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Permalink Reply by JHH on June 22, 2011 at 11:32

I don't know of any advantage to a mineral owner who signs 5-year over a 3-year lease unless you get a HUGE lease bonus... enough to pay the money you lost if the oil/gas company never drills. The property was effectively off the market for three or five years.  It gives the O/G company a lot of time to drill.

I know of one NG company that is good at leasing a bunch of acres for little bonus and never drilling.   And then assigns the property to various companies (for $$$ i'm sure-mineral owner gets squat) before the lease runs out.  Your only hope is to get leased by an honest company and your property gets developed properly.

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Permalink Reply by Joe Aldridge on June 22, 2011 at 13:20

John,

In my opinion a five year lease only benefits the company unless as JHH says the mineral owner gets a very large bonus. The problem is I don't know of any companies that will willingly sign a 3 year lease unless they have immediate drilling plans. 

To give you an example: My family was under lease to Amoco on a five year lease and we were contacted by CHK at the beginning of the fourth year to lease for Austin Chalk. Amoco held our lease for the remaining 2 years with no plans to drill and killed our chances of getting a well. Things move quickly in this business and my feeling is the shorter the lease the better. If I could get a 6 month drill-or-drop lease I would go in that direction with a company that knows how to develop and produce the Austin Chalk and TMS. Just my thoughts.

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Permalink Reply by P.G. on June 23, 2011 at 2:35

Maybe it would be a good idea to ask a company why they would need a 5 year lease..

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Permalink Reply by John Denison on June 23, 2011 at 2:41

The company gave its explanation. The intent of my post is to solicit unbiased information from Shalers who have insight into lease terms, either through their profession, personal experience, or both.

 

 

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Permalink Reply by Skip Peel - Mineral Consultant on June 23, 2011 at 3:02

As with most other leasing issues, there is no pat answer.  There are a myriad of reasons for the terms a lessee offers.  Without details, all responses are conjectures, informed or otherwise.  IMO, one of the reasons we see more mentions of longer term lease offers is the trend to development of unconventional reservoirs.  Historically, development of conventional drilling prospects meant leasing a much smaller area as those reservoirs were limited in aerial extent.  For example an energy company seeking to develop a conventional target might have a proposed lease tract of 30,000 acres with the thought that something less than 100% (too often much less) would eventually be found to be uneconomic.  The industry looks at unconventional reservoirs such as the shale basins in a different way and is willing to lease hundreds of thousands of acres because the formations are relatively continuously productive over large aerial extents.  Obviously it takes much longer to drill 200,000 acres than it does to drill 30,000.  And even longer to construct the required infrastructure to support that quite large number of wells.  Five years makes more business sense when considering the longer term potential development of an unconventional play.  I prefer a 3/2 with a significant extension option price just to give the operator an incentive to drill sooner rather than later but both are acceptable at a fair market bonus amount as long as the other lease terms important for the protection and benefit of the lessor are included.

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Permalink Reply by Joe Aldridge on June 23, 2011 at 2:48

In the past the first 2 years of a 5 year lease was used to build a lease block in an area where the play is a large one. This was the case until the HA. In that case though things went nuts and companies had to get serious quickly and the 5 year lease just gave some additional time to develop a very large area.

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