Category Archives: Negotiation

A Study on Lease Terms and Money

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What matters most when you are negotiating an oil and gas lease? Your knowledge of oil and gas? Which company you’re negotiating with? Your negotiation skills? Where your property is located? How much oil and gas property you own? What the overall market is like? Which landman you’re negotiating with?

Turns out, it’s whether you “…have the skills or resources to negotiate for more favorable leases…”.

Here’s the abstract of a study done by the National Bureau of Economic Research.

Just in case the web page disappears someday, we’re going to quote the abstract in full.

“Oil and gas lease negotiations provide mineral owners the opportunity to negotiate for both compensation and auxiliary clauses that may protect their health and properties. We use optical character recognition to assemble a novel dataset of compensation and specific clauses in nearly 60,000 leases signed in the Marcellus Shale Play of Pennsylvania. We leverage the dataset to produce three main findings. First, contrary to the standard utility maximization model, we find a positive relationship between compensation and clauses. Second, we find that as development of the shale play progressed over time, compensation rose and leases became more likely to contain environmentally protective clauses. Third, we find that compensation and the presence of clauses have a weak relationship with the geologic productivity of nearby wells. Together, our findings indicate that oil and gas firms simultaneously make concessions by raising compensation and approving clauses, but these concessions do not depend on geologic productivity. This suggests that some mineral owners, such as those that are high-income or from more socially organized communities, have the skills or resources to negotiate for more favorable leases all-around and point to similar environmental justice concerns identified in other shale plays.”

There’s a good bit to unpack here, but the main point is that if you are knowledgeable in oil and gas, or you can hire someone who is (a lawyer), you will get the best terms and the most money.

Our experience shows that people with larger net mineral interests (more oil and gas property) also get better terms and more money than those who don’t.

So, if you want to maximize the return on your investment, get a lawyer.

Upper Devonian Drilling

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Upper Devonian

EQT has announced that it will start drilling Upper Devonian formations along with the Marcellus shale.  This is a great move, and while I don’t like EQTs stance on post-production costs or know anybody that really likes working with them, I have to applaud it.  Here’s why.

The Upper Devonian lies just a few hundred feet above the Marcellus shale.  It produces gas, sometimes wet gas that is rich in ethane, propane, butane and the like.  It doesn’t produce as much gas as the Marcellus, though, so a lot of companies have ignored it.

If memory serves, you can improve production from any acre by about 50% if you can produce from both the Marcellus and the Upper Devonian.

However, if you develop the Marcellus without developing the Upper Devonian formations you are unlikely to be able to develop the Upper Devonian.  This is because the fractures you make in the Marcellus migrate upwards for hundreds of feet, right up to the Upper Devonian formations.  When you go back later to fracture the Upper Devonian you lose a lot of, if not all of, your fracking pressure into the existing fractures.

In order to take advantage of the Upper Devonian formations you have to frack them at the same time you do the Marcellus formations.

Anybody out there negotiating their own lease should ask the company whether they are planning to develop the Upper Devonian, and find out why they are not.  They may have good reasons, such as it simply won’t produce much gas in your area.

You probably won’t be able to convince them to change their plans unless you control all of hundreds of acres, but you could always tell them you won’t sign a lease unless there’s something in there saying they will develop the Devonian with the Marcellus.  It’s worth a shot.

 

Get Everything in Writing!

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DocumentOne thing we hear all the time is that the company promised X but never did it.  Now the mineral owner wants the company to do X, but the company is refusing.

It’s a really unfortunate situation.  In general we all want to be able to trust people.  Were supposed to be able to trust people.  Everything works better when you can trust people.  Society and civilization work best when you can trust people.  But you can’t trust a company.

It’s not that the people running the company are bad or good or indifferent.  A company is made up of people who also want, are supposed to, and work better when trust can be given and received.

It’s that a company functions based off policies and procedures, not people.  The people come and go.  The policies and procedures stay.  The only way a company works over the long term is because of what is written down.

So a company can only go by what was written because that’s the nature of a company.

