Negotiating a Unitizing Amendment For an Old Gas Lease

I own 75 acres in Upshur County, WV, subject to a 1979 gas lease (12.5% royalty, no Pugh Clause) with 2 old low producing vertical wells. The leaseholder/gas well operator wants to amend the lease to add a unitizing clause, not in the current lease.

I know I can't lease to another party as long as the current leaseholder maintains the current lease through production. Other than for that factor, is my negotiating position relative to the unitizing amendment with the leaseholder as good as the negotiating position I would have if no current lease existed, respecting up-front cash payment, royalty rate for other than the existing wells, and rental fee for surface occupation unrelated to the current wells?

I suspect there are many mineral rights owners in WV in the same situation as mine.

Richard

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Permalink Reply by JK on May 29, 2011 at 2:55am

You are so correct in "many mineral rights owners in WV in the same situaton" needing answers.

What is 'unitizing'??

I hope we can get some perspective here.  Same thing going on here in Monongalia county.

Thanks for posting this topic.

 

Permalink Reply by Richard Fanelly on May 29, 2011 at 4:54am

IK: I am sure there are others more knowledge than me on the unitizing issue, but I will give it a shot.

In order to drill a Marcellus well, a drilling unit of about 640 acres is needed for each well because the well bore will be horizonal in the Marcellus shale and extend for up to 2000' from the vertical well bore, and after fracing the Marcellus shale around the horizonal well bore the well will drain gas from a large area. The 640 acre drilling unit is about the area that will be drained of Marcellus shale gas.

Nobody foresaw this prior to around 2004. Old leases, prior to mid-decade 2000, contemplated only vertical wells that  drain gas from an area with a radius of about 1500' from the vertical well bore, around 20 acres. Consequently, many of the old leases did not contain a clause that permitted the leaseholder to join, or unitize, your acres under lease with acres of other landowners in your immediate area to produce the 640 acre drilling unit for a Marcellus horizonal well. Many old leases in WV, such as mine, contain a clause that says your acerage may be unitized "IF required by law or regulatiom". WV at this time has no such law or regulation for wells at the depth of the Marcellus shale, but WV does have that requirement for wells deeper than the Marcellus shale. (WV oil and gas interests, naturally, want the state legislature to change the current status so they can unitize your acerage without obtaining your further approval.)

Since the old leases do not authorize the leaseholder to unitize your acerage for Marcellus shale purposes, the leaseholder wants you to sign an amendment to the current lease that legally permits unitizing your acerage with other acerage to form the 640 acre drilling unit.

My initial post asks the question how strong or weak is our bargaining position with respect to the amendment the leaseholder wants us to execute. I think it is strong, but I would like to hear other opinions.

Richard

Permalink Reply by Nancy Mosley on May 29, 2011 at 5:36am

I'm quite a novice a this, but am learning. One of the royalty interests my sister and I inherited has the other portion of the royalty owned by someone with a lot of experience in the industry. When we were sent a letter recently to amend our old (1890) lease to allow unitizing I contacted this man, who said he would ask $400 an acre to sign such an amendment. He said he would not reply and if the company wanted it enough they would contact us again. My sister and I are following his example. So far we have not been contacted again. He thought that the company (and others) were sending these lease modification documents to everybody and hoping that many people would sign without a thought. I expect he is correct.

As to what value to ask in return for such a modification, for our county (Ritchie) the $400 / acre is probably in line with the price for new leasing.

That is how I see it at the moment. I look forward to reading others' opinions and experiences.

Permalink Reply by redbank on May 29, 2011 at 5:50am

I just finished negotiating with the gas man in a very similar situation, here in PA. Regs may be a little different from state to state, but I'll give you some of my experience, though I'm no expert. My opinion of your bargaining strength is high but not at the top. A clean, lease free, big piece of property is the best position to be in. Although, once they need to amend your lease, they are opening it up for anything, and if you're as good as the greasy, greedy, used car salesman of a landman negotiater as the the man you're dealing with, then your in good shape.

I had to sign on to unitize the standard 640 acres, and they also separated deep and shallow gas, (so I could keep my free gas). I tried to make him specify Marcellus only, so if in the future, they go deeper (Utica shale), I could renegotiate for that, but he would not go for it (maybe you can?). I asked for some things that don't cost him anything first, then I asked for $$$ later. Tell him you don't want any structures/pipeline or surface damage unless you agree to it and get paid for it (my existing lease pretty much spelled out they could do anything they wanted). Demand that you can audit their books so you can verify they aren't shorting you on your royalty. Ask for a higher % royalty (if your good you might get it, good chance you won't). Make sure you're getting royalty on gross production and not get any costs passed onto you for their processing costs.

Make sure everything is in writing. If you haven't figured it out yet, the landman will make you feel bad for him, and make it seem like he's doing you all kinds of favors. Then he'll tell you he can't give you this or that because he didn't give it to the others in your unit (B.S.). These people have these jobs because they are good at what they do, they are professional manipulators and talk a good game.

I'll offer more info if you would like to hear more, but I don't want to go on and on and bore you (I may have already) with info you may already be aware of and are capable of bargaining for.

Be realistic in your expectations, just because you have seen on here huge #'s and big $$'s, doesn't automatically mean your getting that too. There are many variables in this equation, good and bad.

 

Permalink Reply by Nancy Mosley on May 29, 2011 at 6:56am

Thanks, redbank, for the great ideas. I'll remember that next chance I get (I expect there will be one some day). I especially like the auditing the books idea after a bad experience with another operator.

