Fair Or Not Fair

I have kept up (somewhat) with the discussions on this board for a while now. I have seen constant complaints about contracts being unfair to the land owner. So I ask, what is fair?

If you own 100 acres of land and lease it to a farmer, would he be required to pay thousands of dollars per acre for the right to farm.

On that 100 acres of land the farmer is using, will he keep his crops down to only a few acres and allow you to use the rest?


Will the farmer give you one quarter of the value of his crop?

The fact of the matter is, these wells are extremely expensive to drill. Most companies (including HK & CPK) will require investors to get the job completed. In addition, not every well produces. Just because the wells to date have done well, doesn't mean they all will. It only means they drill the best prospects first, when they get down to the less favorable well planned, their success rate will go down.

Everybody is in this to make a profit. Profits on oil and gas (per barrell or per Mcf) are low, even when prices are high. The more you produce, the more you make, as in any industry. Thats the only reason Exxon/Mobil makes billions, not because they are screwing the public, but because they are producing billions.

And yes, I am a landman, I have been one for 15 years. I consider myself ethicle and honest, as do most working in NW Louisiana. You will have the usscrupulous landmen taking advantage of the uninformed land owner, but they are few and they don't usually work long in the industry, most never become seasoned landmen.


The simple fact is, I have seen more unscroupulous land owners and land owner representatives than landmen. I have seen countless contracts prepared by legal representation that are really just filler and no substance and for that the rep charges hundreds or thousands of dollars. Bottom line, you need to pay more attention to who is actually trying to take advantage of the unaware. The o&g companies aren't hiding anything, can you say that about your agent or representative.

My suggestion, if you need legal advice on a legal document, find an attorney that specializes in that area. If you are buying a house, ask an attorney familiar with real estate, if you have questions about an oil & gas lease, ask an oil & gas attorney. He will charge you, but he will not ask for a percentage of what you are making (always a warning sign). If you have dealt with a landman in the past, give him or her a call. Most landmen are happy to answer questions from landonwers. They will always preface their advice with "Now keep in mind that I am not an attorney", but they will probably help when they can.

I have rambled on long enough now, I am sure only the serious readers have actually gotten to this point, so I should probably say so long, not good by, because as a sesaoned landman, I know that I will be dealing with you, the landowner, for many years to come. That is one of the reasons I will try to be as fair and honest as I can be, I will be the one you call to yell at.

So in closing, have a good day, a merry christmas and a wonderful new year. And remember, don't take any wooden nickles from those bad landmen.

lando

P.S. Forgive the spelling, I am a landman, not a writer.

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Replies to This Discussion

Permalink Reply by Mike Shane on December 7, 2008 at 7:17
OK, you guys really aren't getting it. If the minerals are worth hundreds of millions of dollars, that is great, and you as a mineral owner get 25% of those hundreds of millions of dollars, that is what you lease for, not the bonus consideration. The money paid when you signed your lease is pocket change compared to the potential you will make at 25% on your royalty income. The lease isn't for your minerals, it is only a contract that allows the o&g companies to access your minerals. They aren't leasing your minerals and they aren't buying your minerals. Is it fair to pay a few hundred to one landowner and a few thousand to the next, not really, and it is something we generaly try to avoid, but nobody could know how the prices would sky rocket. The kind of prices that were being paid in NW Louisiana was un heard of and probably did more to damage the industry than anything else. Many people will not be sharing in production simply because it isn't the Haynesville Shale. Smaller companies that have been drilling and producing for years in other sands can no longer afford to operate, that means no royalty money for you unless you are one of the relatively few who will share in HD production. The companies are going to spend the money, would you rather see the money spent on drilling and producing (your 25% will yield more than your rentals or bonus ever would) or would you rather less drilling and production because the cost of acquiring land is so expensive.

