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Brown Dense Oil and Gas Leasing

Presentation by Jim Rankin, with Perkins Trotter PLLC, at an Oil and Gas Leasing Workshop in El Dorado on June 21.

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Brown Dense Oil and Gas Leasing

  1. 1. By James D. Rankin IIIPerkins & Trotter, PLLC
  2. 2.  The information provided in this presentation should not be taken as legal advice. For specific questions regarding your rights, please consult an attorney.
  3. 3.  What is it? Where is it? Who’s here looking for it? What should I be concerned about?
  4. 4.  Lower Smackover Formation Organic-rich limestone Typically 200-300 feet thick Source rock to the Upper and Middle Smackover Historical production, first discovered in Smackover Field in 1937.
  5. 5. Where is it?
  6. 6. Fracture StimulationPhoto – Lowell Georgia, Oil & Gas Investor, Jan. 2006.
  7. 7.  “The meek shall inherit the earth - - but not the minerals.” - J. P. Morgan  “Sometimes you get, and sometimes you get got.” - Mark Twain
  8. 8. Oil & Gas LeaseA lease is a binding contract that creates legal rights andresponsibilities for the landowner (lessor) and the productioncompany (lessee).
  9. 9. Cash BonusAn up-front payment or “signing bonus” paid to the landowner bythe leasing company. In a “paid-up” lease, this is the only significantcash paid to the landowner until and unless a producing well isestablished on the property. This amount is nearly alwaysnegotiable.
  10. 10. Primary TermThe primary term is the number of years that the lease will be ineffect unless a well is being drilled or a producing well is completedon the property. A typical primary term offered today in Arkansas isthree to five years, but may be more or less.
  11. 11. Secondary TermThe duration of the lease extending beyond the primary term if aproducing well is developed on the property, or on other land thathas been “pooled” or combined with the leased property forproduction.
  12. 12. RenewalMany leases also have an option to renew, which allows the lessee torenew for additional years (without drilling a well) by paying asecond specified bonus before the end of the primary term.
  13. 13. RoyaltyThe landowner’s share of production or profit from oil or gasproduced from the leased property. Royalty may be calculated beforeor after expenses, and may be based on various factors.
  14. 14. Shut-in RoyaltyPayment to the landowner when a gas well is capable of production,but is shut down for some period of time. Landowners shouldunderstand that when a well is shut-in, there is no gas beingproduced and no royalty being paid on production.
  15. 15. Pooling ClauseAllows the lessee to “pool” or combine your property with othernearby property to produce gas from one or more wells designed todrain the entire pool as a unit.
  16. 16. WHY ESTABLISH DRILLING UNITS?• Protection of correlative rights• Protection of the oil and gas producing reservoir• Prevention of waste by overproduction• Establish area for sharing of production proceeds and production costs
  17. 17. Damages ClauseThe lease should state clearly that the operator or lessee is liable forsurface damages to crops, timber, roads, and other improvements.
  18. 18. Warranty of TitleMost form leases contain a clause whereby the lessor “warrantsand agrees to defend the title to the lands herein described.”This could require the landowner to defend the Lessee in court. 10. Lessor hereby warrants and agrees to defend the title to the lands herein described, but if the interest of lessor covered by this lease is expressly stated to be less than the entire fee or mineral estate, lessor’s warranty shall be limited to the interest so stated. Lessee may purchase or lease the rights of any party claiming any interest in said land and exercise such rights as may be obtained thereby but lessee shall not suffer any forfeiture nor incur any liability to lessor by reason thereof. Lessee shall have the right at any time to pay for lessor, any mortgage, taxes or other lien on said lands, in the event of default of payment of lessor, and be subrogated to the rights of the holder thereof, and any such payments made by lessee for lessor may be deducted from any amounts of money which may
  19. 19. Pugh ClausePut simply, when operator finishes the drilling started inthe primary term, the lease becomes severable, freeing upthe lands the operator failed to develop. If at the end of the primary term, a part but not all of the land covered by this lease, on a surface acreage basis, is not included within a unit or units in accordance with the other provisions hereof, this lease shall terminate as to such part, or parts, of the land lying outside such unit or units, unless this lease is perpetuated as to such land outside such unit or units by operations conducted thereon or by the production of oil, gas or other minerals, or by such operations and such production in accordance with the provisions hereof.
  20. 20. Statutory Pugh ClausePrevents extending the term of a lease to lands with noactivities. Parties can agree to extension. 15-73-201. Lease extended by production -- Scope. (a) (1) The term of an oil and gas, or oil or gas, lease extended by activities on lands in one (1) section or pooling unit, whether established by rule or by order of the Oil and Gas Commission or the lease, shall not be extended to sections or pooling units under the lease where there has been no activity.
  21. 21.  A statutory process to protect the correlative rights of mineral interest owners.  Drilling imminent.  Unleased mineral interest owners.  Application – Notice – Hearing.  Options.  Lease  Participate  Elect Non-consent  No Response
  22. 22.  15-day election period. Options.  Lease  Participate  Elect Non-consent  No response.
  23. 23.  Developed to accommodate horizontal drilling Establishes well spacing and drilling unit size Drilling Units – Governmental Sections (~ 640 acres) Maximum of 16 wells per Drilling Unit
  24. 24. Variable Set Back 560 ft to 1320 ft + 5280’ _ + 5280’ _Set Back Area are off limits for completions, without approved exception location.
  25. 25. Completion Areas 5280’ Set Back Areas in Red Completion Areas 5280’Set Back Areas are off limits for completions, without approved exception location.
  26. 26.  Royalties are paid to the recorded mineral interest owner. Mineral rights transfer with property absent a reservation.  Contact Operator  Deed - Name - Address - Tax ID.
  27. 27.  Mineral Estate is Subservient to Surface Estate. Mineral Owner – Reasonable Use of Surface. Lessee Required to Return Property to Original Condition “As Near As Practicable”.
  28. 28.  Arkansas Oil and Gas Commission Arkansas Department of Environmental Quality Private Attorney
  29. 29.  Record Mineral Interest Owner Land Grab = Ownership Map Leasing Division Order Before Royalties  Attorney Title Opinion  Locate Mineral Interest Owner
  30. 30.  Location, Location, Location  Established Production  Infrastructure Coffee Shops and Water Coolers Negotiate
  31. 31.  Lease = Binding Contract Breakable?  Fraud  Mistake Virtually All Are Enforceable.
  32. 32.  dense-lower-smackover
  33. 33. Question & (870) 863-4949