Replies to This Discussion

Permalink Reply by Bobi Carr ("parker") on September 29, 2010 at 4:10

You could change the continueous drilling clause to kick in ONLY when gas is at $ "x" price. That way you don't sell your gas too cheap and they don't loose their lease.

• ▶ Reply

Permalink Reply by Eli on September 29, 2010 at 12:59

Interesting concept, but I don't want to just give that valuable leverage away. Trying to agree on compensation

• ▶ Reply

Permalink Reply by John Brewster on September 29, 2010 at 4:11

Are you in the gas portion of the play or the oily side? If you don't know, what county? Who is the lessee, if you don't mind my asking. Some companies are more aggressive than others. How far away from a new well are your minerals? Is your lessee operating nearby wells? How much acreage do you have (this will determine how onerous the continuous drilling clause is)? Bottom line is: Lessees want/need more time - especially if you have gas. The Eagle Ford break-even is probably at least $5 (an educated guess).
Thanks,
John

• ▶ Reply

Permalink Reply by Eli on September 29, 2010 at 13:02

We've got 7,000 acres and new production adjacent to us on all sides, in zone between wet gas and dry gas. Lessee is a major. Production is pretty much proved up, so I don't believe they want to lose the lease nor drill up a storm at today's prices.

• ▶ Reply

Permalink Reply by John Brewster on September 29, 2010 at 13:55

You have so much acreage, perhaps the best plan would be a two-part approach: Negotiate on say half of it, and allow the lease to expire on the other half. If you are able to determine which areas the company may value most highly (for example, the oily area or the area closest to current production), you might offer them a two year extension. Again, I don't know your situation - whether you want money or a high royalty. Generally the lessee would rather give you one-time bonus money than increase the royalty. Since you are in Eagle Ford, I suspect they already paid you handsomely last time around.

Most E&Ps expect the gas market to heal in the next two years, so 2 1/2 years more time in the better areas of the lease should make them pay up to keep it. They may come back for a 3 year extension, but you can ask for a little more money. With respect to the other portion of the lease, perhaps you don't renew or extend that at this time. Who knows, they might buy the extension and drill a little on the expiring portion of the lease to test specific areas (they'd most likely pay a shut-in rather than produce with gas <$4). Worst case, if they don't drill, you'll have a future opportunity to lease for great terms when the market price gets back in the $6+ Mcf range.

That is the best strategy I have to hedge your bets since Petrohawk and several others are laying down rigs, or drilling lease obligation wells, but not otherwise. Lastly, it is a net positive to have a major company as a lessee in my opinion (although some may disagree). That's another reason why I'd explore whether they would be willing to buy an extension for half of your property. Try not to back off of the continuous drilling obligation - they'll ask.

I hope this makes sense.
John

• ▶ Reply

Permalink Reply by adubu on September 29, 2010 at 14:43

Eli---and John Brewster--- have they drilled and HBP any of your minerals? If not with this many acres I would hope you have a good oil & gas attorney reviewing every thing. If no drilling and nothing HBP and you like the operators I would look at just simply writting a complete new lease with all the great terms and royalty you can negotiate including bonus for they may not have time to drill enough to get you HBP in next 6 months -- sound like you are in the driver's seat on this situation so take advantage of it. What your addition thoughts John Brewster Attorney

• ▶ Reply

Permalink Reply by Eli on September 29, 2010 at 15:27

Thanks for your input, we have pretty good attny, and he has some ideas on how much $ to ask, but we don't want to be too greedy, just fair with what the going rate and economics would dictate. Curious if anyone in the Haynesville or Eagle Ford have gotten paid well for this.

The thought of a whole new lease is interesting, our present lease is pretty well written except for the unit size they could retain. Even though TxRRC is under temporary field rules, I'd like to get their commitment to drill to 80's if engineers and all the press releases and reserve numbers indicate that is the ultimate density. New leases in the area are going for $2k-$3.5k / acre When we leased early on, we didn't get any of the big money, so this company has low cost so far.

Also, no drilling on us to date, promises and stakes in the ground, but no rig yet !

• ▶ Reply

Permalink Reply by DJG on September 30, 2010 at 3:10

Some interesting strategy and good advice from John above. The item that I would be most careful with is the continous drilling obligation as the inclusion of that clause in your contract is your protection from having your acreage held indefinately by production from only a few wells. That clause is not currently to your advantage to have the pacing of those in-fill production wells at that every 90 days pace due to the low market price of NG over the immediate timeframe, although it is critical to your long-term protection.

Perhaps one strategy to consider would be to offer the lease extension and relief from the 90 day in-fill commitment (for a price), but limit the time period (2 years? 3 years? etc...) where this relief will be effective. That way later on down the line, once market prices for NG have hopefully improved, you would be in the position to go back to either revert back to your accelerated 90 day in-fill period or be in the position to negotiate with your O&G againg (for a price) to allow for an additional extension and relief from the continous production clause.

Just be careful to not strike that continous production clause completely, regardless of the extra $$$ offered by the O&G.

There are so many folks that have not thought past getting only one well. Once those first wells are drilled, then many people are likely to end up dissappointed to find that they might find them HBP'd for decades without any additional activity in their units.

Good luck to you.

• ▶ Reply

Permalink Reply by Eli on September 30, 2010 at 7:27

Thanks for all the great input.
That is what we are working on, give a time period of relief for continuous drill, then kicks back in and for that, pay something good now. Also, HBP would be smaller size than what TxRRC allows

• ▶ Reply

Permalink Reply by Mac Davis on September 30, 2010 at 7:09

I wonder if splitting the acreage up somehow is a good idea? Maybe each well only holds x acres of lease. Specify a yearly rental per acre for any remaining acres. Or maybe a well only holds its acreage if production is more than x MCF per year.

I think the big idea here is to not let them HBP a large acreage with a small number of wells. Specify a smaller unit size.

• ▶ Reply