When Will Linn Energy, LLC (LINE) Default?

All,

Linn Energy, LLC is a large Mid-Continent operator. By rough estimation, they operate 1484 wells in Oklahoma alone in both the Anadarko and Arkoma Basins. Today, FuelFix, announced Linn expects to break their mortgage covenants in 2016. A bankruptcy announcement will likely follow unless Linn can renegotiate with its lenders. This announcement coupled with the delayed release of Linn's 10-K is an ominous sign for the operator that once delivered large distributions to its shareholders.

Leverage works both ways and many forget that when times are good and borrowed money is cheap. There will probably be little love lost between Linn and its offset operators and working interest partners. Linn has a reputation for being difficult to work with. This plus the fact they like to JIB their partners for pumpers' Coca Cola and new boots while deducting 50%+ from the gas gross revenues leaves many with a bitter taste in their mouths when they think of Linn.

More to follow,

Berlin

Protesting OCC Applications as a Company Policy

There are many reasons why one would want to protest another's applications at the Oklahoma Corporation Commission. Protests serve a purpose, but at the end of the day both oil and gas companies and Oklahoma mineral rights owners make more money if wells are drilled.

Protesting just to protest is uncivilized. Frivolous protests waste both money and time. Cases without merit will eventually be dismissed or ruled against by the ALJ and all that the protesting party has accomplished is the production of economic waste. The Applicant's show will go on.

It's a small club, and irresponsible action at the OCC is not easily forgotten. The shoe will be on the other foot some day in the future.

More to follow,

Berlin

The Boiling Frog and Liberty

We are the boiling frog. Our liberty is evaporating before us and we are distracted by the promises of entitlements we cannot afford.

"The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries." -Winston Churchill

More to follow,

Berlin

My Boss' Mother-In-Law Wants More Money

Received a call from a fellow landman at a well known, but failing company in the City. Apparently, his boss's mother-in-law received an offer to lease, and surprisingly, she thought the offer wasn't "fair." When are bonuses ever enough? Might be the most valuable minerals this side of Spindletop for all we know, but we do know. I'm glad the son-in-law found the time for he and his landman to try to negotiate a higher bonus for her 0.38 net acres. I guess he has the time. The company has billboards around town, and signage at the Thunder games, but not employees. His company "didn't have it in their budget to lease her interest or they would."

More to follow,

Berlin

We're still evaluating our assets...

When did Marathon Oil buy TXO Production? Was it '92? Despite the fact the Marathon has owned this acreage for 20+ years, they still can't make a decision about what they are going to do with it. According to their last investor presentation, they don't have the budget to participate in non-operated wells (~$50m for 2016 in the Mid-Continent) so their goal is to stop others from developing the section. Protest after protest at the Oklahoma Corporation Commission. Incredible that MRO is still considered a player and they are completely paralyzed by the fear of making making decisions. If not now, when? How much longer do you need to evaluate your assets? Does the process start over again year after year when someone leaves the team? Squandering shareholder value at every turn. Booking PUDs off other companies wells who undertake the risk to explore. Eventually the bloat and inaction will allow them to be overtaken. Dismantled piece by piece by men who have a bias for action.

More to follow.

Berlin

Marcus Aurelius and Lease Bonuses

"My buy it now price is $1000 per acre and 1/4 because that's what my cousin got from Newfield in 2N-4W." 

Begin each day by telling yourself: Today I shall be meeting with interference, ingratitude, insolence, disloyalty, ill-will, and selfishness – all of them due to the offenders’ ignorance of what is good or evil... 

-Marcus Aurelius, Meditations

The value in real estate is in the location and oil and gas mineral rights are no different. Being in the same state is not a valid comparison, being in the same county in not a valid comparison and sometimes even being in the same township is not a valid comparison. Having a reasonable idea of comparable lease prices will make you a much better negotiator. Asking for triple the price ensures you won't get leased or you will get force pooled without the clauses of the oil and gas lease to protect you.

