Replies to This Discussion

Permalink Reply by oil guy on August 3, 2009 at 10:05

A lease well becomes a Unit well when the Office of Conservation signs the order creating the unit. If your lease expired before the unit was created, and the well was not drilled on your property, then you are an unleased mineral owner. You did not mention how many acres you have in Sec. 26, but to get an idea of what your participation is divide your acreage by 640 (i.e. if you own 40 acres, then 40/640=.0625). This will give you your tract participation interest. You in essence have become a working interest owner with the operator. This is the number you should be paid on once the well has paid out, net of expenses.

• ▶ Reply

Permalink Reply by Dion Warr, CPL on August 3, 2009 at 11:58

KMD5614:

What was the primary term of your lease? What was the date of the lease?

Was this a paid up lease?

Generally, the habendum clause grants lessee the right to drill, explore, and produce oil, gas, and other minerals on the leased property or on lands pooled therewith. Unitization in Louisiana through the LOC is done through force pooling, but in general unless restricted otherwise, many lessors grant lessee the right to pool the lands leased and the leases without Lessor's joinder (they don't need your consent) through voluntary pooling.

According to Field Order 944-A-3, CV RA SUT of Johnson Branch Field (which encompasses the entire section) was unitized and thus force pooled effective August 28, 2007. The subject well (SN 236389) was spudded on December 21, 2007 and TD'ed in the CV (10,250') in late January 2008. As long as the well was spudded prior to the end of the primary term, the drilling of the well through the end of the primary term will hold the lease. If the well operations proceeded on a more or less continuous basis (as defined on your lease), shut-in payment(s) were made (in accordance with your lease) or lessee otherwise maintained the lease in accordance with its terms and provisions, the well and its production will hold your lease.

It is not necessary for lessee/operator to declare the well to be a CV target upon filing the well application (this well was applied for with an intended zone of completion to be the Smackover, well below the unitized CV zone, which was not unitized at the time of filing). What matters is that the well was of sufficient depth to test and/or made capable to produce at a depth or zone which is unitized to hold the lands and leases within the unit (a shallow well 'that the operator intended to deepen' typically would not serve to hold the lease, for example).

• ▶ Reply

Permalink Reply by Dion Warr, CPL on August 3, 2009 at 12:06

Followup:

While I can certainly empathize with the perhaps less than stellar reputations of the lessees / operators involved, what will matter (IANAL) is whether the lessee / operator

(1) intended to drill the well to a target within the unitized zone (IMO they did), at which point they are afforded the ability to conduct drilling and/or completion operations past the end of the primary term;
(2) conducted good-faith operations to maintain the lease in accordance with the terms and provisions of the lease such that an contractually defined period of time failed to pass b/w cessation of good-faith operations on the well and the commencement of other good-faith operations on said well or the spudding of a new well (the latter being inapplicable in the situation on point), OR
(3) otherwise maintained the lease in accordance with its terms and provisions past the end of the primary term and the commencement of production.

• ▶ Reply

Permalink Reply by Dion Warr, CPL on August 3, 2009 at 12:29

But Jay: they did have share the HS gorilla's penchant for optimisitic data skew in their press releases and talking up their common stock. Besides the lack of execution, revenue and drilling budget maladies, what went wrong??

Personally, it wouldn't surprise me to find out they were fronted for a time as a Brand 'X' that was given a chance to earn their keep and had to forfeit their position due to lack of execution.

• ▶ Reply

Permalink Reply by KMD5614 on August 3, 2009 at 14:22

The lease was a standard Bath Form Louisiana Spec. 14-BR1-2A-NL Paid up R2/99 Lease with a three year term and no added provisions, signed May 14, 2005. The permit date of the well is 9/24/2007, spud date 12/21/2007 and effective date of unitization 8/29/2008. No shut-in payments were made. I do appreciate all of the responses to my inquiry and find it all very helpful, although a bit overwhelming. A friend of ours had his (attorney) girlfriend look at our information and she concluded that we are bound by the terms of the prior lease. However, a seed of doubt was planted by a landman when he brought up the issue of the date of the unitization of the well.