Before you reply to this, sit down and actually give it some thaughtful consideration. Nike makes shoes in other countries because they can't afford to make them in the U.S. U.S. auto makers are being driven out of business because of the cost of labor in a union shop. In the same manner, companies like Exxon Mobil will not drill on land in the U.S. simply because they can't afford to. Do you really want to see the trend keep going the way it is.
Permalink Reply by Two Dogs, Pirate on December 7, 2008 at 7:28
You seem to forget the Barnett Shale. Why should the mineral owners in NW LA not ask for the same consideration if not more due to the fact that the HS wells are doing much better than the Barnett? The shalers are trying to HBP acerage at present and wait for prices to rise before extending their drilling program. This may take some time so the big money that some of the older folks may see is going to be the bonus money.
Permalink Reply by Skip Peel - Mineral Consultant on December 7, 2008 at 7:54
Mike. There has been much thoughtful consideration, and discussion, on the site prior to your arrival. Many of the members do "get it". Others are becoming better informed and will soon "get it". What they "get" will be a better understanding of all the elements involved in leasing their mineral interests. "How" they choose to use that better understanding is their business. You make some good points. Points that have been made hundreds of times before. In a time of uncertainty and suspicion as to how to deal with the industry, members are more likely to listen, and give consideration, to your opinion when expressed in a respectful manner.
Permalink Reply by Les Bamburg on December 7, 2008 at 12:43
Mike, sorry but you are off base with the comment about ExxonMobil and other majors leaving the US due to cost of leases. Those majors focused on international opportunities because they felt no "elephants" (ie large projects) were left to be found in the US. Hence the focus on Nigeria, Qatar, Angola, etc. Now with the shale gas plays many majors (BP, Shell, ConocoPhillips, etc) are returning to the US plus others (StatoilHydro).
Permalink Reply by Snake Stewart on December 7, 2008 at 10:30
Permalink Reply by Mike Shane 2 hours ago
OK, you guys really aren't getting it. If the minerals are worth hundreds of millions of dollars, that is great, and you as a mineral owner get 25% of those hundreds of millions of dollars, that is what you lease for, not the bonus consideration. The money paid when you signed your lease is pocket change compared to the potential you will make at 25% on your royalty income.

Hello Shane,
Since I dont get it , slow it down for me and see how far off I am here. Basically what you are saying is that the only purpose the bonus serves, is to prod me into relinquishing 75% of my proceeds in the well just out of sheer joy because the O&G's chose my property, to check and see if there may be Millions of dollars worth of gas under my land ? This results in me taking $500 per acre for those rights and being happy with it ? Those days are long gone.Whether I make a nickle or not, doesnt matter.

I think we need to get you up to speed Shane. You have spent too much time running title in the courthouse. Things have changed Shane, drastically! Some will realize much more in bonus (real bonuses) then they will ever see royalty wise. If you state differently you are being disingenuous. People know what their land is making the O&G's now. Heck, CHPK is still flippin' property in this play.Why would I be happy to find out a flipper has my lease ? If there is still plenty of room to flip and make a huge profit, I didnt do my job and get the most I could out of my lease.

I liken this to a car deal.Your job is to hold as much, up front gross, for the company. My job as the purchaser of your deal is to try an make you seek employment in another field. I am not looking to coexist with you any more then you would make a cold call to me wanting to be friends. It isnt personal , at least that has been poured into the tops of our craniums since the get go. So please dont try and make it personal now with a simple explanation of how I need the O&G's and how their survival depends on me and the rest of the greedy mineral owners on the Haynesville Shale.

P.S. I call B.S. on the reason Exxon hasnt been here drilling in the last 30 years. If Exxon cant afford to drill here we might as well shut the whole shooting match down. That borders on unintelligible and really not appropriate for this site at this point. We all know that Exxon has been feeding their own insatiable greed abroad while the smaller independents have been doing the leg work around here in their absence. Discovering and producing here, on a somewhat smaller scale. Until the BIG BOYS tapped all they could outta' the sheiks.Now that the sheiks aren't able to keep up with demand anymore, I am sure we will see the Exxons start to diversify a little more around here"outta the goodness of their hearts". They will watch it all get set up, ready to be put into motion, swoop in and take over these struggling companies and sit on it until it is ripe for their taking. So in other words those bonuses mean a heckofva lot more then they used to .
Permalink Reply by Dion Warr, CPL on December 8, 2008 at 12:08
Wow! And the good old, bad old days are here again!

