Is it better to sign a lease with poor lease terms instead of being unleased in a unit? Under what circumstances can being unleased work out in a mineral owner's favor? Is a lease always preferred to being unleased?

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Ryan, mineral law varies by state.  What state are you interested in?

This question is for Louisiana.

First, what lease terms do you find "poor"?  There are a lot of various terms in an O&G lease, some may be more negotiable than others.  Some may be quite important and others no at all depending on the specific circumstance.

The compulsory unitization (force pooling) laws in Louisiana protect unleased mineral interests from risk penalties and require an operator to pay them based on 100% of their pro rated share of unit production - after the well recovers it's cost to drill and complete. 

In the heady early days of the Haynesville Shale, some wells paid out in 90 days.  Of course that was their max production period and natural gas was $13/mcf.  Then the price of natural gas went into free fall and it became obvious that not all horizontal Haynesville Shale wells were equal.  A lot of mineral owners, especially those with small acreage interests, were unable to get some really favorable lease terms and decided they would just go non-consent.  We call them a UMI (Un-leased Mineral Interest).  Unfortunately for many of those owners, they didn't get the best of wells and the depressed price of natural gas meant their well would not pay out for a long time.  In some areas the early wells have never paid out.

So, the question becomes one of educated guesses.  Are you in one of the areas of better rock?  Do you think the price of natural gas will go up significantly in the next year or so?  Do you mind receiving no compensation while other owners in your unit receive royalty payments?

Some of those UMIs were overlooked and never offered a lease.  There should be a remedy, a law to ensure that they have the option to be leased.  Other UMIs were offered a lease but couldn't agree to terms.  I fear that a good many in that category were unaware of what constituted "reasonable terms" and asked for terms that did not fit their ownership situation.  In my experience few Haynesville operators have offered a lease to either category at a later date.

My opinion has always been it's better to be leased than unleased, because many of the wells drilled in the Haynesville Shale never reached paid out status. Unleased mineral owners do not receive any payments until the well reaches a point where gas sales have equaled the cost of drilling and maintaining the well.  Whereas leased owners begin receiving royalty payments once initial production begins.

However my opinion may be changing with the introduction of CUL's.  I have recently seen at least one CUL well reach paid out status in under 24 months at sub $3 gas.  There may now be hope for unleased owners to see some revenue.    

Ronny, some of the recent CUL's have started out at 1 BCF/month.  Two wells next door to my property have made 12.5 BCF between them in the first 9 months.  It will not take anywhere near 24 months to pay out at that rate.


And that should be even better for an unleased owner.  I would speculate that if gas were above $4 these operators would be more inclined to offer leases to all unleased owners in the new CUL units. JMO

What does CUL stand for?


CUL=Cross Unit Lateral.  In the early days of the Haynesville Shale drillers were restricted to a single 640 acre section and the wellbore had to remain 330 feet off the sections lines.  With the advent of new technology and relaxed Louisiana mineral rules drillers can now go through and across section lines with lateral well bores reaching 2+ miles long.  This allows for much, much more gas to be produced from a single well with basically the same well expense of the early days. Some well bores depending on the well pad location can produce gas from 3 different sections.



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