confused on current gas lease versus bonus money

I signed a lease near the end of October with Chesapeake.  I currently receive royalties (not much, a check every 2 to 3 months) on a well located on my neighbors property. I discussed this with the landman that came twice to the house to have me sign and he stated that the well I currently receive royalties from is, in his opinion, not producing enough to classify the well as "producing."   He said he would come back a third time, if needed, to get me to sign.  The current lease is with Enervest.  How does all of this work?  I have not heard anything bac yet.  I am in Tusc County, Lawrence Twp.

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0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on January 6, 2012 at 3:40am

I am glad that you Keith and Martin are sharing info here...I really like it when we find someone out there that understands cause it is perplexing.

Keith, a bit confusing....they are not paying you for production royalties from the well yet it is producing enough to give you gas to heat your home...and they call that 'held by production"?

Are people that have some 'free' gas to heat their homes (which is a source of monetary provision) going to have to look forward to that being their only income from all of this yet the lessee is still making money in flipping leases? You would think that if the lease has changed several times in ownership that the new buyers are being advised that the well produces? you think?  I would think your lawyer would question why you are not receiving royalties other than the 'free gas'....why would buyers purchase the lease otherwise...yet the oil companies are 'bundling' these leases' so that an investor would not necessarily discover the wells that are not producing much as they are thrown in the bundle.

 

Permalink Reply by Jim Litwinowicz on January 6, 2012 at 4:10am

It is generally accepted that using house gas from a well extends the lease as HBP. The gas has value that could be sold instead of being used to heat the house, thus the homeowner is getting financial reward.

Look for any clause that states what depth or names the strata they are drilling to. If none is mentioned then the deep rights are also HBP. If they do state a depth or strata, then you MAY be able to lease the deep rights separately.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on January 6, 2012 at 5:05am

both you Jim and dr.j have added good input here..hope it helps someone.

my question is Jim, if the well can produce enough to give 'free gas' to the landowner...then isn't it producing to pay royalties?  Actually I did read that he is getting about $80 in royalties so there is some.  I mean are they leaving it on to give the owner some free gas?   I find it difficult to understand that if there is enough ng for the heating of their home...isn't the oil company deriving some ng from that well to sell? to pay the landowners their royalties also?   could they be postponing to delay as the owner stated his bonus and an 18% royalty is a very decent royalty..?

I am new at all of this and just learning...so if my questions seem ignorant, forgive me.

Permalink Reply by Jack Straw on January 6, 2012 at 5:51am

When a well is no longer producing, the state requires that it be plugged and abandoned.

This will potentially cost the O&G company something like $20,000-$30,000 for a shallow well.

Also, so long as a property is HBP, the O&G company are in possession of a valuable lease.

A hypothetical situation: They get $560/month (paying $80/month to Royalty owner.

It costs them $600/ month to maintain the well and production.

They are losing $40/month ($480/year).

But, they are delaying an expense of $30,000 to P&A.

Looking at the time value of money, by maintaining production they are essentially borrowing money at less than 2%.

And, more importantly, HBP from a shallow well allows them to hold the deep drilling potential - possibly worth many thousands of dollars per acre.

There have been documented cases when very small royalties have been paid on non-producing wells - simply to avoid the expense of P&A and to dupe the Mineral Rights owner into believing that the O&G operator still have a legal right to hold the lease.

 

JS

 

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on January 6, 2012 at 7:37am

thank you Jack, that was info that not only made sense but is appreciated.

those kind of situations like the oil company keeping the well with some though little production rather than pay out thousands to plug it helps us all to understand better.   Why the oil companies don't freely explain all this to landowners in some way doesn't make sense...of course you said that some use it to show they have a legal right to hold the lease......and I think that  some landowners/Lessors might complain if they knew the situation and still insist on plugging the well...it it were possible.  I think the best for them in this case is to honor the new lease with the Lessor (such as Martin has in his hand) and go forward in making it a better situation for both.  Of course that is most likely why they don't want to give the 3K upfront bonus money to Martin as there already is a lease on the non-productive unit and perhaps they are trying to get out of paying the 3k per acre to him...so they are stalling while they make a decision.   that is of course if I am understanding the situation so far correctly.

Permalink Reply by Martin J Huth on January 6, 2012 at 9:00am

VG, I think this may be part of the delay as they are trying to make a decision on what to do....I shall provide an update as soon as I hear anything new. Marty

Permalink Reply by Berk on January 6, 2012 at 1:57pm

here is a link to a recent Pa ruling maybe this will be of some help to someone.

http://www.hh-law.com/News/20111103-Non-ProductionDuringSecondaryTe...

 

Berk

Permalink Reply by Martin J Huth on January 6, 2012 at 7:20am

Keith, how long after you signed did you get your denial letter?  I signed October 26, have not heard anything yet except for when I called the landman a month ago.  Marty

Permalink Reply by Keith Travis on January 6, 2012 at 8:40am

Martin,

we signed on Sept. 14, and the denial letter is dated Dec. 1, but we didn't get it until the middle of December.  While I knew  not to count the money until the check was cashed, it was still kind of a disapointment  for me. We had spent several months before signing thinking things were being checked  out, and the landman said the old well would be no problem. I've been studying  and talking to anyone that might have some experience, and I don't know what to do next. In reading my old lease (I should have done that before last September, because I forgot a lot from when it was signed in 1984),  I am entitled to annual delay payments when they don't sell any product commercially, but I have to notify them in writing to get it. I did not do that.Old lease also has a no pooling clause and is for 40 acres. I think Enervest is going to have to talk to me about that.  I had a man tell me they did me a favor by turning me down,  the bonus payments will go up when the new well proves whats down there .So it's patience for now, waiting to see what's next.

Permalink Reply by Martin J Huth on January 6, 2012 at 9:03am

Keith, so, I should be expecting my denial any week now....but we shall see...thanks

Permalink Reply by dr j on January 6, 2012 at 3:24am

Hi Marty

Yes- you need to get that other document referenced in the margin.   You will often be amazed at what you find.   For our own personal property a unique situation started me down the path to finding all the documents pertaining to our old lease- and I found not only a "release" of our old lease but also a document in which the previous lease holder had given up their exploration rights.  It's important as a property owner to "know" what pertains to your property and NOT rely on the oil and gas industry ( landman or drilling company).  

Good Luck!   

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