More to follow,

Berlin

How a Man in Amarillo Lost $100k by being an Ass on the Phone

I won't use his name, he's a pro, but a dinosaur. He did business with Joe Dan Trigg and John A. and the Calders and the Dines, and the Culpeppers, the Allens and the Snows, the Hodges and the Hefners. He was "Funny Money." I called him about an old lease in Canadian County, outside Union City. The well had just died and neither of us knew it. I was willing to pay big money to offset that big horizontal that was just drilled. He yelled "state your question" and "never call me again." The lease he owned had cessation language and the well was plugged three months later. Title was done and I would have met him at the Big Texan for supper, check in hand. Don't be an ass on the phone or your might hang up on $100k. Could have bought his neighbor a new Cadillac. 

More to follow,

Berlin

80% of Success is Showing Up

Woody Allen said that. He's not my favorite playwright, but he has a point. How many big company landmen are willing to meet an Oklahoma mineral owner at zero dark thirty to get an oil and gas lease signed in Minco before the day starts? Think the former OU Energy Management major would disrupt his morning routine for that? He'd have to get in his Tahoe and drive down from Edmond before the sun rises. That's the opportunity. There is always a lease to buy and a unit to bust. If they know your name in Davis, you'll get the call. It won't be the Landman II at Apache.

More to follow,

Berlin 

The Patch In Oklahoma

Times have been better, but they have been worse. Oklahoma oil and gas operators are in a pinch. Did Chesapeake experience a dead cat bounce today? Will Linn Energy survive to the winter wheat harvest in Tuttle, Oklahoma? Lease prices are down and the litigating is up. The only thing we know about prices is that no private equity shop or big Wall Street bank will ever hit the nail on the head. They will always be wrong. "This time is different," "macro-price environment," "commodity headwinds," "the land grab is over," "SCOOP STACK MERGE," "NAPE was interesting," "lot of cash sitting on the sidelines," "ENCAP or NGP?" It doesn't even matter. It's all a game. Not "the Greatest Game," but a good one. Pawns hand over their money and take a 2%/20% haircut for the chance to sit at the table. It's a resources play they say, don't even need geologists. A damn shame.

More to follow.

Berlin

Shut In Royalty Payments

Oklahoma Mineral Rights Owners,

Most oil and gas leases contain what is commonly known as a shut-in royalty clause.  The clause developed over the years to mitigate the harshness of the automatic termination rule.  Under the automatic termination rule, an oil and gas lease will generally terminate any time after expiration of the primary term unless there is a well on the leased premises producing gas “in paying quantities.”  This rule, in a majority of jurisdictions, requires actual production and marketing of natural gas.  Unlike oil, natural gas cannot be produced and then stored or transported in railroad cars or tank trucks – post-production facilities such as pipelines, compressors and dehydrators are generally required to process and deliver the gas to market.  In such circumstances where a gas well has been completed, but no market exists for the gas, the shut-in clause enables a lessee to keep the non-producing lease in force by the payment of the shut-in royalty.  Such payment serves as “constructive production” and avoids application of the automatic termination rule.

A standard shut in royalty is usually a nominal $1.00 per acre per year. If there are no additional provisions to address the shut in, then the operator can hold the lease if he continues to pay the shut in royalty. When negotiating the oil and gas lease, the lessor should ask for a provision such as the following:

"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 heretofore, for any one shut in period of more than three (3) years, or from time to time, for shorter periods which exceed three (3) cumulative years."

Any questions regarding shut in royalty payments for the Oklahoma Oil and Gas lessor? More to follow.

BR

Option to Extend Primary Term in Oklahoma Oil and Gas Leases

Oklahoma Mineral Rights Owners,

One of the most common provisions an oil company landman will try to negotiate is an option for the oil company to extend the primary term of the lease. For most oil and gas leases in Oklahoma, the primary term of the lease is three years. The landman will ask for an option to extend the primary term of the lease for two years. This oil and gas lease is sometimes referred to as a 3 + 2 lease.

