by Kassi Fitzgerald, site member

The Haynesville Shale and Mineral Leasing: What Every Land Owner Needs to Know
What is the Haynesville Shale?

• Unconventional gas deposit
– Methane gas located in hard “shale” rock instead of porous rock formations.
– Between 10,500 and 17,500 ft deep
– Reported by Chesapeake CEO as being one of the “4 largest natural gas deposits in the world”
– Extends from NW LA to E TX
Parishes Impacted
• Boarders not currently definitively defined
• All of: Desoto, Jackson, Red River, Bienville
• Southern: Caddo, Bossier, Webster, Claiborne, Lincoln, Caldwell
• Northern: Sabine, Natchitoches, Winn
Drilling Basics
• Usually takes 20-30 days, 24 hrs/7 days
• Completion rig put into place
• Frac trucks complete the fracturing process (takes about a week)
• Well head is installed (Christmas Tree) along with storage tanks

Drilling Basics

• Drilling & fracing processes are very loud
• Noise abatement (sound barriers and sound blankets) help reduce noise.
• 4-5 million gallons of water per day, per well for drilling & fracing process.
• Only 5%-10% of water used can be recycled
Drilling Basics
• Drilling mud: Combo of fresh water, bentonite clay, barium sulfate & calcium carbonate
• Disposed of by separating solids from water
– Solids mixed with the land surface & must not be able to migrate to other land surfaces
– Salt water goes in injection wells
More Drilling Basics
• Water used for fracing must be disposed of in deep formations in wells regulated by state and federal agencies due to potentially hazardous waste products
• Naturally occurring radioactive material: NORM: can build up in well piping, storage tanks & other surfice equipment.

Drilling: Potential Problems

• Air Pollution from Diesel engines
• Improperly drilled or cased wells or corroded casing can serve as pathways for contamination of aquifers
• Oil based muds commonly used for high pressure shales or during directional drilling. Oil contaminated cuttings contain hazardous chemicals
• Muds usually contain bentonite clay: very expansive soil. Common practice to dispose of drilling mud either by burying the reserve pit or discharge the mud to the surface
• If building on a former drill site you must remove all unstable and toxic materials & fill the pit with compacted materials to qualify for FHA mortgage insurance.
• Soaps and other substances sometimes used to remove drill cuttings may migrate from the borehole into the ground water zone that supplies private wells.
• Well blowouts: can completely destroy rigs and surrounding homes may have to be evacuated

Drilling: The Land Owner Should

• Negotiate protections in their lease such as:
– Use of noise abatement technology
– Testing of water wells prior to beginning of drilling activity or stipulation that the quality and quantity of water is adequate.
– Payment for repair or replacement of water sources/wells if damaged
– Payment for surface damages (take “before” pictures of the land/homes)
• Negotiate protections in their lease such as:
– Re-contouring and re-seeding the land
– Minimum distance from inhabited dwellings for wells
– Noise abatement technology and low pollution equipment
– Off site disposal of waste products from drilling

Seismic Exploration

• By blasting dynamite from a hole drilled several hundred ft in the ground OR
• By dropping a heavy wt from a truck (thumper truck) on hard ground such as paved roads
• By shaking the ground with a vibrasizer
Seismic Exploration: Potential Problems
• Seismic lines destroy vegetation & may cause erosion
• 3-D tests –cause greater surface disturbance than 2-D tests
• Dynamite “shot holes” may intercept the water table & water may begin to flow or seep to the surface.
• Can cause water wells to become “dirty”
Seismic Exploration: The Land Owner Should
• Ask Co. to avoid steep slopes, surface water areas & any ecological sensitivity areas
• Negotiate more payment and stronger surface damage provisions if 3-D testing is done
• Get water wells tested before Seismic testing is done
• Review state regulations and ensure the Co. follows them
Legal Issues
• Community Property: Both spouses must sign the lease
• Co-owned land: Must have 80% ownership to lease without the other owners but “every effort” must be made to contact and contract with the other owner(s)
• If no drilling for 10 years minerals revert to surface owner
Legal Issues: Force Pooling
• Typically 640 acres based on section lines
• Land owners must be notified & hearing held (typically in Baton Rouge)
• Costs taken out of production
• The “risk charge” of 200% of expenses does not apply to unleased interest not subject to an oil, gas, and mineral lease

