Why Haven't I Been Offered an Oil and Gas Lease?

Many of our clients seek our expertise in reviewing an oil and gas lease that has been offered to them. These people have been approached by oil and gas companies that are interested in accessing the oil and gas under their land. When reaching out to landowners, these companies usually have a pretty good idea as to whether or not that particular landowner is eligible for an oil and gas lease. Even so, sometimes landowners who are eligible for an oil and gas lease aren't offered a lease. This could be for a number of reasons. Acreage size is probably the most important of these reasons. Generally speaking, oil and gas companies are most interested in large parcels of land. For this reason farms are very attractive. However, smaller acreage can still be very valuable. It is these small parcels that can be overlooked by oil and gas companies.Frequently are we asked to determine our client's oil and gas rights. Determining this will also determine their eligibility for signing an oil and gas lease. Most often the process is quick and involves the answer to a few basic questions. Remember, if you have already signed an oil and gas (even many years ago), it is pretty likely that your land is already ineligible for a new lease. We are happy to review your old lease and give you a definitive answer. Similarly, if you are unsure about your oil and gas rights, contact us and we will be happy to research the issue.

Breaking an old Oil and Gas Lease

How do you determine if your oil and gas lease is still in effect?This is one of the most common questions we receive. It typically comes from landowners who had signed an oil and gas lease many years ago and want to take advantage of the current lease frenzy. That is, landowners who have signed an oil and gas lease in the 1970's or 1980's want to know if they are eligible for a new lease and the signing bonuses that come with it. The answer to this question can be very valuable, as bonus payments for signing an oil and gas lease today are much much higher than they were twenty or thirty years ago.Like many questions concerning the law, the short answer to this question is: it depends. Generally speaking, if a person has signed an oil and gas lease in the past, it is pretty likely that they are ineligible for a new oil and gas lease. However, old oil and gas leases can and do expire. If this happens, a landowner would then probably be eligible to sign a new lease.Determining if land is still under lease involves many factors. Some have to do with the timing of payments made by oil and gas producers. Others have to do with specific terms of the old lease. Some of the language in the old lease might not be favorable to drilling new wells. Broadly speaking, however, if a landowner is still receiving payments for a well on or nearby their land, it is pretty likely that the old lease is still in effect.We realize that each landowner's situation is different, and will not always fit squarely into one of the above circumstances. With the above in mind, we have helped landowners effectively break their current oil and gas lease. Contact our office if you believe your old lease has terminated.

Landowner Rights Video

On Nov. 30, 2011, I had a chance to address landowner rights during the YOUNG 2011 Conference & Expo in Youngstown, Ohio. This post has an embedded video of the one hour presentation that I gave that day.

Oil and Gas Lease Forfeiture or Expiration in Ohio

Recently, I’ve been receiving a number of calls from prospective clients who are looking for ways to extract themselves from an old lease that covers their property. Various scenarios exist: (1) an old lease was signed years ago, but no well was ever drilled; (2) a well was drilled, but has sat idle for some time, with no royalties being paid; (3) a well was drilled and royalties have been paid, but they are sporadic or of a very small amount. With the recent increase in leasing in Ohio, and considering the large sums being offered, these clients want to know if they can cancel the old lease to allow them to sign a new lease for large dollars.

Old Lease – No Well Ever Drilled

This situation is the simplest to deal with. An oil and gas lease will normally have a fixed primary term (for example, 5 years) and a loose ended, secondary term (for example, so long as oil or gas are produced). If a well is not drilled within the primary term, the secondary term never kicks in and the lease terminates automatically – it is not necessary for a landowner to go to Court to void the lease. A landowner should be free to sign a new lease with another company after the lease term expires. The new company will sometimes request that the landowner sign an affidavit indicating that no well was ever drilled under the old lease and that no royalties ever paid, just to have some peace of mind.

