Replies to This Discussion

Permalink Reply by obed w odom on October 27, 2013 at 11:26

Thanks, Skip. I probably was confusing LA rules with AR rules regarding the minimum bonus payments.

Permalink Reply by Skip Peel - Mineral Consultant on October 27, 2013 at 11:52

Correct.  The trade off for no required minimum lease terms is that there is no risk penalty for going non-consent in LA.  And a UMI's 100% proportional share of production after payout  is subject to a limited number of costs defined by the state.  Most operators will entertain negotiations for a lease after a unit is formed.  And may do so even after a well is drilled and completed.   I don't suggest waiting until after the unit well is turned to sales.  Many UMIs with modest acres in Haynesville Shale units with unit wells that would never reach payout due to the decrease in gas prices were offered the operator's standard lease with a quarter royalty and no bonus.  No negotiations, take it or leave it. 

Permalink Reply by tony allen on October 27, 2013 at 13:30

What if the acreage is not modest? Say you have enough acreage to give an operator control of a 1280 acre unit. What would you suggest?

Permalink Reply by Jon on October 27, 2013 at 13:47

I'd get an Oil & Gas Lawyer.

Permalink Reply by obed w odom on October 29, 2013 at 6:07

If there are no required minimum lease terms in LA, is any lease required to be offered to UMIs when a unit is formed. I could imagine a scenario in which an operator had leased enough of the minerals to form a unit, and wanted to drill a "science" well, not expected to reach payout. In such a case, the operator might want the remainder of the minerals in the unit to remain unleased in order to minimize the amount that he has to pay in royalties. Would the operator have the option to do this, or would he be required to offer the UMIs some lease, for example the standard royalty percentage with no bonus?

Permalink Reply by Land Rat on October 29, 2013 at 6:38

The unleased mineral owners have a right to be heard by the administrative body during the unit hearing.  The decision by the administrative body would take all comments/evidence into consideration when deciding whether to allow the unit to be formed or not.  The decision of the agency is subject to judicial review (though, there is probably some appeals process with the the DNR-OC that must be complied with first).  The agency will make its decision based on the substantive statutory framework and consequential rules and regulations established thereunder. 

Permalink Reply by Land Rat on October 29, 2013 at 6:47

This is some of the scientific basis that goes into establishing units....

http://dnr.louisiana.gov/assets/docs/TPG_Kumar-Articles.pdf

wildcat plays = benefit of the doubt it with the one proposing the unit, generally.

http://dnr.louisiana.gov/assets/OC/43XIX_Nov2011.pdf#page=119

Hearing Rules Page 113 et seq.  There are no simple answers to these questions.

Permalink Reply by Skip Peel - Mineral Consultant on October 29, 2013 at 7:02

No lease is required to be offered to UMIs in an approved unit under LA law.

The State of Louisiana relies on market forces and rational business practices to govern a number of issues.  There is no statute requiring minimum lease terms for mineral owners within the boundaries of an approved drilling & production unit.  An operator wants every last inch of that unit under lease if they can get it within the terms that make the acquisition sufficiently profitable for them.  Where to draw that line is what gives people like me a job.  Negotiating a lease without any reference for what is reasonably possible in the way of terms can be quite a challenge. And may lead to unintended consequences.

As to your specific example, let me ask this:  What if that science well demonstrates that there is one or more attractive pay zones that appear to be very profitable?  And may be so over an extended area around your science well.  Now you would need to go lease all those minerals that were left unleased previously.  Do you think that you could now get them for the same terms as before the well was drilled?  After spending the money for the leases on which the well is actually drilled and incurring the cost to drill and possibly to complete the well, what happens if you can't get those other leases on surrounding minerals that you need to drill step out wells.  What if the mineral owners are members of GHS and watching what is going on with the well and sharing the information?  What if some other company has the same idea and leases up much of the area that you had planned to lease? 

The fact that energy companies know what they are doing and do not make irrational decisions was brought home to me years ago by the staff attorney at the LA DNR when I asked about the minimum number of acres under lease required for an operator to apply for a drilling & production unit.  I was fairly astonished when he replied that there was no such requirement.  He went on to explain that the economics of developing a unit require that a majority of the unit be under lease.  No operator wants to invest that much capital and leave out minerals that would be profitable leased.  Operators will recoup their cost to produce unleased minerals under LA law for UMIs but will make no profit.  Operators are all about profit and will make an attempt to lease every last inch of dirt that appears to have good title.  If they can not get enough acres under lease to make a profitable unit they will take their development capital and drill a well somewhere else.  A field order from the State of Louisiana does not include an obligation to drill a well.  Operators walk away from some leased dirt every day of the week for a myriad of reasons.

Permalink Reply by Skip Peel - Mineral Consultant on November 20, 2013 at 5:40

obed, and others who are mapping SWN activity,  I suggest that you review the state bid tracts in the December auction nominated by T. S. Dudley in Union and Claiborne parishes, primarily Union.  With a large portion of SWN leases expiring in 2014 the time has come to high grade the BD leasehold and HBP those leases that the company wishes to retain.  State leases have a primary term of one year and operators generally do not take them unless development is scheduled in the near term.  The acres in each tract is less relevant than the location of the tracts.  By my count there are 15 nominated tracts in Union and 1 in Claiborne.  By adding these sections to your maps containing existing units and wells you should get a reasonable idea of SWN's drilling program in 2014.  I'd post the s-t-r for you but I've just acquired my annual case of the crudde and my medicine head is kicking in.  I think you will find the tract locations of interest.

Permalink Reply by Matthew Kable on November 20, 2013 at 6:30

Skip, I assume the bid tracts you are referring to are the Union parish and Claiborne parish tracts listed here?

Notice of Publication for the December 11, 2013 Mineral Lease Sale

Permalink Reply by Skip Peel - Mineral Consultant on November 20, 2013 at 6:35

Correct, Matthew.

Permalink Reply by Matthew Kable on December 13, 2013 at 13:08

North La. oil tracts draw interest at sale

The Associated PressDecember 12, 2013 

Read more here: http://www.bradenton.com/2013/12/12/4885171/north-la-oil-tracts-dra...

http://www.bradenton.com/2013/12/12/4885171/north-la-oil-tracts-dra...

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