Replies to This Discussion

Permalink Reply by Alan Pavlik on October 15, 2012 at 8:17am

I have experienced situations in the past and present where both parties negoitiated a lease and both felt is was fair and they executed the lease, however I come across those same people today who now say the lease is unfair and they want out of the lease (even with a well on the property). The lease was fair up until the time a "third party" came along and told them it was unfair. Your description of the above sounds perfect however we do not live in a perfect world nor are the people living in it perfect.

What is fair?....its what both parties agree to and say is fair not what another says is fair.

My problem is that people blame and do not accept their role in past/present leases....that doesn't sound fair to me.

Permalink Reply by Bob Jenness on October 18, 2012 at 4:05pm

Alan,  

Thanks for joining this discussion.  I was starting to feel lonesome.

Blame may or may not be appropriate.  Depends on whether the blamer was, in fact treated fairly.  Time will change our views of fairness less if we know as much as we can from the get...go.  We can know as much as we can if and only if we have the same access to the same information as our "drilling partner".  I agree that people are far from perfect, but I believe when we do business in America, we have every right to expect integrity and honesty should be at the famous "six sigma" level.  I've seen a lot more landowners that come close to this than "drilling partners".  Then there's how close we all come to perfectly competent - a much wider range on both sides.  Only problem is, when a "drilling partner" makes a mistake, the consequence to him is a small hit to his bottom line (assuming he gets it right 99% of the time).  The consequence to landowner is often a complete abandonment of hope for royalty income.  After some research, there's only one "drilling partner" out there that publishes his quality numbers, and he's not drilling around here.  Anybody here know of any others? 

Permalink Reply by Alan Pavlik on October 18, 2012 at 10:39pm

I respectfully disagree with some of your points and your terminoloy as well.

I have dealt with thousands of landowners in the past and most I would agree have or had what I would consider integrity, that is/was the beauty of dealing with landowners/farmers....alot of basic values, but let's not play word games here, lately when there has been alot of bonus money thrown around in areas where people are already under contract and we start to use the word fair, I balk at that term because why is it that the lease  was fair and fine up until the time the big bonus money started to come into the area. Now we start to use the word fair, that is when people began to look for a way out of their lease so I just don't buy it, It is blatantly clear to me what the intentions are here of the landowner...... try and get out of the lease that you accepted rental and/royalties from for several years and then all of a sudden its not fair. It is greed plain and simple. If you were lied to, fine thats a different story, but I can tell you what I have seen and it only began when someone  else started to make a better offer  then the one that was already signed. I have come to realize that everyone has a price, including the operator or "drilling partner". A driller doesn't have to make a mistake in order to hit a dry hole, its the nature of the business or as they say "if there was no risk everyone would be a doing it" so mistake doesn't quite work for me. By the way 6-8 million dollars it costs to drill a mistake seems like alot of money to me and to you it is a small consequence. I cannot speak for the new companies that are in the area now but the ones that were hear before the land rush were considered pretty fair......not all but most just like the landowners that were here before the land rush. This shale play can become a very good thing for the community however greed and/or integrity has been tested, some have not passed this test. That is my opinion, Thank you.

 

Permalink Reply by 0ym9x5ag7ury2 on October 19, 2012 at 2:03pm

Bob,  

To learn what a fair lease looks like, read all the leases that are sent to you by the oil and gas companies. You can also go to an electronic court house in those counties that have them, and read the old oil and gas leases. You'll find statements like "If the Leasee does not comply with the details of this contract, the lease is not terminated. The Leassor must notify the leasee of the failure to comply, then allow 60 days for the Leasee to correct the non-compliance". People have actually signed these unethical contracts.

Next go to alov.us and read the March 2012 lease that was written for a landowners group. The more leases you read written for the benefit of landowners, the more you will know what what a fair lease looks like, and what the O&G companies forgot to put in their leases.

Any contract that you sign should be written for you by your lawyer or written by a landowners group lawyer and be slanted towards protecting the landowner. 

Educate yourself or those who are in the know will help you dispose of your wealth. Some of them will want to be your friend and they have a fancy slogan thats make you feel good, but they don't drill. These folks are going to resell your lease and make the difference between what they give you and what the driller is actually paying. 

When it comes to leases, pipeline right of ways or road right of ways, you are in a street fight with those who want what you have. Playing fair with a corporation rather than being street smart will cost you, ask your neighbors about it.  "Money Brings Out The Worst In People".

