Replies to This Discussion

Permalink Reply by j garrett on February 8, 2010 at 12:14

OGMLadvisor - I feel certain that Mr. McFarland is incorrect on the subject of unleased mineral interests. Operators employ thousands of landmen and spend millions of dollars to tract down all of the interest to establish a Unit. Why? If McFarland is correct, they could seek out a fractional mineral owner to lease and produce (steal) all of the minerals without compensating anyone else. Unleased mineral interests get "taken to the bottom of the hole", meaning they get 100% of their interest, which is held in escrow I'm told. McFarland's article that you posted even contradicts itself when discussing the 330 ft lease line rule. That paragraph is discussing an unleased TRACT that gets contained (surrounded) by a unit. In this case, the drill path has to remain a minimum of 330 ft from the tract to protect and not "drain" the minerals from the unleased tract. Usually, unless the outstanding interest is VERY small, operators will not unitize a tract with outstanding interest. Experts please chime in and set us all straight. I'll be consulting my copy of Oil & Gas Law in a Nutshell....

Permalink Reply by j garrett on February 8, 2010 at 12:50

After re-reading McFarland's article, I think he was attempting to clarify unleased interest "within a unit boundary", being a tract that becomes an island or a "belly-button" surrounded by a unit, although a couple of sentences would contradict that thought as well. I've got $100 that says McFarland is wrong. Again, I'll consult my resources....

Permalink Reply by j garrett on February 8, 2010 at 13:49

Just as I thought. They get 100% of what their interest would be, not subject to only a royalty interest. They may bear production costs though. Plus, as I mentioned, most operators just won't unitize a tract with any significant outstanding interests. McFarland ought to retract that article.

TEXAS NATURAL RESOURCE CODE

SUBCHAPTER C. RIGHTS IN A POOLED UNIT

§ 102.051. OWNERSHIP OF PRODUCTION. (a) For the purpose
of determining the portions of production owned by the persons
owning interests in the pooled unit, the production shall be
allocated to the respective tracts within the unit in the
proportion that the number of surface acres included within each
tract bears to the number of surface acres included in the entire
unit.
(b) Notwithstanding the provisions in Subsection (a) of
this section, if the commission finds that allocation on a
surface-acreage basis does not allocate to each tract its fair
share, the commission shall allocate the production so that each
tract will receive its fair share, which for any nonconsenting
owner shall be no less than he would receive under a surface-acreage
allocation.

Acts 1977, 65th Leg., p. 2573, ch. 871, art. I, § 1, eff. Sept. 1,
1977.

Permalink Reply by ogmladvisor on February 8, 2010 at 14:49

I'll take the bet!

Firstly, companies do want to track down all of the interest in a given area, I assure you. And they do want to make equitable deals to lease those minerals. But there are cases in which we can't get the leases, due to unreasonable demands or clauses, or perhaps the unleased owner simply isn't interested no matter the terms...or maybe we can't find the owner, and have no time for a receivership lease.

As a quick example, let's imagine we have a proposed 700 acre unit. Let's also assume that my company has the entire 700 acres leased, except for a 20% undivided interest in a 50 acre tract within the unit, so 10 net acres. We will assume this imaginary tract within the imaginary unit is located along the west boundary line of the proposed unit, and the unleased acreage belongs to none other than Cheerleader himself. I have tried my best to lease Cheerleader on his outstanding 10 acres, but Cheerleader thinks his acreage is worth 100k/NMA, plus he wants that elusive 37.5% royalty he heard about "through the grapevine". Either way, I cannot ever get approval from my management to buy a lease on his terms.

So, as Plan B, we decide to drill the well anyway. We plan to drill it in a north to south direction, and we also plan to drill the well on the eastern side of the unit, easily 330' feet away from Cheerleader’s tract, and the only unleased interest I have within the unit. Being 330’ away from my trouble tract means I do not have a Rule 37 situation, so I get my drilling permit from the RRC easily. Skipping ahead, we make a good well, and I proceed to file my Designation of Unit at the county courthouse, which is the device we use to actually pool the minerals. As my trouble tract is within the boundaries of the unit, I do pool the leases that I do have in that tract…but not Cheerleader’s interest. I cannot possibly pool Cheerleader, because I have zero pooling authority as to his interest since I have no lease. Two months later, Cheerleader shows up at the Cheerleader Family Thanksgiving, and all his cousins run up to him to celebrate the arrival of their first royalty checks. But poor Cheerleader didn’t get a check, because he was not pooled into the unit.

Why does Texas allow this? Oil and Gas Law in the state has many doctrines, but one that you will hear time and time again is a mineral owner has a right to produce his minerals. This simply means that Cheerleader’s cousins have a right to produce (or cause to produce), and Cheerleader cannot stop them from doing so. If he doesn’t want to get in the game, then fine, but if they don’t see things the same way, he can’t hold them up in this situation. The other reason, which in my opinion is the real reason the state allows it, is money, money, and more money, as in ad valorem taxes. If we didn’t have a tool such as this one, drilling wells in this state gets harder and harder, and what would be the result of that? Fewer wells get drilled, less production comes out of the ground, and the state makes less revenue. Anyone that understands the greedy nature of government can understand that!

