So, I got a letter in the mail from Encana postmarked Aug. 18, 2010 with a check to exercise their two-year extension right on a five acre piece of property and a two-acred piece in Township 17 range 12 west, Sections 19 and 30. The check was dated Aug. 13 and the lease expired on Aug. 15. Going by the postmark, they missed the deadline. Three years ago we signed with $200 an acre bonus and 25% royalty with $50 an acre to extend.
In addition, I got a phone call asking about an easement 3 months ago and saying that they were planning to drill this fall in that area. Nothing since then, though.
I need some education about something, if ya'll will help me...let's play out a specific scenario so there are some real numbers to work with. First, the background. 2 of the 7 acres I own are separate pieces of property. 5 acres is mostly in sections 19 and 30. The other two is in the middle of nowhere in section 28. I discovered today that there are two wells that are active and producing less than 300 yards from my property. April and May was the first full production months for them. The production is running between 240,000 and 250,000 MCF per month for each well. They are both Petrohawk wells. Since I was in a lease with Encana, I assume that I was (properly) not receiving information or royalties from these wells. Here are my questions.
1. If I'm indeed no longer bound by the Encana lease, don't I suddenly have interest in these two wells? And since I don't have a lease with Petrohawk, wouldn't that mean I get a full 100% royalties off both wells (after Petrohawk finishes paying for the expenses of the wells)? (and I can negotiate the 5 acre property separately with Encana--or whoever...).
2. How close to you have to be to a well before you are entitled to royalties? Do you just have to be in the same field as the well? One well is labeled for the Sligo Field and one for the Elm Grove Field (see #3 below why).
3. One well bored one mile north and lands in the same section, the other one mile south in to another section (unless the section boundaries are off a couple of hundred yards on the Sonris site) . Both wells are just southwest of my property. Is it my location from the well itself or where they bored to that is relevant?
4. Ok, let's throw some numbers out and everyone can tell me how oversimplified and wrong I have it :-)
a. 243,455 MCF production for Sligo Field in May (latest data I could find) at $4.36/MCF (July 1 amounts I found online) = $1,059,029 per month. Let's make that an even $1 million to make it easy.
b. If I have 2 acres out of 640 acres in a section, that's .003125 of the section.
c. $1 million x .003125 is $3,125 per month. Since there is not lease, that is equal to 100% royalties, yes?
d. Is that an estimate of what I would expect in royalties per month (after the well become profitable)?
So, tell me what I've done wrong and what assumptions I've made and shouldn't have! Thanks!
Being "close to" a well doesn't entitle you to royalties. You are entitled to royalties only if you have a lease, and the land that you leased is in a production unit that producing gas and turning it to sales.
If you are not leased, you are not entitled to royalties, no matter where drilling occurs. If your unleased land is in a unit that is being drilled, then you fall into the category of being an unleased mineral owner (UMO), and you will receive payment for your proportionate share of the gas only after the well pays out.
Now, let's be specific about your area in 17-12.... By my records (and you should use Skip or Les as the gold standard in records, not mine), sections 19 and 30 are Encana Units. Section 28 has been unitized by Petrohawk. I can find nothing on sonris that indicates any drilling under Sections 19 or 30. However, I find that Petrohawk has completed a well located in Sec 28. BUT, that well goes under Sec 33, so this well will not pay out to you. HOWEVER (the good news), Petrohawk has drilled a well in Sec 33, going north into Sec 28 --sonris #240579, Henderson 28H -- and this well will be the one that will ultimately pay you.
I would guess (a bad thing to do) that if you included Sec 28 in your lease to EnCana, then this well is covered under that lease. You should contact EnCana and Petrohawk to see who will be paying you.
As to the land in your other two sections... Check your lease and see if you had a horizontal Pugh Clause. This clause says something to the effect that if you have land in multiple tracts, only those tracts in producing sections can be HBP at the end of the primary term, and the others must be released.
And, as Skip said, visit an O&G attorney to see if your land in Secs 19 and 30 are leased or not. It is well worth a few hundred dollars.
Thanks, Henry, for taking your time to clarify some issues for me. Here's what I gathered from your comments:
1. You used the term UMO to describe what I was saying about 100% royalties, so I had the right idea, just the wrong terminology it sounds like.
2&3. It sounds like each Section is a drilling Unit, which is a smaller area that the "oil field" (like Sligo Field or Elm Grove Field I mentioned), and I have to be in the same section where the bore terminates for it to effect me.
4. Still don't know about the calculations. It'd be nice to know so I can estimate how long it was take to pay my portion of the well costs before I started receiving payments.
Your records are all correct, at least they are the same as the ones I looked up on Sonris yesterday. The only discrepancy was that it looked like well 240579 was in Section 33 on Sonris, but when I typed in the X/Y coordinates for the well, it put it in Section 28. It sounds like it doesn't matter, though, since the well is pulling from Section 28 in either case..
Thanks again for being specific with you comments. I wasn't as far off as some might suggest--at least I was asking some of the right questions!
As exciting as this is, we know that we have a responsibility to do this thing correctly. After all, we want the farm to remain a place where the family can gather for another 80 years and beyond. This site was born out of these desires. Before we started this site, googling "shale' brought up little information. Certainly nothing that was useful as we negotiated a lease. Read More