Replies to This Discussion

Permalink Reply by Grillin' - MmmMmm on December 22, 2008 at 12:41

Dion: I'm confused. If CHK or whomever is the operator of the unit, isn't it the responsibility of the unit operator to disburse royalty payments to all unit royalty owners, regardless of who leased from them? Since I'm not a land man, just a dumb old engineer, seems like as operator my company sends checks to all of the landowners holding interest in the unit, not just the ones we leased directly from. In that instance, it doesn't matter if a WI owner goes non-consent. But again, this is way out of my league so you can correct me. I'll check with my royalty payments department when I get back in the office next year.

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Permalink Reply by Dion Warr, CPL on December 22, 2008 at 14:02

Mmmarkkk:

Unless directed by the non-operator to do so, subject to operator consent, no, operator is not responsible to pay royalties to all owners, unless contracted to do so by JOA or other agreement between the parties, or a court of jurisdiction were to direct it to do so (my expertise is LA; it may be different in other states).

When setting up DOI sheets for some clients that I have worked with in the past, the client may wish to track the entire unit WI/NRI picture, both consent and non-consent, as well as tracking all RI and ORI obligations due under the leases, regardless of WI owner, for internal purposes. Generally, costs to the UMI and non-consents are carried by the operator, and the revenue and royalty attributable to those interests and not disbursed at payout (or multiple thereof, if taking in risk penalty) is held, from what I have seen.

In a joint venture situation, it is very common for the operator to take charge of disbursing monies for all of the consenting JV parties, and simply remitting the remaining Unit NRI to each JV partner, and I would believe that upon the agreement of operator, it would do so for the non-consents with which it very commonly does business (ex. AMI and development partners, where the ebb and flow of money is relatively constant over a larger area, and costs and risks are high enough to force the address of the ability of a party to 'go non-consent' on a unit-by-unit basis).

But why would an operator elect to pay a non-consent WI's way as far as royalties if it didn't have to? Non-lessee Operator does not have a contractual obligation to pay royalty in this scenario; the non-consenting, non-operator, lessee does. If such a lessee will not pay its share of well costs incurred by operator and the consenting WI parties, why would an operator wish to assume the non-consent's lease obligations?

To be fair, I am no oil and gas accountant either, and my experience in this regard is obtained from the accounting department personnel that I have had the privilege of working with over the years. It could very well be that a JOA on a unit operated by your company could in fact provide that the operator will do all of the accounting for the particular unit in question, or some other situation may exist that I am not taking into account. I would be interested in hearing the facts and reasoning behind such a circumstance.

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Permalink Reply by Dion Warr, CPL on December 22, 2008 at 20:12

Jim:

To do your justice to your post, allow me to reply to your comments categorically:

'Anyone serious about buying leases in the Haynesville play is going to pay more bonus money than they have ever paid for a lease outside of this play... None of these operators is going to pay more than than an investor paid for the lease--' * I am not sure I have run into the 'investor' who has paid more than $22,000 per acre on an oil and gas lease up in the HS. However, highlighted tracts in the 8/2008 state lease sale averaged this in bonus. These offers were made by operators, or their directed emissaries. The bonuses were run up by major oil and gas competitors looking to put other major competitors, smaller competitors, and 'investors', out of the field of play. Unfortunately for said major competitors, they could not fully effect their plans to corner the market prior to the money running low. They did however, change the economics on the playing field in that bonus rates went from x to 100x, and appear to have now settled back to between 5x and 20x.

' Anyone buying leases in this play today plans to participate the leases they bought, which is legal, ethical and good business. --' IMO, it is a good thing you put in the operative word 'today'. There were people coming out of the woodwork trying to lease unsuspecting l/o's at lowball prices during the runup (2/08 - 6/08 approximately), all so they get put small blocks of acreage together to peddle to anyone who might be willing to buy leasehold with the keyword 'Haynesville' attached to it. Such things happen when 'gold fever' hits an area, albeit it would be considered far from ethical or good business. Just because you didn't do it, and I didn't do it, doesn't mean that it didn't happen. As far as whether AFEs on completions will be $8MM or $9MM, such will be borne out over time.

