Lease Legnth

I have heard of offers for 10 years, 3500 per acre with a 17% royalty, versus 5 years renewable in 5 years, 2500 per acre with the same royalty. Am I correct in assuming that if the well is drilled within the next five years that the 10 year lease would be more attractive? And that if it was drilled in years 5 thru 10, that the 5/5 would be better? Any comments are appreciated. I am located in southern Butler county.

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Permalink Reply by John Mackey on May 15, 2013 at 5:35am

Most sorry -- yes I can spell length!

Permalink Reply by Mike Sero on May 15, 2013 at 5:45am

Don't sign a 10 year lease!!! That is a true horrible lease.

A 10 year lease gives the driller 10 years to do something - and your land could just sit there.

5/5 lease - this gives the driller the option to renew or not - now if you do one of these - x's your bonus times 25% then add that to the the current bonus. this gives them more incentive to drill.

or just do a non renewable with first right of refusal to match a new offer in 5 years -

Once you are drilled and in production you are Held by production. HBP, for the life of the well, and lease length doesn't mean anything. 

But the person signing a 10 year lease at 3500 an acre is technically getting less money over long run - 350 dollars a year to be held to a lease.

I'd stick to 3500, 5yr not renewable. 17%.

Permalink Reply by Armstrong Land on May 15, 2013 at 9:18am

Sero - how can you value Mackey's lease with the information you have been given?  Isn't it possible that Mackey is in an area that one operator dominates and he is fortunate to have an offer at all?  Aren't the terms of the addenda a consideration in valuing this lease?  Are you familiar with Mackey's current financial situation? 

 

Your recommendation on "What you'd stick to..."  seems out of line for the southern Butler County lease market.

Permalink Reply by Mike Sero on May 17, 2013 at 4:11am

The standard has become 5yr non-renewable - Paid up in almost all areas in PA, OH and WV.

I've been in the O&G industry for over 9 years - and the time for land owner friendly leases are here. I negotiate all the time for a large client of mine in 5 states that he has rights including Pa, Oh and WV. I know what works and what won't having been on both sides of the fences.

I negotiated a deal with a small driller in a county in pa, where no one else is drilling - complete exploratory well, for a 22% royalty and we took no bonus they didn't have lot of capital for leasing and my client didn't need the cash- was only 10 acres all in his proposed unit. Then gave him first right refusal on the rest around the unit if he hits - 3yr lease Pugh clause etc...

Every situation will be different - for every person -

But I stick by my thoughts on never signing a 10 year lease - the drillers are in no hurry to expand or drill - and hold your minerals for 10years!!!

My advice never sign anything longer than 5 and I go for 3 often depending on area, driller etc....

Permalink Reply by Trapper on May 15, 2013 at 9:55am

Maybe my thinking is askew , but if I were inclined to tie up my rights for ten years , I would want alot more than that. @5 yrs: 2500=$500/yr. @10 years:3500=$350/yr.  The math adds up in the win column for the O&G. At least the royalty % is the same.

Permalink Reply by Mike Sero on May 17, 2013 at 4:13am

if they are willing to pay 2500 and 3500 on a 10 - they will do a 3500 on a 5yr

Permalink Reply by Trapper on May 17, 2013 at 6:08am
That's my thoughts too Mike.
Permalink Reply by John Mackey on May 17, 2013 at 3:59am

Thanks for the input. I have 7 acres, and the area is dominated by one driller who has alot of signed leases and is aquiring expiring leases from other companies. A well pad across the street from me appears to imminent, and that is why I am questioning the timing of the drilling vs the lease length. Again, much thanks for your thoughts.

Permalink Reply by Kyle Nuttall on May 17, 2013 at 5:46am

Go for the 5 year, non-renewable.  And if they say they are giving you a 5 year, non-renewable lease, make sure to read the lease through word by word and cross out anything that contradicts that.  I've spoken with more than one mineral owner who told the landman they wanted a short term of years, non-renewable, but ended up signing a renewable lease anyways because they didn't read the final draft of the lease.  Read the contract!  Even if the landman is honest, he can still make mistakes.

Also, negotiate the royalty.  Down here in WV we're starting to see 15-18% as the norm, and I think PA is a richer play.  Besides, you want to get more of the royalties anyways, don't you?  

Also, ask for no post-production costs.

Also, ask for no warranty of contract.

Also, ask for indemnification.

I'd start talking pooling and Pugh clause and stuff, but I'm only licensed to practice in WV.  You should get an experienced PA attorney to look at those details for you.

Permalink Reply by Mike Sero on May 17, 2013 at 7:29am

Agreed

Permalink Reply by Billy Park Whyde on May 17, 2013 at 8:02am

I personally would like to see a performance bonded lease. If they fail to have drilled and produce a well in paying quantity (your call in  $$$$$) they forfeit all lease rights and have no standing to prevent payment of the performance bond. Highway construction, buildings often contain performance bonds why should we as land owners have to settle for maybes?

Permalink Reply by Mike Sero on May 17, 2013 at 8:15am

Never happen, they have no way of controlling mother nature.

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