Ozark Highlands Unit - Fayetteville Shale
Southwestern Energy has just mailed a huge package to all of us in the Western area of the Fayetteville Shale play. Here's how SWN describes our new opportunity:
"Our newest project in Arkansas is the Ozark Highlands Unit, which contains approximately 185,000 acres within the Ozark National Forest in Conway, Johnson, Pope, and Van Buren counties."
The company is proposing the new unit for federal unitization. More than 86% of the planned unit area is public lands. The company is inviting private mineral lease holders to sign a contract to join the new unit and allow the company to explore, develop, and operate under a comprehensive plan of development between the unit operator, the unit participants, and the Bureau of Land Management.
The company says this new unitization will allow a geologically defined area to be explored more efficiently and developed by a single designated operator. The land being unititized is mountainous, with streams and lakes. It is difficult to access some areas and impossible to drill some areas due to the terrain.
SWN says the plan will operate "pusuant to unit plan regulations 43 CFR 3180."
This will pool the entire area into a 184,600 acre unit. The company explains, "Depending on when and where wells are drilled and completed, the area "reasonably proven to be productive" or the "participating area" can include one or many sections (640 acres per section) of land. All owners of mineral rights and royalties are allocated production in proportion to their land within the participating area." The letter then gives an example of a pooling of four sections into a 2,560 acre participating unit.
The company sent me a $7 packet, signature required, containing a 13 page legal brief filed with the Bureau of Land Management, a giant map of the area being unitized (153,766 acres of public land under lease, 5,489 acres of public land unleased, 202 acres of state lands, and 25,144 acres of private land like ours), a two page description of the new Ozark Highlands Unit, 5 pages of frequently asked questions with answers, one page with the description of our lands, a two page letter from the Bureau of Land Management accepting the SWN unitization plan, 6 contracts (identical) to join our land into the new Ozark Highlands Unit, and a two page letter to Anna and I with instructions on joining. We've since submitted a couple of questions by email and gotten a couple of pages of reply.
The company is giving a committment in writing to 11 new exploratory wells in the next three years.
Our analysis is this: If we join, we will likely get small royalties that will build over time as the number of wells increases. In the short term, our royalties will be very diminished by the dilution of all those acres. We are more likely to see steady royalty increases over time and extending to our Sons upon our death and our grandchildren upon our Sons' deaths. If we don't sign, it becomes less likely that SWN will drill on land that is not part of their hugh unit.
Do any of you have experience with anything like this?
Do you have any advice?
"Our newest project in Arkansas is the Ozark Highlands Unit, which contains approximately 185,000 acres within the Ozark National Forest in Conway, Johnson, Pope, and Van Buren counties."
The company is proposing the new unit for federal unitization. More than 86% of the planned unit area is public lands. The company is inviting private mineral lease holders to sign a contract to join the new unit and allow the company to explore, develop, and operate under a comprehensive plan of development between the unit operator, the unit participants, and the Bureau of Land Management.
The company says this new unitization will allow a geologically defined area to be explored more efficiently and developed by a single designated operator. The land being unititized is mountainous, with streams and lakes. It is difficult to access some areas and impossible to drill some areas due to the terrain.
SWN says the plan will operate "pusuant to unit plan regulations 43 CFR 3180."
This will pool the entire area into a 184,600 acre unit. The company explains, "Depending on when and where wells are drilled and completed, the area "reasonably proven to be productive" or the "participating area" can include one or many sections (640 acres per section) of land. All owners of mineral rights and royalties are allocated production in proportion to their land within the participating area." The letter then gives an example of a pooling of four sections into a 2,560 acre participating unit.
The company sent me a $7 packet, signature required, containing a 13 page legal brief filed with the Bureau of Land Management, a giant map of the area being unitized (153,766 acres of public land under lease, 5,489 acres of public land unleased, 202 acres of state lands, and 25,144 acres of private land like ours), a two page description of the new Ozark Highlands Unit, 5 pages of frequently asked questions with answers, one page with the description of our lands, a two page letter from the Bureau of Land Management accepting the SWN unitization plan, 6 contracts (identical) to join our land into the new Ozark Highlands Unit, and a two page letter to Anna and I with instructions on joining. We've since submitted a couple of questions by email and gotten a couple of pages of reply.
The company is giving a committment in writing to 11 new exploratory wells in the next three years.
