Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on February 7, 2010 at 8:49

The language in the individual leases dictate the depths or formations that a lessee has the right to develop. Leases with a depth restriction (Pugh) clause limit a lessee to the deepest depth that is produced plus 100' after the initial term of the lease, usually three years. All formations below the depth defined are then released from that lease agreement and the lessor is free to lease those depths separately The original lease remains in force for the formations above the deepest depth produced as long as that production satisfies the lease agreement and the LA. Mineral Code. If a lease contains no depth restriction, the lessee has the rights to all depths, whether produced or not, as long as the lease is maintained through continuous production in paying quantities. The lessee may choose to develop the deeper formations, sell the development rights to another or enter into a joint venture (JV) agreement with another company. The LA. Mineral Code recognizes that a lessee may choose to do none of these options and provides a means for a lessor to "demand development" when it is reasonable to assume that a productive prospect is not being developed. It's not only in the interest of the lessor but that of the State as the LA. Office of Conservation is in the business of maximizing state revenue from minerals. A "demand to develop" is tricky and not something that a mineral owner should undertake lightly or on their own. An experienced O&G attorney should be consulted as to the prospects of prevailing in such a legal challenge. The basic requirements sound fairly simple and straightforward. So much so that attorneys inexperienced in O&G law are often quite willing to charge a fee to send a certified Demand to Develop letter. The reality is that lessees routinely ignore such letters especially when they come from an attorney with no history of following up with a law suit. IMO, only those lessors willing and able to follow through with litigation should commit to this course of action. And those that do will have to have a very good O&G attorney to have any chance of success.

Permalink Reply by fngrsxnpd on February 9, 2010 at 5:18

Makes complete sense. What do you know about Palmer Petroleum and their plans to develope, they are the lessee.

Permalink Reply by Skip Peel - Mineral Consultant on February 9, 2010 at 5:24

Small, local independent O&G. The best way to get an idea of how active they are and what type wells they like to drill is to go to SONRIS Lite and perform a "Wells By Organization" search. Note how many wells drilled in the last year, what type and where. IMO, Palmer is not a "Shale Driller". Most small independents will not even attempt to drill a horizontal HA well. They will wait for an offer from a "Shale Driller" and assign their deep rights with or without a Working Interest. Where shallow production holds "all depths", there is no reason for Palmer or a Shale Driller to be in any rush as the leases will remain in force until they are ready or a mineral owner forces their hand through a successful demand to develop process.

Permalink Reply by fngrsxnpd on February 9, 2010 at 8:59

In the actual lease I can find nothing stating a depth clause. However, on the division order it states drilling and prosuction unit for gas and condensate from the Upper Glen Rose Zone. Does that give a leg to stand on?

Permalink Reply by Skip Peel - Mineral Consultant on February 9, 2010 at 9:11

fngrsxnpd. If there is no depth clause in a lease then it is considered "all depths" and any production no matter how shallow will hold it in force. The lessor will receive the royalty and terms of that lease for all production from drilling & production units covering all or part of the leased minerals. Division Orders break out production by zone because different zones may have different unit boundaries and therefore participation fractions. Sorry, no leg. You'll just have to sit. And accept the mail box money that the existing lease generates. The lessee will develop the deep rights or lease them to another company. They will receive the bonus and the royalty differential between what your lease calls for and what they can negotiate with the other company. If you have a 20% royalty and they lease for 25%, the 5% difference is their profit going forward. ALL WAYS GET A DEPTH CLAUSE!