There are a couple of ways that I have heard this explained by O&G folks, which are none too flattering, and really doesn't further the discussion, and so I won't go there. Sufficed to say, it's worse than what Shane has written here. One way was exposed by KSLA, from secretly recorded discussions, that virtually everyone on this site has read or heard about. 'Nuff said.

As to what is required of the lessee, and inequitable bargaining positions: Much of that is or has been remedied by the introduction of the Mineral Code, effective 1/1/75, and subsequent jurisprudence. It is important to point out that with respect to both the Code and the case law, the common private landowner is afforded a special status in that he is (1) not required or forced to lease, (2) cannot be charged a risk penalty, (3) cannot be charged dry hole costs, (4) can only have revenue withheld up to his share of any direct well costs. (I'm sure I'm missing some, here... but I'm typing fast). So the idea that the lease sets up some sort of 'equal partnership' is a non-starter.

As to inequitable lease terms: there is no defense, and no egalitarianism, either. Most of the time, the lease term provisions vary more on the scale of 1X:2X, not 1X:50X or 1X:100X. Then again, mineral rights in LA are not subject to rescission for lesion beyond moiety (thus, your lease is worth what a lessee will pay for it). Then again, just as there was fury when lessors found out about other what other lessors were paid, there will be fury about what O&G companies will no longer pay. The only solace I can offer the mineral owner is this: IMO, the runup in lease bonus had less to do with the mineral rights being leased and more to do with the main players fighting each other. Your mineral rights are worth exactly what they were a year ago: what a prospective lessee is willing to pay for them. Think of it this way: if your mineral rights had a fixed and assessable value, the state and parish would figure out a way to assess them and tax you for them. I don't believe anyone is ready for that day to come. Instead, your mineral rights become valuable at the point of lease, and at the point of capture. Thus, all the taxes become due at those points (severance taxes, income tax from bonus, rentals, royalties, etc.).

Yes, most all of you know that I am a landman not currently contracted in the HS area or zone; in case you didn't know, now you know. It has been alluded to in this thread and others that by leasing, one is trading their right to receive 75% of their revenue for a lease bonus. That is not true. You are trading your right to work your minerals, currently two miles beneath your feet and millions of dollars worth of service work, risk, and expertise away from the marketplace, for a lease bonus. Part and parcel to the lease negotiation is that lessee agrees to explore and drill "at its sole cost and risk" for your minerals. If the HS is considered so sure, and the rewards so great, why haven't lessors in NW LA banded together to borrow or contribute enough money to drill for their own minerals? Why haven't smaller O&Gs with the means to do so just put their own credit lines up to drill their own HS? I submit that it is because the development of this play takes more than money pledged, it takes time, talent, resources, risk tolerance, and expertise that the mineral owner does not possess. It is correct that the analogy of the tenant farmer is not a perfect one; besides the stated reasons of Jim and others, it is imperfect to purport that in the HS one could reap hundreds of thousands or millions of dollars per acre with your own sweat and labor, your own two hands, or a few thousand dollars worth of basic farm equipment. (Heck, throw in some free advice from your neighbors and the local co-op as well.)

One last point: the ultimate cost of the commodities (or byproducts) that you purchase (including oil and natural gas) is set by the market and measured against what the sum total cost to bring that product to the marketplace. You may have HS gas, but in the marketplace, it is just natural gas. In light of this, consider the following situations:

A) If you as an operator could produce Permian Basin gas with net expenses (including initial E&P costs for the project) of $4/mcf, and could sell it for $8, would you rather do that, or because of higher initial lease acquisition costs in HS, produce HS at $8.50/mcf, and sell it for $8?

B) Would you pay more for HS gas as a consumer, because it is HS gas, so that others in your area can continue to receive higher lease bonuses?

