As excitement builds over the possibility of an economic AC play and the opportunity for some private mineral owners to receive an offer to lease, I think a note of caution is in order.  The history of exploration and production, or more specifically the lack of production, in the parishes currently being targeted for leasing programs appears to lend a certain mind set to expectations.  There is a common history among numerous land/mineral owners of multiple leases over decades of time with no successful production which, for some, leads to an over emphasis on the bonus dollar amount and less concerning the other lease terms.

It is worth noting that the prior history of largely vertical drilling and lack of technology specific to very challenging formations is not a good decision making model for what has become the new normal in the last ten years.  If you are following the general technical advances across all basins and the success of the AC in Texas in particular, you ought to have an increased expectation that this time may be different for central LA.  I strongly suggest that GHS members with significant size acreage ownership to get the assistance of a law firm experienced in negotiating O&G leases for land owners.  It is still too early to fully know how this AC play will turn out (see the TMS) however if it does become economic, the lease bonus will soon be of less long term value than a larger royalty fraction.  For those who have surface ownership there are very important terms beyond the bonus.  If ignored those terms may create regrets for decades to come.

My general rule of thumb is:  if the bonus payment for your signature on a O&G lease will make a significant difference in your financial security or rescue you from an immediate financial emergency, it's acceptable to place your emphasis on the bonus.  If however you, and your family, have a measure of financial security and do not need a cash bonus for some compelling need, have patience and get some professional help.  If this AC play is a bust, you may regret to some extent not taking a lease in time.  If this AC play is a success, you will almost certainly get considerably better lease terms and the long term difference in royalty revenue could easily be many thousands (or hundreds of thousands) of dollars more than your bonus check.

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Replies to This Discussion

I like that clause. What would determine the "production in paying quantities" test. I am dealing with an old lease agreed to with a prior generation and a gas well that has produced for ~30 years. Currently it is not in paying quantities but is still held by production without a Pugh clause. We have been suggested by Landman that we could take it court to force separation but it does not seem to be a worthwhile expenditure at this time. Just looking for it to be shutdown like the other 3 wells within the next decade.

If you own the surface, contact the most experienced O&G attorney whose practice serves land/mineral owners, not the industry, regardless of where their physical office is located.  Be prepared to provide the production history for your well over the last two years.  You should be able to get an opinion on the strength of your case for no charge.  If you wish to proceed from there, prepare to sign an engagement letter and pay an hourly rate.  A demand letter on your behalf coming from a well known O&G legal firm will be of greater concern than a demand letter that you send yourself.  Also be prepared to answer a question from your lawyer.  The most successful lawyers have their demands taken seriously because they follow them up with a suit if the demand is denied.  That entails a cost and a commitment from you.  Attorneys that make demands and do not follow up soon get a reputation for bluffing.  A successful O&G attorney does not wish to detract from their hard won reputation.

I can't speak to your comment regarding a "Pugh" clause without more information.  However, if this is the only well holding your lease and it does not meet the test then a horizontal Pugh shouldn't be an issue.

We had  some of our land in Texas released on a lack of production clause and it has worked out very good for us. It can happen get a good attorney.

I'm curious if your statement "a larger royalty fraction" is any indication that a 1/4 royalty will stick now or in the future, and that a 1/5 could be on the cheap side if the play "plays", as they say in industry parlance. Your comment?

I suspect that there are already leases with a quarter royalty for well located, large acreage owners with first rate legal assistance.  The play will have to prove economic and open acreage may have to be in areas where there is competition for leases by two or more operating companies to get those terms at this point.  Let a handful of good wells be announced and the bidding will likely go up. 

Here in the Haynesville Shale early leases prior to the Chesapeake announcement tied up a good many large acreage interests at a fifth and $200 to $500/acre bonus.  After the play was announced and the first round of well completions were reported, everyone got a quarter.  Didn't matter whether they owned 1,000 acres or 10.  Something along those lines may happen in the Central Louisiana AC but it is too early to bet big.  If the current bonus dollars are not enough to be life changing, I'd wait a while.

Appreciate your comments. Allow me to add an operator could insulate himself somewhat from whatever can go wrong during drilling by offering the fee owner a lease with a back-in after payout of 25% royalty and a stiff reduction the bonus. I don't know if many fee owners would go for that at the expense of royalties during payout, but it does seem somewhat more beneficial in the long run. The bonus money will be long gone shortly, but royalties can go on for decades. That five per cent spread between twenty and twenty-five is mighty attractive if going long.

I could use the pigs and hogs analogy but we decided to stop using it long ago as some mineral owners found it offensive.  I understand why.  It is better to simply state that one should have a feel for their negotiating clout/position and what is beyond reason in the way of lease terms.  In the early days of GHS too many members with low value tracts asked for the sky and got left behind.  At first some of them thought that was okay since a fair number of wells were paying out in 4 to 6 months at $13 gas.  Then the bottom fell out and many of those members have gone years with no payment.  Some of their wells may never pay out.  Those that have get pencil whipped regularly by their operators.

You make a strong argument to take the bonus money and run. Having seen the Austin Chalk in Louisiana turn on and then crash, you can lose your appetite for risk in a hurry. When they operators first developed Masters Creek East in the 90's they were going to build drilling pads for the chalk all the way to where the trend intersects the Gulf of Mexico. And then one day- POOFH, the bottom fell out from under both oil and gas. 

And it was all over but the crying.

Bob, you miss my point.  I'm not making any argument for taking the bonus money.  That would be an understandable course of action based on past AC plays however I think this time may be different.  With that said, it is unlikely that the AC will be economic across the entire area now seeing leasing activity.  So it's a game of musical chairs and the music has not even started.  What I am saying, explicitly, is that if the bonus payment would achieve something substantial in someone's life, take it and don't look back.  That doesn't mean ignore other lease terms.  It just means that trading a higher royalty for a bonus is a personal choice.  If the play fails, those that took the bonus and did or didn't place value on the other terms will feel validated.  If the play takes off, they may feel differently. 

I concur this time around the AC might play differently. I am cautiously optimistic the new lateral fracking technology will turn this play around. But then, so were the E&Ps in round one likewise optimistic. 



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