Lease Language for Texas

I am trying to help my elderly aunt, who has  1 acre of mineral rights which is in an undivided interest of a 40 acre tract in Texas within the Haynesville shale. All the other relatives who have mineral rights in the 40 acres have signed the lease, but as she is out of state the lease was mailed to her to sign.

However, when I looked over the lease one thing that caught my attention is that in the main body of the lease the amount of royatly to be paid states only 1/8 several times.


Then in the Exhibit "A" attached to the lease it states this: It is understood and agreed that wherever "one-eighth" (1/8th) appears in Paragraph 5 of this lease "one-fourth" (1/4) shall be and is hereby substituted therefor.

I guess my question is, with conflicitng statements will this be a problem? In the end, what royalty will be paid to all who signed this lease.  Will they get the 1/4 (25%) they think they are getting OR will they get the 1/8 (12.5%)? 

Also, any advice as to if this is a a good "Cost Free Royalty" Clause which is in Exhibit "A" as provsion 2 below.  Will all my relatives who signed this lease really get a cost free royalty they think they are getting or are there other hidden expense cost that will be deducted besides severance tax & production tax (what would the production tax relate to in Texas?)

There are only 6 provisions in Exhibit "A".  They are below.  How do they look?  Any problems?

Exhibit "A" Provisions read:

1. It is understood and agreed that wherever "one-eighth" (1/8th) appears in Paragraph 5 of this lease "one-fourth" (1/4) shall be and is hereby substituted therefor.

(what royalty % will end up being paid?)

2. Lessor's royalty provided for herein shall be calculated on the gross proceeds from the sale of production at the point of sale, and not withstanding anything to the contrary contained herein, it is provided that payments to Lessor for Lessor's royalty share provided herein shall never be charged directly or indirectly with any ofthe expenses of producing, storing, separating, dehydrating, compressing, transporting or otherwise making oil, gas, liquid hydrocarbons, condensate or other fluids produced ready for sale. Notwithstanding the foregoing, Lessor's royalty will bear its share of all severance and production taxes. It is intended that the terms of this section or paragraph of this lease be controlling, and not merely surplusage under the principles set forth in Heritage Resources, Inc. v. Nations Bank, 939 S.W.2d 118 (Tex. 1996). Lessee or its assigns shall immediately reimburse Lessor for any charges as mentioned above that may have been charged in error. This paragraph will hold precedence over any Division Order executed on this lease.

(Is this really a cost free royalty or not?)

3. It is understood and agreed that this lease covers only oil, gas and associated hydrocarbons and does not cover iron ore, coal, lignite and gravel.

4. At the expiration of the Primary Term, or upon the cessation of continuous operations as provided for herein, whichever is the later date, this lease will terminate as to all depths below 100 feet below the stratigraphic equivalent of the deepest depth drilled in a vertical well drilled on the leased premises or on lands pooled therewith, or it will terminate as to all depths below the base of the deepest formation penetrated by a horizontal well drilled on the leased premises or on lands pooled therewith.        

( Does this serve as a good Pugh Clause?)

5. At the expiration of the Primary Term, or upon the cessation of continuous operations as provided for herein, whichever is the later date, this lease will terminate as to all of the land lying outside the snrface perimeter of a pooled unit or units.

6. It is understood and agreed that Lessor warrants to defend title to said land against persons lawfully claiming same or any part thereof, by, through, or under Lessors, but not otherwise.                

(I was a little concerned about this one ... should I be?)
...................................................

Of course, the oil company has 20 provisons in the main body of the lease. And, I know the lease is always written to protect the oil company. But, will these 6 added provisions override any contray statements in the main body of the lease?


This is all new to me and I am just trying to help my aunt as she can hardly read the lease, much understand it all.  

I know it would be best to have an attorney look it over, but with only 1 acre of minearl rights I hate to advise my aunt to seek a lawyer.

The oil company has called her a couple times wanting to know when they will get the signed lease?   Should I tell her to sign the lease with the 7 provisions in Exhibit " A" or not?

Or, are there any changes which should be made, if even possible at this point?  I know it is too late for all the other relatives, but for my aunt are there any suggestions?

Thank you in advance for any advice I can share with her.

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Replies to This Discussion

Permalink Reply by adubu on July 11, 2012 at 12:42

With only one acre of minerals you will receive 1/4 (25% R) with a depth pugh clause and R free --- good lease IMO take it and sign. Warrent of yout title simple says you are sure and can prove you own the minerals as defined-- not a problem The Exhibit A over ride the body of the lease.The terms are good even if you had a 100 acres. IMO

Permalink Reply by HBP on July 12, 2012 at 4:18

1 ac - no surface, 1/4 royalty, no cost royalty, good indemnification, no warranty (when possible).

Permalink Reply by Boomer on July 12, 2012 at 13:17

Thank you guys very much for your input.  It is appreciated.