Even if that weren’t the case, the written paperwork is going to be the best evidence of what happened.  Some of the paperwork we’re working on today is going to be in existence long after we’re all dead.  We’ve seen a lease that was signed in 1892 that is still in effect today.  You can’t rely on people when the people aren’t there any more.  You won’t be able to show up in court and have your say 120 years from now.

You have to get it in writing.

Courts have recognized that this is the case and have said that if it isn’t written down it didn’t happen.  The following quote from a West Virginia Supreme Court case says exactly that.

In Iafolla v. Douglas Pocahontas Coal Corporation, the Court restated the well established rule that, “A written contract merges all negotiations and representations which occurred before its execution, and in the absence of fraud, mistake, or material misrepresentations extrinsic evidence cannot be used to alter or interpret language in a written contract which is otherwise plain and unambiguous on its face.”

Notice that the Court said it was a “well established” rule.  This case was from the 1970s.  The line of cases it quotes will go back to English common law, probably the 1600s or 1700s.  It doesn’t get much better “well established” than this.

So, the Court says that a “written contract merges all negotiations and representation”.  In other words, the Court assumes that what you talked about is what you wrote down.

However, you’ll notice that the sentence didn’t end there.  The Court continued on and gave some exceptions to the rule.  It did it in a roundabout kind of way, but it did it.  It said, “. . . in the absence of fraud, mistake, or material misrepresentation extrinsic evidence cannot be used to alter . . . a written contract . . . “.

With that language, the Court said that fraud, mistake, and material misrepresentations can throw into doubt whether the written paperwork is valid.

The trouble is, it’s hard to prove any of those things.  You need good witnesses or … wait for it … written documents.  In the modern world you could even use recordings of conversations (assuming that the other party knows they’re being recorded to follow the most strict rule we know of).  Emails would work, of course.

In a he-said-she-said situation it’s going to be awfully hard to convince a court that the paperwork with your signature on it is something other than what you intended to sign.

That’s why we recommend that you communicate with the landman or other company representatives by email as much as possible.  Even when you talk with them on the phone, send them an email summarizing the conversation.

Get it in writing!  If it’s not written down it didn’t happen.

Pennsylvania Lessors Should Have Gotten Competent Counsel

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DocumentA Pennsylvania judge ruled against a couple guys who signed a lease without getting competent counsel.  If they’d gotten competent counsel, they would have ended up in an entirely different position than they are in right now and probably wouldn’t have even had to go to court.

Competent counsel would have helped them either:

  1. understand that the lease they signed did not do what they wanted it to, and so managed their expectations so that when the company did what it did they would have known that was something the company could do, or
  2. (and even better) get changes made to the lease so that the company could not do what it did.

Either way would have been better than filing a lawsuit after the fact, spending tens of thousands of dollars for lawyers fees, and losing in court.

You can read the article for yourself, but the long and short of it is this.  Camp Ne’er Too Late signed a lease and two separate pipeline right of way agreements with East Resources which then sold it’s rights in the lease to SWEPI (the drilling arm of Shell).  SWEPI drilled one well, capped it, and then put a pipeline across the property.

Original plans called for up to 11 wells, and the owners of Camp Ne’er Too Late figured they would be rolling in the dough.  When they realized that the rest of the property wasn’t going to be developed, they sued.  Unfortunately, the plans and maps that they were shown during negotiations were not part of the final lease.

Also unfortunately, the final lease didn’t say anything about continued development.

In fact, without even seeing the lease we’re willing to bet that there was a clause in there that said the company could either develop or not at it’s own pleasure.  That’s extremely common in oil and gas leases.  It also looks like harmless legalese, so the owners of Camp Ne’er Too Late probably just breezed right over it.

We can’t really blame them.  They didn’t know any better.

You can learn from their expensive experience.  Don’t make the same mistake they did.  Don’t just breeze over your lease thinking you know what it says and does.  It can come back to bite you in the butt.

Now you are forewarned.  Get an experienced and knowledgeable attorney to review your lease before you sign it.  It can save you a lot of heartache, and net you a lot more money in the long run.  Call the office at 304-473-1403 to get help.

