Replies to This Discussion

Permalink Reply by VirginiaDore on June 14, 2012 at 8:16

Like Rebecca Lane, I am an absentee (out-of-state) owner of mineral interests in Arkansas and naturally have a hard time staying up with what goes on, especially knowing nothing about the oil and gas business generally.  I tried to make an issue of post-production costs in contract negotiations with SWN (or Triad) last year but was told that that point in the contract was non-negotiable.  After conversations with several acquaintances in Columbia County (including a lawyer) with much larger mineral holdings in southeast Columbia County than my own, and learning that they too had been unsuccessful in getting a better deal on this point and were signing or had signed anyway, and that they believed NO ONE was getting any concession on post-production costs, I concluded that I would sign as well.  Part of my holdings (those in Section 15, Columbia County) were force integrated a few months later.  My understanding is that those who were force integrated received the best terms received by any of us who signed.  But you, Lerret, are saying that even if NO ONE in Section 15 who signed was successful in having post-production costs deleted from their contract, which as far as I know was the case (let's assume so anyway for the sake of argument), the O&G Commission just arbitrarily DISALLOWED subtraction of post-production costs from royalties for all the persons in Section 15 who had declined to sign contracts?  I find this hard to believe and would like to hear what others (Skip Peel et al.) think or know about the matter.  If it's true, then yes, we who signed all made a big mistake.  But that includes a lot of bright and knowledgable people who looked into the matter carefully, and I can't believe it's true.

Permalink Reply by flex auger on June 14, 2012 at 10:29

Virginia, I have read alot of then intergation ruleings from the ark ogc the last few years, i have never even seen compression or any other cost mentioned. That leads me to believe it is pretty much standard procedure that the lease your offered requires you to pay them, the gas company after all they are looking out for themselves first. Once they get the clock ticking on your 15 days after the meeting, you wont get it from that gas company, you will have to get a competing gas company to lease you with that option. They might just do it too, since it is also their last best chance to get "in" on the section. Timing is critical. A lease that pays you "before cost" will mean an extra 2 or 2.5%  on your portion. A 1/5 or 20% royalty will actually turn out to be closer to 22.5%. Mine does, and it means alot over time. If you have already signed up then this makes no matter and its not worth being upset about, be glad they are interested enough to possibly drill and everyone gets a check, dont sweat a 2% left on the table. Good luck!

Permalink Reply by Skip Peel - Mineral Consultant on June 14, 2012 at 10:37

Virginia, I've got a copy of the unit order for your section and will review it when I have the chance.  AR integration statutes are penal in the extreme when compared to LA force pooling statues.  The APL lease that is used is an old standard Bath form Producer's 88.  For those who have not seen the form, a link follows.  Note that links to the AO&G database time out rather quickly so anyone interested should make a copy.

http://aogc2.state.ar.us/PDF/JOA%20Archive/AOGC%20Lease.pdf

Permalink Reply by Skip Peel - Mineral Consultant on June 14, 2012 at 15:34

The challenge with AR mineral law is that forced integration is key to streamlining development under the mineral laws that allow for the severance of the surface estate and the mineral estate in perpetuity.  LA avoids the complications of highly divided mineral ownership interests (and incredibly complicated mineral titles) through prescription whereby the severing of the two estates creates a mineral servitude that is for a maximum period of ten years lacking any good faith attempt to develop the minerals or the establishment of production.  At the end of the prescriptive period the mineral ownership reverts to the current owner of the surface estate.   Lacking prescription AR  mineral  development would be very difficult and expensive to assemble drillable leasehold. 

LA mineral owners who choose not to accept a lease offer may be force pooled into a drilling unit as an Unleased Mineral Interest.  The UMI receives payment based on their proportional share of the unit acres after the well pays out.  The UMI gets 100% of their prorated production subject to certain ongoing lease operating costs after payout.  There is no risk penalty for UMIs, only for Working Interest owners.  AR risk penalties of 400%  on unleased mineral owners is overkill.

The basic tradeoff is that mineral ownership in AR is perpetual if not voluntarily conveyed.  And the state chooses to force integrate under terms favorable to the lessee/operator in order to provide an incentive for development.  Any reforms to the mineral code would take changes throughout the statutes to maintain the balance that the state desires for revenue purposes.  Since the majority of commissioners on the AR Oil & Gas Commission are from the industry (most actually own operating companies) there is little chance for reform by that avenue.  An overhaul of the mineral codes would have to go through the state legislature and that is a very difficult political challenge. 

I find no option for mineral owners other than the standard APL lease with it's limited protective and beneficial language for lessors under AR forced integration laws.  The only defense for mineral owners may be to have a majority of mineral acres in a section encumbered and unavailable for lease by way of an option to lease plan.  That can be complicated and I am unsure if it would stand up to litigation.  I do not know if it has ever been attempted.

Permalink Reply by The_Baron on June 15, 2012 at 3:32

" Lacking prescription AR  mineral  development would be very difficult and expensive to assemble drillable leasehold. "

 

More like impossible. Forced integration and receivership are many times the only way for us to get a well drilled.

 

"AR risk penalties of 400%  on unleased mineral owners is overkill."

 

I disagree. The MI still have the option to accept the lease OR even participate. If they refuse either way, we operators have to give up part of our deal to a party that wil lnot pay up front, and if we drill a dry hole, foot the bill for them out of our pockets.

 

Permalink Reply by flex auger on June 14, 2012 at 10:41

Mr Shields, about how many royalty owners are presently in the arkansas chapter of the association?

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