Our analysis is this: If we join, we will likely get small royalties that will build over time as the number of wells increases. In the short term, our royalties will be very diminished by the dilution of all those acres. We are more likely to see steady royalty increases over time and extending to our Sons upon our death and our grandchildren upon our Sons' deaths. If we don't sign, it becomes less likely that SWN will drill on land that is not part of their hugh unit.
Do any of you have experience with anything like this?
Do you have any advice?
Views: 564
Replies to This Discussion
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Permalink Reply by Skip Peel - Mineral Consultant on -
WayneandAnna. It is possible that you will realize more income from the use of your surface through a well crafted lease than you will receive in royalty income. Especially if the operating units end up being as large as appears likely.
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Permalink Reply by john goodday on
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Do you believe that this "Federal Unit" agreement will take precedence over the OGML you signed with them? Are you foregoing your rights under the terms of that lease in sake of this multi-thousand acre unit agreement where the drilling of one well might hold tens of thousands of acres?
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Permalink Reply by WayneandAnna on
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John, my lease is protected. Anna and I negotiated a few extras that are protected. I have that in writing.
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I'm on your side and am looking for advice when this thing shows up in my mailbox. You are right - Seeco and the BLM will ultimately decide what happens and who will divide the spoils. Any suggestions would be appreciated.
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Permalink Reply by WayneandAnna on
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John, I see the good side of this being a greatly increased likelyhood of collecting royalties and those royalties will likely increase steadily over time. I see the bad side of this being that the royalties will be smaller than if a big find was in my section alone. If I were 30, I might want to roll the dice for a big payday. I'm 62 and want to collect royalties and stuff them into subprime collateralized debt instruments for my old age.
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Permalink Reply by WayneandAnna on
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An interesting aside, I called the Arkansas Oil & Gas commission and spoke with a director. He didn't know anything about SWN's new 185,000 acre unit. He told me that units in Arkansas were 640 acres. Then he added, "well, I suppose if SWN got everyone to agree under contract to a larger unit, then it might be possible.
I also asked if the management of the new unit might fall under the Bureau of Land Management instead of the Arkansas Oil & Gas Commission. He didn't "think" so. After which, the most I got out of him was repeated, "I don't knows."
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Congratulations to you on being able to actually speak with anyone on the AOGC and I'm not surprised by his answers. It's very difficult trying to get any answers of any kind from anyone in AR
Have you posed any questions to SEECO regading these issues of having to share production with thousands of folks? Another question would be their right to hold thousands of acres with the drilling of one well.
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Permalink Reply by WayneandAnna on
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Yes, they will talk about it. They realize and acknowledge that this dilutes short-term royalties for individual lease holders and diminishes individual influence. But they claim this is needed to develop the huge federal lands involved in this area and to develop the mountainous area with lakes, streams, and rough terrain.
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Permalink Reply by Grillin' - MmmMmm on
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In the long long run, the dilution evens itself out. Who knows, you may get some cash trickling your way faster than if it were developed as parts of the conventional 640's, particularly if you aren't in a "hot spot" that will get drilled first. The use of participating areas sets up "mini units" within the larger federal unit.
The other thing is that large federal units have provisions where the operator has to drill in undeveloped areas or the unit contracts, carving out a percentage of the undeveloped area. Look at the paperwork they sent you for those issues. I've worked in an area where we were constantly being forced by the BLM to contract the unit and we were giving up large portions of the undeveloped acreage over time. Eventually, the unit contracted down to the basic drilled outline.
The good news is Southwest is a good company to deal with, technically on top of things and IMHO, the top dog in the Fayetteville! Good Luck!
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Permalink Reply by WayneandAnna on
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Good information. I can see that this might benefit us.
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Permalink Reply by Robert G. Oliver on
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I think Southwest is wanting to tie up all the level land around the mountians. You can roll the dice and maybe hit. Then again you might just set and see where they start drilling. Your surface will be worth a lot to them if they need your land for a drill site to drill under the mountian. Your access from the property will be a real asset to the Company if they drill in your area. You will just have to take a chance if you want to get a good deal from the Oil Company.
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SEECO has come up with a plan to hold thousands of acres with the drilling of a few wells. As an operator - this will surely work in their favor, however, I'm not so sure it benefits anyone else. Perhaps if they were to absolutely limit the size of the units and obligate drilling commitments upon themselves within the contract, it could work.
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