Replies to This Discussion

Permalink Reply by Dion Warr, CPL on October 30, 2013 at 10:58

Lan:

Free leases are usually offered when an operator has planned operations that are imminent and would generally "promise" a well drilled in a short period of time, or when the lessee has a cash flow shortage that would preclude them from offering lease bonus monies which would subtract significantly from their drilling budget.

 

Couple of things that I would say here right off the bat:

 

If operations are imminent, the lessee (or his agent) should be able to tell you that.  Ask them what their stated objective would be / what formation they plan to drill to or test.  I would then recommend that you only grant a lease to the base of the formation that they plan to test (no deeper, or at the most, maybe 100' below that).

 

If the intended target is deep (say, below the Travis Peak, or the top of the Cotton Valley), I would probably recommend having an upper limit on the lease as well, if you can get that.

 

No options to extend on a "free lease".  Never (well virtually never) a good idea - the idea in not getting paid is to effect timely commencement of operations which would bring you royalties - otherwise, they're just getting something for nothing.  Usually, I would advocate for a drilling commitment / specific performance provision with some "teeth" to it (monetary, or otherwise), but for 7 nma, you'll never get that.

 

I would ask for more royalty, but investigate what "going royalty rate" is in the area.  For a wildcat well or "chancey" conventional well, a 1/5 may be OK if others have signed for, say, a 1/6 RI - but for a free lease, I would generally like to see a little more.

 

I would want to know who is drilling the well, and lease to them.  If it is not the operator, they could be just speculating and looking to turn their lease - if you're not getting any monetary consideration, why should they?  Sometimes there's a reasonable explanation, but when I have acquired "free leases" for a client, the name of the client / operator is listed on the form.

 

Lastly, check their story - there are a few TX folks around here on GHS that can find out a couple of things for you or confirm purported "facts" or condemn them as hogwash.  This is what I would do for a client that contracted me to negotiate on their behalf, or for myself, before dealing with anyone.  I would also do so ASAP - 90 day lease offers usually don't have a whole lot of leeway on them as far as time.

 

Good luck to you.

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Permalink Reply by Lan DeGeneres on October 30, 2013 at 11:50

If you can tell me who else I can talk to....or, you can negotiate for me.....let me know. You can e-mail me or call me 970-749-6966 (Cortez, CO.) Thanks, Lan

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Permalink Reply by Two Dogs, Pirate on October 30, 2013 at 12:37

Lan, jffree 1 is my go to for information on Texas, she is the best at finding out what is going on there. You may also post your question in the specific Texas County group here on GHS.

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Permalink Reply by 1kw6x71km1v37 on October 31, 2013 at 5:00

Twenty per cent is too cheap for a free lease. Sign for 27-1/2 to 30. And watch your back on the lease.

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Permalink Reply by 1kw6x71km1v37 on October 31, 2013 at 8:24

It is advisable to run with the 27.5% in lieu of thirty.....

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Permalink Reply by jeff on November 2, 2013 at 3:32

Pigs get fattened and hogs get slaughtered.

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Permalink Reply by Andrew on October 31, 2013 at 12:09

If there's no bonus being offered, I'd want to see some of their skin in the game, like a promise to drill. Otherwise, I don't see any reason to give them a lease out of generosity, no matter how short the term.

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Permalink Reply by Skip Peel - Mineral Consultant on October 31, 2013 at 12:32

Seven acres is not going to command a favorable negotiating position.  And we don't know the specifics of the unit and formation to be explored.  It's difficult to get too specific with suggestions without a more comprehensive picture of the circumstances.  Has a unit been formed?  Is a surface location prepared or under construction?  Is a well permitted?  A 90 day lease is a good indication of the operators intent to move expeditiously to drill.  There's little risk in such a short effective term.  I'd certainly want to make a couple of stabs at negotiating better terms but other than the standard protective and beneficial lease clauses I would stick to the royalty.  Maybe ask for a quarter and settle for nine fortieths, 22.5%.  Much depends on whether this is a conventional or unconventional prospect.

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Permalink Reply by Andrew on October 31, 2013 at 18:32

All good points, Skip. The most import thing is that something has to make a free lease make sense where it otherwise wouldn't. Considering Comstock is an operator, an offer for a free lease makes me wonder if the well is already producing and they overlooked the interest.

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Permalink Reply by Skip Peel - Mineral Consultant on November 1, 2013 at 1:20

No, not producing yet. 

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Permalink Reply by jffree1 on November 1, 2013 at 2:54

Comstock has an existing well in this survey and the plat looks like the unit includes the entire survey. The well has been producing from the Longwood (Cotton Valley) since Feb. 2007 so this lease is a formality.
Now the discussion should be on "pay from effective date of lease" or "pay back royalties"? That is a legal question so I will defer to those who may have some knowledge or experience in this area.
The well is not a barn burner.It has produced 59,849 mcf NG & 2,229 bbl condensate from a vertical completion that doesn't look like it has been re-completed up hole. Could they be thinking about adding a lateral in the CV?

API #203-33760, Lease ID #227683

Plat: http://webapps.rrc.state.tx.us/dpimages/img/200000-299999//PR000024...

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Permalink Reply by jffree1 on November 1, 2013 at 3:26

If someone has access to Harrison Co. records, the Unit Designation would tell more about the unitized acreage. The permit was filed as non-pooled and there is not have a P-12 on file with RRC.

Completion packet attached.

Attachments:

• 203-33760.pdf, 1.9 MB

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