While a 3 + 2 oil and gas lease is more favorable to the Oklahoma mineral rights owner than a oil and gas lease with a 5 year primary term, it is still worth the mineral owner's time to try to negotiate it out of the oil and gas lease and here's why:

• If the area turns into the next SCOOP (South Central Oklahoma Oil Province...thanks Harold Hamm...) then the bonus amounts per acre will increase substantially and the Oklahoma mineral rights owner will most likely be locked into a reduced bonus amount that was negotiated several years prior.
• If the area turns out to be a bust (think Mississippi Lime...) then the oil company would let the option expire and if they were going to re-lease, would negotiate a lower bonus amount. This leaves the Oklahoma mineral rights owner in no better shape than if they didn't have an option.

If a landman won't strike the option, request that the option to extend be priced at 125%-150% of the current lease bonus. Most will hem and haw, but will usually concede that point.

More to follow.

BR

Forced Pooling In Oklahoma

Oklahoma Oil and Gas Mineral and Royaty Owners,

Pooling is the process of combining the interests of two or more tracts in the same spacing unit. The area is called a pool, or a unit. Pooling provides benefits to the operator by combining all owners’ interests in one common pool under one drilling and spacing unit and utilizing one or more common geological formations, commonly referred to as a “common sources of supply” by the Oklahoma Corporation Commission (“OCC”). The primary purpose of pooling is to develop and operate a given formation in order to recover the greatest amount of hydrocarbons that can reasonably be produced, prevent the drilling of unecessary wells, and also to achieve equity among the interest owners by permitting each owner to recover a fair share of hydrocarbons therefrom. There are several types of pooled units, but for today's discusssion only voluntary pooled units and forced pooled units will be discussed.

Owners wishing to propose a well must secure the commitment of other owners in the drilling and spacing unit.  The proposing party, at minimum, should send a well proposal to all other owners in the unit. Most drilling and spacing units for horizontal wells comprise an area of 640 acres or one section. Since Oklahoma minerals rights are often bought and sold, this could mean that there are hundreds of owners in just one section. Closing a deal or even locating all the owners is very difficult. Therefore, the proposing party must file a pooling application through the OCC in order to “force” or secure commitment from all parties. This process is called forced pooling in Oklahoma.  

The pooling application will provide notice to all of the unleased mineral owners or all lessees who will be listed as respondents on Exhibit “A” of the application. The pooling notice is mailed to all respondents having the right to drill and/or participate in the well. The notice sets a time and place for the upcoming hearing and allows any respondent to be present in order to protect his interest.

At the hearing, the landman who attempted to negotiate with all the owners in the unit, will testify under oath that proper notice was given to each of the respondents and also that a good faith effort was made to come to terms with each respondent listed on Exhibit “A”. Testimony by the landman will include the fair market value of the mineral interests in the section and the surrounding eight contiguous sections ("the nine spot"), as it relates to lease bonuses paid and royalties offered within the last year; and may include any competitive single section trades such as farmout agreements or term assignments made in the same area.

After the hearing, the judge will decide whether to issue a pooling order or not.  If a pooling order is issued, the respondent(s) will have 20 days from the issuance of the order to make an election on the options provided. A pooling order typically provides for one of the following two options:

1.  Participate in the well and pay the owners' proportionate share of costs.

2.  Select one of the options presented by the landman. There will usually be two combinations of a cash bonus per net mineral acre (nma) and a royalty. For example, one could selected $200/nma and a 1/8th royalty or $100/nma and a 3/16th royalty.

It is important to note that an owner's selection will govern his unit rights for as long as that unit is producing. There should be provisions in the pooling order to govern subsequent wells. For example, if an owner elects not to partiticpate in the intial well and instead selects the 3/16th royalty, he will not have the option to participate in subsequent wells.

This process is beneficial to the operator as the OCC causes all undecided landowners to make elections pursuant to the pooling order. Oklahoma’s forced pooling process benefits operators, working interest partners and mineral interest owners. It stimulates a competitive market for development of oil and gas, which results in revenues for investors and royalty owners.

There is no minimum ownership percentage to file to pool a section. Even an owner with a small stake in the unit can apply to pool the other owners to force the drilling of the well. This is important because it can push legacy operators out of the way who are not wanting to spend the capital to develop the newly found horizontal horizons.

