Replies to This Discussion

Permalink Reply by Dion Warr, CPL on October 3, 2013 at 16:57

Wm. Hill:

The problem that has been outlined in various litigation on this issue to date (of which there have been lengthy discussions on quite a few) seem not so much to revolve around whether a true "arms-length" purchase takes place (although language that specifies such an arms-length, non-affiliated party not being owned to a significant degree by parties owning significant interest in the lessee does appear to improve the position of lessor), but around the issue of conflicting language in the preprinted form (significantly defining "mouth of the well" as the point of evaluation, ie., product reduced to possession and settlement due) and language in the lease riders which do not pass the test of being in full conflict or as to present an ambiguity. Courts currently seem want to make a "frankenclause" interpretation of these provisions such that anything before the settlement point is "cost-free", any costs incurred beyond the settlement point is fair game and proportionately borne by lessor and lessee, with the tragic problem being that the settlement point is almost uniformly adjudged to have been "mouth of the well" in many of these disputes, which effectively guts lessor's understanding of what the cost-free provision was to address in the first place.

Understand that my points here are neither an endorsement nor a criticism of what has seemed to have occurred in these circumstances. It is just my view of what has effectively transpired when such disputes have arisen.

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Permalink Reply by Francis Mayo on October 3, 2013 at 23:41

So, bottom line, if the Bass Boys can get screwed and the system is bought out anyway, just scratch it and get glad. There you have it, straight from the Land Men. That is what landowners deal with. You just have to decide if you will be happy with the crumbs they throw you.

Some landowners actually turn them down and live without dealing with them. Some just hang on to those sweet dreams, sweet talk, and an actual cost free clause. Later they post and wonder how the good petroleum people could get away with it. Then they are told that nothing is bullet proof, it happens to the Bass Family, and essentially the courts are purchased.

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Permalink Reply by Dion Warr, CPL on October 4, 2013 at 4:01

Francis:

Uh, if you want to take a couple of posts from a couple of different posters, stitch them together however you like, and fill in a couple of gaps with some invective yarn, then I guess that you can clothe yourself in your truth. To be clear, that is not what I said.

The thrust of what TD was saying (IMO) was that this is more about "bad actors" (outlaws, as he put it). As it stands, with the award of punitive damages not being availed to the lessor, a bad actor which would be willing to game the lessor out of deductions not attributable to them in the first place has no impetus (other than saving some legal costs) to not back up their position. Of course, they could just not withhold the deduction, but then they wouldn't fit the definition of bad actor.

Since you brought up the "out of the mouths of landmen" theme, I have to say that I still find it amazing that five plus years later, with all that has occurred, people that wouldn't trust certain companies and their (sometimes former) CEOs on virtually anything still quote them as gospel as far as what their bonuses "should be" and what their minerals are "really worth". That lousy $300 and 20% was judged to be a decent offer by virtually everyone in a pre-shale world and made it economic for many smaller and mid-sized companies to develop prospects. Arguably, it still lies within the realm for developmental prospects for other targets other than shale.

Henry has done a lot of work and information gathering detailing who pays what, gross and net. Landowners should consider such information, in addition to their lease bonus and royalty, and the purported "ironclad" lease riders, when making a decision as to whether to lease, and to who.

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Permalink Reply by Francis Mayo on October 4, 2013 at 4:05

Mr. Warr:

I will take your verbage for what it is from the source it comes from. 

The initial offer went up, Mr. Warr. Both the bonus and the royalty. The ironclad language queered the deal. I have experienced what I have experienced and I have heard five different stories (pitches) from five different professionals (lease hounds) contracted to two different companies. Thanks for your insight, Kreskin.  

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Permalink Reply by Dion Warr, CPL on October 4, 2013 at 4:49

Francis:

You must have lost your train of thought somewhere. I am Warr, not Kreskin. I'm a landman, not a mentalist.

As to so-called "iron clad" agreements drafted by your knowledgeable attorney, I would submit that the brothers Bass would have a full complement of similarly sage counsel under retainer (who knows, maybe some of them are even better). Regardless, TD's admonition is well warranted; I would dare say that holding yourself or your counsel in a different light than folks who have been involved in the oil business since the beginning of the Texas oil business smacks of hubris.

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Permalink Reply by Francis Mayo on October 4, 2013 at 5:04

The Bass Brothers are dealing with a different company and in a different state and certainly with a huge block. I can only speak of my experience with my attorney and with the two companies I have dealt with. I can also relate my experience with recent activity here. I find it truly remarkable how the terms changed and the stories shifted. Much as when I was younger and wanted to purchase a car.

