Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on July 5, 2011 at 13:42

Les, the short answer is a qualified  Yes.  Bonus offers are based largely on two determinations:  the level of competition for leases and the lessee's development time line to drill the section. Competition has all but disappeared in the Haynesville Play.  And it's difficult for the average mineral owner to determine the time line for an operator to spud a well.  Until that well is spud, the offers are likely discounted.  The value turns on a number of circumstances from the number of acres in the production unit to whether the mineral tract in question is a qualifying surface location (well site, road or pipeline rights-of -way, etc.). The important negotiating points are, and have always been lease terms; being more specifically the royalty percentage, a no cost royalty and a vertical Pugh clause for those with modest sized mineral interests.  If you don't have sufficient unit acres to use as leverage, you are negotiating a limited set of lease terms that have long term potential benefits.  Without specifics regarding your mineral interest, that's my best advise.  Good Luck.

Permalink Reply by Les on July 11, 2011 at 2:53

Skip,

   Thanks for your suggestions. I'm not familiar with a "vertical Pugh clause". Could you direct me to someplace on this site for an explanation? Thanks.

Permalink Reply by Skip Peel - Mineral Consultant on July 11, 2011 at 2:58

Here is an example of a Vertical Push clause.  There are various versions and you should seek help from an experienced O&G attorney to review any lease agreement prior to execution.  This particular one has been on GHS for quite some time,  IMO, it has one major flaw.  The term "depth drilled" should be replaced by "depth produced".

 

It is agreed and understood that upon the expiration of this primary term of this lease, this lease shall expire as to all rights below 100 feet below the deepest depth drilled, or the stratigraphic equivalent of the deepest depth drilled in any well drilled on the leased premises, or on a unit with which all or a part of the leased premises may be pooled or unitized, during the primary term of this lease. Lessee agrees that it will, within sixty (60) days after the primary term of this lease has expired, execute and file of record the appropriate Act of Partial Release which will fully release the Lessee’s rights in the lease as to all zones, depths and horizons lying below 100 feet below the deepest depth drilled, or the stratigraphic equivalent of the deepest depth drilled on any well drilled on the premises, or on a unit with which all or a part of the leased premises may be pooled or unitized during the primary term of this lease.

Permalink Reply by Les on July 12, 2011 at 11:13

Skip,

  Thanks for the example.  I will incorporate this, or a similar version, into the lease that was presented to me and see if Petrohawk accepts it.  As far as a "no cost royalty" clause, with only 2 acres to lease, is that a point worth negotiating? Thanks.

Permalink Reply by Skip Peel - Mineral Consultant on July 12, 2011 at 11:17

Yes.  A "no cost royalty" and a "vertical Pugh" should be included in all lease agreements regardless of size of acreage.  If you live on the 2 acres or it otherwise does not qualify as a potential surface location, you will not need a "no surface use" clause.

Permalink Reply by Les on July 12, 2011 at 11:25

Can you direct me to an example on GHS of a "no cost royalty" clause?  Thanks.

Permalink Reply by Skip Peel - Mineral Consultant on July 12, 2011 at 11:30

The royalty to be paid the Lessor on gas, casinghead gas, and gaseous substances shall be the market value at the wellhead for said gas, casinghead gas, and gaseous substances produced from said land and sold or used off the premises or for the extraction of gasoline or other products therefrom. Notwithstanding anything contained to the contrary in the previous sentence, Lessee shall not sell any gas, casinghead gas, or gaseous substances of Lessor at a price that is less than the price the Lessee receives for the sale of its gas produced in the field and Lessee shall make every effort to sell the gas, casinghead gas, or gaseous substances of Lessor at the best price available in the filed where produced. Lessee shall not sell the gas, casinghead gas, or gaseous substances produced from (a) any wells located on the lands described as the leased premises in this lease, or (b) any wells located on any lands unitized with these lands described as the leased premises in this lease, to a Subsidiary or Affiliate of Lessee unless the value of the gas, casinghead gas, or gaseous substance sold is not less than the market price then current for gas of like character and quality delivered to any other purchaser in the field. “Affiliate” means any Person or Entity (1) which directly or indirectly controls, or is controlled by, or is under common control with the Lessee or a Subsidiary of the Lessee (a “Subsidiary”); (2) which directly or indirectly beneficially owns or holds five percent (5%) or more of any class of voting stock or voting power of the Lessee or any Subsidiary; or (3) five percent (5%) or more of the voting stock or voting power of which is directly or indirectly, of the power to direct or cause the direction of the management policies of a Person or Entity whether through the ownership of voting securities or voting power by contract, or otherwise.

  As a condition of Lessor entering into this lease with Lessee, Lessee in computing Lessor’s royalty shall not deduct the cost of treating, gathering, transporting, dehydrating, compressing, extracting, processing, manufacturing, marketing, improving, or any other cost, whether similar or dissimilar to those enumerated. It is clearly understood that Lessor shall be entitled to look only to Lessee for payment of its royalty and shall not be required to deal with purchases of hydrocarbons produced from the leased premises or any other third party. Under no circumstances shall Lessor, in order to obtain payment of the royalties due it hereunder, ever be required to execute a division order or other document that in any way amends, alters or changes any provision of this lease.