Most poolings are in force for a year and if the initial well is not spud within this time frame than the order will expire as to the formations that were pooled.

Any questions? More to follow.

BR

Oklahoma's Surface Damage Act

Oklahoma Oil and Gas Mineral Owners AND Surface Owners,

What is the Oklahoma Surface Damage Act? The Surface Damage Act requires oil companies to negotiate in good faith with landowners to determine and pay for the amount of damage that will occur to property as a result of oil and gas operations. The damages considered are listed below. If these negotiations are not successful, the Surface Damage Act provides a procedure for determining those damages by an appraisal and if necessary, by jury trial.

The Surface Damage Act applies to the operator and the surface owner (not lessee) of the property where oil and gas operations will occur. The Act does not apply to damages caused by the exploration for oil and gas using seismic instruments.  The amount of damages to be paid is the difference in the fair market value of the entire tract of property before the oil and gas operations on the property, and the fair market value of the entire tract of property after the oil and gas operations are completed. 

The Oklahoma Supreme Court has noted that the following items are some of the factors that may be considered in calculating the damages:

• The location or site of the drilling operations.  
• The quality and value of the land used or disturbed by said drilling operations.
• Incidental features resulting from said drilling operations which may affect convenient use and further enjoyment.
• Inconvenience suffered in actual use of the land by the operator.
• Whether the damages, if any, are temporary or permanent in nature.
• Changes in physical condition of the tract.
• Irregularity of shape and reduction, or denial of access.
• The destruction, if any, of native grasses, and/or growing crops, if any, caused by drilling operations.

Before an operator enters the property, it must provide notice to the surface owner of its intent to drill. This notice must be sent by certified mail. The letter must include (1) the proposed location of the well, and (2) the approximate date that drilling operations are scheduled to start. Once this notice has been delivered, the operator has five days to start “good faith” negotiations with the surface owner. If the parties can agree to the amount of surface damages and write a damages contract, then the operator can enter the site and start drilling. Once this amount is paid, the Surface Damages Act has been fulfilled.

If the operator and surface owner cannot reach an agreement, a new procedure begins. First, the operator must file a bond with the Oklahoma Secretary of State. This bond is meant to ensure the payment of whatever damages may be determined. Second, the operator must file a petition in the district court for the county in which the proposed well will be located. This petition asks the court to appoint appraisers to determine the surface damages to the property. If an operator properly completes these steps, it can enter the property even without the permission of the surface owner; however, the operator cannot enter the property until these steps are satisfied.

If the operator asks the district court for the appointment of appraisers, the surface owner must be given notice of the petition within ten days. Once the surface owner has received his or her notice, the parties have 20 days to choose their appraisers. One appraiser is chosen by the surface owner, and one chosen by the operator. These two appraisers choose another appraiser, for a total of three.

Once the appraisers have been appointed and sworn in by the court, they have 30 days to inspect the property, confer to estimate the amount of damages, and submit a written report to the district court, which is then forwarded by the court to the surface owner and the operator. Once the report is filed, the surface owner and operator have three options from which to choose. First, if the parties agree to the appraised amount of damages, the damages can be paid to the surface owner by the operator, and the matter is closed. Second, either party can, within 30 days of the filing of the report, file an exception with the court stating the party believes the appraisal is inaccurate. If either party chooses this option, the court will review the appraisal and either confirm it, reject it, modify it, or ask for a new appraisal. Third, either party can, within 60 days of the filing of the report, demand a jury trial to determine the amount of damages.

It should be noted here that the oil and gas operations at the site in question may continue even if an exception or demand for jury trial is made, so long as the operator posts an amount equal to the appraised damages with the court clerk. 

Any questions? More to follow.

BR

The Public Land Survey System (PLSS) in Oklahoma

Oklahoma Mineral Owners,

One of the very first questions that a mineral owner will be asked if he wants to sell his Oklahoma mineral rights or oil and gas royalties is the legal description of where the mineral rights are located.

Throughout the history of the United States there have been various ways of surveying public land. Oklahoma, just like most lands west of the Mississippi, was surveyed using the Public Land Survey System or PLSS for short. It is a way of subdividing and describing land.