Permalink Reply by Bob Jenness on October 28, 2012 at 9:09am

Ron,

Thanks again for posting.  I did actually read all or parts of quite a few leases before my original post.  I would certainly agree that current standard and lawyer-customized leases are, on average, probably a bit fairer than those written pre-horizontal-drilling.  They still have a number of visible tilts in favor of the drillers.  The mere fact that everyone agrees that every landowner needs a lawyer tells me that the "energy partners", if left to have their "standard" lease would let their greed drive us to an unfair lease (in their favor, of course).

As to "educate yourself", I would have done lots more of that, except the information I need is unavailable or delayed.  Examples of this are rampant in this forum - I'd like to educate myself as to the geologic value of my land by trading seismic testing access to my land for that information.  I'd like to see production data from Utica Wells already drilled in my neighbor's lands (in Ohio), etc. etc.  The "energy partners" have conveniently protected this information so neither I nor my lawyer can get it.

Anybody want to talk about geologic layer separation lease terms in current leases?  Shouldn't a fair lease address all interesting layers individually?

Permalink Reply by 0ym9x5ag7ury2 on October 31, 2012 at 10:38pm

Bob,  The Educate Yourself could have been said in a different way, the intent was to learn about what you have to protect yourself from those that would like to take if from you. Go to the Ohio Department Of Natural Resources to find information on well production rates in Ohio, along with geologic conditions below this area. The production rates my not be be accurate.

There are interactive maps of horizontal wells in each county in Ohio. Does PA have an equivalent site and map? I would like to see a map for PA.

The other fact is without pipelines the production rates will be much lower than if the pipelines were in place. 2014 is a completion date for a 36" pipeline from Columbiana County to Southern Ohio which will increase the production rate, but the number of producing wells will have increased by then. We won't see full production rates until the pipelines catch up with the number of producing wells.

Permalink Reply by Ronald L Wilcox on November 2, 2012 at 9:10am

I think what we have here is the chicken and the egg syndrome,why would you drill a well if you don't have a pipeline to carry the product to market?Or,why put in a pipe line if you have no well's?However,I think a professional in the petroleum industry could answer this question,l would like one to please reply.

Permalink Reply by Bob Jenness on October 28, 2012 at 8:56am

Alan,

Thanks for your post and your affirmation of the general integrity of landowners.  I think it's always been true that landowners, especially farmers have a strong fairness ethic.   When you fight mother nature and greedy middlemen to make food or energy for your fellow Americans, you tend to grow such an ethic, and you also tend to be on the short side of fairness more than the long side. 

Now, as to the folks who try to get out of their leases.  Even if they're "several" years old, the combination of financial need and overwhelming market weight (and perhaps a lot of that greed you mention) on the "energy partner" side could very easily have produced an intrinsically unfair lease several years ago.  If it was labeled a "sale" rather than a "lease", then you'd have the right to whine about welching.  But when a driller can make a fortune on his own stock by drilling cheap vertical wells to HBP forever land cheaply leased "several" years ago, that lease was probably unfair.

Also, do you think it's fair that "energy partners" can now completely change the economics of their industry with horizontal drilling and continue to use old, vertical-oriented HBP leases to get the landowners gas dirt cheap while new leases are paying a "fair" price?

How about the Bakken, where most landowners were long since squeezed out by financial hardship while shallow vertical wells easily held land without paying sustainable royalties?  When the hardship got too big, there was always a landman there with a small pittance to buy whatever rights not HBP forever.  Now the "new landowners" are getting rich while the farmers' kids are roustabouts on the rigs.

I've also read enough drilling histories to know that the dry hole ratio decreased from more than one in 6 in 1984 to less than one in a hundred today (that, of course is a bit imprecise, 'cause as a landowner, I can't get real accurate data for today).  That level is starting to get down, and the DWM technology is getting precise enough to support the claim that mistakes are now a significant part of the "risk". 

Permalink Reply by Alan Pavlik on November 3, 2012 at 7:05am

Bob J

I'm not sure I agree with of some of your statements, so I'll state mine as I see them.