• ▶ Reply

Permalink Reply by Dion Warr, CPL on August 5, 2009 at 3:15

KMD:

If there's any seed of doubt here IMHO, IANAL, it would be (1) the amount of time between cessation of post-TD operations and completion operations and (2) the events that transpired during the 'waiting on completion' timeframe. If the well would have just been completed soon after the TD, I wouldn't foresee a problem with stating (IMO) you're HBP. The well is drilled to a sufficient depth in the unitized zone; at the moment of the completion of the well, it would be the unit well for the CV RA SUT. The problem is that per the well file there was approx. seven months b/w TD and completion. If no shut-in payment was made, what happened (or did not happen) during that seven months is key to your question.

If the answer to that question is 'nothing; they just moved the rig off and sat on their hands', you could very well be UMI in the well (lease expired), and in that case you may wish to aver as to any action to characterize you as a royalty interest owner (including cashing the check) and notify the operator in writing that it would appear that the lease had expired of its own terms prior to the completion of the well and the commencement of production therefrom, and request a release.

If the operator conducted in good-faith operations without a lapse of time greater than the time specified in the continuous operations clause in your lease (generally ninety (90) days in the Bath 14 series of lease forms, but could be different or otherwise modified in the lease addendum), your lease could be held by operations past the end of the primary term without production from the subject well, and lessee has lived up to its obligations. You might as well cash the check.

You mentioned that there was no shut-in payment made, which would be available to hold the lease if the well was capable of production but there was no market or pipeline available to bring natural gas to market even if the well had not been completed (since the well would only need to be capable of producing in paying quantities, which would be demonstrable with evidence from the well log as necessary.

Unless specific and local to the situation at hand, as far as I know they would be no events that would have occurred between well TD and production that should qualify as ‘force majeure’ that would have otherwise prevented operator from completing and producing the well.

Generally, any or all of these conditions being met would be how an operator / lessee would seek to hold a lease in the absence of production past the end of the primary term.

While I certainly laud your integrity in not wanting to lease a second time when the status of the prior lease was in doubt, it would appear that the landman making the substantial lease offer (which advised you of his belief that your original lease had lapsed) was aware of the situation and was willing to take a lease from you anyway. Altruistically, I would have advised you to have considered this lease offer with the understanding that the second lease would be with no warranty of title whatsoever (even for the return of consideration paid) and would be granted ‘at lessee’s sole peril’. If lessee was willing to take that risk, I would not have considered it untoward on your part, as you identified the title risk, insured lessee’s (or his agent’s) knowledge of same, and thus let the sophisticated party in the transaction bear the informed risk. I realize that this may not do you much good now, but please bear it in mind going forward.

If the lessee resists releasing your lease in any way, consult an attorney, as the ‘nasty/firm legal written demand’ is the step that would come next; you will need someone to represent your interest (in court, if necessary), and you will need a representative that is admitted to the bar in that case.

• ▶ Reply

Permalink Reply by Dion Warr, CPL on August 5, 2009 at 3:25

KMD:

P. S. The unitization was accomplished by the field order cited above, on its effective date, NOT by the name change and declaration on the date of the completion of the well. Any well drilled and completed in the unitized zone would automatically become a unit well, irrespective of when it was drilled, and what the prior intentions as far as TD and completion were. (The first well designated 'the unit well', any subsequent wells being designated 'substitute well' or 'alternate unit well' as necessary.) The well being permitted as an intended non-unitized Smackover completion meant there were no applicable field orders and that the well HAD to be permitted as either a lease well or a voluntary pooled unit well (e.g., VUA; Bob 3 #1). Don't get hung up on the date that the well went from being called 'Wilbanks 36' to being called 'CV RA SUT; Wilbanks 36'; the lands, minerals, and leases had been force pooled already by the Field Order.

• ▶ Reply