The PLSS typically divides land into six mile squares called Townships. Townships are further subdivided into one mile squares called Sections. Sections can be further subdivided in various divisions such as into quarter sections or quarter-quarter sections.

The PLSS actually consists of a series of separate surveys. Surveys begin at an initial point and then the townships are surveyed from that point. The North-South line that runs through that point is called the Principal Meridian and the East-West line that runs through the point is called the base line.

Each township is identified with a township and range designation. Township designations indicated the location North or South of the Baseline and Range designations indicated the location East or West of the Principal Meridian. For example, Township 11 North, Range 8 West means that it is the 11th township North of the baseline and the 8th township West of the Principal Meridian. To identify a specific section in the township, one will call the section number before the township. For example, Section 1-Township 11 North-Range 8 West.

As one can see in the photo above, the sections begin With Section 1 in the North East corner for each township and run across and then down through Section 36. One will also notice, that Oklahoma has two Principal Meridians. The Indian Meridian currently lies 6 six miles west of Davis, Oklahoma. The Cimarron Meridian lies in Cimarron County, Oklahoma, just west of Felt. Only lands in the Oklahoma Panhandle were surveyed by the Cimarron Meridian.

More to follow.

BR

The Anadarko Basin

Oklahoma Oil and Gas Royalty Owners,

The Anadarko Basin is a a geologic depositional and structural basin centered in the western part of Oklahoma and the Texas panhandle. The Basin underlies nearly 50,000 square miles and contains some of the most prolific natural gas fields in the country such as the Union City (Tigers) Field and the Elk City (Elks, obviously) Field.

Attached is an excellent presentation from the Oklahoma Geologic Society that explains the details. 

More to follow.

BR

The Rule of Capture

Oklahoma Oil and Gas Mineral Owners,

The rule of capture is common in almost all oil and gas producing states. The rule establishes the ownership rights to natural resources. For the Oklahoman, the three most popular areas this rule applies to are oil and gas, groundwater, and wild game. 

It is accepted, just like deer jump fences, that oil and gas are migratory in nature. Millions of years ago dinosaurs and ferns died in the Anadarko Basin and through heat and pressure through geologic time, the carbon that made of their structures now are in the form of oil and gas, both fluids. And these fluids move through the pore spaces in the rocks where oil companies drill.

The owner who "captures" the resource or harvests the game within the boundaries of his land is the owner. One cannot drill under his neighbors land to prospect for oil, but he can drill close enough the property line to drink his neighbor's milkshake.

Naturally, the rule of capture incentivizes the individual landowner to drill as many wells as possible on his land and remove all the oil and gas before his neighbors do the same. This is what everyone did during the earliest parts of the 20th Century in the prolific fields of Glenpool, LA, and Beaumont.

This massive amount of drilling was enormously wasteful. Too many wells were drilled at high costs when a lesser number of wells could have drained the same reservoirs more efficiently. Also, because the reservoirs were damaged and the pressures were depleted, mass quantities of oil and gas are now prohibitively expensive to extract. The combat the rule of capture and its unintended consequences, states established conservation entities to lessen the waste and protect the rights of adjoining landowners. In Oklahoma, this entity is called the Corporation Commission and in Texas, the entity in called the Railroad Commission. Both have similar missions which will be discussed in the near future.

More to follow.

BR

Fractional Undivided Interest

Oklahoma mineral owners,

Today a woman, let's call her Ruth, from outside Duncan called the shop and said her mother passed last September and she and the three other siblings wanted to sell their Oklahoma mineral rights to simplify the estate. Luckily, she had the legal descriptions on hand from a will (her mother died testate). However, Ruth didn't know what "an undivided 1/7 interest in and to the oil and gas minerals located in Section...Township...Range. Isn't something that's a fractional interest already divided? As with most title issues, the answer is yes and no.

