When Leases Term & Things Pick Up

Hoping we don't see a lot of Forced Pooling Applications to the ODNR to pool lands / landowners into substandard tailgate leases. That's always been of serious concern to me - and don't know why it doesn't seem so to everyone else.

That's why I think Ohio needs to either revise force pooling rules to provide a modern land / landowner cognizant Leasehold with a minimum $3,000 / acre sign on bonus / paid up front delay rental and at least a 12.5% guaranteed royalty - or repeal force pooling / force unitization laws / rules altogether.

Something like that would need to be applied to all Ohio forced pooling / forced unitization applications for any long horizontal bore in any strata / for all pooled acreage amounts - HBP or whatever.

All as it always is, only IMHO

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Permalink Reply by Bob Shaw on November 8, 2015 at 3:11pm

This link seems to be a balanced explanation (high level) of all states forced pooling regulations, a general description and enough reference material to get complete details. It seems relevant to the conversation.

http://www.ncsl.org/research/energy/compulsory-pooling-laws-protect...

Permalink Reply by Joseph-Ohio on November 8, 2015 at 4:21pm
Thank you Bob.

Your reference makes a good reasoning FOR the Forced Pooling / Forced Unitization Laws / Rules. However IMO there is many a devil in the application details.

The biggest landowner negative I see to the Ohio Forced Pooling and Forced Unitization Rules / Laws is the potential for a landowner to be included in a pool of acres governed by some old Tailgate Class pre-long bore horizontal type of leasehold agreement. In areas where lands are so-held and / or Held By Production (HBP) I'm thinking it's more of a probability than a possibility.

It's in that regard that I see need for change / special consideration to the new Forced Pooling / Forced Unitization Laws / Rules.

These new long bore horizontal wells may be drilled well after (years after 1st term / renewal of 1st term). And even once drilled may be throttled back / shut-in for long periods of time necessitating landowner protection in the form of a significant sign-on bonus / delay rental.

So, you know, I'm not totally anti-Forced Pooling / anti-Forced Unitization; I'm just pro-Landowner Rights, including rights to fair compensation considering the advent of these new long-bore horizontal type wells and their associated leasehold agreements.

I think there are many more land / mineral owners that feel the same way and as evidenced by over 1250 views of this particular discussion here on GMS.
Permalink Reply by Bob Shaw on November 9, 2015 at 2:46am

The reference is not for/against, but it provides an explanation of why it exists and a factual basis of how things are now. I agree that it appears biased for the producer, and that makes sense, given that it takes some initiative to create law, and initiative = money. All hope is not lost, Ohio requires 90% participation before forced pooling can go forward, unlike states that require only 25%.

You bring up interesting points regarding historical concepts of mineral developmnt verses new issues introduced a horizontal well, and what I understand to be a shut-in or fractional shut-in. 

There are other aspects I see,  such as Risk-Penalty, seem to be heavily biased toward the producer as well.

Does the way forward involve developing a short list of protections that are missing, and build a consensus around that? 

Permalink Reply by Joseph-Ohio on November 9, 2015 at 6:41am

The reasoning presented appear to me as valid; and the apparent valid reasoning (with landowner / lessor protections) translate as 'pro' to me; as I like to think of myself as, at least, a man of reason.

In other words, the valid reasons translate to me to be good enough to go forward BUT with modifications / adjustments / landowner protections that prohibit landowners becoming ignored and abused.

I believe you are correct when you write / ask if the way forward involving a list of protections that are missing (missing landowner protections, that is to be most clear).

Here following  are a few that I can think of and that have even been discussed earlier on these pages and which IMHO ought to be incorporated into any 'STANDARDIZED' leasehold agreement pertaining to any long horizontal bore well through any strata :

1)  a minimum $ per acre sign on bonus / delay rental payment to cover postponed development / production

2) a minimum landowner royalty % 

3) lease (and sales) agreements to be 'strata specific'

4) royalty payment based on all extracted / harvested BTUs without deductions and with payment based on sales as / as if to a non-affiliated ('arm's length') customer / purchaser

5) production and royalty payment calculated independently for each lateral traversing a lessor's land and a maximum 640 acre unit size for any single lateral

6) allowance of course for negotiated deviations

7) a minimum $ / leased acre shut-in clause paid to the lessor

The above list only names a few that I can think of off the top of my head in conversation here at this point in time.

All should add their suggested options / improvements to the above list.

I would like to see that.

Permalink Reply by Joseph-Ohio on November 9, 2015 at 6:43am

Bob,

Risk penalty IMO is on the developer and needs to be addressed / offset by the developer purchasing appropriate / adequate insurances and of course needs to be mentioned / specified in the lease (or sales) agreement.

Layman landowners / lessors normally aren't in a position to purchase such - to me development techniques and insurance protections are totally the realm of the developer professional.

Permalink Reply by Joseph-Ohio on November 9, 2015 at 10:11am

Another thing that doesn't wash with me, is the part about owning 100% of the production, pro-rated on the basis of your acreage to the total acreage, after the producer recovers 200% (or 300%) of the cost of the well.

Like that would ever happen anyway.

That to me is a give-away of your compensation (based on  the way things appear / seem to me to be going).

