Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on June 28, 2010 at 2:15

Tahoe, a one year paid up lease is a rare offer indicating that EOG intends to drill in the near future. I would counter with a higher bonus but realize that operators are not as likely to offer the same bonus as they do for a standard three year lease term. The value of near term royalty income under a good royalty percentage and a no cost royalty clause is far more important than a few thousand dollars difference on the bonus. If you were one of my clients my advise would be as follows: Be cordial in dealings with the landman and give the impression that you are interested in leasing but in no hurry to sign just yet. Tell them you need to research and consider what terms you would find acceptable. Leave the bonus negotiations for last, get a commitment for the good Exhibit A lease terms first. By drawing out the negotiations and coming to incremental agreements you allow time to pass and a well to be permitted and drilling to begin. The best offer to come from EOG will likely be close to the completion date of the well. Logic suggests that there is no reason for them to make you their best offer until that time. Operators want mineral owners leased. And you can lease before the well is drilled, during drilling or after completion.

Permalink Reply by Tahoe on June 28, 2010 at 4:24

Thanks Skip. The landman is telling me that the no cost royalty clause coupled with 25% royalty is possibly a deal breaker. He said the price of gas is currently below the "break even" level so it is taking years to recover the high cost of drilling these wells. He implied that if we were unleased then it would be years before unit payout would happen. I'm not sure I agree with that. There sure are alot of wells being drilled and I find it hard to believe that these companies are sinking millions into developing this if it is going to take years to recoup their investment. He did say to come up with a list of terms to submit to EOG. I will do that. Any insight on the amount of time it is taking these wells to cover the cost of drilling? Just curious......

Permalink Reply by Skip Peel - Mineral Consultant on June 28, 2010 at 4:40

I would tell the landman that a 25% royalty and no cost royalty clause will be a requirement for you to consider any lease offer and that if in the future his company would care to make that offer you will be happy to speak with him again. Leave it there and do not budge. Remain cordial but be patient and wait for a well to begin drilling. Do Not Contact the landman. Wait him out. Make him initiate the contact. I'd also require vertical and horizontal Pugh clauses and a no surface use clause. In fact prepare your own Exhibit A page and have a good O&G attorney review it. For 10 acres I would not hire an attorney for negotiations but I would spend the relatively small amount to have one review the exhibit page and then the final lease prior to your signature.

Permalink Reply by Tahoe on June 28, 2010 at 5:03

Thanks Skip. That's what I'll do. We're only talking 10 acres so I have no problem waiting as long as they want.....

Permalink Reply by Tahoe on June 29, 2010 at 4:47

Wow, this land man is nothing but gloom and doom about the Haynesville Shale. Listening to him you would think the Haynesville Shale is a distant memory and companies like Chesapeake are on the verge of bankruptcy. I'm not listening.....

Permalink Reply by Henry on June 28, 2010 at 5:57

Tahoe,
If the price of gas is currently below the "break even" level, then why is EOG aggressively drilling the 4th and 5th wells in many of their sections?

Permalink Reply by Tahoe on June 28, 2010 at 7:02

My thoughts exactly Henry..... It is well known in the area how proud they are of the wells they have drilled.... I guess you can't blame them for trying..... less for me, more for them.