You're right about the landman. Great talkers, always in a hurry so the company doesn't go on to something else, etc.

Permalink Reply by melinda golden on June 6, 2011 at 10:23pm
I would love to hear more, I need all the education on drilling possible & I am not bored, very helpful info. here, redbank ! THANK YOU
Permalink Reply by edward bilik on May 30, 2011 at 7:07am
                  There have been instances where some comapanies ( Hanley & Burd) have paid thousands of dollars per acre for unitization agreements.  Some shallow developers did not place unitization or pooling clauses in their leases and now need them in order to sell their deep rights to a Marcellus developer. They typically solicit the landowner for a modification, affirmation and unitization amendment. My advice is not to sign something for nothing. Today, many companies are trying to expand their unitization rights . Some companies are telling people that they are permitting a well nearby in the hopes of obtaining execution of the unitization agreement. The threat of being "left out" is always implicit. Clearly, some companies are acting in bad faith. Once the company has recieved your executed unitization agreement, their interest in drilling ebbs. It is necessary to determine the lease status of your neighbors and determine what unit strategy the company is using. Should you find a large block of neighbors in the same boat as yourself, organize and negotiate co-operatively.  There is always leverage in size. You will need to see an experienced gas and oil attorney.
Permalink Reply by Paul Martinelli on June 2, 2011 at 11:05am

Can anyone share thier experiences in this area?

 

It seems to me that lots of money was invested to purchase existing leases for the purpose of Pooling and creating larger units to drill deep wells.

 

The old leases are very attractive I'm sure.....few restrictions, 12.5% royalties.....O&G companies got to love those terms.  But, perhaps they over looked the unit limitations and need that modification to the old leases.

 

So, lets say this is the case.....what would you consider fair  compensation to agree to the modification? I'm mostly concerned with restrictions rather that dollars per acres.  Or a modification to help secure an actual well being drilled.  Perhaps the modification would be granted with these terms....  $xx,000 per year to be paid until a producing well is drilled.  It is a win-win situation......no well you get paid....drill a well...they don't pay.  There is lots of play in royalties given the fact that theey picked up the leases with a 12.5% royalty term.....unless the current lease holder sold the  lease for the 5-6% royalty differnce?

 

Permalink Reply by Richard Fanelly on June 7, 2011 at 5:50am

I'm not inclined to sign a unitizing modification unless I get initial, delay and shut-in rental fees of $100 per year per acre, pro-rata monthly, escalated at 25% every five years following the modification date, and $1000 per year per acre, similarly escalated, for all surface facilities. The delay rental will apply to all acerage from which I am not receiving well royalty. I also want the royalty on oil and gas to be based on first sale to a non-affiliated entity based on an arm's length transaction from which the lessee receives no consideration from the buyer other than the sales price of oil and gas.

This position is based on current circumstances - three Marcellus wells permitted but not drilled within five miles of my property. As the permitting near my property increases, which I follow closely, the $100 initial, delay and shut-in fees will increase. I did not demand a higher royalty (currently 12.5%). I may do that if my immediate area becomes "hot".

The lessee rejected my terms and said they would get back to me later.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on June 3, 2011 at 12:18pm

the more I think about this Richard.....I see that with the leaseholder wanting to amend the existing lease...is a good opportunity for you to review other parts of the lease and it leaves a good opportunity to clean up where any clean up is needed to get the contract back with a 'fair' amount for you as landowner.   I just examined the lease I inherited and I am in awe how the lessee is taking advantage of the landowners...not a good awe.   Pls read this discussion I just started as I realize that a real error on my dad's part (and mine) was done in trusting the landman at the time of the lease.

http://gomarcellusshale.com/forum/topics/and-the-name-of-the-shale-is

 

Permalink Reply by Andrea Richlin on June 10, 2011 at 6:40am
I have been contacted by my lessees landman about amending one of our gas leases to add a force majeure clause and a severability clause. I am familiar with these clauses from a later lease we signed on different property , but dont know why we should agree to add these to the older 2008 lease. Anyone else been contacted in northeast pa...   bradford or sullivan county
Permalink Reply by edward bilik on June 11, 2011 at 1:58am
                        If you have been watching the news, you will see that big oil has been buying up shallow well developers. The shallow well companies are selling their deep rights to the Marcellus companies. In order to do that, they must have leases holding the deep rights and permitting unitization. In the process of a company doing it's due diligence , when it is discovered that the lease has no unitization clause, a ratification, modification and unitization agreement goes out to the landowner. The shallow well company is being paid thousands of dollars per acre for the sale of the deep rights. Should you sign the unitization agreement you most certainly will not share in that. The decision as to whether or not to sign rests in the size of the acreage and the near potential for drilling. The shallow well developer is more apt to pay landowners of large parcels. Any company buying the deep rights requires a unitization clause. You must make a judgement as to whether Marcellus drilling is imminent or is the company simply looking to firm up it's leases. Should there be no imminent drilling, there is no urgency and you should require payment for the signing of a lease modification. As always, the more acreage, the more leverage you have. I have not seen a company renegotiate a lease to obtain a unitization clause. Companies have paid a signing bonus to landowners for unitization rights. Understand the companies want hundreds of acres in a unit (640 here in Pa) and sometimes more if so defined by a unitization clause. You need to understand the purpose and strategy being employed by the company seeking the modification. Seek advice of an expert before signing any such agreement.

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