The landmen were much more snotty than the car salesmen. The tone was very similar to your last post. They certainly were frightened with the language and I am very satisfied with my attorney and he has done more deals than you could have possibly done since your preparation at Episcopal High. That must be where you mounted that tall stead you are on. You, my friend, keep yourself in good graces with your sponsors. Good shilling, i am jellin.  

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Permalink Reply by Dion Warr, CPL on October 4, 2013 at 7:58

Francis:

Look who's purporting to be Kreskin now.  You've divined where I went to high school, by reading my...  my...  no, you just searched on the internet.  I will notify the good folks at Tulane University that they should do a better job of making sure that would-be Googlers be able to find evidence of my attendance there as well.

 

I trust you found no actual sponsors of mine in your internet search, otherwise you would have posted them.  No shilling either.  I have not bought the first shale lease in the area covered in this forum (being the Haynesville), otherwise, ethically, I would find difficult to openly comment here.  To those who have questions far afield of the shale fairways which have gotten "close to home", I have generally contacted these folks privately, disclosed whatever affiliation that I have with the situation, and advise them accordingly if they choose to seek my advice, or alternately let them know that it would be improper to comment.  As I have not contacted you and informed you of such a conflict of interest, and you obviously found none, I would expect you to put away the tar brush, before I have to ask TD to have his dogs to hike a leg on your dog.

 

Unless you are referring to a different set of Bass brothers or a different lawsuit, the issue being disputed is the exact issue that William Hill brings up, namely, the application of costs, against purported "cost-free" royalties:

 

From the Dallas Star-Telegram:

 

"At issue is whether Chesapeake Operating and Chesapeake Exploration properly calculated royalty payments on the Oklahoma City-based company's natural gas production.

According to the lawsuit, the companies improperly deducted production costs, expressly forbidden by the leases, and used "sham transactions" with two other Chesapeake affiliates to set a below-market price on which royalties were paid, also a breach of lease terms...

The case with Bass and the others involves leases on 3,952 acres [my note: hardly a huge block]... 

Under the lease terms, Chesapeake is not allowed to pass along "any part of the costs or expenses" of producing, gathering, transporting or processing gas, the suit states.

The leases require the owners to bear their share of certain expenses up to 75 cents per 1,000 cubic feet (mcf) "under certain conditions," but those conditions never applied, it says.

Chesapeake imposed costs on the owners exceeding 75 cents per mcf, the suit says."

Notice the last part cited - perhaps this is where you thought that their case involved something different than what was discussed here.  But it's not; the Bass lease and the Lessee/Operator's alleged misconduct goes beyond the "cost-free" provisions: (from the original suit filing)

"42. These leases require the lessor to bear its pro rata share of certain expenses (not to exceed $0.75 per Mcf) under certain conditions. But, at all relevant periods, those conditions did not exist.

43. For example, the Winscott leases, the Rall Properties lease, and the Trinity Valley lease each require, among other requirements, that any such post-production costs are “actually incurred by [Chesapeake Exploration] for the purpose of making the oil and gas produced [under the relevant leases] ready for sale or use or to move such production to market” before any part of the expense may be borne by the Winscott owners, Rall Properties, and Trinity Valley. But, on information and belief, Chesapeake Exploration did not actually incur any post-production expenses “for the purpose of making the oil and gas produced [under the relevant leases] ready for sale or use or to move such production to market.”

44. Any payment by Chesapeake to any lessor under these leases that reflects, either directly or indirectly, “any part of the costs or expenses of production, gathering, dehydration, compression, transportation, manufacturing, processing, treating, or marketing of the oil or gas or components thereof or associated minerals” violates any such lease."

 

Bass' lease actually went further than most "cost-free" royalty provisions in going so far as to cap the "post-production" costs applicable to the gas captured by Lessee (that could be assessed) at $.75 per mcf.  According to the original petition, Lessee violated that provision also.  At worst, one could interpret that as "different hair from the same dog", specifically, a pattern of disregard of contract provisions by lessee, alleged and disputed by the lessor.

