Chesapeake energy has proposed Drilling units that run from the vicinity of the intersection of Thompson Road and Kilgore ridge road running to the south east for approximately 3 miles to the edge of State Route 151. The well pad has been prepared. Approximate 250 landowners have signed leases, but one landowner owning approximately 30 acres has refused to sign a lease. This Owner is reportedly requesting a $7500 per acre signing bonus and other lease clauses unacceptable to Chesapeake. A reliable source has reported the Chesapeake is preparing an application for force pulling from the Ohio DNR. Attorneys who are familiar with this process tell me that it is unlikely that the application will be decided on in the remaining six months before approximately 100 leases expire. The Issue then becomes whether Encino will attempt to release the properties with expired leases. LET’S hope so!
Wow....and we were so close. I asked our attorney about that process and he said there's still opportunity to try to negotiate even after they file.
What stops you from leasing land to an entity other than an oil company? Such as a land broker or land speculator who might be inclined to give more favorable terms ? It might be worth taking payment at a latter date to secure a good lease and not be subjected to forced pooling.
Clarification....we're leased so it's not our property. What I meant was that we are/were so close to being in a drilling unit. However, we did inquire about the mandatory pooling process from an informational perspective when we were negotiating. Hopefully the landowner and the company will come to some sort of agreement.
Regarding the leases that are due to expire, it is my understanding that a "force majeure clause" in a lease will extend the lease past expiration date while a forced pooling action is being processed including the time allow to the company to drill.
They will drill this unit as soon as they get this last lease signed.
Can a company break a lease through forced pooling? Aside from issues like increasing maximum acreage in a unit would they have any grounds to challenge terms that they just don't like. What if a company wanted to lower the royalty amount?
My thought was to lease to a third party such as a land broker, a vertical driller or a speculator, with no upfront money. Payment to be made to the lessor at the time of permitting or upon transfer of the lease. The third party would make their money when the lease is purchased from them by an other company Much like when drilling companies acquire acreage that is leased to other drillers. This would secure terms of the lease that could be very favorable the mineral/land owner and stop forced pooling.
I have had experience with a company the used forced pooling of a small parcel to extend the terms of all other leases in the unit that were due to expire. This may not be the case here but companies do weaponize the forced pooling process.
I would appreciate any thoughts on this.
KW, I don’t mind replying as long as you understand my response is a personal opinion, and I am a Ley person not an attorney.
I attended the national Association of royalty owner convention last week. While at the convention, I asked questions about force pulling with three attorneys. at the end of the convention there was a joint conversation among the four of us and I was surprised to learn that even the attorneys were not in agreement. Of course, you must understand we’re talking about Ohio.
For the case at hand, there is no lease which is the reason for the forced pooling. Another reason for force pulling might be a result of the landowner not agreeing to it an increase in the drilling unit size. As I understand it, all the owner would get is A 1/8 royalty/working Jana and no funds would be paid until 400% of the drawing cost was recovered by the operator when forced pooling is used in Ohio . An operator cannot break a lease through forced pooling, but they certainly can get the Ohio DNR to modify some of the restrictions. The DNR’s involvement is to make it possible for the operator to legally drill and would not change simply because the operator initially agreed and now doesn’t like the lease provision.
There is a significant problem with your strategy. And it involves the feds. Federal tax statutes require the amount of a signing bonus to be paid in the year that the lease is signed. I’m pretty sure that the theory of no payment would be considered by the feds to be avoidance of a tax liability and therefore you would not have a legal contractual document.
I’m not sure if this totally answers your question, but this is a very complex issue, and for the case at hand I believe forced pooling is totally justified.
Unfortunate situation. I don't understand why Chesapeake would even start the mandatory pooling process if they intended to walk since they've already invested significantly in this unit. If they do walk, will Chesapeake also default on all the leases they have recently signed?
I appreciate the updates.