As excitement builds over the possibility of an economic AC play and the opportunity for some private mineral owners to receive an offer to lease, I think a note of caution is in order.  The history of exploration and production, or more specifically the lack of production, in the parishes currently being targeted for leasing programs appears to lend a certain mind set to expectations.  There is a common history among numerous land/mineral owners of multiple leases over decades of time with no successful production which, for some, leads to an over emphasis on the bonus dollar amount and less concerning the other lease terms.

It is worth noting that the prior history of largely vertical drilling and lack of technology specific to very challenging formations is not a good decision making model for what has become the new normal in the last ten years.  If you are following the general technical advances across all basins and the success of the AC in Texas in particular, you ought to have an increased expectation that this time may be different for central LA.  I strongly suggest that GHS members with significant size acreage ownership to get the assistance of a law firm experienced in negotiating O&G leases for land owners.  It is still too early to fully know how this AC play will turn out (see the TMS) however if it does become economic, the lease bonus will soon be of less long term value than a larger royalty fraction.  For those who have surface ownership there are very important terms beyond the bonus.  If ignored those terms may create regrets for decades to come.

My general rule of thumb is:  if the bonus payment for your signature on a O&G lease will make a significant difference in your financial security or rescue you from an immediate financial emergency, it's acceptable to place your emphasis on the bonus.  If however you, and your family, have a measure of financial security and do not need a cash bonus for some compelling need, have patience and get some professional help.  If this AC play is a bust, you may regret to some extent not taking a lease in time.  If this AC play is a success, you will almost certainly get considerably better lease terms and the long term difference in royalty revenue could easily be many thousands (or hundreds of thousands) of dollars more than your bonus check.

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Replies to This Discussion

I like that clause. What would determine the "production in paying quantities" test. I am dealing with an old lease agreed to with a prior generation and a gas well that has produced for ~30 years. Currently it is not in paying quantities but is still held by production without a Pugh clause. We have been suggested by Landman that we could take it court to force separation but it does not seem to be a worthwhile expenditure at this time. Just looking for it to be shutdown like the other 3 wells within the next decade.

If you own the surface, contact the most experienced O&G attorney whose practice serves land/mineral owners, not the industry, regardless of where their physical office is located.  Be prepared to provide the production history for your well over the last two years.  You should be able to get an opinion on the strength of your case for no charge.  If you wish to proceed from there, prepare to sign an engagement letter and pay an hourly rate.  A demand letter on your behalf coming from a well known O&G legal firm will be of greater concern than a demand letter that you send yourself.  Also be prepared to answer a question from your lawyer.  The most successful lawyers have their demands taken seriously because they follow them up with a suit if the demand is denied.  That entails a cost and a commitment from you.  Attorneys that make demands and do not follow up soon get a reputation for bluffing.  A successful O&G attorney does not wish to detract from their hard won reputation.

I can't speak to your comment regarding a "Pugh" clause without more information.  However, if this is the only well holding your lease and it does not meet the test then a horizontal Pugh shouldn't be an issue.

We had  some of our land in Texas released on a lack of production clause and it has worked out very good for us. It can happen get a good attorney.


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