 

More on point to Mr. Hill's followup, regarding third-party purchasers of products, including "DBA"s (I presume Mr. Hill meant non-independent affiliates), the Bass petition goes on thusly:

"47. Chesapeake, directly or indirectly, has imposed on the Winscott owners, Rall Properties, and Trinity Valley the costs of treating, dehydrating, compressing, processing, and transporting even though such postproduction costs were not: (i) charged at arms-length by an entity unaffiliated with Chesapeake; (ii) actually incurred by Chesapeake for the purpose of making the oil and gas produced ready for sale or use or to move such production to market; or (iii) are incurred by Chesapeake at a location off of the lands covered by the Winscott leases, the Rall Properties lease, and the Trinity Valley lease...

Market value for sales of gas

 

62. The Winscott leases, the Rall Properties lease, and the Trinity Valley lease each establish a method to calculate market value of gas produced from the relevant lands for the purpose of computing royalties. In all cases, these leases provide that, if actual sales of gas produced from the relevant lands meet certain criteria, those actual sales will set the market value (for the purpose of computing royalties).

63. If the actual sales fail to meet the listed criteria, the Winscott leases, the Rall Properties lease, and the Trinity Valley lease each set the market value (for the purpose of computing royalties) of gas produced from the relevant lands by calculating “the arithmetical average of the two highest prices then being paid by purchasers in Tarrant County, State of Texas for gas of substantially equivalent quality and quantity as the gas being produced from the Leased Premises.”

64. Where the arithmetical average method of calculating market value applies to the sale of gas produced from the relevant lands, the Winscott leases, the Rall Properties lease, and the Trinity Valley lease each provide that, to the extent “prices used in determining market value. . . are under contracts or arrangements making deduction for any of the expenses of production, gathering, dehydration, compressing, transporting, manufacturing, processing, treating or marketing of such oil, liquid or liquefiable hydrocarbons or gas, then such deduction shall be added back into the prices for the purposes of calculating market value for the payment of royalties to the end that Lessor’s royalty shall not be charged directly or indirectly with any such expenses, except as expressly provided in this Lease.”

65. On information and belief, none of Chesapeake Exploration’s actual sales of gas produced from the relevant lands meet the criteria listed in the Winscott leases, the Rall Properties lease, and the Trinity Valley lease for deeming the sale price the market value (for the purpose of computing royalties).

a. On information and belief, Chesapeake Exploration has not sold and does not sell Chesapeake Exploration’s share of gas produced from the relevant lands under a bona fide gas sales contract.

b. On information and belief, Chesapeake Exploration has not sold and does not sell Chesapeake Exploration’s share of gas produced from the relevant lands under a contract providing for the purchase of such gas by a purchaser which is not an affiliate (as defined in the relevant leases) of Chesapeake Exploration.

c. On information and belief, Chesapeake Exploration has not sold and does not sell Chesapeake Exploration’s share of gas produced from the relevant lands under a contract where the only consideration for such sale is the price of the gas provided for in such contract (with no provision for advance payment).

d. On information and belief, Chesapeake Exploration has sold and now sells Chesapeake Exploration’s share of gas produced from the relevant lands under a contract that has a term of more than five years.

e. On information and belief, Chesapeake Exploration has not sold and does not sell Chesapeake Exploration’s share of gas produced from the relevant lands under a contract that contains provisions for upward redetermination of price not less often than annually on a basis to insure that the price for such gas will always be reasonably equivalent to, and not less than, the then current market value of gas similarly sold or used in the area of the relevant lands."

So, while the lessee here may not be your "Mississippi operator", the Bass case is clearly on point as to what Mr. Hill's discussion was about.

 

As far as being snotty, I generally am not, except when confronted with snottiness, at which point by first reaction is not engaging in "sweet talk".  As far as this "tall stead" I am purportedly riding on (I think you meant the one with two e's, e.g., a horse), I own no horse, not even a club pony.  However, I will stand in boots high enough to steer clear of the "stinking lanman" horse hockey that you seem want to muck in.  I was answering the man's question, not shilling for any particular agenda.  And in case any one was confused as to my tone from the first post to Mr. Hill, I wanted to make it known that I was commenting as to where the position(s) of these disputes seem to rest, and not a personal position.  It was you who went to the "there you have it from the land men", take what glint you want and "bury the rest" in an ad hominem attack.

 

Personally, I find it sad that someone would be frozen in such a mentality.  For my part, I've been here for over five years, mostly trying to answer other member's well-meaning questions.  My page here is not set to "private"; it is open to everyone to see, anyone here can know who I am and what I do.

Permalink Reply by Francis Mayo on October 4, 2013 at 8:22

I am referencing my experience with two companies totally unrelated to the Bass suit and the Anisman suit. The problematic  language dealt with more than just a cost clause. You, my faux Kreskin, seem to know the details. 

