WHAT HAPPENS AFTER YOU SIGN YOUR OIL & GAS LEASE?

I want to welcome Eric Camp as a regular contributor to the GHS blog feature. Eric has been an integral part of the GHS community for some time now. I look forward to hearing from him in this new medium.

Keith "Haynesville"
Site Publisher


WHAT HAPPENS AFTER YOU SIGN YOUR OIL & GAS LEASE?

by Eric Camp

This article discusses what generally happens after signing an oil and gas lease (“Lease”). Every situation is different and these steps may happen in a different order than listed below but all occur before the mineral owner (“Owner”) gets a royalty check. This article is based on Texas law.

1) Finding a Surface Site

Oil and gas companies (“Operators”) require surface sites to drill wells. In rural areas, this is easy. But in urban areas, there are fewer options because of prior developments and municipal regulations. In urban areas, Operators often secure a surface site first and then lease around it.

2) Conducting a Title Search

Operators frequently take out Leases after conducting only a preliminary title search. This is why many Operators give Owners drafts instead of checks – if title fails, the Operator does not fund the draft. After getting a Lease, the Operator will conduct a thorough title examination and secure a title opinion from an attorney.

3) Pooling Lands

Operators require a certain amount of Leased acreage to drill a well and usually a single tract is too small. To remedy this, Operators “pool” contiguous tracts to form a drilling unit. Owners grant Operators this authority in the Lease which frequently limits the pooling power through pugh, depth, anti-dilution, and other clauses. Owners share production based on their respective acreage amounts in the pooled unit. Thus, an Owner with 20 acres leased in a 100 acre pooled unit with a 20% royalty gets twice as much royalty as an Owner with 10 acres leased in the same unit with the same royalty.

The Operator must file a Unit Declaration or Declaration of Pooling in the County Clerk’s Office and a Certificate of Pooling Authority with the Texas Railroad Commission.

4) Obtaining Permits

The Operator must apply for a drilling permit from the Texas Railroad Commission and demonstrate that the proposed well complies with applicable state set-back, density, and other requirements. If the well does not satisfy a requirement, the Operator can apply for an exception permit.

If the well is in a municipality, the Operator must also apply for a drilling permit from the municipality and demonstrate that the proposed well complies with applicable municipal requirements (usually more burdensome than state requirements). Again, if the well does not satisfy a requirement, the Operator can ordinarily apply for an exception permit.

5) Drilling & Completing the Well

Drilling a Haynesville Shale well usually takes 30 – 40 days. Actual drilling time depends on the type of well (vertical or horizontal), depth, and complications/problems.

“Completion” consists of perforating the casing and “frac-ing” the well. Perforating the casing allows oil and gas to flow into the production casing and “frac-ing” the well allows gas to flow through the new cracks to the well bore. Completing a well takes another 10 – 15 days assuming no problems.

6) Treating the Gas

Gas must be of a certain quality before entering the pipeline. The Operator must remove impurities (treating) and water (dehydrating). These processes occur on the well site. Lease language controls whether the Owner’s royalty bears any portion of these expenses.

7) Installing Pipelines

Pipelines transport natural gas to market. If a significant pipeline infrastructure already exists, the Operator can fairly quickly connect to the existing larger lines. But if no infrastructure exists, the well will be “shut-in” until pipelines are built.

8) Obtaining Division Orders

The Operator will obtain a Division Order Title Opinion from an attorney prior to paying royalties. This document identifies who owns what in the respective unit. For example, if an Owner has 10 acres in a 100 acres unit and a 20% royalty, that Owner’s royalty share of the unit’s production is 2%.

Next, the Operator sends Division Orders to all Owners specifying their respective interests in the unit. The Owners check their interests for accuracy and then sign and return the Division Orders to the Operator.

9) Selling the Gas

Once in a marketable condition and in the pipeline, the Operator sells the gas to a gas purchaser.

10) Distributing Royalties

After the Operator completes the above steps, it will distribute royalty proceeds to the Owners according to their interests as specified in the Division Oder.

Other Considerations

Often Owners expect Operators to drill right after obtaining a Lease. But more often than not, the Operator will not drill the acreage until near the end of the Lease’s primary term. Why? Because the Operator probably has other Leases whose primary terms’ are about to expire. Those other Leases are the Operator’s priority because if not drilled soon, the Leases will expire and the Operator will lose its investment. If an Owner just signed a Lease with a 3 or 5 year primary term, the Operator probably will not drill a well until the Lease is about to expire.

Eric C. Camp is an associate in the Fort Worth, Texas law firm of Whitaker, Chalk, Swindle & Sawyer, LLP where he practices oil and gas law (http://www.whitakerchalk.com). He can be reached by phone at (817) 878-0500, by email at ecamp@whitakerchalk.com, or by mail at 301 Commerce Street, Suite 3500, Fort Worth, Texas 76102-4186.

Disclaimers and Acknowledgements

This article is not intended as legal advice and should not be relied upon as such. If you need legal advice, seek independent legal counsel.

These comments are the author’s own and not the official or unofficial position of any bar association or his law firm. The author is an attorney licensed in Texas, not Louisiana.

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Comment by Abington on September 17, 2011 at 3:44pm
In Louisiana, state law does not require the signing of a division order by mineral rights owners. If you get receive a division order in Louisiana, you can just write a note saying signature not required by Louisiana law and return the division order. Or, I have seen cases where the division order was not returned, and the checks began coming anyway.
Comment by lawrence on May 5, 2011 at 2:08pm
NEED INFO. CONCERNING RIGHTS OF HEIRS. (LOUISIANA)
Comment by Jace Reppond on February 2, 2010 at 5:21pm
Thanks!
Comment by Skip Peel - Independent Landman on February 2, 2010 at 3:29pm
Use the link below to go to the SONRIS Help Center Group page. Read the instructions in "Basic Well Search By Section - Township - Range", then click on "Go to SONRIS Lite" and perform a search using your section-township-range. Let us know if you need any help or have any questions. Good Luck.

http://www.gohaynesvilleshale.com/group/sonris_help_center
Comment by Jace Reppond on February 2, 2010 at 3:15pm
Hello, I believe that my unit has already been drilled back in Dec. but, we have not heard anything yet. Where do I find out the status of our lease? I am in S16-T16N-R14W. I appreciate any help!
Comment by paulosteurno on October 12, 2009 at 1:02pm
I realize that every drill site is different...what is the average sign-to-royalty time period.
Comment by Skip Peel - Independent Landman on September 30, 2009 at 8:05pm
Pam. You need a well spudded (drilling) before the ten year prescription date.
Comment by Pam Knieper on September 30, 2009 at 7:55pm
If your mineral rights are about to expire because of the 10 year sale to indiv. rule...and they are in the process of obtaining permits etc...where do you stand on rights. Do they expire on date and go to the property owner or what?
Comment by Inquirer on September 28, 2009 at 1:55pm
Thanks Skip.
Comment by Skip Peel - Independent Landman on September 27, 2009 at 8:42pm
Ann. The operating company (the one that drills) pays all the "pooled mineral interests" in the unit based on the terms of the leases they signed. It doesn't matter who the lessee is on your lease, you get your prorated share of production for the unit paid by the operator. If you are leased to a company other than the "operator", the two companies enter into a "working interest" agreement to share development costs and profit from the remaining royalty percentage of your leased acres. If you have a quarter royalty, their agreement is based on the remaining three quarters of the production from your proportional percentage of the unit acres.

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