Lease Assignment

We have 36 acres under an old lease (2004).  After we signed, a shallow well was drilled and has been producing ever since.  Recently, the deep rights were sold off to a large energy company.  Does the shallow well production keep the lease active even though the deep rights have been sold?  In other words, does the holder of the deep rights have to produce in order to keep the lease?  Thanks in advance for your help.  

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Permalink Reply by Nancy Mosley on February 20, 2021 at 6:10am

I am not a lawyer, but as I read the leases I have seen and understand the laws of WV (not sure about other states), production must be continuous on at least one well, whether shallow or deep, or a shut-in fee paid (according to lease terms) if the well is shut in for a period of time, or (for the old flat rate leases, a certain $ amount per year or per quarter) the flat rate royalty is paid on time. If this doesn't happen, there might be ways the lease owner can try to get around the situation, but generally after a certain amount of time with no production and/or no other appropriate payment, the lease is null. Whether or not there is a formal release of that lease recorded is a different question.

It sounds like your question is mainly about the deep rights and production from that. It sounds like since your shallow well is still producing, the lease is in effect. The deep rights question is between the companies. There might be some language in their agreement stating that a deep well must be drilled in a particular time frame but that kind of agreement is not always filed in full, sometimes just a Memorandum.

Again, I am not a lawyer, and am not familiar with laws of states other than WV, and don't make a claim about WV! If I had to know the answer for my own situation, I would consult a qualified attorney.

Permalink Reply by Angela Brown on February 20, 2021 at 7:45am

Thank you, Nancy.  That is very helpful and makes sense.  

Permalink Reply by farmgas on February 20, 2021 at 10:49am

This is a very important question.  Our original lease was with CNX Gas who sold off shallow wells to Diversified Gas & Oil.  Who is CNX responsible to; DGO or the original landowner lease holder?  Does the old lease determine drilling obligations or as mentioned, is the original gas company responsible to the new shallow gas lease holder?  Shouldn`t the original leaser be entitled to know these details?

Permalink Reply by Nancy Mosley on February 20, 2021 at 11:23am

As I understand it, you would have to look at the Assignment/'Conveyance/Bill of Sale or whatever they call the document, when CNX sold the wells to Diversified. They probably sold the lease and lease rights and wells only for the shallower depths. Or maybe just sold the wells. We have a similar situation with CNX selling to Diversified. They had the kind of language I put above, with wording about this just for the Target Formations. The Target Formations are defined differently for Northern WV (where we are), Southern WV, and 2 different parts of Pennsylvania. For Northern WV, it is "depths and formations from the surface of the earth to 500 feet below the stratigraphic equivalent of the base of the Benson formation at a depth of 4580 feet, as seen in the SHR1C Pilot well API 4709502111, Tyler Co. "

If you have access to your county's documents website, you can search for this under CNX Gas Company or Alliance Petroleum Corporation. Alliance changed into Diversified Production in 2019. In My county, it was filed in May 2018.

If it is the same situation, CNX would keep their rights to the depths below the Target Formations, including probably the horizontal wells. Diversified would have the rights higher up. The Original Lease, I think, would be the with Diversified but any terms in there would also apply to CNX for its depths and wells.

I hope I understand it correctly, and have explained it correctly. We are getting production payments from both companies so that part of the lease is being honored.

And, unless you have some wording in the lease for the Lessor to be notified, they probably don't have to tell you. We have received letters from Diversified, and probably CNX, about the changes in well payments. They didn't say much about the ownership.

Permalink Reply by farmgas on February 20, 2021 at 12:11pm

I think you are correct.  It just bothers me that the gas leases can be bought & sold without landowners being involved, or at the least communicated with to those changes.  An explanation of the changes would be nice with an open exchange of the information.  After all, when the leases were originally signed the landowner has choices to consider who to sign with; now those choices are taken away.

Permalink Reply by Nancy Mosley on February 20, 2021 at 12:31pm

Very much agreed!

Permalink Reply by farmgas on February 20, 2021 at 12:57pm

As the gas industry has changed over the past year, how do you see CNX these days?  They seem to be a changed company with a new focus for the future.  Their quarterly reports appear to take on a new objective now.

Permalink Reply by Nancy Mosley on February 20, 2021 at 2:01pm

I have not read those quarterly reports. Please share your insights!

Permalink Reply by farmgas on February 20, 2021 at 2:31pm

Check out a recent GMS posting for gas company reports.  Recent CNX reports appear to be focused on informing investors now providing less information to landowners. 

Permalink Reply by Joe C. on February 24, 2021 at 1:50am

Angela, The shallow lease holds all depths (HBP) (Held by Production) unless you modified that back in 2004. When a E&P company like EQT or CNX wants to drill a Marcellus/Utica unit, they do an assignment with the company who holds the original lease. Then the E&P company like EQT or CNX will send you an amendment of ratification for you to sign for you to get paid on any deep production.

Permalink Reply by farmgas on February 24, 2021 at 2:49am

JC, I still find this process to be confusing to me.  CNX sells their shallow wells to Diversified Gas & Oil and those wells still HBP the rights to deep shale gas even though no new deep wells have been drilled yet.  DGO bought the leasing rights down to the target formation as Nancy Mosley stated.  Does this mean that CNX could no longer drill within that target zone but only to deeper depths?  In other words, in my understanding of all of this, DGO only owns the wells & infrastructure but CNX still owns the primary lease, even though I did not sign a new lease with DGO, right?  This sounds like a sweet deal for CNX (maybe EQT, too) doesn`t it?  I suppose my confusion is this, why should the deep gas rights not be severed since the original lease holder no longer owns the shallow gas wells and HBP rights!  Why was the original lessor not a part of this process?

Permalink Reply by Joe C. on February 24, 2021 at 4:22am

What we have to look at is the HBP. Anytime someone signs a lease with giving that company ALL Depths, it is held by the old lease. If CNX sells DGO all assets (Shallow Well), DGO has the ALL depths from the lease that was signed in 2004. If EQT, SWN or even CNX wanted to come in to build a 640 acre marcellus/utica unit, they have to have a assignment with DGO (New Owner of Depths). The assignment is giving EQT, SWN or CNX the right to development deeper shale. DGO still owns the Shallow well and Production. For the mineral owner who has that old lease, EQT, SWN or CNX would have to send them a Amendment of ratification to that old lease to modify newer language of a  Pooling/Unit and Shut-in terms. This allows the mineral owner to collect the original royalty percentage from the older lease on any deep depth production. Of course, you want to take the amendment to an attorney and have the attorney fight to get the royalty higher since EQT, SWN or CNX is modifying the lease. 

Now, say if DGO wants to produce the deep, they would have to go through the same process, amendment of ratification of the original lease. 

The amendment is to modify newer language used in newer leases. A company can not sign a new lease since it is HBP. WV law. If the shallow well is plugged or abandoned, then the company can present a new lease.

For example, I have a cousin in Marion Co WV who had a shallow well from Waco oil and gas. They drilled it in 2003. It's still producing (HPB). He gets a phone call from XTO Energy about needing a amendment of ratification of the older Waco lease because they're drilling a 640acre unit. My cousin went to the courthouse and pulled the assignment where WACO assigned XTO the deep rights to drill. So XTO had to modify that older lease with newer language. 

When a company like WACO assigns to XTO, XTO has a separate farm out agreement on what they are paying WACO or WACO may get a certain royalty percentage from XTO royalty on all producing well legs. 

I hope this helps.

JC

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