Old Lease – Well Drilled, But No Royalties Being Paid

This is a much trickier situation, and will really depend upon the particular facts. Recall, as discussed above, that the lease has a secondary term. Leases use various language to define the secondary term. Oil companies will frequently use some very broad, and sometimes vague, language to define the secondary term of the lease. For example, the lease will continue if “oil or gas are capable of being produced from a well on the subject premises in the judgment of the lessee.” That’s not a good clause for a landowner. I prefer to define the secondary term as “so long as oil and gas are being produced in paying quantities.” This means that there is significant production coming out of the well and the landowner is being sent a royalty check. I believe this is fair to both parties. After all, when the lease was signed, the parties likely were not agreeing or anticipating that the lease would continue for years after the point where was no profit being generated from the well.If the lease is favorably drafted for the landowner, and if production has stopped for an extended period (particularly if for no good reason), a landowner can successfully argue that the term of the lease has expired. “Extended period,” as used in the preceding sentence likely means years, rather than months. There have been several Ohio court decisions that have so found under these circumstances. See, for example, American Energy v. Lekan, 75 Ohio App.3d 205 (1992) and Moore v. Adams, Ohio App. 5 Dist.,2008, 2007AP090066.

Old Lease – Well Drilled, Minimum Royalties Being Paid

One monkey wrench that an oil and gas company can throw into the above situation is the payment of a shut-in royalty. Most leases provide for a shut-in royalty that can extend the secondary term of the lease, even though a well is shut in. In the Moore case, cited above, the lease did have a provision permitting the lease to continue if shut-in payment were made. However, the gas company failed to pay shut-in payments (or any other royalties) for a period of 6 years. Then, as the landowner was about to file suit, the oil company sent a check equal to 6 years’ worth of shut in payments. The landowner (smartly) refused to cash the check and the court determined that tendering this late check did not keep the lease alive. When representing landowners, I will typically permit a shut in clause because sometimes things happen that legitimately cause an oil company to shut things down for a time. However, I like to fine tune that clause so that a producer does not have a right to pay a modest shut in fee indefinitely and for no good reason.

Other Issues

The discussion above really concerns the expiration of a lease based upon the written terms thereof. An alternative method of cancelling a lease would be through a forfeiture. Ohio courts generally disfavor forfeitures, so these are tough cases. If the facts and lease language are a favorable, a landowner will generally want to argue that his lease expired by its terms, rather than argue that the lessee forfeited its interests in a lease. Sometimes, however, you don’t have favorable lease terms or facts. For instance, maybe there is an old well and you are still getting small royalties. At the same time, all your neighbors are getting great wells drilled and the company operating your well appears to be in no hurry to do any additional drilling. You have a large farm which has ample room for more wells – or perhaps deeper formations could be drilled on your property (e.g. to the Marcellus or Utica formation.) What can you do about that?Again, these are difficult cases, but you could argue that, by failing to drill additional wells on your land, the lessee forfeited such right. In 1897, the Ohio Supreme Court, in Harris v. Ohio Oil Co., 48 NE 502, held that an oil and gas companies have a duty to operate prudently, under the surrounding circumstances, and to reasonably develop the lands under lease. It affirmed similar decisions in other states that implied these concepts into an oil and gas lease. It recognized that where wells were drilled on neighboring properties, it was negligent for an oil and gas company to permit that to continue where gas or oil might be drained from the leased property. However, the court stressed that if the landowner could be compensated by money, rather than a by forfeiture of the lease, that was the preferred method of compensation. There have not been a lot of cases decided in Ohio on this issue, but I anticipate that there will be more activity in the courts in the near term.

Ohio Oil and Gas Leasing Update January 2012

In the last six months we have seen a lot of changes in the oil and gas leasing game. More wells have been drilled and more data about the Utica Shale is now available. This has created a lot of buzz in the oil and gas world. There has been a real surge in interest by many oil and gas companies. There are new “hot” counties where lease prices have escalated substantially, while other counties are of less interest to the oil and gas companies. More companies are moving into this play every week. Major companies now include: Chesapeake, Devon, Hillcorp, Shell, Anadarko, Hess, Gulfport, Consol, and XTO (Exxon). However, not every company is interested in the same area.It can be extremely difficult to figure out how to get the highest price for your property. As a law firm, we have worked with many landowner clients since the inception of the Utica shale play. We keep track of the offers in terms of upfront lease money and royalty. We also track the offers geographically so that we know which companies are interested in which counties and townships and what the ‘going rate’ is for a particular area. Because we understand the lease market, we are able to negotiate on your behalf and will attempt to get you the highest price available. Importantly, we also have contacts within the major Utica companies and can typically work more quickly than a landowner could on their own.Give our office a call today at 888.324.5127 and let us do the negotiating work for you.

