Replies to This Discussion

Permalink Reply by Spring Branch,mineral owner on June 28, 2010 at 4:12

Skip/Dion...........As a result of Judge Adam's ruling and with the common knowlege that the only viable economic method of developing shale plays, including the Haynesville, is with the drilling of a horizontal well with sufficient lateral length to have multiple frac stages...............how could an Operator at this time drill a vertical well (that is not as step out well into a new area)) for the sole purpose of HBP'ing a section which has leases about to expire. This would seem to me to fly in the face of RS 31:32 which requires the lessee to develop the property as a "reasonably prudent operator for the mutual benefit of himself and his LESSOR." With the knowlege we have of characteristics of shale plays today, I would think that that dog would no longer hunt!

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Permalink Reply by Skip Peel - Mineral Consultant on June 28, 2010 at 4:21

SB, I think you are correct but it may take a lawsuit to dissuade some operators from attempting just what you describe. IMO, the courts will follow the lead of the Office of Conservation in requiring reasonable and prudent operation as it benefits the revenue and conservation interests of the state.

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Permalink Reply by Dion Warr, CPL on June 28, 2010 at 5:49

Spring:

Since you put me in here, I would say that I largely agree with Skip. IANAL, but the problems with predicting a decision at this early of a stage are:

(1) There is an administrative apparatus in place (via DNR - Office of Conservation and the Mineral Code) that one would have to pursue prior to filing a suit that would be given a hearing.

(2) "Duty to Develop" actions (as well as any suit or dispute involving 'Reasonable and Prudent Operator' or 'Production in Paying Quantities') always come down to a judicial determination based upon the facts ('case-by-case') and prior precedent. Being that this is the first case of this type, and there is room for appeal... I think (IMHO) the precedent is not really set at this point, and you still have to look at this strictly on a 'case-by-case' basis.

My own personal opinion (and where I somewhat part ways with Skip, more than likely) is that there is still a great deal of HBP in the area held by smaller operators which lack the capitalization and experience to pursue a reasonable and prudent attempt to complete horizontal wells within the HS, and that fact alone should not be a basis to dissolve leases on a stratigraphic basis that have otherwise been earned in good faith. To allow the suit to stand as precedent at this stage would allow for all such lease contracts to come into peril. It could result in virtually all leases existing within the HS being reduced to "strata leases", or to otherwise include stratigraphic Pugh clauses. It invites the judiciary to intervene into a private contract at whim and impose whatever result it deems to be equitable. I'm not sure that that is a message that the LASC would want to send.

If I had to guess, the ruling will be challenged up to the LASC, and they will have to either make a precedent-setting ruling, or at least remand to the district or appelate court advising of certain issues that should be reexamined in light of public policy. I'm not sure that the LASC would jump at the first chance to make a landmark ruling, but what do I know.

As far as the vertical HA well situation specifically, I think that that battle would still have to be fought separately. But the dynamics of the shale that has been shown thus far would point to the marked differences in flow rate and production of a vertical completion versus a horizontal completion, (insofar as $X for vertical resulting in Y worth of production, spending $2X-$3X for proper horizontal resulting in 10Y-50Y worth of production) and the relative uniformity of the shale leaves a lot less room for lessee to hide behind.

Permalink Reply by S.H.M. on June 28, 2010 at 3:38

Skip, thanks for all of these postings and you have a unique ability to trim the fat of a posting. Good stuff (from you and all).

Okay, so can't the operators make the case that it is not economically viable (at this time) to develop certain locations of the HS and then not be affected by this ruling?

Certainly, that excuse has been used with regard to our off and on HS lease prospects.

And, if I understand correctly. Currently, leases without a Pugh Clause could be reconsidered (through use of a knowledgable, and effective O&G attorney)? This would be good news for some in my section/location as I felt they got skewered by the "held by production" matters.

I guess my posting is mainly a reiteration of previous info (thrashing a non-living equine mammal). But I think this is good news for some that have royalties dribbling in on upper formations.

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Permalink Reply by Skip Peel - Mineral Consultant on June 28, 2010 at 3:56

SHM, Thrashing of a non-living equine mammall!!!!! LOL! Now that's a good one! As to industry making a case for economic viability, I am sure they will attempt to do so but the likely success of that line of reasoning will depend on the surrounding development activity. I can not imagine an operator making that contention the basis to defend a demand to develop suit when there are average or above wells producing in adjoining sections or within a reasonable proximity. Obviously this applies to minerals located well within the boundaries of the Play and not out on the edge. Current leases lacking a depth clause would certainly be an area where the ruling could apply but only for demand to develop not for dissatisfaction with bonus or royalty terms.

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Permalink Reply by Ron on June 27, 2010 at 3:21

What if we assume that Questar wanted to lose to gain more acreage in other areas that will ultimately be affected by this ruling. In that case, they have plenty to gain here. 47 acres is really not much when you consider the big picture and all of the lands that could be released in the Haynesvill formation. Just a thought.

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Permalink Reply by LB on June 27, 2010 at 8:22

My grandmother owns mineal rights to prperty that is held by production. The company leased the land to Chesapeake for Haynesvill shale exploration. Does this decision affect her old lease? The company that leased to Chesapeake paid my grandmother and siblings $1,000 per acre for new lease and old company recieved $6,000.

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Permalink Reply by Skip Peel - Mineral Consultant on June 27, 2010 at 8:29

Quote from Ferrara attorney:

“It is difficult to assess the impact on any other landowner because the facts of each landowner’s lease may be different. In general, this is one of the first cases to deal with the legal obligation to fully develop a lease applied to the Haynesville Shale. For that reason I feel it is probably going to be significant,” Davidson said.

It is too early to know the full extent of the effects of this ruling. And it may take a number of future cases to clearly define the legal questions at issue.

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Permalink Reply by Mac Davis on June 27, 2010 at 12:06

A few thoughts I had.

1) It may simply be Questar made mistakes in defending themselves and this doesn't set much of a precedent for other cases if they properly handle their defense.

2) On the other hand, maybe it could lead to the conclusion that if the lessee doesn't develop a particular resource, developing another resource on the same lease doesn't entitle them to hold the lease for all minerals.

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Permalink Reply by Skip Peel - Mineral Consultant on June 27, 2010 at 12:48

Mac, the nature of demand to develop actions has changed significantly because of the Haynesville Shale. The other resources you mention are "conventional". The Haynesville and Bossier are "unconventional". Legally the difference is the complexity and expense of this type of suit. In the past the productivity of the formation not being developed was a battle of experts and science whereby the industry had the upper hand. Now the industry will have a difficult time convincing a judge that core areas of the Haynesville/Bossier Play are not known to be productive short of drilling a well. The fact that the shales are contiguous and productive over large expanses makes the difference and that fact may be proven by summarizing the data specific to the location which is available on state owned databases.

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Permalink Reply by Marc Stepman on June 28, 2010 at 3:19

All are good points. Companies do have constraints both market related and government related. The main issue to me is the differences in the leases that folks have signed. It would be hard to apply. No situation is the same.

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Permalink Reply by Skip Peel - Mineral Consultant on June 28, 2010 at 3:29

Marc, IMO the true potential of this ruling is that it sets up a different interpretation of the mineral codes as they specifically apply to the shale. Regardless of the differences in the factual points of future cases, this ruling has the potential to remove from contention the onerous battle of trying to validate the productive nature of the minerals in question. This is where the industry has maintained a decided advantage and where many mineral owners balk at the expense of a battle of experts. I believe that the courts will validate that a mineral estate surrounded by successful Haynesville and Bossier shale development can be considered productive without the myriad of science that was required in the past with conventional reservoirs.

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