Replies to This Discussion

Permalink Reply by nc man on August 24, 2016 at 4:17am

Scott,

Could you give me an explanation of the Pugh clause, please.

Thanks!

ncman

Permalink Reply by scott peterson on August 24, 2016 at 4:40am

Lots of typing so I have pasted a very simplified explanation. The Pugh Clause is the language used in an oil & gas lease to spell out what happens to the portion of the acreage you leased that does not either contain a well or is not included within a producing petroleum pool or unit. The typical Pugh Clause reads as follows: "If at the end of the primary term, a part but not all of the land covered by this lease, on a surface acreage basis, is not included within a unit or units in accordance with the other provisions hereof, this lease shall terminate as to such part, or parts, of the land lying outside such unit or units, unless this lease is perpetuated as to such land outside such unit or units by operations conducted thereon or by the production of oil, gas or other minerals, or by such operations and such production in accordance with the provisions hereof." While the clause may seem complicated at first, its meaning is quite simple: at the end of the primary term, the lease will expire as to any part of the land that is not being used by the petroleum company. Without the Pugh Clause, if your lease covered 600 acres and the petroleum company only put 20 acres in a pooled unit for a producing well, the lease would remain in effect as to the 580 acres not being used as well as the 20 acres in the unit. Even though you are receiving no production (and thus no profit) from the 580 acres, they would remain tied-up by the lease indefinitely. With the Pugh Clause, the 580 acres would be released from the lease at the end of the primary term. You would continue to receive royalties from the production from the 20 acres, and the 580 acres would be available to lease to another company when one comes along. Depending on the additional language in the lease, you must keep in mind that the petroleum company may be able to hold on to the 580 acres in our example through methods other than actual production of oil or gas. Some of the typical ways that land can be maintained absent production is through seismic work, continued drilling operations, or additional rental payments. As with all provisions of the lease, the Pugh Clause and any additional language must be worded very carefully to provide maximum opportunity for the petroleum company while also providing maximum protection for the landowner.

Permalink Reply by MA on September 9, 2016 at 1:25am

Just received this offer from a Landman from Holland Services working with Eclipse on 9/9/2016.

 

"The offer to lease the oil & gas estate under your property in Guernsey County, OH is as follows. We offer an 8 year lease term without an option to extend. In compensation for that term, we offer $7,500 per net mineral acre. That payment is amortized at $500 per net mineral acre in year one and $1,000 per net mineral acre for years 2-8. Therefore, if you property has not been unitized/pooled within the 8 year term, you will have received $7,500 per net mineral acre. The royalty is calculated at 15%."

 

My initial thoughts are that this is a fair offer given the market conditions. Considering my 5 year term with Chesapeake at $2500 total per acre for 5 years @ 15% was not renewed this past June 2016, this may work out better. Does anyone else have the contact numbers of other Landman as I think I could get the offer higher if I have other competing offers?

I know there are some that would say hold out for more - but I would be curious to see what others think? Thank you in advance.

 

Permalink Reply by Finnbear on September 9, 2016 at 2:25am

If they drill in a year, you only get $500/acre. 15% seems a bit low - is that a gross, NO deductions lease or do they allow market enhancements to be charged against your royalty?

Permalink Reply by MA on September 9, 2016 at 2:43am

Here is the link to the agreement - the file is called Blank Lease.PDF (just do not click on any of the other pop up windows)

Proposed Lease Agreement

It is the standard format. 15% is on the low end. Not sure about deductions and market enhancements - I will ask. (Maybe you can determine it from the proposed contract.)

Permalink Reply by MA on September 9, 2016 at 3:18am

For me, I just move the cursor over the Proposed Lease Agreement (the cursor changes to a finger) and it will allow you to click on it. A dialogue box comes up and you can then click on Blank Lease.pdf Thanks

Permalink Reply by Brett on September 9, 2016 at 9:48am

MA,

Your link worked fine for me and I'm going to read it over. My lease with CHK expired in June and I'm looking for the best lease agreement that I can find. I'm in Oxford Township. You haven't heard of any land groups forming to represent orphaned leases have you. Thanks for your post.

Permalink Reply by MA on September 14, 2016 at 9:07am

The Landman from HollandServices came back and he would add the Market Enhancement Clause.

By the way, if they drill the yearly payments ($500/acre year 1 and $1000/acre years 2-8) would stop and I would only be entitled to the royalties. Is this common? I would be afraid that they would drill - royalties would be small and the yearly payment would be gone. But if they are to drill - they would do it for a good reason and the royalties should be bigger than the yearly fee. Any thoughts?