The easiest way to think of undivided ownership is to think of a swimming pool. For example, brothers Waite and Frank Phillips each own an undivided 50% of the swimming pool behind Philbrook. Who owns the deep end? Who owns the water next to the swim up bar? The answer is they both do. Both Waite and Frank own 50% of the water in the pool down to the individual atoms (that's two hydrogen and one oxygen for those of y'all who didn't go to chemistry class). Undivided mineral ownership works the same way. Ruth's mother owned 1/7 of the tract (pool) of land. 

Ruth and her siblings were going to inherit a few tracts of land, some large and small small. The family wanted to sell their smaller Oklahoma minerals interests because each of the siblings would have just ended up with a couple acres if they split them up four ways. Berlin Royalties made them a cash offer on their oil and gas interests they wanted to sell. 

More to follow,

BR

The Division Order

After the Oil and Gas Lease, the Division Order is the second most common instrument the Oklahoma oil and gas mineral and royalty interest owner will be exposed to. Like the oil and gas lease, the division order has a lotta ins, a lotta outs, a lotta what-have-yous, but we will focus on the basics for this post.

The purpose of the division order is to divide the revenues from a producing oil and gas well proportionally among those entitled to revenue in the well. A description of how those parties came to own a revenue interest can be found here.  The division order specifies the division of interest from the well. The decimals described in the division of interest are used to determine the percentage of the monthly revenues owed to the interest owner which equate directly to the royalty check.

There are three steps in the division order process:

1. Receive the division order from the oil and gas company.
2. Review and verify the royalty interest decimal.
3. Sign (execute) the division order.

Not all Oklahoma mineral owners will have a well drilled on their mineral rights, so to receive a division order is a wonderful thing. It means that millions of years ago the dinosaurs died in the little square under their family farm and the oil company's geologist was competent enough to find them. It also means that the well is producing in paying quantities and the oil company is almost ready to distribute the first revenues from the well. 

The oil company has determined the percentage of ownership through a document called the Division Order Title Opinion. A Division Order Title Opinion is prepared by an attorney who specializes in title ownership. He will check every document in the county courthouse from the beginning to present day.

Review and Verify

It is necessary to know what to look for when reviewing the division order. The company issuing the division order requires the royalty owner to take the following two actions:

1. Verify the legal description is accurate and it matches the description on the lease.
2. Verify that the royalty owner’s decimal interest stated in the division order is accurate and there are two formulas needed for this task:
   • Net Mineral Interest equals the net mineral acres in the spacing unit divided by the gross acres in the spacing unit. For example, if James, from Enid, owns 160 net mineral acres in a 640 acre section, then his net mineral interest is 0.25 or (160/640=.25)
   • The Decimal Interest, equals the net mineral interest multiplied by the royalty rate. If James, from Enid, agreed to a lease with a 3/16th royalty, his decimal interest would be 0.046875 or (160/640)*(3/16).
   • All of the owners' decimals will add up to 1.00000000 after the interests are accounted for under the DOTO.
3. Agree that the oil company can make payments based on that certain decimal interest specified on the division order until notified by the royalty owner that the ownership has been changed.

By signing the division order, the mineral owner releases the operator from liability to third parties who claim to own the interest being paid to you as the royalty owner. This means that if a owner is being paid more than his fair share another owner has the right to pursue him for compensation, with no responsibility on the part of the operator. Yes, you read that correctly, the mineral owner can be held liable even if the mistake was originally made by the title attorney in preparation of the DOTO or the oil company who used the DOTO.

Sign (Execute) and Return

Once the mineral owner has reviewed the division order and verified his decimal interest, send it it back to the operator. It may take up to six months before a check from the oil company. The State of Oklahoma allows operators six months from completing a well to when royalty payments must start being paid to mineral owners after which a 12% annual interest must be paid on unpaid royalties.

If there is any confusion, please seek the counsel of an experienced oil and gas attorney. While he might charge a few hundred dollars for his services, an error in a division order or DOTO could cost the mineral owner many times that over the life of a well.

More to follow.

BR

Oil and Gas Lease Clauses and Provisions Part 2, The Pugh Clause

The Pugh Clause is named after the Louisiana Barrister Lawrence Pugh in 1947 after the state Supreme Court ruled on Hunter v. Shell Oil Co., 211 La. 893 (1947). In this case, the Court, held that production from a unit with maintain the Oil and Gas Lease in force as to all lands described on the lease even if they are not contiguous.