Pipeline Negotiation Stories

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Ford Turner at the Reading Eagle, a Pennsylvania newspaper, put together a pretty nice article which illustrates how different attitudes can bring different results in negotiating with a pipeline company.  In writing the story, he interviewed a number of people from his community about their experiences with putting together a deal with the pipeline.  Each person had a different experience.

If you have been approached by someone who represents the Atlantic Coast Pipeline or the Mountain Valley Pipeline, you should definitely take a few minutes to read the article.

Lease Terms: Gas Storage

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One issue that we run across with nearly every oil and gas lease that we see is that the lease gives away the rights to store gas on the property.  This has been standard language in West Virginia oil and gas leases for decades, nearly a century.  Sometimes it’s just a phrase contained in a sentence, other times it’s the subject of a full paragraph or more.

DocumentGas storage gives the oil and gas company the right to store gas from other places on your property.  Gas storage isn’t the primary purpose of an oil and gas lease.  The company wants to produce gas first of all, but once the gas is all gone the company might decide to use the property for gas storage.  The formations that trapped the naturally-occurring gas and kept it from escaping to the surface will also trap gas that the company pipes in from other locations and injects into the formation.

Gas storage exists mainly because natural gas production and natural gas consumption take place in different locations.  Historically, natural gas was produced in large quantities in Oklahoma and Texas, and the large markets for natural gas were on the east coast.  Pipelines carried the natural gas from production to consumption, but during the summer months consumption was a lot lower than production.  The company would get a much lower price during the summer, and needed far less gas.  Then in the winter the price would go up and the pipelines were overburdened with gas.  There are other factors in play as well, but that’s the main reason for gas storage to exist.

Natural gas storage fields can last an awfully long time.  The very first natural gas storage field in the United States, the Zoar field, was put into operation near Buffalo, NY in 1916.  It is still in operation today.  There are no plans to mothball it in the near future.

The natural gas that is injected into a storage field doesn’t come from the property, so it isn’t owned by you, the mineral owner.  It’s been extracted from some other property, sometimes from half way across the continent, and a royalty has been paid on it to the other mineral owner.

Since the storage company has already paid a royalty on the gas to some other mineral owner, it’s not going to pay a royalty to the mineral owner where the gas storage field is.  Sometimes the mineral owner will be able to negotiate for a royalty on gas stored on his or her property, but it will be pennies on the dollar compared to a real royalty, and rightfully so.  The mineral owner is not the owner of the stored gas.

A lack of royalty payments isn’t the big problem, though.  The big problem is that your lease, which you thought was supposed to be for oil and gas production, is kept alive by gas storage.  Where it would otherwise have expired by it’s own terms, since oil and gas production had stopped, the lease stays alive because the gas storage clause is being put to use.

The company gets to keep the rights to produce all the formations that are included in the lease, usually all the formations from the surface to the center of the earth, but doesn’t have to actually produce them.  The company can keep the lease indefinitely, waiting for a better price on the oil or gas, and then produce them when it wants to or sell the production rights to another company.  It won’t have to enter into a new lease with the mineral owner.  It won’t have to pay a new bonus, negotiate a new royalty, or negotiate any other terms of the lease.

Here in West Virginia it didn’t matter too much whether a lease was held in place by gas storage or not until the Marcellus shale boom.  Leases were being paid for at $5.00 per acre and the typical royalty was 12.5%.  There wasn’t a whole lot to negotiate.  Now if there’s any interest at all in minerals, the companies will offer $250 per acre and a 12.5% royalty on the low end, and $4,000 per acre and 15% royalty on the high end, and they’ll negotiate up from there.

People who have leases that are being held alive by gas storage don’t get the opportunity to negotiate the terms of a lease, or receive a new bonus payment.

We highly recommend that you get gas storage language removed from your lease.  It’s usually very easy to negotiate, and can be financially beneficial to you in the long run.

If an oil and gas company absolutely has to have gas storage rights make sure that gas storage is a separate agreement.  An oil and gas lease should only deal with oil and gas production and nothing else.

Utica in West Virginia: More Details

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WVMetroNews has an article by Sunshine Wiles which points out a few things about the Marcellus Shale.  It points out that the Utica is much deeper than the Marcellus, and that we in West Virginia have “some of the lowest energy costs in the country”.