'Only crazy people would buy leases at these bonus prices and not have a home for the leases --' Again, you live in Jim-world. Just because you deem it crazy, and I might agree with your assessment, doesn't mean that other yahoos (I mean, irrational speculators) didn't engage in this very thing just a few short months ago. Before March, anybody paying over $1,000 per acre paid up to an individual l/o would have fit the title 'crazy'.

'What you are saying is that if a company is not a major player in this play, they are a fly by night or shady operator.-- Nope, Jim, but good try. Until a company shows a track record of working to develop their leasehold, including a willingness to participate from the non-operator position, however, they should be viewed pragmatically, if not skeptically.

'If the "company" doesn't want to negotiate with a landowner and offers a pittance of what they paid other landowners in the same section, the landowner should lease to the company at whatever terms they offer and not lease with the company that gives them the best terms.--' I didn't say that. But it does make sense for a l/o to trade with the operator on respectable terms, or at least trading with a non-operator who has a track record of paying its obligations and maintaining a respectable cash flow, versus trading with the 'investor' who can promise development, but not effect its delivery. Or, for that matter, a fly-by-night LLC that can easily roll up into bankruptcy while its principals are shielded behind the corporate veil.

(Continuing from above) 'That's absurd. The lessor gets the same royalty and the same treatment under a lease, irregardless of who the Lessee is. It is the law.' Maybe it should be, but from a practical standpoint, it's not. The operator is producing the product, and receiving the revenue from the purchaser, and disbursing net proceeds to the non-operator(s) (unless non-operator elects to put in its own facility and split-stream and/or market its own share of the gas directly).

As you said before, in Texas, the oil and gas revenue stream begins and ends with the lease, also in Texas, the interest owners are afforded a preferred security status in its claim on the product (from either cash or revenue streams )that cannot be quashed by bankruptcy proceedings; in LA, the case is a little murkier.

'Every lessee participating in a unit is developing the lease and the unit, not just the operator.' Again, based upon the worldview that a lessee will participate and do what is 'right'.

'I have never seen the kinds of tactics being used by these companies, whose merits you taut.' Never 'tauted' (or touted) anyone, but continuing, 'They blow wads of money to get a majority of the leasehold in a section, then form a compulsory unit, so they can strong arm the lessors with the smaller interests into leasing for next to nothing or remaining unleased and trying to ever get paid for their interest once a well is commenced. It is a deliberate strategy.' I don't think that whole sentence was the strategy all along, but here's what I do think: certain companies blew wads o' money to choke out the other competitors, but it didn't work. Now, they are faced with dealing with UMI owners that they cannot cut out of the unit (like they could in TX) or force lease by integration (like they can in AR) or charge risk penalties for non-consent like other WI owners (like they can in MS). The choices are limited, and now they can either 1) pay like bonuses as before, and have their remaining bonus dollars consumed as quickly as they were in June, 2) lower their offers to a 'not so high' of a level, citing changing market conditions, and try to make deals, or 3) not lease, except in those areas in which they have significantly established positions or at least high overall WI% in the unit (regardless of who owns the leases).

'As much as these companies and their hands would like for people to believe, this isn't a club or a fraternity, it's a business.' Totally agree. This principle usually keeps bonus and royalty payments restrained to a more reasonable level throughout, rather than yielding such wild swings over a short period of time as has been seen in the HS area over the last year. But the business-minded people in this business have usually made it painfully apparent to the 'investors' in the business that they should be prepared to pay their own way, the whole way, and those who are not well-monied enough to do so should prepare for some rough treatment, and being made to own up to their share of costs and pay their lessors. If the 'investor' or 'investor group' can do that reasonably, they'll do fine; if not...

