Oil and Gas Leasing from the Operator's Perspective


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Oil and Gas Leasing from the Operator's Perspective

  1. 1. What to Expect When You’re Leasing: Oil and Gas Leases from the Operator’s Perspective Lisa C. McManus Vice-President, Legal Pennsylvania General Energy Company, LLC
  2. 2. Evolution of the Oil and Gas Lease To have and to hold for a term of five years and for so long thereafter as oil or gas are produced. This Lease shall remain in force for a primary term of FIVE (5) years from 12:00 AM. April 23, 2010 (effective date) to 11:59 P.M. April 22, 2015 (last day of primary term) and shall continue beyond the primary term as to the entirety of the Leasehold if any of the following is satisfied: (i) operations are conducted on the Leasehold or lands pooled/unitized therewith in search of oil, gas, or their constituents, or (ii) a well deemed by Lessee to be capable of production is located on the Leasehold or lands pooled/unitized therewith, or (iii) oil or gas or their constituents are produced from the Leasehold or lands pooled/unitized therewith, or (iv) if the Leasehold or lands pooled/unitized therewith is used for the underground storage of gas or for the protection of stored gas, or (v) if prescribed payments are made or (vi) if Lessee's operations are delayed, postponed or interrupted as a result of any coal, stone or other mining or mining related operation under any existing and effective lease, permit or authorization covering such operations on the leased premises or on other lands affecting the leased premises, such delay will automatically extend the primary or secondary term of this oil and gas lease without additional compensation or performance by Lessee for a period of time equal to any such delay, postponement or interruption. vs.
  3. 3. Initial Considerations • The Lessee’s Reputation • The Leasing Landscape • Developing a Rapport with the Lessee • Early Agreement as to Key Terms • Guarantees • Professional Responsibility
  4. 4. The Lessee’s Reputation • Financial stability • Operating or Speculating? • Experience • General Reputation – Google Alerts – Skytruth Alerts - NOVs – MarcellusGas.Org – GoMarcellusShale.com
  5. 5. The Leasing Landscape • County • Price of Gas • Geological formations • Competing E&P Companies • Neighborhood Grapevine • Enhanced Technologies
  6. 6. The “Small Stuff” • Developing a Rapport with the Lessee • Early Agreement as to Key Terms • Guarantees • Professional Responsibility
  7. 7. Lease Form • Producer’s 88 • Operator’s Lease Form
  8. 8. Commonly Negotiated Lease Terms • Bonus – No inclusion of actual bonus – Value of Tract: Location and Size – Impact of Technological Advances – Community Leasing • Lease Term – Number of Owners to Be Leased – Environmental Concerns – Geological Challenges • Extension of Primary Term – Right to renew/first refusal
  9. 9. Commonly Negotiated Lease Terms, contd. • Royalties o Skirting the GMRA o Impact of Post-Production Deductions  Those paid to the operator’s affiliate/subsidiary  Those paid to third-parties in arms’ length, commercially reasonable transactions • Delay Rentals o Paid-up Lease v. Delay Rentals • Most Favored Nations Clause • Shut-In/Delay in Marketing o Time limitations and Alternatives
  10. 10. Lease Development/Implied Covenants • Primary Covenants – The Prudent-Operator Standard – Initial Exploratory Well Covenant – Implied Drilling Covenants – Protection Covenant – Development Covenant – Further Exploration Covenant – Marketing Covenant – Covenant to Use Reasonable Care and Diligence • May be Waived • Caldwell v. Kriebel Res. Co., LLC – No implied duty to drill all horizons
  11. 11. Pooling, Unitization, and Pugh Clauses • Pooling generally refers to integration of smaller tracts of land to obtain a drilling permit to comply with the state’s spacing rules – applies only to drilling penetrating Onondaga • Unitization refers to the consolidation of fee or leasehold interests covering a common source of oil or gas in order to most efficiently extract the oil and gas • Pugh Clause v. Unitization Limitations (e.g., 50%) • Depth v. Acreage Unitization Limitations
  12. 12. Surface Use Provisions regarding surface use often include the following: a. setback requirements b. consent to the location of pipelines and drill pads c. burial depth of pipelines d. compensation for damage to growing crops, pastures, and timber; erosion of soil; fences, barns, and other structures; water pollution e. road construction f. reclamation • The dominant tenement has the right to access its oil & gas estate even if injury to the surface/servient tenement occurs provided the use is reasonable and necessary. • Operator may pay a negotiated sum for damage for well location and other surface use in exchange for release.
  13. 13. Questions?