McClendon/Larchmont Dissatisfied with Chesapeake's Pace of Drilling
Chesapeake, ex-CEO fighting over La. drilling program
Haynesville Shale sites at issue
BY TED GRIGGS tgriggs@theadvocate.com January 22, 2014
Nine months after being ousted at Chesapeake Energy Co., former CEO Aubrey McClendon is fighting the company over its drilling program in northwest Louisiana’s Haynesville Shale.
McClendon’s Larchmont Resources LLC has asked the state Office of Conservation to approve 12 alternate-unit wells on four units — each around 640 acres — in Bossier Parish. Chesapeake already operates a well on each of those units. Larchmont says the current wells are leaving the bulk of the produceable natural gas in the ground. Cheseapeake has asked the state to reject those applications, saying among other things that Chesapeake and the firms that own 80 percent or more of those leases don’t want Larchmont, which owns 2.5 percent, deciding when and where drilling will take place.
McClendon was widely criticized for a special program that allowed him to buy 2.5 percent in each well Chesapeake owned. A Forbes.com article described the deal as obscene because the only collateral McClendon had to put up was the drilled wells themselves.
John-Mark Beaver, Larchmont’s director of land, said the company owns parts of 869 units, and 961 wells have been drilled on those properties.
“There’s a lot of gas that’s still in the ground,” Beaver said Wednesday during a public hearing on the application.
Larchmont has filed for alternative well permits out of necessity, he said. The company has attempted to negotiate an accelerated drilling program with Chesapeake but has not received counter offers, and plans to develop the units.
Larchmont is committed to spending $10 billion to drill in the Haynesville over the next decade, Beaver said.
An economic impact study authored by economist Loren Scott says that if Larchmont and other minority working interest owners were allowed to gain approval for alternate unit wells like those proposed, over the next decade:
- Business sales within the state would expand by $3.3 billion.
- State revenue would increase by $921.9 million, not including severance taxes.
- The minority owners’ investment would support about 22,743 jobs.
However, the Office of Conservation won’t take the study into consideration in deciding on the permits because Chesapeake didn’t receive a copy in advance, wasn’t given a chance to question Scott or to hire an expert to refute the study.
Randy Songy, an attorney for Chesapeake, argued that Larchmont and McClendon aren’t interested in increasing drilling as much as buying Chesapeake’s interests in the leases.
“That’s what this is really about, this filing. It’s to give you leverage in those negotiations?” Songy asked Beaver.
Beaver said Larchmont wants to see more wells drilled.
There are more than 3,000 additional well locations on the leases where Larchmont and Chesapeake are co-owners, he said.
Songy said even if the state approves Larchmont’s wells, the company has no way to drill them because the state forbids having dual operators on a unit.
“I see it as an exercise in futility,” Songy said.
David Ogwyn, an attorney for Larchmont, said Chesapeake is acting against the state’s best interests by preventing development and keeping large amounts of natural gas off the market.
Larchmont wants the state to recognize the need for drilling more wells per unit, he said.
Public Service Commissioner Foster Campbell, who owns part of the property where the proposed wells lie, said landowners would prefer the state allow companies to drill if they have the resources to do so.
Chesapeake is saying it will drill but not providing any details, Campbell said.
Songy said Chesapeake has gone from two drilling rigs in the Haynesville under McClendon to seven.
The company is willing to file its drilling plans for 2014 within two weeks if that’s what the state wants, he said.
The Office of Conservation is expected to issue a decision in the next 30 days or so.
Views: 2116
Replies to This Discussion
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Permalink Reply by 1kw6x71km1v37 on
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This strikes me as a contractural dispute between working interest owners that ought to be in a courtroom. The Commissioner can rule more wells are necessary to drain the field, but he can't make an operator drill.
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Permalink Reply by Nixon Dow on
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Actually, while logic would say you are correct, the rules for pool and unit operation say otherwise. By rule the Commissioner of Conservation is the "jurisdictional" body to handle these disputes. Any issues regarding "Drilling and Operating" for a commissioner declared unit has to go through their office. Determinations on drilling, operating, income, and production marketing are suppose to be handled by the commissioner (as per La R.S. 30:1-10 -*mineral code). While the commission is suppose to make these rulings he general like to stay out of it, thus creating the problems that we have today.
Now getting back to your original issue, in short a unit is created upon request and after all the proper notices have been given he will create the unit. Now either during the same process or at a later time any party will request to drill a well and it is up to the commissioner to grant the request and award them the rights to become operator. Now generally the party with the most interest typically will be awarded the right to operate and drill the well however, there is no legal standard that says that is what is required. In theory, if a party who owns 3% of a unit want to drill and well and the commissioner believes their proposal is in the best interest of the unit then they should be allowed to do so. Now, this is where the party who owns let say (85%) steps and tries to claim that this is unfair and they own right to drill and operate said property. Under conventional property ownership I would agree, but when forced pooling takes play that ownership right to direct, decide, and control the use of said property is taken away and put int he hands of the commissioner. The party who owns 85% has options, just like any unleased landowner has when there land is forced pooled. 1) They can present their own application to drill. 2) They can decide to participate. 3) They can decide to not participate suffer the 200% payout penalty.
The summary of my ramble is that "lease/ownership" rights and "forced pool unit drilling & operating rights" need to be looked at as two separate things. At the end of the day the 3% owner is drilling and develop the unit with burden of %100 of the risk (if the other parties decide not to participate) but will only plan to gain 3% (after payout). If someone is willing to take that risk and the commissioner believes that his plan to drill is in "the best interest for the overall development of said resources" (which is the reason for forced pooling), I have not legal issue with doing so (at least under the current rules we have in place).