'...Just like they drove out the competition with their ridiculously high bonus payments, they will bring it back with their hard ass, low ball tactics. The $3000 to $5000 per acre lease bonus puts this game back in the real world.' Totally agree. Now, if someone like you and your partners would be interested in acquiring more than 50 acres per unit and actually acquire some of this acreage in these expiring leasehold areas, the l/o's would have the makings of an emergence from the current OGML bonus bottom. In this thread, Linda has reported that she has received an offer of $1250/25% from CHK, not too long after receiving Kouga/Columbia's $1000/20% offer. So much for the 'real world' just yet.

'None of these companies came into this play leasing under their names.. Thank god for a JOA.' Other than God is usually capitalized, not much fault with this, other than, who said that all the parties have to sign a JOA?

'If a company, the operator, does not own a lease on a tract in a compulsory unit and the tract remains unleased or is leased by someone else, it does not affect the net revenue interest of the company in that unit...' (True, but if their NRI is too low, they will drill another unit of equal quality in which their NRI is higher, unless such is outweighed by the effects of losing one's leasehold in said unit. If they cannot drill them all, the company will 'lose' the lowest NRI unit of equal stature first.)

No matter who owns a lease or minerals in a unit, they have the opportunity to participate in that unit on a pro-rata basis at net invoice cost. If a lessee elects to participate or farm out, they have the right to join in the JOA. Once they have executed the JOA and fulfilled the terms of their obligations thereunder, the operator is liable for the land owner's royalty under that lease, just as they are for their leases and every other participant in the unit. I can't imagine buying a lease inside a unit to not participate it or farm it out. Otherwise you would be buying a lawsuit, and not many people do that, unless they are sure it will make a lot of money.' Sure, as in the case of the gambler who has a system, sure, like some of these folks looking to flip leases to the big boys earlier in the year? Jim, you seem to be suffering under the delusion that everyone who bought an oil and gas lease in the HS was reputable, and interested in acting in good faith and fair dealing. Ask the landowners who are still holding on to unpaid drafts if they still consider that to be true.

'I have bought a few acres on this side of the Sabine as well, but not much since the Austin Chalk play, where I bought 38,000 acres in Pointe Coupee Parish and turned it to Trans Texas in 1996.' (Hopefully you did not buy the infamous '7200 acres in {certain township}' lease. Nice description on that one.) I take it you did not intend to hold that acreage and participate in any resulting units, made some cash and some ORI and/or reversionary interests, for investment purposes. Thankfully you did not hold them until 1998, when you would have just gotten stuck with them. Or, I guess 'it just depends on which side of the fence you are on as to how things look to you.'

'As far as Linda's lease is concerned, I advised her to let it expire for reasons I set out. If I were to buy a lease, it would be in a unit already formed where I had reason to believe a well would be drilled in six months to a year or was already drilling. I like units where forty or fifty acres are owned by unleased mineral owners not willing to lease for $1000 and 1/5 royalty. To you it may be block busting, but to the lessors and me, it's business.' Suggest you do business then: offer Linda's mother 'real money', something between $5K-$8K per acre for a one year lease, contact CHK and offer to farmout or participate in their unit if they can get the rest of their lease picture together, b/c as a good business practitioner, you will participate, and once CHK capitulates, Linda's problem is solved, and you'll be paid timely. Right?

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Permalink Reply by Dion Warr, CPL on December 26, 2008 at 6:02

Jim:

Congratulations on your self-congratulatory response. I would feel remiss to not mention to you that responding to something or someone that you purportedly do not care about is probably, uh, delusional. That being said, neither God, you, nor I cannot change the expiration date on the lease, although with God (notice the capital "G", jim), the operator may have the hope of force majeure.

Sorry to hear about your ex-wives, Jim. I'm still married to my first. With such a winning personality and charming disposition, I cannot imagine why a woman would ever want to break it off with you. Maybe it was the bad habits that you mentioned.