Lease Details

• Never sign a standard lease!
• Minerals: Limit lease to petroleum and natural gas and related hydrocarbons only except coal, lignite and uranium.
• Negotiate the best possible bonus payment and try to stick to a 3 year primary term only
• Minimum royalty should be 25%
• Ask for a “no cost” royalty
• Royalty payments should begin within 120 days of production in paying quantities
• Stipulate what constitutes timely payment and what penalties will result from late payment.
• Royalty payments should be based on price of gas at the casinghead or market price.
• Stipulate a minimum royalty per acre per year or define production in paying quantities.
• Shut in provision should include:
– Monthly or annual payment during shut in
– Time limit on shut in
• Allow for reasonable time in the event of a force majeure but stipulate what constitutes a force majeure
• Request removal of any liability of warranty on the title
• Include an indemnification clause
• Include a vertical Pugh clause i.e.: you retain depths from 100 ft below the deepest formation produced by the production company in the Haynesville shale
• Request horizontal Pugh clause
• Do not allow clauses that allow units larger than 640 acres without state approval
• Include a clause allowing you or your agent reasonable access to the Company’s books
• Request horizontal Pugh clause
• Do not allow clauses that allow units larger than 640 acres without state approval
• Include a clause allowing you or your agent reasonable access to the Company’s books
* Request strongly worded water protection including testing of wells if you utilize well water
• Negotiate surface rights separately
• Limit proximity of wells and storage tanks to inhabited dwellings
• Include payment for all surface damages

How do I get what I need?

• Organize your section/neighborhood
• Collectively bargain
• Ensure person negotiating for the group has adequate knowledge, business sense and negotiating skills
• Do not sign anything without reading it and understanding it.
• Pay for representation if necessary
• Be patient, time is on your side
• Research and educate yourself
• Never allow yourself to be pressured into anything
Where do I begin to organize?
• Get a map of your section including property owners from the tax assessors office
• Get in touch with people in your section
• Communicate, Communicate, Communicate
• Hire help if needed
• Watch out for the elderly
Most important advice!
• Remember this is a long term business deal. It may last longer than many marriages!
• The O&G Companies are not evil but they are smart business people. Insist on being treated as a business partner.
• Do not go into mineral leasing lightly, read, ask questions, get help if needed to be sure the best possible lease is negotiated for you.

Needed Mineral Code Changes: Contact your state represenative and ask for:
• Mandatory Horizontal Pugh Clause
• Separation of Mineral Leasing from Surface Leasing
• Requirement for Disclosure of Activity
• Three Day Waiting Period
• Discussion & Lease in Native Language

Additionally:

State and Local Laws Can Apply:

Most states have specific laws in place that regulate mining and drilling activity. There are also laws that regulate the sale of surface and mineral property. These laws are meant to protect the environment and all parties involved in property transactions. These laws are the only protection available to buyers or sellers on issues that are not specifically addressed in the mineral transaction agreement.

Fee Simple - Complete Ownership

The most basic type of property ownership is a "fee simple estate". This is complete or absolute ownership. The owner controls the surface, the subsurface, and the air above a property. The owner also has the right to sell, lease or bequest the land to others.

If we go back in time to the days before drilling and mining, real estate transactions were fee simple transfers. However, once subsurface mineral production became possible, the ways in which people own property became much more complex.


Surface Rights vs. Mineral Rights

"I'll pay you $100,000 for the coal beneath your property!" This type of transaction has happened many times. The fee simple owner may not have the interest or the ability to produce the coal beneath his property but a coal company does.

In this type of transaction the owner wants to sell the coal but retain possession and control of the surface. The coal company wants to produce the coal but does not want to pay an additional price to acquire the buildings and the surface. Maybe the surface owner does not want to give up the land. So, an agreement is made to share the property. The original owner will retain the buildings and rights to the surface, and the coal company will acquire rights to the coal. The transaction can involve all mineral commodities (known or unknown) that exist beneath the property or the transaction can be limited to a specific mineral commodity (such as the coal) or even a specific rock unit (such as the "Pittsburgh Coal").

Buying a coal seam is much more complex than buying a car. When you buy a car you simply exchange money, file a title transfer with the government and drive the car home. However, when mineral rights are purchased, removal of the mineral is usually deferred. A mining company needs time to acquire a mining permit and schedule its equipment and workforce to commence at the new property.

