Is this a rotten deal?

WARREN

For 7,000 property owners in Mahoning County, 7,000 in Trumbull and 450 in Columbiana whose “deep” mineral rights were transferred June 26 from Everflow Eastern of Canfield to Chesapeake Energy of Oklahoma, the result could be — eventually — higher royalties for the property owners than they now receive.

But having Chesapeake in possession of rights to the Utica shale formation won’t be as lucrative for the property owners as those who sold their mineral rights to BP America this spring, said Atty. Mark Finamore, who represents several townships and villages as well as private-property owners.

Rights to the Utica shale are sometimes referred to as “deep rights” because the Utica shale formation is lower in the ground than the Clinton shale, which Everflow has been mining in the Mahoning Valley for several decades.

Chesapeake bought the deep mineral rights to 28,000 acres for about $35 million from Everflow in February, according to a filing with the U.S. Securities and Exchange Commission.

It is not known how many of those 28,000 acres are in Mahon- ing, Trumbull and Columbiana counties. Calls to Everflow regarding the leases were not returned, and Chesapeake declined to comment.

“There’s no negative impact, no disadvantage to them for their rights being assigned” to Chesapeake, Finamore said of the property owners.

In fact, the transfer will be a “windfall” because if and when Chesapeake begins to drill on that land using horizontal fracturing, it’s likely that the company will be able to extract a much larger amount of gas and oil than Everflow could using the older vertical form of drilling, Finamore said.

The terms and conditions in the original leases with Everflow transfer to Chesapeake, Finamore said, including the percentage of royalties being paid — in most cases 12.5 percent.

The Everflow property owners won’t get a signing bonus such as the BP owners got, Finamore said. They received their signing bonus when they signed their lease — typically $100, Finamore said.

BP, conversely, is paying its property owners a signing bonus of $3,900 an acre on the 84,000 acres it has leased in Trumbull County. BP is paying its property owners royalties of 17.5 percent.

Those people who signed leases with Everflow didn’t know at the time that technology would make it possible for drilling companies to use horizontal fracturing to extract oil and gas from the much deeper Utica shale layer, Finamore said.

They made the best deal they could at the time, but their leases — some as old as 25 years — will prevent them from getting the kind of money the BP property owners are getting, Finamore said.

Two of the leases for the Everflow property owners obtained at the Trumbull County Recorder’s Office gave Everflow and any company buying the lease the right to extract minerals “for five years and as long thereafter as operations are being conducted on any such unit or oil or gas can be produced in paying quantities.”

If a property owner wishes to, he can try to argue that his lease should be canceled on the grounds that the well is dormant. Short of that, the lease allows the drilling company to keep the mineral rights for an indefinite period of time, Finamore said.

“As long as operations are being conducted and gas and oil can be produced ... their lease goes on in perpetuity,” Finamore said.

Trumbull County Recorder Diana Marchese said most of the leases transferred to Chesapeake June 26 involved Everflow but possibly not all.

The recorder’s office reported that the title work on the leases produced the largest single fee ever charged in Trumbull County for a title transfer — $34,159 — and took several employees two weeks to complete.

In Trumbull County, most of the leases are for land in the townships of Warren, Weathersfield and Howland, but there are some in Bazetta, Champion, Liberty and Lordstown. Many of the parcels are small — in many cases only a quarter of an acre, records show.

Views: 5127

▶ Reply to This

Replies to This Discussion

Permalink Reply by Frank Nesmith on August 1, 2012 at 8:54am

I have a friend in this deal and he is flaming mad. The article makes it all sound good, but these folks don't get any signing bonus. No way to get good drilling conditions from Chesapeake. They believe they will be put in 1280 acre production units. He is crushed over this. I am not sure if I even understand the ramifications of all this. Can anyone here tell me if there is an up side to this, or are these people just plain screwed? Any way they can fight this at all?

Permalink Reply by JR on August 1, 2012 at 9:18am

They're stuck with the terms agreed to, by whoever signed the original lease with Everflow.  And, from all accounts I've heard, CHK is hardball about NOT negotiating with landowners once they own those rights.  Your friend is basically bound to an antiquated lease with zero recourse.  Bummer for them.  Lots of people are in this situation.  Much of Northeast OH was HBP by little clinton well operators.  All the big guys have to do is make those clinton operators rich (buy them out) and they can pick up from there.  

Permalink Reply by jb379 on August 1, 2012 at 9:44am

Not sure it would be considered a "bummer for them" if some nice wells are drilled and the fat royalty checks start flowing in.

