Replies to This Discussion

Permalink Reply by fngrsxnpd on June 26, 2010 at 4:36

So after all is said and done, if the decision remains. Would this mean the landowner would release and get the lease money, or is Questar just now going to sale the lease and still get the benefit of the lease money?

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Permalink Reply by Skip Peel - Mineral Consultant on June 26, 2010 at 16:11

Upon demand to develop, the lessee would have to submit a development plan or release the depths below the producing formation. Or they could do as Questar and not respond at all forcing the landowner to file suit. No one should expect that energy companies will agree to drill or cancel the lease just because they receive a demand letter. It will be important that the demand is handled by an attorney who has the reputation of following through with a suit. And it may take filing a suit to get action. Energy companies do not bluff easily.

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Permalink Reply by Henry on June 26, 2010 at 14:46

If I take this literally, and read that the lessee has an obligation "to FULLY develop a lease," will lessees be obligated to drill 8 wells per section in some reasonable time? Anyone have some thoughts?

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Permalink Reply by Skip Peel - Mineral Consultant on June 26, 2010 at 16:33

Slow down, Henry. LOL! As it is not practical to drill all 8 wells in a section/unit sequentially, I doubt that the courts would interpret "demand to develop" to require a short term drilling schedule. The initial rulings will likely focus on requiring a lessee to drill the shale instead of sitting on it where shallow production exists and leases do not contain vertical Pugh clauses.

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Permalink Reply by Dion Warr, CPL on June 26, 2010 at 17:22

Skip:

It would appear that what was all the more damning to Questar was the complete lack of response to communication up until and through a good portion of the lawsuit. Not having the benefit of reviewing all facts in the case, should STR have responded to the initial demand and continued further, if not protracted communication, IMHO (IANAL), a lot of this could have been avoided.

I don't feel that the demand to the HA falls into the same line as say, demand to drill an offset to develop in a conventional reservoir, as it is more or less recognized, as the HA requires stimulation to develop, and it can more or less be demonstrably proven that the reservoir does not communicate over significant distances. The resources or more or less "in place" until the well is drilled and frac'ed. Perhaps the greatest chance for a successful appeal (perhaps to LASC) is that lessee's failure to develop within the short period of demand and resulting suit is not to lessor's or lessee's detriment to his reserves. Nor or we looking at the issue of systematic development of a lease (like the large development leases of old that were judicially restricted to productive acreage blocks due to operator's lack of development of large blocks of leasehold except for relatively small areas of operation.

IMO, if operator would have simply responded stating that they would be looking to develop these reserves over time, but had more pressing issues to attend to in other areas (e.g., attending to non-productive leased acreage prior to developing their reserves in HBP areas, lease maintenance by drilling other wells (perhaps even not to HA depths), this wouldn't have been such an issue, as operator could have adequately demonstrated being a reasonable and/or prudent operator. As it has been reported here and elsewhere, the apparent aloofness of STR in its dealings with the l/o and the court pretty much dared the judge to make this ruling. Judges are human, and can chafe at the idea that issues which the court feels or pertinent or germane to examine are not worth a litigant's time or adequate response either to the court or a plaintiff.

Unfortunately, the court's reaction to such a situation can set up a standing precedent with unforeseen consequences. I'm sure that the more jaded E&P people in our community would try to paint this as "anything that lessor's and attorney's can do to the break the lease", but I'd like to consider the broader consequences. If such a precedent stands, for instance, can you foresee the unfortunate situations of smaller, less experienced and less well capitalized operators, being forced to drill and complete subpar wells in their prospective HA leasehold in an effort to maintain the leasehold? (Let's forget vertical HA completions for the sake of the hypothetical and look at marginally executed HZ drilling to the HA formation.) Now you have the fostering of a situation which that poor efforts to demonstrate lessee's response to duty to develop could actually serve to diminish the value of and the recoverable reserves to the detriment of lessors / m/o's.

I know from the landowner / mineral owner's perspective, this can be looked upon as a victory against lessees which interminably sit upon their leasehold looking for their golden payday, and an opportunity for lessor to lease again and receive a "proper"bonus and lease terms for this day and time. However, if this ruling serves to constrain lessee's picture to obtaining only that amount of acreage which they can develop in the short term, there could be a chilling effect to leasing in general and in the non-core areas in particular, as companies only secure those blocks which they feel that they can reasonably develop in the short term.