The good news is that carpal tunnel surgeries usually recover pretty nicely. Most patients fully recover within a few weeks, unless you stubbornly or stupidly neglect to follow the post-op instructions, at which point the scar tissue that can develop within the tunnels can sometimes make the entrapment worse than it was prior to the surgery. It hasn't been more than a couple of months, has it, Jim?

I'm guessing that it is the pending AFE for the Encana well that is currently filling your plate this month. I'm guessing that you are not funding your ex-wives and children on your share of the production from the Glen Rose well that has HBP'ed your 40 acres all these years (for which you probably paid $100 an acre, and a sixth royalty), which frankly would not cover a respectable landman's dayrate. All in all, based upon your success in the operator history that you cite, you would probably be better off participating than operating, being the operator in good standing that you are.

As for me, I have been one of those independent landmen filling a station that you find so financially unfulfilling for only a dozen years. I love what I do. I have been fortunate enough to stay on under various clients in LA for all but a two-year period that I went and ran a fiber optic ROW crew in GA and NE FL. I have found and still find the business to be exciting, challenging, and rewarding, financially and otherwise.

Perhaps most importantly, I have found, time and again, that it always behooves one to treat others with decency and respect, whatever the other person's knowledge, or station, or belief, a lesson that you seem to have lost (or have willfully ignored) for however many years that you have walked the earth.

Despite your knowledge and experience, you have shown time and again that any followup questions or alternate propositions from others, either to your posts or to your 'tried and settled' POV, is somehow just a 'pain in the @$#!', and it sullies every parcel of print that you type, and belies the narrow-minded impishness of your every post.

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Permalink Reply by Skip Peel - Mineral Consultant on December 20, 2008 at 10:27

GD. Don't look now, you're short a card. No room left for big dogs unless they are acquiring existing leasehold.

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Permalink Reply by Skip Peel - Mineral Consultant on December 20, 2008 at 11:33

GD. You are no dumb country boy. LOL! And everyone has the right to crunch their numbers any which-a-way they like. I crunch my numbers each and every day for a living. And my business is not impacted by their being more or less acres leased. I compile my running leasehold figures through on-line reports. Anyone who would like to make the case that the O&G industry likes to fudge their numbers may certainly do so. The figures that I compile come from annual and quarterly reports and company announcements to investors and the media. Considering the consequences of knowingly providing false information to the financial community and the media outlets that serve Wall Street and investors, I judge these announcements to be somewhat accurate. If they are not exact to the specific leasehold current at the time of the announcement, they are low. In my blog post, "Analysis of Haynesville Shale E&P Companies By Net Acreage Positions As Of Sept. '08" (under blogs in the right hand column of the Main Page), I account for 2,664,200 acres. There has not been much updated information since Sept. as it was the end of the third quarter. The next announcements that give updated leasehold by company will increase that number. How much? No one knows. Though leasing has slowed, it has not stopped. Let's be conservative and speculate that I may be north of 2,750,000. How much of the remaining ~750,000 is currently held by companies and investors who do not report and therefore do not appear in the totals? How many of those acres are HBP to small companies not capable of HS development? How much is unleaseable due to clouded title or represents land tied up in legal disputes? And what are the odds that any meaningful percentage is contiguous? I will wait until I have the benefit of another round of corporate announcement that allow for an accurate revision of the figures. Probably late January, early February. As I track HS leasing on a daily basis, I could offer some additions to the total now. But it would be speculative on my part. I prefer to crunch the numbers that the E&P companies report. I'll look forward to this discussion in the new year. Seasons greetings to you and your family. And, umhhh, you really should trim some of that ear hair. It's getting pretty long. LOL. PS. For the holidays let's all just hope that the 3.5M is wrong. And low.

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Permalink Reply by Skip Peel - Mineral Consultant on December 20, 2008 at 14:53

Thanks, GD. I'll look forward to seeing you in the new year. Best. Skip

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