Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on October 5, 2008 at 4:44

KB, do you think that a "right of first refusal" clause reduces the chance that lessors will see competition from rival operators over existing leases nearing the expiration of their term? And how important is the clause to a lessee? Would some consider it a "deal breaker" for a lessor to request the clause be omitted from their lease prior to signing on? I am pondering how top leasing will play out in areas where there are existing leases to multiple O&G companies. Short of a joint venture agreement, competition to be the "operator" could be an opportunity for mineral owners fortunate to have leases with term expiration approaching.

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Permalink Reply by Skip Peel - Mineral Consultant on October 5, 2008 at 11:00

Time to bump. One time only. I may be a little premature, timing wise, as so many lessors are still in their initial term. Those who have not yet leased would benefit from a comprehensive discussion of the topic. IMHO, top leasing will begin in earnest in '09. Fore warned is fore armed.

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Permalink Reply by Snake Stewart on October 5, 2008 at 11:17

What would be the great benefit of taking a top lease if the company can pull out anyway ? If the company decides not to take the lease dont you have to give back the money?If you top lease a year before your term is up in this play, wouldnt you run a huge risk of missing out on the big bonus again ? Thanks for any info. There is a big group around me that may be coming out next year.Some have 2 year options but not all.

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Permalink Reply by Skip Peel - Mineral Consultant on October 5, 2008 at 11:43

Snake, the only reasons to top lease are for either a superior (fair market) bonus offer, a better royalty percentage and/or an opportunity to get drilled by a better operator. You don't top lease with a year left on an existing lease. You would not be offered one. What if you top leased for $20,000 per acre two months ago and then the bonus offers dropped? The top lease is actually an option to lease if the prior lease holder does not produce within the term of the lease. The option comes with a nonrefundable bonus payment. That's among the possible reasons for lessors to top lease. Usually 5 to 10% of the bonus offer. For example, a lessor top leases for $20,000 per acre. They receive 10% ($2,000 per acre) up front, non-refundable. If the lease terminates, the top leasing lessee then pays the remaining 90%. If the original lessee produces prior to the end of the initial term, then the top leasing lessee has lost their bet and is out the 10%. If the original lessee does not produce and the top leasing lessee chooses not to honor the top lease, the lessor has benefited from the non-refundable option payment and is free to solicit any offer to lease. That's for those under an existing lease. If a mineral owner has not yet leased, they have the option to accept or reject the right of first refusal clause that is now appearing in many leases offered by the E&P companies and their land representatives. I hope the group you mention may be in a position to benefit. And you are welcome. Regards, Skip

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Permalink Reply by Two Dogs, Pirate on October 5, 2008 at 11:48

Snake there are varied reasons a company may want to top lease. Insider information one company may have on another holding a lease. I took some top leases one time to use as a leverage buy out of an oil field, it worked. We were bluffing to a certain extent as we didn't have the whole field under a top lease but said we did. The money paid out was all up front to the landowners not a half now half when the old lease expires type deal. The money paid out was at risk but the client was a gambler.

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Permalink Reply by Skip Peel - Mineral Consultant on October 5, 2008 at 13:23

Jim, Chesapeake has used the lease form (or at least the right of first refusal clause) you reference in Louisiana since at least late '07 in some of their leases that I have reviewed.

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Permalink Reply by Two Dogs, Pirate on October 5, 2008 at 13:27

Audubon has been putting it on the Exhibit "A" for over 3 years.

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Permalink Reply by Two Dogs, Pirate on October 5, 2008 at 13:47

Jim, I would have to line it out also. It also provides that if an existing lease from say surface to 5000 feet expires then they get that 5000 ft without conpensation.

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Permalink Reply by Skip Peel - Mineral Consultant on October 5, 2008 at 14:01

Agreed. However, the CHK lease clause I reference above does not cover the expiration of existing leases at other depths. That should be a deal killer for any lessor under the circumstances outlined.

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Permalink Reply by Two Dogs, Pirate on October 5, 2008 at 14:15

You are right Skip, the shallow rights have worth. People don't seem to understand that in North Louisiana. I stand here in Zwolle and have many formations under my feet and each has a value in dollars. The Shale players want to take that away by leasing from the surface to China. This will be the last lease they grant, including their great great great great ....... grandchildren. This is the case for all North Louisiana, wake up and see what your brothers in South Louisiana have been doing for years, only lease the formations that they will produce from, give others a chance to produce other formations above and below your feet. Five checks are better than one.

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Permalink Reply by Skip Peel - Mineral Consultant on October 5, 2008 at 14:22

Well said, Two Dogs. And hopefully your admonition will be recognized by our members. Every mineral asset has value. And everything down there is not necessarily Haynesville Shale.

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Permalink Reply by Two Dogs, Pirate on October 5, 2008 at 14:32

You are right Skip. Only lease the depths covered in the conservation units. I know that this will be a problem for those that have allready leased but it will help for those that will lease in the future. The independents have been drilling for maybe 90 years, give them a chance to do more.

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