Even if you believe the 85% interest lessee has rights under the lease he has with the mineral owner that should be considered in this determination, remember under the mineral code the lessee has a right to act on the best interest of not only himself but also his lessor. If another party is willing to development the minerals in a reasonable and prudent and the current lessee can't provide a legitimate reason why develop is not in the best interest for the mineral owner then they in theory should be obligated to release the lease.
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Permalink Reply by Dion Warr, CPL on
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Nixon:
There may be another problem. The leasehold interest that Larchmont (McClendon) owns is an undivided interest in the same leases that CHK owns. While one co-owner may not prevail against another co-owner as to the right to drill and develop, the rights availed under the lease to capture those minerals from the surface can only be utilized by one having permission of at least 80% of the owners of the surface rights. Could this standard be similarly applied to owners of exclusive rights to explore and develop (including rights to use the surface) per the lease? I may be reading more in the tea leaves than what may actually be there, but IMHO the fact reported of CHK et al owning 80%+ of the leases in question is an important one. Can the Commissioner permit a well? Yes. Does his right extend to the permitting of alternate unit wells of this type? Currently I would say yes, but I guess we will still await Gatti to play out. Does the Commissioner have the right to confer or force an assignment of leasehold rights from one lessee to another and run afoul of other statutes and/or legal principles germane to use of the surface in the right to explore and capture? I'm not sure that he does. If this is the case, where does Larchmont have the right to spud a well, unless those rights are secured from another owner (or co-owner)?
Contractually, does Larchmont have the right to propose and drill a unit well on leases that it gained under the terms that those rights were conferred from CHK? Probably not, as anecdotally the rights were mainly associated with the rights to participate in the wells and units on a percentage basis per the Founder's agreements, but a reading of those contracts will provide the truth on this. Conversely, I would believe that Larchmont would likely have a right to participate in any additional well(s) proposed and drilled by CHK in drilling units previously secured by prior CHK wells. If this were the controlling issue, I would think that Larchmont would be filing suit per the contract(s) rather than pursuing the issue procedurally.
Finally, release of the underlying lease from which both parties derive an interest presents another set of problems. Additionally, it has already been shown that the reasonable and prudent standard does not equate to "drill more wells, produce more gas". The lease does not create a fiduciary duty to the lessor over lessee's interest. Also, this appears to be a dispute between working interest owners, not lessors and lessees, to which a dissolution of the lease in favor of lessor serves neither.
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Permalink Reply by HBP on
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I've had to read over the responses a few times, especially Dion's, because I think there are some extra angles here that make this difficult. Apparently Larchmont is going to frame it as "good for everyone" but it seems that allowing minority WIs to operate alts may be a slippery slope. Foster Campbell is correct that landowners prefer production, however new production does not always equal fair or beneficial production. If this was one major arguing with another then I would say flip a coin - but its Aubrey. Also, what if this was a minority WI with the resources and money but no real HA experience? Would you want them playing around in your unit?
I don't even think Larchmont believes the Commissioner will ever let this happen so it must just be a bargaining distraction for another deal as mentioned in this thread. At least its interesting - Aubrey acting populist - fighting for the little guy.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Considering the rate of current CHK HA well applications I think that if this question is not now moot, it will be soon. All Aubrey/Larchmont wants is more wells drilled. CHK appears to be in the process of doing that as I write this.
Exhibit A: http://www.gohaynesvilleshale.com/forum/topics/oil-and-gas-news-jan...
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Permalink Reply by Henry on -
So Aubrey is unhappy with his operator? How ironic is that!
I wonder....Did Aubrey initially express his concerns by calling CHK's 800 number twelve times before getting a person to talk to? Or maybe he sent some polite emails that got lost when they entered into the Chesapeake computers? And, if that didn't work, do you think he then sent the obligatory letter via certified mail and waited 30 days for CHK to apologize make everything right? Do you think Aubrey is unhappy with how much Chesapeake deducts for transportation and marketing?
Give me a break.
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Permalink Reply by Skip Peel - Mineral Consultant on
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LOL! Good One, Henry.
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Aubrey McClendon has been highly successful with his blitzkrieg tactics. He's got something up his sleeve, but I can't peg it. CHK better watch it's back.
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Permalink Reply by Mike Bradstreet on
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Let's see...now that Cheapsapeak is doing to him what he did to everyone else, he doesn't like it?? karma's a B Aubrey couldn't happen to a better guy, what goes around comes around, hope you get buried with them in class action lawsuits to come!!!
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Permalink Reply by mickiebyrd on
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Remember Aubrey was the crook that started the Chk high deducts and low price affiliate scam.
You can be sure that his interest doesn't bear cost. Crook fighting Crook, hope they both fail.
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Permalink Reply by Skip Peel - Mineral Consultant on
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American Energy Partners secures more commitments
tulsaworld.com Thursday, January 30, 2014 12:00 am | Updated: 4:35 am, Thu Jan 30, 2014.
American Energy Partners LP has secured another $500 million in equity commitments to acquire oil and natural gas interests, the company announced Wednesday.
American Energy-NonOp LLC, an affiliate of Aubrey McClendon's American Energy, intends to pursue non-operating working interests in various onshore oil and gas plays.
The company did not offer any further details in Wednesday's announcement, although it is accepting leasehold submissions. It also is looking to hire people with acquisition expertise in a variety of disciplines.
The Energy & Minerals Group, a Houston-based firm, is the exclusive private-equity investor in the new American Energy venture. It manages more than $8.2 billion in assets.
The equity firm, led by industry veteran John T. Raymond, also was a lead investor in American Energy last fall when the company secured $1.7 billion in equity commitments and loans to move into eastern Ohio's Utica Shale.
McClendon launched American Energy last year after being ousted by the new board at Chesapeake Energy Corp., which he co-founded with former partner Tom Ward in 1989.
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