Thoughts on Group Leasing or Mineral Selling

We are often asked whether a landowner should join a “group.” The short answer is “it depends.” Certain landowners will benefit from joining a group while others will do better standing alone.Factors we consider include:

• How many acres do you own?
• Are you willing to sign a lease that allows the company to drill on your property?
• Are your neighbors leased?
• If your neighbors are leased, did they sign with the same company that has approached you or a different company?
• Is the group made up of large landowners or small landowners?
• Is the group centered around your property or spread out?
• If the group is spread out, how many townships or counties does it span?
• Has the group already been approached by any companies?
• Does the group want you to pay a fee to join?
• Does the group want you to commit to joining the group for some period of time without guaranteeing terms?

Depending on the answers to these questions we may advise you to join or not join a landowner group. There are many different groups available. We often put our landowner clients into “groups” where we feel it benefits them. If we think your position is stronger by yourself, we will advise you to stand alone.You should speak to an attorney to figure out if you will benefit from a group situation. As always, do not sign any documents committing you to anything until you have consulted an attorney.

June 2011 Update

Oil and gas leasing in Ohio has continued at a rapid pace. Columbiana County, Jefferson County, Mahoning County, Caroll County, Stark County and Harrison County continue to generate signing bonuses in the $2,000/acre and up range, with prices in Harrison County (where a rumored huge well has been drilled) reportedly hitting over $3,000 per acre. Outside of that core area, in Trumbull County, Portage County, Summit County, and Tuscarawas County, activity is pretty brisk, but at lesser per acre amounts. Going beyond those counties, we are seeing new entrants, besides Chesapeake Energy, into the Utica shale play who are leasing in Medina County, Ashland County, Wayne County, Holmes County, Coshocton County, Belmont County and other areas. These new players are paying considerably less per acre than what we have seen in Chesapeake’s core area.Approximately 5-6 horizontal Utica shale wells have been drilled to date, with only a few of those having been fully completed and put into production. We are likely to see some dozens more drilled by year end. Leasing trends are going to be dependent upon the success of these initial wells.Finally, in some of the core areas, landowners with old leases are being courted by a company known as MC Mineral Company, LLC to buy out their mineral rights with a one-time payment. MC Mineral Company, LLC would appear to have a relationship with Chesapeake Energy. It need be understood that if you are selling your mineral rights, this is different than signing a lease. Under a lease, a landowner is entitled to future royalties if and when a well would be drilled. A sale of mineral rights would cut off an landowner’s right to future royalties. Tread carefully if you are considering such a sale of mineral rights. I am in the process of putting a group of landowners together to negotiate the sale of their mineral rights, so feel free to drop me a line if you have received a letter from MC Mineral Company on this issue.

Oil and Gas Law

The first commercial well drilled for oil was the “Drake” well, which was drilled in 1859 in eastern Pennsylvania,. Many years and many wells have passed since that time and, as would be expected, many disputes have arisen concerning the leasing, drilling and operation of oil and gas wells in the United States.Since I began practicing law in 1983, I have been involved in all manner of such disputes – some of which ended up in court. Some involved claims between landowners (Lessors) and the company who took an oil and gas lease (Lessees). Some involved claims between co-owners of a lease rights. Some involved claims between competing oil and gas companies. Sometimes, I’ve represented an oil and gas company facing a claim by a state regulatory agency or I’ve represented an employee injured while working on a gas well. Oil and gas law encompasses a big universe. Below I’ll set out some of the more common issues and disputes that might arise in the realm of oil and gas.