Would the producer then abandon the well ? ?  Why wouldn't he as there would be nothing further in it for him ? ?  Who then is responsible for the goings on at the well ? ?  Who buys the insurances then ? ?  The land / mineral owner ? ?

How do you see that one Bob ? ?

Permalink Reply by Bob Shaw on November 9, 2015 at 7:07am

Those are all consistent with a well written lease, with the possible exception of the minimum signing bonus. It seems reasonable that a producer can provide some incentive to those that are offered and negotiate terms without the need for a forced unitization action.

I wouldn't take a position against that, but otherwise each point seems rational and reasonable to most anyone, and are standard terms in well written leases.

Permalink Reply by Joseph-Ohio on November 9, 2015 at 7:19am

It's the Developer E & P that (in the 1st place) doesn't want to be reasonable that concerns me Bob.

Those of the ilk that want to scam the Land / Mineral Owners and don't give a hoot about being rational and reasonable.

From reading these GMS pages I'm seeing more of the unreasonable than the reasonable.

It's been that way for quite awhile now the way I see it.

Wondering - do you see the minimum signing bonus / delay rental ($3k per leased acre mentioned in the OP) as too little or too much  ? ?

I really think it low myself but I qualified it with it being the MINIMUM for use as a STANDARD - meaning it would still be open to negotiation but that there WOULD BE a signing bonus / delay rental up front payment involved.  I've read on here that there have been Forced Pooling / Forced Unitization Applications approved by the ODNR without ANY signing bonus / delay rental up front payment involved - which I think is BEYOND wrong myself.

Can you think of a Landowner / Lessor Protection that preferably would be written into the Rules / Laws governing Forced Pooling / Forced Unitization here in Ohio ? ?  Tell us all about any kindly.

Say - been trying to send you a 'friend request' - it doesn't report as sent on this end - did you get it  ? ?

Standing by.

J-O

 

Permalink Reply by Bob Shaw on November 9, 2015 at 10:12am

As I said, I would not argue against the concept of a minimum signing bounus. As a land owner, more is better, but in a soft market setting a dollar minimum value might be a barrier to commerce. I received more than $3,000, and others far more than that. I am ok that someone did better than I did, nature of free market. I will check on friend issue, no reason not not.

Permalink Reply by Joseph-Ohio on November 9, 2015 at 11:30am

Received your friend accept Bob.

Did the site advise you I wonder ?

Thank you friend.

The soft market part vs. the minimum bonus / delay rental amount :

Maybe the 'minimum' amount can be graduated pending the length of time from signing to actual operation @ throttled flow and actual production @ full flow and if shut-in @ anytime somehow.  

To me that should work to encourage development and production and discourage land banking.  

Maybe (for a 5 year initial term) $5k per leased acre while waiting for production or shut-in, $4k per acre if producing throttled and $0k per acre if at full throttle production considering the agreed to royalty being paid.  If shut-in after the initial term the option to extend the lease under the same terms would seem to work.  OR SOMETHING LIKE THAT. Admittedly this part needs work.  Actually, it all needs work.

Permalink Reply by Joseph-Ohio on November 9, 2015 at 11:57am

Of course the actual $ per leased acre is always negotiable except the minimum $3k (or other established / codified fair minimum would not be).

Just thinking out loud trying to be proactive and protective of landowner lessors.

Let's read a few other ideas from any member who cares to contribute.

Permalink Reply by Joseph-Ohio on November 10, 2015 at 3:46am

Gave it a little more thought and came up with the following ideas (for what they may or may not be worth) :

A 5 year 'Initial Term' Lease @ 5k per Leased Acre (Sign On Bonus / Delay Rental) with a Minimum 3k per Leased Acre 'Paid Up Front' ; with no well developed or if well developed but 'Shut-In', could work something like as follows :

A) Upfront = 3k per Leased acre
With remaining Balance of 5k per Leased Acre paid over the 60 month Primary / Initial Term

B) The Principal and remaining Balance would be calculated as follows :

(Leased Acres x 5k per Leased Acre) - (Leased Acres x 3k per Leased Acre)

C) Remainder of Sign On Bonus / Delay Rental paid in Monthly Installments first calculated on the basis of no well developed as follows :

(Leased Acres x 5k per Leased Acre) - (Leased Acres x 3k per Leased Acre) / 60

If a well is developed during the 'Initial Term' or any subsequent 'Renewed Term' and production is established but is being 'Throttled' / 'Choked Back' ; the principal is recalculated @4k per leased acre (and the 3k per leased acre paid up front considered). In that event the newly calculated monthly installment payment would be reduced, or may be paid in full, or may be exceeded by virtue of only Throttled Production royalty.

Under the circumstances that the minimum 3k per Leased Acre has been paid, and a well is developed, and production is being Throttled, and if the royalty paid to the landowner exceeds the monthly installment payment calculated at the well's Throttled condition; the well would be considered as running at Full Throttle / Full Capacity and any remaining initial signing bonus / initial delay rental payment would be waived / re-calculated at 0k per Leased Acre. But, if the royalty paid to the landowner does not exceed the calculated monthly Throttled Condition installment payment, the difference would be added to the monthly royalty payment.

The same format could be applied to any $ per Leased Acre figure negotiated / agreed to.

A little complicated; but, I think indicative of a lessor's motivation and their desire to co-operate with an equally motivated / cooperative lessee.

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