Now, why do we want all of the acreage leased, and do not like situations such as the above one? Because when it comes time to infill drill this imaginary unit, we probably won’t be able to maximize the potential of the unit…because there is good ole’ Cheerleader, stopping us from drilling one or more wells, depending on his tract shape and how it fits into the unit. More correctly put, he cannot really stop us from drilling a well (unless he successfully defends the Rule 37 action, which is unlikely), but we would owe him his 8/8’s royalty at payout, and we’re not going to do that. So, if we assume that each HS well brings $10 million is profit for the E&P’s, then Cheerleader is actually costing us $10 million in future profit by remaining unleased…so he does hold a couple of cards, and they are actually pretty decent ones. But with the longevity of the first well in the unit that did get drilled, and the time that will pass before we are forced to drill another, we will be dealing with Cheerleader’s children or grandchildren instead of with him.

Mr. Garrett, when you check with your sources and I am proven correct, I would prefer to direct my $100 in winnings to the charity of my choice, in this case the Wounded Warrior Project.

Thank you,

ogmladvisor

PS - I saw your latest post, and I'll get you an answer to Section 102.051 by this weekend.

Permalink Reply by ogmladvisor on February 8, 2010 at 15:00

More food for thought, from yet another oil & gas attorney:

If a mineral interest is unleased or unpooled, the interest owner is deemed to be a co-tenant. Each co-tenant has the right to separately develop his premises or participate with the other co-tenants in the joint development of the tract. The rights of the unleased or unpooled co-tenant depend on whether he has an interest in the drillsite tract or a non-drillsite tract. An unpooled co-tenant in the drillsite tract who elects not to participate in the pooling operations receives his pro-rata share of production from the drillsite tract (i.e., undiluted by pooling) once the reasonable and necessary costs to drill, complete and operate the well are recovered by the operating parties (i.e., 100 percent payout is achieved). (See Byrom v. Pendley, 717 S.W. 2d 602 (Tex. 1986); Cox v. Davidson, 397 S.W. 2d 200 (Tex. 1964).) However, if there is an unpooled interest owner in a non-drillsite tract, such owner does not participate in production from the pooled unit. (See, Superior Oil Company v. Roberts, 398 S.W. 2d 276 (Tex. 1966); Donnan v. Atlantic Richfield Co., 732 S. W. 2d 715 (Tex. App. — Corpus Christi 1987, writ denied).) Under certain limited circumstances the unpooled interest owner in the non-drillsite tract may ratify a unit lease or the unit designation and thereafter participate in unit production on a pooled basis. (See Ruiz v. Martin, 559 S.W. 2d 839 (Tex. Civ. App. — San Antonio 1977, writ ref’d n.r.e.), and Superior Oil Company v. Roberts, supra.) In these instances, the unpooled interest owner’s (in the non-drillsite tract) ability to ratify seems to be based upon circumstances indicating that the unit operator extended the unpooled interest owner the “offer” to ratify the unit.

Permalink Reply by j garrett on February 8, 2010 at 15:04

Sounds plausible but would be news to me. I've been wrong before. When you are confirmed correct, how bout I donate the $ to Keith and GHS...

I still can't wrap my mind around the fact that a mineral owner would be not be compensated for their minerals, although they are being produced, albeit as part of a unit. If the hold out signed later, would they be compensated from IP? Why include the tract and pay anyone?

Permalink Reply by jffree1 on February 8, 2010 at 15:48

I believe Keith runs ads to help defray the costs involved in maintaining the site which you may have noticed is free to members. There is a limit to the number of pages, amount of content, etc... available on a free NING community site and after you exceed that limit it takes money to keep the site up. He originally had site sponsors who got to run small ads. Most of those have dropped out and he switched to commercial and Google ads.

I would be willing to pay a membership fee. It's a great site with nearly 13000 members the last time I looked. That's bigger than the population of my county.

Permalink Reply by jffree1 on February 8, 2010 at 16:15

If we paid a membership then we wouldn't have to look at all those ads.
I really, REALLY hate dislike website ads.

Permalink Reply by DJG on February 8, 2010 at 16:42

Man, I'd actually miss all of the advertisements if this converted over to a paid membership site.

I mean, just today, I clicked on a link and got an unbelievable deal on laser hair removal!!!!

Permalink Reply by jffree1 on February 8, 2010 at 16:53

I know you DIDN'T!?! LOL!!!
Seriously, I don't think he would ever change it over to membership. It started out as a free site and I think he wants to keep it that way... hence the ads. But he does accept donations. Whatever a person feels like contributing is ok. So, I guess it's up to the individual to decide what the content is worth, eh?

Permalink Reply by DJG on February 8, 2010 at 17:57

But seriously, I do think it is a positive thing that this has been set up as a free site. I believe there are quite a few folks who have benefited from the information herein that might not have had it been set up as a pay to play website.

That said, hopefully, those same folks realize the benefit they have recieved and do choose to donate via the voluntarily once they see some income from thier leases or royalties....

Permalink Reply by ogmladvisor on February 8, 2010 at 15:27

Someone on this site who refuses to shoot the messenger!!! Thank you J.R. Ewing for your support on this confusing issue!!!

And Mr. Garrett...it is hard to wrap one's mind around, I can't help but agree...but consider this: the way the state sees it, we have to be 330' off of the unleased tract to get the permit. This is because 330' is the distance the state assumes is "being drained" away from the borehole. Thus the Rule 37 "lease line" field rule. So your not actually getting drained according to the state. That is why being a drillsite makes a world of difference, because you absolutely are being drained in that situation.

And a little more backup here (pay special attention to the section on page 2 entitled "Revenue After Payout When Cotenant Leases Non-Drillsite Tract or One Not Serving As A Corridor For Horizontal Wellbore): http://recenter.tamu.edu/pdf/843.pdf

• ‹ Previous
• 1
• …
• 6
• 7
• 8
• 9
• 10
• 11
• Next ›
• Page