Oil and Gas Leases

In law school, I had a real estate professor who taught me that owning real estate was like owning a bundle of sticks. As an owner, I was free to take one stick out of the bundle and sell it to someone else. That stick could represent a mortgage given to a bank or an oil and gas lease given to a producing company. Once given, I’d still hold the rest of the sticks, but the stick representing the right to produce oil and gas from my land would be held by a third party.The oil and gas lease should therefore represent an attempt to balance a producer’s right to economically extract oil or gas with the landowner’s right to exercise the rights held in the remaining bundle of sticks. For example, a farmer should have the right to cultivate as much of his land as possible even though one or more wells may be drilled on the property. A good lease will therefore permit the landowner to have input into the location of any wells, roads or holding tanks and will require that pipelines be laid below plow depth. Alternatively, the oil and gas producer’s rights must be sufficient to allow a decent return upon its investment. Requiring a producer to drill a well on the only swampy ground on the farm is likely overreaching, due to the added costs created by such a condition.Entering into an oil and gas lease is much like entering into a partnership, where the ultimate goal is the successful extraction of oil and gas and where both producer and landowner share in the income generated therefrom. The landowner contributes his rights to the oil and gas and, to some degree, his right to have unfettered use of his land; the producer contributes its money and expertise to the venture. Any good partnership requires a degree of trust and cooperation on both sides. Landowners need to pick their producer / partners with care. Get some references. Call your state department of natural resources or farm bureau. Ask to be shown some existing wells drilled by the producer. Talk to your neighbors. You could even check with the Clerk of Courts to see if this producer likes to litigate or has been sued before.Even if you have total faith and trust in a producer, it pays to be smart. You need to negotiate a good oil and gas lease. I believe there are two primary components to oil and gas leases: the money component and the land use component. The money component would include things such as signing bonuses, delay rentals, royalty calculations and spud fees. These are by no means consistent among producers in the same area or in different areas by the same producer. If you have undrilled land in the middle of a known “sweet spot”, I can negotiate a much better money component in your lease that if your land is in an area of poor production.The land use component of an oil lease is equally important. Any oil lease presented to a landowner was almost certainly drafted by an attorney representing a producer – it’s going to be slanted in a producer’s favor. THERE IS NO SUCH THING AS A “STANDARD” OIL AND GAS LEASE. It’s important for any landowner, particularly one who has never had oil and gas wells located on their property, to be educated as to the procedures involved in drilling and operating wells and the impact this can have upon their subsequent use of the property. By way of example, I’ve seen situations where, long after the lease was signed, former farm land has become a potential shopping center. A good lease will have language permitting the land to be commercially developed without unnecessary interference from the producer, by allowing, for example, existing tanks and pipelines to be moved to allow for construction of new buildings.Encumbering your valuable land with an oil and gas lease is a significant undertaking. My advice to you – don’t be penny wise and pound foolish. Consult with an attorney experienced in this field prior to signing any lease presented to you.

Oil and Gas Litigation

All litigation is expensive and risky; as a result, litigation should be your last course of action. Oil and gas issues are often very technical and require expert testimony, adding to the cost of the lawsuit. Nonetheless, sometimes folks are just not reasonable and settlement is not possible – a lawsuit is your only choice.Because oil and gas leasing, financing, drilling and producing is very specialized, any counsel you might choose to represent you should have some experience in this area. If your lawyer doesn’t know the difference between a rutabaga and a roustabout or the difference between a dog house and an out house, he or she is likely going to have some problems handling your case.There are many areas of litigation that can arise in the field of oil and gas:

• Claims by workers injured on an oil and gas well
• Claims by landowners whose lands were damaged by a producer
• Claims between working interest owners in the well against the party operating the wells for its negligent performance
• Claims by landowners for under payment of landowner royalties
• Claims by a producer against a drilling company for failing to competently drill a well
• Claims by sub-contractors on a well who did not get paid by a producer (can anyone say “mechanic’s lien?”)

I’ve handled all of the above over the years, and many others. If you need help, please let me know.

Oil and Gas Investing and Financing

Although I have an undergraduate degree in economics and finance, I don’t hold myself out as a financial planner. Nevertheless, over the years I have been called upon by clients to review situations where they invested or intended to invest in an oil and gas venture. These investments sometimes take the form of limited partnership or joint venture interests or in the form of stock.To be blunt, while the vast majority of producers are hard working, honest and intelligent people, there are some shaky operators out there with designs on preying upon inexperienced investors. The best course, obviously, is to have someone with experience take a look at the venture before you put your money down. If you feel you have already been burned, however, give me a call.