AboutFrederick M. Scott CMM RPL Expertise I can answer questions about oil and gas leasing, and give suggestions on negotiating a good oil and gas lease and how to best deal with oil companies or their representatives. I can answer questions about buying and selling oil and gas royalty or mineral rights. I can help with questions concerning forced-pooling, correlative rights, deeds and conveyances, and "post-production" costs. I am most experienced with Oklahoma properties and laws, but am able to answer questions concerning other oil and gas producing states in many cases.
Experience I am a Certified Professional Mineral Manager (CMM) (certified by the National Association of Royalty Owners in Tulsa, OK) and have managed my own oil and gas properties in Oklahoma for over 10 years. I have dealt with many landmen, attorneys, and other oil and gas professionals in the course of doing so. I am also a member of several professional associations and have written articles of interest to royalty owners which have appeared in several industry publications. I have prepared deeds, title work, and done curative for my own minerals; and have acquired a good deal of knowledge on the subject of oil and gas law and landwork in general in the process. I am the owner of Timbercreek Mineral Company, LLC; which was formed as a vehicle to manage family mineral interests, and as a way to facilitate the buying and selling of oil and gas interests for other people.
Organizations NARO, NADOA, AAPL
Publications National Association of Royalty Owners "Action Report" (ROAR); NADOA Magazine, Landman Magazine, and several royalty owner association groups newsletters.
Question Hi,
My wife and I received a solicitation from Gateway Land Services on behalf of Chesapeake Exploration to grant mineral rights to some property located in Cleburne County, Arkansas. The parcel is described as Section 23, Township 11 North, Range 10 West.
In reading some of your past responses, we will be adding a Depth Clause, Favored Nations Clause, and other deductions pertaining to the following:
DEDUCTIONS: Lessee shall pay the Lessor 1/4 of the market value at the well for all gas (including all substances contained in such gas) produced from the leased premises and sold by the Lessee or used off the leased premises, including sulfur produced in conjunction therewith; provided, however, notwithstanding the foregoing, in calculating the value of lessor’s royalty, there shall be no deductions made from the gross proceeds received from the sale of such gas by reason of the costs of any required processing, dehydration, compression, transportation or other costs of marketing such gas which occur on the leased premises or within one (1) mile outside thereof.
DEDUCTIONS: Lessor’s royalty shall not be charged directly or indirectly with expenses of production, gathering, dehydration, compression, transporting, manufacturing, processing, or treating of oil, gas or any liquefiable hydrocarbons extracted therefrom. Lessee shall directly reimburse Lessor for any such charges or expenses withheld by a purchaser, by Lessee or by others.
These tips are great, I would never have thought about including them.
We don't own a very large percentage of the mineral rights, but would like to protect what rights we have.
My main question involves the degree of exploration activity ocurring on this parcel. We don't have direct access to drilling maps etc. Any help would be appreciated. Thanks for your website and willingness to answer questions.
Answer Ron, I'm glad you liked the lease clause "tips." Keep in mind however that there is no guarantee that the lessee will actually accept all of them. If you get too pushy then they may decide not to lease you after all. It's a balancing act really, and the more acres you have that they want, the better your negotiating power. I would suspect at a minimum they will accept a "depth clause"; as they are fairly standard and basically restrict your lease to the depths drilled during the primary term of the lease. If they later want to drill a deeper well, they would have to get another lease from you for those depths. Without a depth clause they would not need a new lease to drill a deeper well, assuming the first well they drilled was still producing.
Frankly, the "no deductions" clauses you cited are "stronger" versions than some lessees will accept from the average mineral owner. While they are probably "better," they're pretty useless if the lessee won't even accept them. If they won't accept one of those versions I would suggest you ask them to put in one of "theirs" which will probably be similar to the following:
DEDUCTIONS: It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, all oil, gas or other proceeds accruing to the Lessor under this lease or by state law shall be without deduction, directly or indirectly, for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other products produced hereunder to transform the product into marketable form; however, any such costs which result in enhancing the value of the marketable oil, gas or other products to receive higher net proceeds may be deducted from Lessor’s share of production so long as they are based on Lessee’s actual cost of such enhancements.
The above version (one used a lot in Oklahoma) still provides good protection (assuming they abide by it,) while being more "palatable" to lessees. Sage advice would be to run ANY clause you plan to use by an Arkansas OIL AND GAS attorney, as they are familiar with the intricacies of Arkansas oil and gas law and can ensure that the clauses you'd like to use have the best wording for your purposes.
Also keep in mind (I'm not trying to depress you) that no matter which clauses you use, some lessees will simply ignore them (especially deductions clauses) until they are sued into compliance because it is much easier and cheaper (man-hour-wise) to simply treat all leases the same as to what is deducted (or not deducted) from the royalty payments. Truth is, most mineral owners won't even know whether they are being paid fairly or not without doing some pretty hefty research that, while not rocket science, does take some time and effort. That said, it still does pay to have these types of clauses in your lease (deductions, depth, etc.) because in the event you do have to take them to court, these clauses will likely be enforced if neccesary. Additionally, sometimes class action suits are filed against lessees for illegal deductions etc. so they would come in handy in those cases as well.
I'm really not trying to be nasty to the lessees here either. Many if not most companies/lessees make a genuine effort to pay their mineral owners according to their lease terms, even though it can involve quite a bit of extra paperwork and time on their part. Apache Corporation is a good example of this in my opinion; and there are others as well that genuinely attempt to abide by lease terms. There are "bad apples" in every business though that of course that bear watching. I'm sure there are even some "bad apples" in the apple business!
Now, as to exploration in the area where your minerals are; 11N-10W is currently in kind of a "dead zone" as to new wells and/or permits for new wells. In other words, there are none of either currently that I can find, nor are there any previously-drilled wells that are producing in Township 11N-10W. Most of the "main" activity (in the bigger tri-county picture) is to the west (by about 15 miles)and east (by about 15 miles) and south (by about seven miles) of your minerals. There are a few wells that came in in 12N-10W late last year and this year that are pretty decent, but typical of the area. These few are less than seven miles NW of your Section 23. I also do not see any recent leasing activity (unless VERY recent) in Section 23-11N-10W. This would indicate to me that you won't have too much bargaining power with your lessee, since you don't own much, and there are few if any other companies vying for the same area currently.
My advice would be to not be too pushy, but do insist on a depth clause if at all possible, and go ahead and ask them to put one of "their" no deductions clauses in, or simply send them one of the three and see what they say. You could also just ask for more bonus if they won't accept the clauses. Can't hurt to ask; just be polite.
I've seen some Arkansas leases that have MANY extra clauses in them that the mineral owner has insisted on, and received. Mostly these will be from owners who have acres in a prime area, and are leasing at least 80 or so. Check with neighboring owners if possible. Perhaps they got some clauses in that you would like in your lease. If the lessee knows that YOU know the neighbor got a good lease. pr a higher bonus, or more royalty, perhaps they will be more inclined to offer you the same; but you will have to ask.
Hope this helps you out.
Frederick M. "Mick" Scott CMM RPL
Timbercreek Mineral Company, LLC