If you would honestly favor producing HS gas over cheaper gas if operations were on 'your dime', and would pay more for HS gas over 'Brand X' natural gas, even if you weren't receiving any proceeds from the HS play, then I cannot debate you any further. But to parody a popular children's series that has been adapted to the big screen, I believe I will end up seeing you standing in front of a proverbial mirror for exceedingly long periods of time, mumbling to yourself, "I see what I desire... I see the Shale! But how do I get it?!"
Permalink Reply by Snake Stewart on December 9, 2008 at 1:04
Permalink Reply by Dion Warr 2 minutes ago
Wow! And the good old, bad old days are here again!

......It has been alluded to in this thread and others that by leasing, one is trading their right to receive 75% of their revenue for a lease bonus. That is not true. You are trading your right to work your minerals, currently two miles beneath your feet and millions of dollars worth of service work, risk, and expertise away from the marketplace, for a lease bonus. Part and parcel to the lease negotiation is that lessee agrees to explore and drill "at its sole cost and risk" for your minerals.

Hello Mr. Warr,
We havent had a dialogue like this since the last time an O&G type got on here spewing.Thats the only reason for the bad old days.Some of your buddies dont like dealing with informed sheep. Baaaaaaaaaad decission on his part.
You made direct remarks about something I said,while calling it a lie,an untruth, so I felt it only fair to try and rebut.

What exactly is untrue about my statement ? If I do not lease, are they not going to drill ? With all the risk and uncertainty involved, I can see how scary it could be but they chose that line of work. As did yourself. You are the experts, not us. So please explain to every lot owner watching, that they are going to hold this juggernaut back.
You state that if it were on my dime, I would feel different. It is on our dime ! How come they arent willing to use their money ? Oh thats right, the only money that is generated is basically from previous lease holds and operations.Which in turn pay for future plays like this one. Where does that come from......That 75%, or worse in some cases, that was eluded to previously.
Why are we even having this conversation anyway ? The O&G's dont have any money for leases, they already have more then they can drill. They are actually having to sell some of their holdings (for huge profits I'm sure).It will take 20 years or so for them to get all they have now drilled. So why are they talking dilluting stock ( then changing their minds) to raise more capital ? Because there are plenty of would be suckers still available for the taking and there are Billions at stake. Not like it was 2 years ago but still plenty.

I have enjoyed your posts and will continue to respect your opinion. Heck, as soon as you can convince me I am wrong I will even issue a public apology. Been done several time by me already. Traden' $500 an acre, for the potential of hundreds of thousands of dollars per acre, just sounds real stupid to me. I aint the sharpest tack in the box but I get by. And you are right! You are screaming at the monitor right now about how you'll dont have to drill by me. Hey thats cool with me cause how much is this going to be worth when there aint no more oil ?
HA!HA!HA!HA!

P.S. I didnt take your remarks personally so I hope that you dont take mine that way either. Have a good day Mr. Warr.
Permalink Reply by Skip Peel - Mineral Consultant on December 9, 2008 at 1:14
Snake. I seriously doubt that Mr. Warr is "screaming at his monitor right now". He doesn't impress me as a screamer. I too respect his opinion. And find the time to read all his posts.
Permalink Reply by Snake Stewart on December 9, 2008 at 1:15
Hey Skip,
I guess my sarcasm pencil is running low of lead.
I basically meant that it has to be frustrating for them to keep repeating the same thing over and over and over again. I know it is for me.
Permalink Reply by Skip Peel - Mineral Consultant on December 9, 2008 at 1:18
Morning, Snake. It's early. Just go sharpen that pencil. Considering the length of time that the site has been down, we have a lot of catching up to do.
Permalink Reply by Snake Stewart on December 9, 2008 at 1:24
Yea , I posted that comment last night and luckily copied and pasted before I lost it. Took me quite a while with two fingers and the backspace button to get that all in. (LOL)
Permalink Reply by Skip Peel - Mineral Consultant on December 9, 2008 at 1:28
Then in addition to being up early, you were up late. I bet you wear suspenders and a belt. Right? LOL

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