MARKET ENHANCEMENT:  It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, all royalties for oil, gas or other production (including but not limited to natural gas liquids and/or condensate, such as ethane, propane and butane) accruing to the Lessor under this Lease shall be paid without deduction, directly or indirectly, for the costs or expenses of Lessee (or an affiliate of Lessee) relating to producing, gathering, storing, compressing, transporting, and marketing the oil, gas and other products produced hereunder; provided, however, Lessee may deduct from Lessor’s royalties accruing under the Lease, Lessor’s proportionate share of any costs or expenses on the express condition that the costs or expenses are incurred to receive a better price for the oil, gas or other products produced hereunder (including, but not limited to, separating, treating, dehydrating and processing), and in any such case, the computation of the Lessor’s royalty shall include the additional consideration, if any, paid to Lessee as a result of any (i) increase in price of such products and (ii) additional revenue stream.  By way of example, but without limitation, if gas produced from the Leasehold, or lands pooled or unitized therewith, is processed for the recovery of liquefiable hydrocarbon products prior to sale, Lessor's royalty shall be subject to deduction for any costs and expenses described above, including, without limitation, the cost of processing and transporting such gas for recovery of liquefiable hydrocarbons, and the computation of Lessor's royalty shall include the both consideration paid to Lessee from Lessee's sale of such liquefiable hydrocarbons and the consideration paid to Lessee for the residue gas.  It is understood and agreed that to the extent Lessee sells oil, gas, natural gas liquids, or other products produced hereunder to an affiliate, the price upon which royalty shall be based shall be the greater of: a) the price paid by the affiliate; or b) the price that would have been received from an arms-length transaction with an unaffiliated third party at the same point of sale as that with the affiliate.

Permalink Reply by bo boboski on September 14, 2016 at 10:21am

Absolutely do not accept. Get a lease drawn up by an Oil&gas experienced lawyer.They'll drill in a year,you'll only get the $500 per acre, then you wont get any royalties because they'll use the market enhancement clause to reduce your royalties to about ZILCH!

Permalink Reply by MA on September 15, 2016 at 1:24am

Thanks Bo - I have reach out to a couple of experienced lawyers in this field for guidance that are local to the area. This is too important not to have my best interests reflected in the contract.

Does anyone have previous positive dealings with an experienced lawyer in the area?

Permalink Reply by bo boboski on September 9, 2016 at 8:41am

I'd say; $7500 an acre is okay, just pay it now, or go fly a kite. 15% royalties aren't too awful bad, as long as it's no less than that by fees,and other deductions. 15% MINIMUM!!!!!!!! From proceeds at point of sale to an UN-AFFILIATED buyer!

Permalink Reply by nc man on September 10, 2016 at 4:08am

Just curious Bo, can you wheel and deal with Ascent on the price of the acre, etc., on a new lease? Or is just getting Ascent to renew the original lease the best way to gol?

Also, an update on Carrizo's well bottom being in our west part of Section 21. My brothers went to County Recorder's office, Tuesday to try and straighten this out. No success there.

Here was their findings, by email to me, after their trip down to Cambridge----

-----------------------------------------------------------

We talked with Jim Merser.  He showed us exactly where our mineral rights are in section 21.  The upper section of 21 is divided into 4 rectangle sections.  Our mineral rights include the entire third section (counting from the left).

 

ODNR issues permits which include all other information related to the site(like laterals).  This info is sent to the Recorder's Office to record and Map Office to Plot on his map for office only for tax purposes and 911 (totally separate from ODNR).  Jim insists on appropriate coordinates to update his map from info supplied by ODNR. 

 

Jim did take all the info to the above well and plot it on his map for Buck and I.  He explained that the width acrossed section 21 should be 1 mile.  Section 21 is sightly larger.  he showed the lateral line from the above well and then drew a line directly down the center of section 21.  It appeared that the lateral line was sightly into our mineral rights.  But Jim said he wasn't sure that that was truly the case...but it sure looks it. Neither office could comment regarding the 500 foot rule (no lateral within  anothers mineral rights).  Jim said maybe that applies to some ones house?

 

Jim made it very very clear.  Who we need to address this issue with is ODNR.  Both offices said Carrizo is a good company.

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I clicked on the bottom hole of theWagler 1S well, and clicked the green dote which brings up the well summary.

On the bottom of that well report page,  I found a place that stated if you have  any discrepancy, report it to Tony Brown at the Guernsey County Auditor's Office,

So I  sent an email to the auditor's office and explained what I had found about the producing Wagler 1S well being on my part of Section 21. We were never included in the pool to recieve royalties since the well started producing.

Explained the well report states, Wagler 1S well starts at Section 27 and ends at Section 20.

BUT IT DOES NOT GO INTO SECTION 20 AT ALL!----------- it goes into the west section of OUR PART of Section 21.

Have not heard back from anyone in the Auditor's Office or Corrizo.

My brother is contacting ODNR but have not heard back from my brother, yet.

I also, emailed Carrizo on this BIG error. No response, yet.

------------------------------------------------------------------------------

Bo or any of my o/g friends, on this site, have any feelings on how this might go down?

Will we or wouldn't we get our fair share from this producing well?

Bo, if you do not want me to bother you with all of this, let me know.

No hard feelings.

nc man

 

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