Help out the Little Guy: Reserve your Shallow Rights!!

Once upon a time, before the Haynesville Shale introduced Northwest Louisiana to the concept of a resource play, the search for oil and gas was conducted by many smaller companies. These smaller companies would drill the more traditional prospects, looking for that hidden resevoir of oil or gas. Now, with the HA shale, large companies have aquired enormous leaseholds and effectivly push out the small independents.

I have watched as these small independents have had to go elsewhere in there search for mineral riches, as these large leaseholds by CHK, HK, Encana, etc. have locked up much of the availble land. These large companies do not want the little guy in there way, and therefore will not farmout to the small independents.

Very little attention has been given to the fact that one reason the lease bonuses rose so dramatically, was to drive out the small inpendents who can not afford to pay thousands per acre, especially so in a prospect that could probally end up in a dry hole.

Many on this site have opined that a lease bonus of $100 acre is ridiculas. That may be true for a lease that contains rights to a valuable resource play like the HA, but for a chance to have a well drilled to the hosston, bodcaw, nacotoch, tuskaloosa, smackover or cotton valley, it is sometimes all that can be justified. Especially so if the well is a wildcat, where the outcome is far from certain.

I have seen more prospects end in dry holes or worse yet non-commercial wells than good producing wells. These wells cost just a fraction of a HA horizontal well, but come with significant risk.

These large companies have no intention of developing these shallower resevoirs. Some companies, like CHK are not even loging all their wells!! Without logs, who knows what possible riches lie above their precious Haynesville shale.

For those who have already leased, it is too late. Maybe after time has passed, you may be able to get your shallow rights released, but it will be difficult.

Most mineral owners who where thoughtful enough to include pugh clauses will also be in the same boat, only the depths below the HA will be released automatically after the primary term.

I urge those who are still unleased to consider the following proposal:

Please withhold your shallow rights, to maybe lease those to someone who will actually develop those depths.

In the end, you may not see the life changing money that the HA might bring, but you never know what lies beneath your land.

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Comment by king john on August 22, 2009 at 3:42
baron, pbol needs help with pugh. i think you're the man for the job !
kj
Comment by Horseshoe Girl - a1 on July 6, 2009 at 6:07
As a Depth Restriction (to reserve shallow rights), actual measurement will suffice, such as "Reserved and excepted from this lease are all depths from the surface of the earth to a depth of 10,400 feet." A Depth Restriction will reserve the shallow rights effective immediately.

A Vertical Pugh Clause, however, should refer to the formation and state stratigraphic equivalency of a relative well, as others responding to this blog have noted. When worded accordingly, the Pugh Clause will release all depths that are 100 feet below the deepest depth drilled upon the expiration date of the Primary Term of the Lease.

In other words, shallow depths can be reserved from the date of the lease, whereas deeper depths reserved via a Vertical Pugh Clause revert back to the Lessor after the lease expires. You can lease a reserved shallow depth next month, but you cannot lease below HNVL Shale until your current lease has expired. This is generally how it works. As always, there is more than one way to skin a cat, so if your neighbor's wife's cousin's brother-in-law's great uncle signed a lease(s) that worked differently then so be it. (For example if the great uncle executed a "TOP-LEASE" that would change the rules of the conventional rule of thumb -- necessity is not just the mother of invention, for O&G's its the mother of loopholes as well.)

Also, just because a clause is labeled as a "DEPTH RESTRICTION CLAUSE" does not mean that it is NOT a Vertical Pugh Clause. The verbage concerning "100' feet below deepest depth drilled" being released upon the the expiration date of the lease is what makes the clause a Pugh Clause. How the clause is written, NOT how it is labled, is the trump card. Beware of this and read through and understand your clauses and addendum clauses as they are written. I hope this is helpful.
Comment by Skip Peel - Mineral Consultant on July 2, 2009 at 9:54
king john. I think it's not a question of "can the surface be shared by multiple operators to fully develop varying formations?" It's a question of "will they have disputes and how are those disputes handled". In other words, you don't leave that issue up to interpretation. You need specific language in a lease to avoid it. If possible.
Comment by The_Baron on July 2, 2009 at 9:51
Still have a place to put the rig. However, directional drilling is more expensive, it is normally used to drill under water bodies (lakes & rivers). The best way is to place the rig as close to where your target is.
Comment by king john on July 2, 2009 at 9:40
with directional drilling wouldnt the surface issue be somewhat a mute point, im not talking horizontal, but kick out drilling.
Comment by The_Baron on July 2, 2009 at 9:33
Skip, When the smaller operators do leasing they tend to already know what we are going after. A geologist didn't just throw a dart at a map, they have looked at a specific formation and determined where they want to drill. Granted, the more we can lease (verticaly) the better. We were involved in a well about a year ago, the cotton valley tested wet, but they were able to come up and produce out of the Hosston. It wasn't a great well, but it sure beat P&A.
Comment by Skip Peel - Mineral Consultant on July 2, 2009 at 9:06
The example offered by The Baron is regularly used and accepted legal language. It appears in numerous legal documents concerning the exploration and production of gaseous and liquid hydrocarbons. It would accomplish the requirement to accurately define formation and depth. The obvious question to follow is, would O&G companies be willing to enter into leases with the stipulations we are discussing? And is additional language needed in the lease that defines surface use in a way that protects the ability of multiple operators to produce formations at varying depths?
Comment by The_Baron on July 2, 2009 at 7:53
KB,

All the shallower wells in Elm grove hasn't slowed down HK.

I would suggest naming the depths by formation name. You can always refer to the stratigrahic equivlent in a nearby well, but personally I think it is sufficient to simply name the formation.
If really want to cover your bases, I suggest the following example:

Depth Restrictions: It is agreed and understood that this lease is limited to the stratigraphic equivalent of the Bodcaw Sand of the Cotton Valley Formation as defined in Louisiana Office of Conservation Statewide Order #_______ as that gas and condensate bearing zone occurring in the electric log depth in the _________________________#1 well in the _____1/4 of Section____, T___N-R____W Caddo Parish, Louisiana
Comment by king john on July 2, 2009 at 5:44
with the exception of the disabled, that could work in my opinion. what about daycare for all those children while their mammas are out doing public service or picking up trash or what ever else needed doing around town?
getting back to topic, i like the message being sent here. i do believe in reserving rights and leasing only certain zones. pugh clause, i wish i had heard of it before i signed my last lease. i also like the idea of keeping it local (to coin a phrase) it would seem one could have a better relationship with a maw and paw than a big impersonal corp. i do think that more of the money would stay and be dispersed locally. why wouldnt an owner like to have as many irons in the fire as possiable? i would love to have two or three operators working off of my one surface.
money money money monnnney,.......money!!!!!
king john
Comment by The_Baron on July 2, 2009 at 4:13
Pick up litter, volunteer, whatever.....

Imagine if all those unemployed on welfare were pu to good use serving the public who are supporting them, imagine how strong our country would be!!

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