One of the reasons that energy cost is so low is that West Virginia mineral owners tend to sell cheap.  Hold on to your minerals, don’t lease for a couple thousand bucks an acre and a royalty of 12.5% (which is 1/8), and write your legislator about forced pooling to make sure they vote against forced pooling.

Pipeline Right of Way Negotiations

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In early 2014 we had a client request help negotiating a pipeline right of way.  The right of way was short, quite a bit shorter than 1000 feet, and the pipeline wasn’t large, only twelve inches.  But the property was important to our client, who wanted it to be protected from unexpected use and abuse.

We negotiated for months.  The location of the right of way never changed, but some important details did.  Our client wanted to get rights to free gas from a well that was on the property, wanted to terrace the right of way to make it more useful for cultivation, and wanted to have the company push dirt across a waterway to create a pond.

As we negotiated, it became clear that the company would be unable to terrace the right of way because state law required that the right of way be returned to it’s original contours.  The company was also unwilling to push dirt anywhere outside the confines of the right of way due to liability issues.  The company was also unwilling to provide free gas as they had started making payments in lieu of free gas, as was provided for in the original oil and gas lease.

Because we had asked for a number of reasonable things, and the company kept saying no to them, the company eventually agreed to fence in the right of way.

Additionally, we were able to get a clause saying that if the pipeline wasn’t used for three years that the right of way would revert back to our client.  We were also able to limit the company to just one pipeline instead of giving them the option for a second pipeline at their pleasure.  Additionally, the company had requested the right to use all existing and future roads on the property for access to the right of way.  We were able to get that removed.

The company also agreed to more than double the amount of money it had originally offered to pay for the right of way.

After a while, the company decided that fencing the right of way was going to be too much of a hassle, and too expensive for them, and asked that our client take a lump-sum payment in lieu of building a fence.  Our client got a couple of bids and decided to take the money as it was significantly more than what the materials would cost.

In the end, our client was paid three times what the company had originally offered to pay for the right of way, and the property was protected from overuse by the company.

We got to that point by asking for far more than we expected to ever get from the company.  The addendum we send to landmen when we start to negotiate is lengthy and comprehensive, and lets them know we are experienced and knowledgeable.  In short, the landman knows we won’t accept an agreement that gives up all control of the land to the company.  As a result, we start off negotiations in a position of strength.  Negotiations are balanced, and our clients get a much better deal than they otherwise would.

If you want help with a pipeline right of way, give us a call at the office.  We’ll be glad to help you.

 

Oil and Gas Leases Could Last Forever

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Autica-shale-stratigraphy-smnyone who has had a lease reviewed by us in the last few years will know that there are multiple producible formations underneath the property they have leased. This is excellent for royalty owners, as the more formations can be produced the more gas can be produced. There’s just one problem with that. It means that the lease that you sign today could possibly be in existence decades, or even centuries from now.

Ignoring the happy fact that the lease will be in effect because the producer will be paying you royalties, let’s look at what the implications of a decades-old lease are. The easiest way is to look into history.

In 1892 a farmer (no names will be used here so as to preserve my clients’ confidentiality) signed a lease on property here in West Virginia. The producer was diligent, and drilled a well on the property within a few months. The well produced gas, which was something of a disappointment because everyone was looking for oil at the time. They didn’t shut the well in though because the producer allowed the farmer to run a pipe to the house and use the gas for heating and cooking.

Over the years gas became a valuable commodity, and the developer put a line of his own to the well and started selling the gas. Of course, the producer paid royalties to the farmer, and all was well. Eventually though, the well produced less and less gas.

Let’s fast forward to today, and that well that was drilled in the late 1800s is still producing in 2015. The production has dropped off to a few hundred MCFs per year. The royalties paid are only a few dollars each year, but it’s just enough production to keep the lease alive.

Now let’s back up to 2007, when the Marcellus boom was just taking off. The current producer of the well was just a small time mom and pop operation. They didn’t have enough money to drill a Marcellus shale horizontal well on their own. They were approached by a big producer who wanted to buy the rights to produce gas from the Marcellus, and the mom and pop jumped at the chance to make some good money from the old lease. They assigned the rights to the Marcellus shale over to the big company for thousands of dollars an acre.