The dry hole ratio that you mentioned going from 1 in 6 in 1984 to 1 in 100 now is  extremely misleading. What is a dryhole? no gas I guess. Here in the Appalachain Basin alot of wells that have been drilled that were not dryholes but only produce some or little gas... it will be along time before they even get to the breakeven point, i.e. if it cost $200,000 to drill and complete a well....alot of these wells will never return the cost that was invested in them, that is a fact. Oh by the way the landowner while only getting a small amount of royalties per year also has free gas this whole time. This needs to be pointed out because you state these old leases are probably unfair. So If you receive the small amount of royalty per year and the free gas and then you still want a do over when new offers are made? please. It seems to me that if at some point in the future that if the contract seems unfair (not enough money) then well let's have a do over.....that is not what this country is about we are a nation of laws, if you make an agreement you abide by it....both sides.

As to the driller making alot of money off their stock, well most of these  HBP leases were held by smaller companies who are not publicly traded co's, who have since sold off their deep right to bigger "greedy" oil companies.

Now then, the small operator sells his deep right to a bigger company who is financialy able to drill these type of wells, that benefits the landowner who by the way can sell his royalty too just like the small operator has done. I think you are painting a scenerio that is kind of onesided and I think it the otherside should be explained factually.

If I bought a stock 10 years ago for $100/share and now it is worth $1 is that fair to me? Maybe not in my mind but I hope I am adult enough to understand it was my descision to make that transaction.

 

Permalink Reply by sldouglass on May 20, 2013 at 11:59am

Unfortunately, life is not so simple.  There is a difference between the negotiating parties.

One is highly sophisticated with a professional landman selling a company designed lease.

The other is a landowner inexperienced in such things.

Yes, they reach an agreement and both parties are bound, but it is hardly a fair agreement and is likely to be subject to question by anyone with some knowledge.  The landowner may be unhappy with the deal once it is explained, but cannot do anything about it.

That does not make it a fair deal.

Permalink Reply by Samuel J. Orr on November 1, 2012 at 6:38pm

Bob: I really do not understand. O&G companies are in business to make money. Their job is to make money for their stockholders. What they can pay you depends on the cost of drilling, and the liklihood of striking gas or oil, and also on market conditions. Their prime obligation is to their stockholders. They are not charitiable organizations. It is not their job to educate you. They are like car dealers. If I go to a car dealer, the salesman's job is to sell me the car at the highest price possible. It's my job to buy it as cheaply as possible. If there are a lot of dealers with the same car and not many people want that car I have leverage. If there are few cars like the one I wantt and only one dealer, then I do not have leverage. You may be able to draft a lease that you  think is fair, and the O&G company may say OK or they may say Sayonara. Another example would be if you bought 50 acres of farmland for $50,000 and then found the land had a million dollars worth of diamonds underneath it, you would not be obligated to share that with the former owner. As for HBP, the O&G companies make money by producing and selling oil and gas, not by holding land by production. But whether they produce O&G from a particular source depends on whether they can produce it and then sell it for a profit. All this seems pretty obvious to me.

Permalink Reply by Bob Jenness on November 12, 2012 at 11:01am

Sam and Jesse,

Thanks once again for posting.  I vigorously affirm your encouragement of all landowners to learn as much as they can before they lease, and to reject any lease that doesn't meet their (and their lawyer's) requirements for financial return and fairness.  I would add the following thoughts:

On the car dealer analogy, there are a few differences.  I can look at the car to any level of detail, have a mechanic look at it (sometimes at no cost to me), look at blue book, and car fax, etc.  These are the same data sources many dealers use.  Thus, I'm completely free to collect ALL the information I need.  The BBB, etc. also rates dealers on business practices.  If I try to do the oil/gas analogy to this, the costs for geologists are prohibitive, and for lawyers quite painful, and neither the energy partners, lawyers, seismic testers, nor any independent third party provides the corresponding level of detail information to the public domain.  Also, the complexity of a lease is MUCH higher than a simple car purchase.  While both car dealers and drillers have some smudges on their reputations, most deals are done without lawyers, until the deal is found to be unfair.  The fair analogy here might be sending your teen-age, newly licensed daughter to the used car dealer the first time.  Would she get a fair deal?

Clearly, the use of energy partner investor information is an essential part of vetting anyone offering a lease, if their name is on it.  Most landmen and flippers can't be vetted so easily.

And all the above analogies don't cover any of the unitizing and permitting considerations.  I did buy an airplane once for a partnership, and shared ownership starts to go in that direction, but that's an intrinsic part of lease complexity, and completely out of the scope of most car deals, so the simplistic "just learn all you can and you'll know enough to know you're being treated fairly"  only works if your lawyer is all-knowing, diligent, and honest.  Good thing we've got some like that on this forum:-)

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