Permalink Reply by adubu on July 13, 2012 at 1:34

Boomer--- only thing I would change on second thought would be the depth clause -- change from deepest depth drilled to the deepest formation production from--- but with only one acre of minerals not deal killer. Tell her to sign amd go on--- over all good lease terms.

Permalink Reply by jffree1 on July 13, 2012 at 2:29

5. At the expiration of the Primary Term, or upon the cessation of continuous operations as provided for herein, whichever is the later date, this lease will terminate as to all of the land lying outside the surface perimeter of a pooled unit or units.

The lease is for an undivided interest in 40 acres, isn't it?  I could be wrong about this (I am not a lawyer) but, if the entire 40 acres is not included in a unit and you don't strike the "continuous operations" part of this clause, it sounds to me like they can hold the entire 40 acres as long as there is production from a unit that includes even just a tiny fraction of one acre out of the described 40 acre tract.  

Anyone?  

Permalink Reply by Andrew on July 13, 2012 at 5:01

I would take this on 1 acre in a heartbeat. The terms are very fair, and even the warranty provision is very timid (limited warranty rather than general). I hope you get some good Haynesville production. 

Permalink Reply by The_Baron on July 19, 2012 at 7:46

jffree,

 

continuos operations should be defined earlier in the lease. Normally it refers to drilling and exploration operations and not to production operations.

Permalink Reply by Andrew on July 19, 2012 at 11:28

Continuous operations clauses usually allow the primary term to extend for a short period (90-180 days) as long as continuous drilling operations are being conducted during that time. This is not something I would think needs to be stricken from the lease. Again, I say this is a rather favorable lease for 1 acre, and I wouldn't get greedy over the already-generous terms.

Permalink Reply by adubu on July 21, 2012 at 9:09

Andrew and other Proffessional ----what's  best clause to put in lease if operator will agree to force continuous drilling of alternate wells in the unit to allowed spacing so operator does not just HBP several hundred of acres in unit with only one well for years. If spacing for shale wells are say 80 acres in a 640 acre unit and plat will support 8 H wells with good laterals of 4-5000 feet. 

Permalink Reply by Andrew on August 2, 2012 at 12:32

You would want a continuous drilling clause requiring drilling on a new well to be commenced every XXX days, or the lease terminates as to all but the existing wells. I can't give you an exact clause requiring this, but it's best to have an OG attorney draft this for you anyway, as the circumstances are very important with a clause like this.

You would want to retain the right to waive this obligation for a particular period without freeing the operator of the continuous drilling obligation forever. I personally would not be thrilled to have an operator drilling a well every 180 days on Haynesville minerals while gas is below $3 - that's not good for either party involved. But once gas came back to the price I liked I would want the ability to start the clock again.

Permalink Reply by adubu on August 2, 2012 at 13:24
Andrew--- understanding good points, do you see any clauses in leases today that address this issue? So the small mineral owner would just have be lucky if gets in unit that one mineral owner had >50% and got some type clause that alternate wells would be continued to be drilled if the economics (prices) were favorable to the operator. So in general if mineral owner has < 100 acres net minerals just forget attempting to negotiate this in lease agreement. I had just heard coffee house talk of recommendation that you should attempt to get it in leases so now I understand not sensible thing to push. I bet the attorney that held out on 20 acres was not a OG attorney. Thanks -- one additional question on this subject -- if economic conditions are good and operator does not drill over the years then what can you do to force operator get your minerals to market ? Is only option litigation ? Of course that ugly and costly.
Permalink Reply by Andrew on August 2, 2012 at 18:58

A few things,

As I suggested above, the more acreage you have the more likely you are to be able to command a continuous drilling clause. It's a great clause to have, for sure, which is why the company isn't likely to give it to you unless they really want your lease. For example, I would be shocked if Weyerhauser did not have such a clause in their St. Helena lease, which is why you see so many Weyerhauser wells so early in the play. On a large tract like that (say ~20,000 acres hypothetically), the company would likely drill multiple wells on that acreage anyway. When you have that much contiguous land, a pugh clause is less helpful because the operator can drill on your lease without forming a unit.

For the small guy, there's not much you can do in lease negotiation (of which I'm aware anyway) to really motivate the operator to drill after they HBP your lease. I would ask for the continuous drilling clause if I was in that position, but I wouldn't expect to get it. 

As to your question about HBP and litigation, I suspect others on this board would be more knowledgeable than me, particularly for states other than Louisiana. I am not an attorney, and my land/legal experience has been more on the leasing than operating side of things. I know that - in Louisiana - you cannot HBP a lease indefinitely by operating a well at a loss every month, and I know that a serious consideration in working interest acquisitions is whether a well is producing enough to "hold the leases." 

The obvious first step, often overlooked, is merely to ask for a release of all but the existing well. Often a respectful request is all that is necessary, and many operators do it just to avoid litigation unless they have definite drilling plans in the future. But beyond that, I'm not familiar enough with the jurisprudence yet to know under what circumstances and on what grounds you could get a release or damages. 

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