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on August 1, 2012 at 9:13am

Nobody got screwed.  People signed contracts, Everflow drilled dozens of wells, survived a bad economy and gets to reap the rewards of being an operator.  Landowners got wells and royalty out of the deal.  Just because the world changed doesn't mean that everyone automatically get compensated evenly.  Does it stink for someone who has been HBP for ten years?  Sure, I guess.  But they lived up to their end of the contract just like the operator.  Not everyone's circumstances will dictate equal outcome in life.  If we had equal outcome we'd be the USSR.

Permalink Reply by Sage59 on August 1, 2012 at 9:28am

You are right. Contracts were signed. But doesn't Chesapeake have to re-negotiate a lot of these old lease agreements with us landowners that only allow for 80 to 160 acre drilling units to be built. My lease only allows for 80 acres. Doesn't Chesapeake have to honor that original agreement, and re-negotiate to build 640 to 1280 acre units?

Permalink Reply by JR on August 1, 2012 at 9:50am
They do. We are not with CHK, but I'm told they're offering $1500-2000 up front to adjust the unit size, no royalty increase. Someone else on here can probably speak more accurately to that. We are in the process of negotiating our unit size increase. So far I'm told, no bonus money, but a nice increase in royalty.
0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on August 1, 2012 at 10:10am

If the old leases need to be renegotiated then CHK will hold less power and the landowners will be able to make a new deal for themselves.  

Permalink Reply by Frank Nesmith on August 1, 2012 at 10:33am

That's what I'm thinking. If the unit size has to be negotiated, at least they have some power. I told him to get a good leasing lawyer and have them look at it. The royalties are not going to change much, but they really do need to play hardball right back at Chesapeake with the permit conditions. His well hasn't paid him anything in years, so he really doesn't have anything to lose. They all know with the prices as they are for wet and dry, they won't get the big bonus money that others got, so it's worth it for them to at least get good terms.

Permalink Reply by Jim Litwinowicz on August 1, 2012 at 12:54pm

A contract is a contract. But if they have to renegotiate to larger unit sizes, the landowners may be able to get a little in return.  If it were me, I would call all my neighbors and try to work together.  I would form a group and try to expand it county wide. There is strength in numbers.

But be reasonable. CHK holds these by HBP.  If the landowners ask for too much, CHK can just sit on them for decades while they drill lands that are not HBP. The biggest advantage would be in areas that CHK signed new leases intermixed with HBP leaseholds. Then they have to come to an agreement with the HBP people in order to produce the newly signed parcels or loose them in a few years.

Do a lot of homework, learn as much info as you can, and expand the group as large as possible. And be patient. Good luck.

Permalink Reply by Frank Nesmith on August 1, 2012 at 1:15pm

That is really good advice. I will tell him. Thanks Jim Litwinowicz.

Permalink Reply by Frank Nesmith on August 2, 2012 at 12:24am

I agree Fang. I'm hoping they do. I can't imagine how difficult this will be with so many small leaseholders involved. Anyone have an idea how many of these wells are still running?

Permalink Reply by Sage59 on August 2, 2012 at 12:25am

As usual, Fang, you hit the nail on the head. If a county group could be formed, it could really benefit a very large number of us. I think we occupy a couple of the most interesting counties in America, as far as Oil and Gas companies are concerned. Nobody wants to take undo advantage of companies that are going to benefit us in the long run, but business is business, and Chesapeake would be happy to pay us as little as possible. It would be tough to sleep at night knowing I had been steam rolled in the negotiation process, and make no mistake, they MUST renegotiate the unification clause to form a larger unit of at least 640 acres. They bought up all those leases knowing that clause for smaller units is in many of the leases. I believe very strongly in being an individual, but there are times when we should work together to effectively negotiate with a large company. It has been proven to work for landowners in the area, ALOV for example. By the way, I think many ALOV members are going to find that they are HBP by old Clinton leases and old pooling agreements. I truly hope you come up free and clear in the process you, and some of my friends, are going through now. We are standing on land we have all invested our lives in, and if we follow the letter of the law as our old leases are written, legally we are permitted to renegotiate better terms. It's like selling a cow. Our cow just happens to be one of the best in the country. I will join a HPB group if one is formed.

RSS

© 2024   Created by Keith Mauck (Site Publisher).   Powered by

Badges  |  Report an Issue  |  Terms of Service