Expert: Frederick M. - 6/22/2009

Question
I received a letter from Chesapeake Energy to renew a lease on my 53.33 acres in Blaine County (Section 4-19N-10W).  I have been given two options:  1)  $150 per acre bonus, reserving a 1/8 th royalty for a five year term, or   2) $100 per acre bonus, reserving a 1/6th royalty for a five year term.  I have tried to navigate the www.occ.state.us web site, but have found that to be very challenging in my efforts to determine activity in that area.  Can you recommend which option to take, and what to include on the lease I will receive (depth clause, environmental cleanup, etc)?    I live several states away. If I call the county courthouse can they help me by looking at the records?   Thank you.

Answer
Jim, Chesapeake just completed the Mark #1 well in Section 2 last December. They also have drilled and completed as producing wells several others in that same section, and other sections surrounding your section 4 since 2006. There are also older wells that have been producing in the area for years drilled by various companies. Most of these wells (both old and new) are pretty small.

I'd try for $150 and 3/16 and make it three instead of five years. If they're renewing it, they probably plan to drill it within three years (probably less) and so they probably don't need five years to decide.

The least I'd accept if it were me is $150 per acre, 3/16 royalty, and five years, and I'd be unhappy with that. The fact that they're wanting to renew your lease leads me to believe they will actually drill this section this time. This gives you some bargaining power..especially with 53 acres...a pretty big chunk really.

You could also opt for an "escalating royalty clause" though you'd probably want an attorney to draft it for you. Such a clause would increase your royalty from whatever you agree to initially to whatever you can get them to agree to later, but it wouldn't "kick in" until AFTER they had recovered their costs of drilling the well. In other words, if they spend one million to drill and complete a producing well, then only after they get their million back would your royalty would increase to the new agreed-upon amount.

Until that point, you'd only be paid the 1/8, 1/6, or whatever the initial royalty rate you agree to is. Most companies will not agree to such a clause in their leases, but it's worth a shot. With 53 acres it could really make a difference if a nice well came in.

The vast majority of Chesapeake's leases in the area the last time around were for 3/16 royalty and three years (not five.) A lot of them are getting ready to expire this year, which is why you've been contacted of course. I would point out to them that most of their leases last time (yours perhaps?) were for 3/16 royalty and three years. Perhaps that will help them "agree" with your proposed terms.

Ward Petroleum out of Oklahoma has also leased in your area recently. You might call them if you can't reach an agreement with Chesapeake. Perhaps Ward could offer you a better deal. JMA Company is another option. I think they are also in Oklahoma...though they are not leasing in this area currently they have been known to take leases where Chesapeake is leasing in order to get information about wells being drilled.

Still another option is to simply let Chesapeake "force pool" you into the unit later, at terms dictated by the State (which will likely be better than your current offer.) You do run the risk that they WON'T pool the unit (they don't have to unless they actually plan to drill a well for sure.) If they don't pool, and you don't lease, then you will of course have no bonus money. A pooling will actually give you several options, much as a lease offer will. If you don't choose one of them, a choice will be made for you. This is the "force" part of forced-pooling.

For clauses, below are a FEW I would put in MY lease. Whether you include them in yours or not should be decided by you and your favorite oil and gas attorney; not me. I list them here only as an example. This is not legal advice. Only an attorney can provide legal advice. Most companies will accept at least some of these clauses, though they may wish to change the wording slightly. If they do this, I just make sure I am still protected to my satisfaction, and will usually agree if that is the case.

DEPTH CLAUSE: In the event this lease is extended by commercial production beyond its primary term, then on such date this lease shall terminate as to all rights one hundred feet and more below the deepest producing perforations in any such well or wells located on the leased premised, or land unitized therewith. If the lessee is in the process of drilling or completing a well at the end of the primary term of this lease, this clause shall become effective upon conclusion of such operations.

SHUT-IN ROYALTY: After the end of the primary term, this lease may not be maintained in force solely by reason of the shut-in royalty payments, as provided for in this lease, for any one shut-in period of more than two (2) years or for shorter periods which exceed two (2) cumulative years.

INDEMNIFICATION: Lessee agrees to indemnify, hold harmless, and defend Lessor against any claim, demand, cost, liability, loss, or damage suffered by Lessor, including reasonable attorney fees and litigation expenses, asserted against or incurred by Lessor at any time or from time to time by reason of or arising out of Lessee’s violation or claim of violation, of any federal, state, or local environmental, surface damage or similar statute, regulation, ordinance or common law liability, in any way arising out of operations pursuant to this lease, or resulting from any liabilities, encumbrances or burdens on the Lessee. The provisions of this paragraph shall survive the termination of this lease.


MARKETABLE CONDITION: Lessee shall place oil and gas produced from the leased premises in marketable condition and shall market same as agent for lessor, for the mutual benefit of lessee and lessor, at no cost to lessor. Royalties payable under this lease shall be adjusted to the extent that they may have been indirectly reduced because the purchaser, or any other person, is providing certain services the cost of which ordinarily is the responsibility of the lessee to place the oil or gas in marketable condition or to market the oil or gas. This includes, but is not limited to, any required processing, dehydration, compression, transportation or other costs of marketing the production which occur on the leased premises or within one (1) mile outside thereof.

You might also want to pick up a copy of NARO's "Look Before You Lease." It's a great little booklet written just for mineral owners and it helps explain the "how to" of what to do when approached about leasing your minerals. NARO's Website is: www.naro-us.org. They have an online store, or you can just call and order on the phone. Great organization for royalty owners! (National Association of Royalty Owners.)


Hope this helps you out.
Frederick M. Scott CMM