What does this mean for the mineral owner? It means than if he leases multiple tracts of land on the same oil and gas lease, all lands with be held by the lease even if only one well is producing in paying quantities. As the mineral owner, you should request a Pugh clause from the lessor.

An example of a vertical Pugh Clause:

• "If at the end of the primary term, a part but not all of the land covered by this lease, on a surface acreage basis, is not included within a unit or units in accordance with the other provisions hereof, this lease shall terminate as to such part, or parts, of the land lying outside such unit or units, unless this lease is perpetuated as to such land outside such unit or units by operations conducted thereon or by the production of oil, gas or other minerals, or by such operations and such production in accordance with the provisions hereof."

With the remarkable advances in engineering with regards to horizontal drilling, many of the wells drilled in the past few years in these areas are indeed horizontal wells. Often times, the lessors are now requesting Pugh clauses to release the deeper geological formations after the expiration of the primary term.

An example of a horizontal Pugh Clause (also known as a depth clause):

• All rights 100' below the deepest depth drilled shall be released one (1) year following the expiration of the primary term, or upon completion of any drilling or reworking operating conducted thereunder which was commenced during the primary term, whichever occurs last.

Many lessors will want a clause such as " Lessee will release all depths below the stratigraphic equivalent of the deepest producing horizon." This sentence injects ambiguity and uncertainty in the oil and gas lease. While this clause initially seems more restrictive to the lessee, there is current on-going litigation regarding the term "stratigraphic equivalent," and neither party should desire to end up in court.

Interestingly enough, the State of Oklahoma enacted a statutory “Pugh” Clause*, Title 52 O.S. Section 87.1(b), which provides that “in case of a spacing unit of one hundred sixty (160) acres or more, no oil and/or gas leasehold interest outside the spacing unit involved may be held by production from the spacing unit more than ninety (90) days beyond expiration of the primary term of the lease. ”This law became effective May 27, 1977 and may or may not apply in your case depending on the date of your lease. For the Oklahoma mineral owner, this means that he does not have to insert a vertical Pugh clause into his lease, but may still request a horizontal Pugh clause or depth severance.

More to follow.

BR

Oil and Gas Lease Clauses and Provisions Part 1

In our last post, we discussed the basics of the Oil and Gas Lease. Today we will discuss some of the finer points, provisions, and clauses of the lease.

Granting Clause: Usually, the opening paragraph of the lease is the granting clause. It outlines the purposes of the lease and describes the substances that can be explored and produced.

Duration: Both the Primary and Secondary Terms were discussed in yesterday's post and will not be rehashed here. However, there are three important provisions that should be discussed.

• Shut-in Provision: Allows the lease to remain in effect whenever the production from a well capable of producing in paying quantities is not being sold. The lessee must pay shut-in royalties to the lessor to maintain the lease after the expiration of the primary term.
• Dry Hole Provision: Will extend both the primary and secondary terms of the lease if oil and gas is not discovered when a well is drilled and certain conditions are met.
• Cessation of Production: Will extend the secondary term of the lease if certain conditions are met.

Royalty Clause: Again, discussed yesterday.

Surface Damages: Unless stated otherwise, the granting of an oil and gas leases carries the implied right to use as much of the surface as in reasonable necessary for the development of the minerals. This is because the surface estate is subservient to the mineral estate.

Pooling Clause: A provision giving the lessee the right to consolidate the leased premises with adjoining leased tracts in order to meet the requirements for the state mandated size for drilling and spacing units. Pooling, both compulsory and voluntary, will be covered in a post at a later date.

Assignment Clause: A provision permitting the lessor and the lessee to assign their rights under the lease to other parties.

Warranty Clause: A clause requiring lessors to defend their interest in, or title to, the leased premises.

Force Majeure Clause: The clause that protects the lessor from liability and loss of the lease whenever an "Act of God" causes the lessor to suspend operations. These acts can range from a tornado to a terrorist attack to the unavailability of a drilling rig.

More to follow.

BR