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Permalink Reply by Skip Peel - Mineral Consultant on June 27, 2010 at 1:14

Dion, agreed Questar demonstrated the typical arrogance of the industry when dealing with the owners of small tracts. At the least this ruling should help to modify that behavior. As the Haynesville Shale is a materially different exploration and production play, this ruling will possibly begin a discussion of what constitutes reasonable and prudent development. The old rules no longer apply, nor should they. I am not concerned at this time for unforeseen developments whereby lessees/operators drill subpar wells as the LA. Office of Conservation will not allow that to happen, IMO. In this particular situation other than the courtesy of communication, I think that Questar should have explained to the landowner that they were not in a position to develop on their own as they lacked sufficient leasehold to do so. Then they should have agreed to pursue an operator to develop the section and if not successful within a defined period of time, either release the depths below the Hosston or offer a new lease with bonus and quarter royalty for those depths.

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Permalink Reply by Marc Stepman on June 27, 2010 at 3:27

Skip I agree with what you said. I think the O&G companies should communicate better with all land owners not just big one. Where I am I get calls from people asking me stuff.I end up giving them the contact number of the guy I talk with at the corporate office. He does not mind but still I hope the ruling helps. Questar looks like it did not do much do you think they will give the appeal more effort?

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Permalink Reply by Skip Peel - Mineral Consultant on June 27, 2010 at 3:32

I can not answer for Questar, Marc. However keep in mind that an appeal can only include the evidence presented in the first trial. That limits the appeal to very little testimony concerning the limited major points of contention that Judge Adams addresses in his ruling.

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Permalink Reply by Henry on June 27, 2010 at 14:02

Skip,
I'm going to beg to differ with your logic. RS 31:122 requires the lessee to develop the property as a "reasonably prudent operator for the mutual benefit of himself and his lessor."

Right now, I see most lessees are drilling to hold the leases, and if they don't continue to develop the property after the first well, they are not acting in the benefit of the lessor. I will contend that your assertion that it is not practical to drill all 8 wells sequentially is not a good argument against this. Just because a company got overly aggressive in a land grab, and bit off more than it can chew, does not give it the right to not develop the property.

But, this is why we have courts.

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Permalink Reply by Skip Peel - Mineral Consultant on June 27, 2010 at 14:21

Henry, you are assuming a definition of "full development". And overlooking the difference as it applies to conventional (prior court rulings) vs unconventional reservoirs (future court rulings, including the Ferrara case). The notion that an energy company will drill one well and then pursue no further development flies in the face of logic. I think what you are concerned with is the pace of development and the fact that the operator's pace may not be as aggressive as your desired pace. Besides the physical constraints that make sequential drilling impractical if not impossible from an economic stand point, there are mutually beneficial decisions to be made concerning the marketing of your gas. What do you think would happen to the price if flush production was forced on a number of HA drilling units? And we think we have a glut now. I think that the courts will define " a reasonably prudent operator" as it pertains to HA development through additional rulings. IMO, no single case can affect the changes that should be made in the interpretation of the mineral code. It will be a process that will take some years.

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Permalink Reply by Henry on June 27, 2010 at 23:13

Skip,
Here's where we agree... "It will be a process that will take some years."

I could imagine this: Some Haynesville mineral owner, a few years from now, has one well holding his lease. His driller is off putting all of his assets into the latest shale play, trying to hold leases there. It would not seem unreasonable for that owner to demand that his property be developed.

Or, I could also imagine that when/if drillers decide to fully develop the Haynesville shale, it will not be by putting the 2nd well in each section and then the 3rd well in each section. Rather, it would be more reasonable (from the driller's point of view) to complete all 8 wells in one section before moving to the next. In other words, some landowners might get their property developed in the near term, while others wait for a very long time. I think that those who end up waiting, might have a case that their operator is not developing their property in a prudent manner.

But, this is why we have courts. And yes, it will take many years for any of this to come to the forefront. (But, you can say you read it here, first!)

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Permalink Reply by Skip Peel - Mineral Consultant on June 28, 2010 at 1:51

IMO, operators will not build gathering systems designed to accommodate flush production from 8 wells drilled sequentially and the courts will not require them to do so. And gathering and treating capacity may well be one of the major determining factors. I do not think a court would require drilling in areas where there is no existing capacity to support the additional production. The capacity constraints could very well come in the long distance transmission lines under a scenario of mandatory flush production.

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