Along with the rights to develop the Marcellus shale came the rights to use the surface in any way that was “fairly necessary”. The big company approached the current owner of the farm. The big company said they wanted to put in a well pad, an access road, and a pipeline. The well pad was going to take up about 10 acres of mostly flat land (flat land is hard to come by in most parts of West Virginia), the access road would be 1/2 mile over property the farmer hunted on, and the pipeline was going to be across other property the farmer owned. All told, the development was going to take up about 15 acres of the farm.

The farmer said no. The big company said, “we have the right to do this because we have this lease that was signed back in 1892, and that lease gives us the right to use the surface in any way that is fairly necessary for the development of oil and gas.” The farmer said, “I don’t see that in there.” The company said, “no, but the courts have said that any lease gives the company that right.” The farmer consulted with a lawyer, who told him the big company was right, but that there were some legal arguments to make and he could take the big company to court, but it would cost $10,000.

Back in 1892 when the first farmer signed the lease, he didn’t expect a well pad, road, and pipeline to take up 15 acres of his good farmland. A well pad took up maybe an acre, and the access road was usually nothing more than a jeep trail.  The pipeline was usually just a couple inches in diameter, and was sometimes laid on the surface over rough ground. He had no way of foreseeing the size and extent of modern well sites. If he could have seen into the future, he probably would have made some changes to the lease before he signed it.

That’s just one example of how a lease surviving for decades could be detrimental to those who inherit it, or those who inherit the property affected by it.

It’s impossible to foresee every possible way that a lease could affect people in the future. You can’t protect your heirs from everything. It is possible, however, to do the best that you can with the information that is out there now.

Multiple formations mean that oil and gas companies could produce one formation until it is exhausted, then a second formation until it is exhausted, and then a third and maybe even a fourth. It’s impossible to tell for sure how many producible formations are down there.  It’s impossible to tell how long the lease will stay alive.

The reason we’re pointing this out right now is that Rex Energy has completed wells to the Marcellus and the Upper Devonian on the same property in Pennsylvania. The Marcellus produced reasonably well, but the Upper Devonian actually produced a little better.  It’s been questionable up until now whether the Upper Devonian would be a good formation to explore.  That question is now laid to rest, at least to some extent.  Wet-Dry_Line_with_Depth

For our West Virginia mineral owners, keep an eye out for leases that include the Upper Devonian.  We can look forward to increased exploration in the usual counties; Tyler, Wetzel, Marshall, Doddridge, Harrison, Ritchie.  There may be a renewed interest in Barbour, Upshur, Taylor, and some of the other counties in the Marcellus dry gas area.  We hope so, as we have clients who are waiting on leases in those counties.

For everyone that’s thinking about signing a lease — do try to think about the future as much as you can.  If you need some help, give us a call.

Magnum Hunter Sells Tyler County, WV Leases

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Dollar SignNow this is news.  Magnum Hunter will close tomorrow on a deal to sell 5,210 acres of leases in Tyler County.  Magnum says the leases are in “non-core undeveloped and unproven” parts of the county.  The sale should net Magnum $40.8 million dollars.  That’s $7,831.09 per acre, by our calculator.  For non-core, undeveloped, and unproven leases.  Oh, and the Chairman of the Board, Gary C. Evans, also pointed out that a large portion of the acreage had expirations on the horizon.  So Magnum sold leases that are expiring soon and in questionable parts of Tyler County for almost $8,000 an acre.

Just speculating, but the only company that could possibly drill on soon-to-expire leases in Tyler County is Antero Resources.  They have the rigs in place and the most infrastructure of anyone up there right now.  We could be wrong about that, of course.  JayBee, Statoil, EQT, and Noble are all working hard in that neck of the woods, too.

But that’s beside the point.  We’d like to point out that the sale was for almost $8,000 per acre for, shall we say, sub-prime leases.  West Virginians continue to sell themselves short regarding what they’ll take for lease bonuses.  Ask for more than you think you can get.  Always ask for more than you think you can get.  You might be pleasantly surprised at what happens.