separation of mineral rights from the surface sale would be counter productive for him and me.  I think we are going to have to work on a trust level, which I have no reason to believe he will try to ignore.  I would be in a better position with unencumbered expectations from the surface owner to negotiate some lease favorable to both of us.  Once, again,, thanks for your valuable insight.

Permalink Reply by Jack Straw on April 18, 2012 at 5:30pm

Take into consideration that the manner in which matters are handled will potentially have ramifications that could outlive you, I and everyone who views this post.

There are people here who are dealing with issues associated with leases that were signed around 100 years ago.

Whatever you agree to will potentially affect people not yet born.

 

All IMHO,

                 JS

Permalink Reply by Finnbear on April 19, 2012 at 1:15am

Easiest thing is to sell the land and keep the oil/gas/mineral interest. Sharing that interest with someone else is a hassle at best and more likely a recurring nightmare. I'm in that situation on some ground I have and would not advise anyone to go that route. As Jim stated below, you could keep all the rights and then if you ever sign a lease, try to provide for the surface owner in the addendum for that lease, assuming the oil and gas co. will agree to the terms.

Permalink Reply by William A Thorman Jr on April 19, 2012 at 2:50am

Your point is well taken.  I have had a longtime friendship with the buyer and want to be sensitive to his expectations but not foolish about the transaction.  I feel he is getting the land at a very attractive price and I am willing to give him the right of first refusal should I decide to sell the mineral rights rather than speculate with leasing.  Shoot, if I became one of the fortunate ones to get a good leasing arrangement producing income, I am not adverse to including him in some of the profits but I don't think it wise to get too far ahead in my expectations.  I think a clean separation based on a trust between us would make the future of leasing or selling much simpler.  I suppose it is possible to include some language that  in the land sale contract that addresses his rights as a surface owner as they relate to mineral issues held solely by me is .  Maybe those rights are already in place by statute law.  In any event,, I have learned a lot in the last 24 hours of dialog on this venue. You and the other members have been very helpful. Thank You.

Permalink Reply by Jim Litwinowicz on April 18, 2012 at 3:26pm

If you retain all the gas rights then it will be up to you to get the addendum in a lease to do what you want.  You could write into the lease that the surface owner gets free gas from any shallow well or be compensated if they do a horizontal well. You will be able to give the new owner whatever you can negotiate. However, that means the new owner must trust you to do so when the time comes. 

Or you could lease the property now and sell it with all those terms in the lease as the lease will continue in force after the sale of the surface. That way the new owner will know what he/she is getting.

You could also sell the land along with 10% of the mineral rights.  That would give the landowner some say in lease terms and give them say on surface activities. But a word of caution...some eventual owner may not want to sign and cause you problems down the road.

Good luck

Permalink Reply by William A Thorman Jr on April 18, 2012 at 5:23pm

Your comment about working with a high level of trust between the buyer and seller is very important.  I think I would be better able to negotiate a lease with a company and provide something benefiting both of us.. I think we can agree to that.. Time will tell. Thanks for your helpful comment.

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