Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on February 3, 2015 at 3:24

LA Force Pooling statutes do not preclude the ability to lease in the future.  Don't waste time talking to customer service about a lease, it's a waste of your time and theirs.  You need to contact the land department and request an offer.  If the acres involved are small don't expect a bonus offer just a quarter royalty on the standard lease form.  The land department is unlikely to enter into a protracted negotiation.  They'll have a take it or leave it proposal.

How do you know the well has paid out?  Have you compared the cost of the well to the cumulative production? How did the former owner get an owner number without submitting a certified letter to confirm UMI status?

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Permalink Reply by kittycatmama on February 3, 2015 at 3:43

I am pretty sure well paid out several months ago. I have leased minerals in same section so familiar with well but going to work on that this week. I don't know how the former owner got an owner no. I ran a title on property prior to purchasing and saw some old issues including a sale of minerals form an earlier owner 2 yrs. after that owner lost it in foreclosure. I thought the last owner had minerals but didn't know for sure. I don't think he really understood unleased min. owner concept. He was very ill and died a short time after selling. He didn't find his owner no. until after we closed. I am glad he found it. I talked to UMO division of CHK. They are ones who told me I couldn't talk to a landman as it was forcepooled in perpetuity. It caught me off guard. Also we did the cert. letter for change of ownership in Oct. Talked to that dept. with CHK and they told me when they processed it--60-90 days down the road--we would get confirmation. Found out yesterday that it was processed in Nov. into our name

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Permalink Reply by Skip Peel - Mineral Consultant on February 3, 2015 at 3:56

Post the well serial number and I'll tell you the cost.  There is no "UMI" division to my knowledge.  You are likely talking to someone who has never dealt with this situation before. It is possible that there is some company policy regarding UMI acreage in producing units but there is no prohibition in LA legal statutes.  The Force Pooling assertion is bs.  You should pursue the possibility of a lease for future production now that development is picking up.  If you can't find the right CHK staffer to communicate with, go get an O&G attorney that has experience dealing with CHK and see if they help.

CHK did a terrible job of title due diligence in their rush to acquire HA prospective leases in the early years of the play.  That resulted in an unusual percentage of "open acreage" in many of their drilling units.  It would seem logical from a business standpoint that they would prefer to have more acres under lease and fewer UMIs as that improves their bottom line.

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Permalink Reply by Henry on February 3, 2015 at 4:27

Skip,

Where do you go to find the cost of a well?  Is it somewhere on sonris?

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Permalink Reply by Skip Peel - Mineral Consultant on February 3, 2015 at 4:38

If a company has applied to the state for their severance tax exemption under the Horizontal Well Incentive Program that form, which includes the well cost, will be entered under the well serial number in the Document Access portion of the state database.

Horizontal wells STATUTORY CITATION: R.S. 47:633(7)(c)(iii)

On any horizontally drilled well or any horizontal recompletion from which production commences after July 31, 1994, all severance tax shall be suspended for a period of 24 months or until payout of well cost is achieved,whichever comes first. Payout of well cost shall be the cost of completing the well to commencement of production.

 

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Permalink Reply by tc on February 3, 2015 at 5:45

Is the well cost for a UMI and for the Horizontal Well Incentive Program the same?  Would a UMI also be responsible for maintenance cost, work overs etc., how about the cost of refracing?  So if the original well cost $5m and then another $1m was expensed for the well, what is the well cost for pay out for an UMI, $5m or $6m? 

Is a no cost 25% lease really better for CHK than a UMI?  With the low price of NG these wells are not hugely profitable and with all the extra charges that CHK could debit against a UMI (nice profit margin) and the fact that they don't have to pay the UMI any royalty for years if ever (helps current cash flow), and then if they do have to have to pay the UMI, there is a good chance that they won't own the wells or they will be wrapped up in a MLPs.

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Permalink Reply by Skip Peel - Mineral Consultant on February 3, 2015 at 5:54

A UMI is never responsible for any well related expense out of pocket.  All costs are recovered from the UMI's portion of production.  In addition to the initial well cost there are Lease Operating Expenses (LOE) that are defined by the state and can be charged against the UMI interest.  I think a UMI will receive deductions for any LOE including workover or re-frac.  Keep in mind that expectations of re-fracs are unrealistic at this time.  It is undetermined if a re-frac would be economic and what wells would be good candidates.  The jury is still out.

I don't think UMI's would receive a no cost royalty from CHK unless they had an exceptional bargaining position.  A quarter royalty lease on the basic CHK form even if no bonus is included is more advantageous for the majority of UMIs.  I should be understood that the well operator receives no profit from the UMI's share of production.  Only the recovery of costs approved by the state. 

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Permalink Reply by tc on February 3, 2015 at 6:44

"I should be understood that the well operator receives no profit from the UMI's share of production."

If marketing/gathering costs & the NG price used to sell to affiliates are allowed for UMI production, then there is a strong argument that CHK is making a profit on the UMI's share of production.  Since the word "profit" at the corporate level can be so twisted, a better word may be "benefit from"

Not every operator has CHK's reputation for aggressive billing, so this discussion and cost/benefit analyst would change for different for operators.

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Permalink Reply by Skip Peel - Mineral Consultant on February 3, 2015 at 11:08

CHK sold their affiliated Haynesville gathering and treatment assets several years ago.  Although they no longer make a profit off of midstream services I'm sure they entered into contracts with the current company that guaranteed them a substantial profit.

There remain some gray legal areas that I think CHK exploits unless challenged in court.  See Slattery Company, Inc. v. Chesapeake Louisiana L P et al.

Permalink Reply by Jeff on February 7, 2015 at 4:18

Skip, if a UMI signs a lease with a well already in production does that well fall under the lease or does it remain unleased with all new wells under the lease?
Do they back pay royalties on the producing well?
Jeff

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Permalink Reply by Skip Peel - Mineral Consultant on February 7, 2015 at 6:28

Jeff, on the day a lease becomes effective the mineral lessor is due production from any and all wells within the unit boundary irregardless of where that well or wells may be in their productive life.  Royalty is not owed for any production prior to the effective day.  That production is governed by the statutes pertaining to Unleased Mineral Interests. 

One of the main reasons I encourage UMIs to seek a lease is that the early production is the best production in horizontal Haynesville Shale wells and even better than average wells can take a long time to payout at today's natural gas prices.  Everyone in the early days of the play that decided to forego a lease and wait for payout may have been relying on the reports that wells were paying out in 4 to 8 months.  Then $13/mcf prices plummeted to $3/mcf, or less, and that time line increased 4 fold, or more.  If a typical Haynesville well flows 75 to 80% of it's lifetime production in the first 24 months that effectively negates the four fold increase in income that comes after the well pays out on the remaining 20%.  Keep in mind I am speaking in generalities and not every well will be typical.  When you take into account the time value of money, I think the vast majority of small mineral interests are better off leased at a quarter royalty. 

TVM is based on the concept that a dollar that you have today is worth more than the promise or expectation that you will receive a dollar in the future. Money that you hold today is worth more because you can invest it and earn interest.  Additionally, future dollars are less valuable than present dollars due to inflation over time.  A dollar today buys more than a dollar five years from now.

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Permalink Reply by kittycatmama on February 4, 2015 at 11:24

Chesapeake's email for Unleased Mineral Owner's with owner no. to check status of their well.

payouts@chk.com

They were quick to respond and helpful

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