The Bass Suit is a good hook for lease hounds to use with landowners to have them "come off the freeze."- You cannot worry about things and let this attorney ruin things, even Bass could not count on his mouthpiece.- You guys have used that as much as "one bad apple does not spoil the whole bunch" speil.

I know you went to Episcopal High, what does that have to do with Tulane? That snouty ego must throw the complete attainment in. My point was, the man I know has done more deals since you were dreaming of them at Episcopal. Yes, I know, Independent Leasing Professional.  And?  I suppose you would have no interest in what way lease terms are weighted and no interest in purchasing mineral interests? Why, of course not.  

Permalink Reply by Dion Warr, CPL on October 4, 2013 at 11:15

Francis:

 

Exactly how I am supposed to presume that Mr. Hill's rather generic question and thread about a Louisiana lease and lease language had suddenly become about your set of facts?  You're not exactly forthcoming with anything but an "all landmen are the same - scum" mentality".  I was trying to address Mr. Hill's concerns with my first post - you responded in a very "cute" (sarcastic? snotty?) aside to my post before posting your Pro Publica article link, which went so far as to outline some of the very tactics which are alleged in the Bass Suit (Again, TD right on point).

 

But hey - sometimes one's tone doesn't translate well into the written form - so to avoid any confusion of why I answered Mr. Hill's post the way that I did, I made sure in my second post to cover that this is the way these types of disputes stand now, not as an endorsement or criticism of them.

 

What I didn't realize was that by the time you commented about your five landmen and two companies, the crux of this thread had become about you, your situation and your facts.  I think I would have had to have been Kreskin to have figured that out.  (Maybe better, I would have had to have been that character that Woody Harrelson played in "Now You See Me".)  Of course, then any references to Bass would have made no sense, but it didn't apply to your experience with your nameless Mississippi operator, your unknown tarred set of "leasehounds", and your set of facts.  Silly me, landman, I was still thinking that this was about William's question and set of facts.

 

As far as ego, I didn't sully your counsel's reputation, nor do I have enough information to be able to compare his knowledge or number of deals to me, or my number of deals.  It would be an apples-to-oranges comparison, as I am not an attorney, so such a comparison is a complete non-sequitur.  I merely pointed out that holding your attorney out there in the same thread in which we are bringing up a major lawsuit with the Bass family legal counsel as if you somehow would turn out better or wouldn't let such a thing happen to you is "pride before the fall".  Perhaps you liked when the landmen made sweet talk with you more than you realized, as you started casting aspersions about mentalism, my occupation and primary schooling, your car-buying exploits, my riding capabilities on tall horses...  And your situation with your operator and your leasing professionals (glad I'm not one of those) that fully supersedes the discussion on this thread and how it's completely different than anything I could ever imagine or relate to.  And I'm the snotty one.

 

Your base advice is good, which I think is, "Go in with your eyes open, retain sage legal counsel knowledgeable about oil and gas, seek out a good corporate actor and knowledgeable operator as a lessee rather than taking the most zeroes you can get, and get it all in writing".  Oh, and "bad actors will be bad actors, no matter the best of intentions, the most learned of legal counsel, or what you commit to writing."  Let's try to agree on those.

If you can do that, and send me your address, I will try to arrange to have a mint put on your pillow.  (Coo...  coo...)

Permalink Reply by Two Dogs, Pirate on October 4, 2013 at 13:55

I would have to say that Dion is one of the most trustworthy folks and one of the most knowledgeable persons here on GHS or what is left of them. He goes by his real name and doesn't try to hide anything. He has taken his own time to answer complex questions that others couldn't answer. Mr/Ms Mayo you are barking up the wrong tree when it comes to Dion having some sort of hidden agenda and I would think that many on GHS would stand by his side and not by yours. I for one give 5 stars next to the name of Dion Warr here on GHS.

Permalink Reply by 1kw6x71km1v37 on October 4, 2013 at 5:21

Suffice to say frequently one must pry his money out of the hands of another who got his dirty hands on it first.

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Permalink Reply by Dion Warr, CPL on October 4, 2013 at 8:08

Wm. Hill:

Apologies for the thread hijack.  I hope that I have answered your questions.  Unfortunately, as to specific comments as to the Bass brothers suit which are applicable to your inquiry, they are buried in a rather long side-bar with Francis Mayo below (whoops, above).  My comments are most applicable to Louisiana, but as you can see, similar issues are being litigated in Texas as well.

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