It is also possible that the new mineral owner has no intentions of production. They are simply buying the property as an investment. Their goal could be to resell at a profit or lease the property to an operator who will assume the duties of production.
Lots of mineral properties are purchased by speculators who have no intent to mine. They are simply attempting to be "middle men" who acquire valuable property from individual owners and broker those properties to mining companies.

Disagreements During Extraction

Disputes between the mineral rights owner and the surface rights owner often arise at the time of mineral extraction. These activities can require use of the surface and damage the surface owner's enjoyment of the property. Here is where the wording of the mineral rights agreement or lease agreement becomes very important. The agreement may give the mineral owner the right to extract the mineral at any time, using any methods and without compensation or regard for the surface owner. This is why legal assistance should be obtained when selling the mineral rights away from a fee simple estate.

When purchasing surface rights it is a good idea to carefully examine the wording of the mineral rights agreement. It may grant significant liberties to the mineral owner at the time of extraction. Although you were not involved in the transaction that sold the mineral rights from the property, you will nevertheless be bound by that contract. When you buy a property you buy both its assets and its liabilities. Hire an attorney who can do the necessary research and educate you about what you are buying.

When mineral rights are being severed from a property, the parties involved in the transaction should be in full agreement on how extraction will occur, what reclamation will be done and who will be responsible for anticipated problems. Most states have mining laws and regulations that limit the mining company's actions during the extraction process and require reclamation. However, these laws might not meet the surface owner's expectations. To avoid problems these matters should be addressed in the contract at the time of sale. Again, the property owner should have an attorney who can research, help negotiate and educate.

Delayed Damage to the Surface

Damage to the surface can be delayed. Subsidence of underground works or settlement of surface mined areas might not occur or be detected until decades after mining is completed. The owner of a fee simple estate should consider these facts before entering into a mineral rights sales or lease agreement. The consequences of mineral extraction will be passed on to heirs and all subsequent owners of the property. It is not uncommon for undermined properties to show no signs of subsidence for decades after mining is completed. Then, cracks and settlement begin to appear. In this situation the mining company may be long defunct and its owners long dead. There is no one to hold responsible - even if repair of any damage was written into the lease or sales agreement.

Damage to Aquifers

Most households in areas where underground mining takes place today are outside of the service of public water supplies. These property owners rely on water wells for the production of their water. When underground mining occurs beneath a property some subsidence and settlement should be expected. All subsurface voids seal themselves over time. If the mine is below the aquifer rock units which are tapped by the well, subsidence of the mine could damage the aquifer and cause its water to drain into deeper rock units. In this situation the surface owner loses his water supply. This can cause a temporary or permanent loss of the water supply.

Purchase/Sale of Surface or Mineral Rights

When buying property in areas of potential mineral development, a buyer of surface property should determine if a fee simple estate is being purchased or if ownership will be shared with others. Mineral rights transactions are normally a matter of public record and copies of deeds or lease agreements are normally filed at a government office. Real estate buyers should ask the seller to specify what rights are being conveyed. When a purchase is made in an area with historic mineral activity an attorney should confirm the extent of ownership through careful research. In many areas the sale of mineral rights are recorded in the government record in a different deed book or data base than the sale of surface property. This means that the deed to the surface property might make no mention at all about mineral rights that have been sold away. In areas of historic or potential mining activity the buyer of a property should ask the attorney to research these carefully. This will prevent future surprises and problems.

What Qualifies as a "Mineral"?

The word "mineral" is used in a variety of contexts. Generally, ores of metals, coal, oil, natural gas, gemstones, dimension stone, construction aggregate, salt and other materials extracted from the ground are considered to be minerals. However, there is no definition of "mineral" that applies in every situation and what is considered to be a "mineral" can vary from state to state.

The Bottom Line

Mineral rights and mineral lease transactions can involve large amounts of money and be very complex. This article is intended to be no more than a brief introduction. Consultation with an attorney who has expertise in mineral transactions and the laws of your state is highly recommended as is consultation with an appraiser who specializes in the valuation of mineral properties. Buyers and sellers should beware and make a dilligent effort to be informed.

Taken from Geology.com

Last updated by Keith Mauck (Site Publisher) Nov 4, 2009.

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