December 12th, 2013
Are Your Oil and Gas Interests Being ‘Held by Production?’ Can You Do Anything About It?
While oil and natural gas operations reaching and producing from the Marcellus and Utica Shales may be relatively new, oil and gas operations have been conducted in the Ohio Valley for many generations. Our grandparents and great-grandparents often signed leases for the oil and gas underlying their property many years ago. What do those old leases mean to you today, now that you and your generation owns the property? As you can imagine, those old oil and gas leases provided monetary terms that are much less than the monies being paid under newer deep well oil and gas leases. They typically provided for 12.5% royalty payments as opposed to the 18-20+% royalty rates that many are producers are agreeing to pay today. Those old leases typically reached only shallow sandstone deposits because the technology simply did not exist to reach the deeper shale plays. How has the horizontal drilling revolution affected your rights under those old shallow well leases? What are your rights with regard to those old leases? Is production still occurring from those old wells? What should you do if an oil and gas operator approaches you about signing a ratification or amended agreement? These are all issues of concern that you should be aware of.
An oil and gas lease typically has a primary term (usually some set period of months or years) followed by a secondary term (which could last for many decades). If a well is drilled and gas is produced during the primary term of a lease, the lease will generally extend into the secondary term so long as gas production and/or other appropriate operations might continue. Important questions with regard to shallow oil and gas wells drilled under old leases include whether such wells have continued to produce over the years and how much of the property that you own is held by that production. The West Virginia Department of Environmental Protection
and the Ohio Department of Natural Resources have several tools to help us to identify the history of oil and gas wells including historical production numbers. We can review the history of particular wells and see if, indeed, there has been continuous production from wells such that the secondary term of an old oil and gas lease might remain in effect. If there have been periods of non-production, arguments can be made that the lease is no longer valid and you, as the landowner, may be entitled to a cancellation of the lease and the right to go out and re-lease your property to another producer.
It is also possible that while production and royalty payments may have continued, certain portions of your property should nonetheless be partially released from old ineffective leases. For example, if you have 100 acres of property subject to an older oil and gas lease and there is only one producing well on the property, does that one producing well hold the entire 100 acres? Despite what the oil and gas operator might be telling you, it may not. The laws of most states read into oil and gas leases certain obligations on the part of the producer. Those obligations become a part of your oil and gas lease because the ultimate goal of such leases is to protect the production interest of both the producer and the royalty holder. A lessor under an oil and gas lease typically has an implied obligation/covenant to reasonably develop the property. That essentially means that the oil and gas producer has a duty to do what is reasonable to ensure that the royalty interests are maximized. In many circumstances, one shallow well on 100 acres is not sufficient to reasonably develop the entire 100 acre tract. It is much more likely that only 20-40 acres are effectively being drained and produced. In those cases, additional wells would serve to ensure the full and complete production of the 100 acre tract. If the oil and gas producer has not reasonably attempted to develop the remaining acreage, it could be determined that the acreage beyond the one well that was drilled is no longer subject to the lease. While the acreage associated with the producing well would still be subject to the old lease, the remaining property would be free.
Many people who have properties subject to old shallow well oil and gas leases have been approached over the last few years by companies seeking to have them execute Ratification and/or Amendment documents. Companies owing or buying those old leases want to expand their production from the existing shallow wells into the deeper shale plays where the money is currently being made. Because the technology associated with deep horizontal drilling is still relatively new, the majority of the old shallow well leases did not address an important issue necessary for horizontal drilling units. Old shallow well leases rarely had pooling or unitization language in them. Marcellus and Utica wells are much bigger than the old shallow wells. They can effectively drain potentially a thousand plus acres of land from one well pad. Without the right to pool your oil and gas acreage with the surrounding acreage, it makes it difficult and probably cost prohibitive to reach the deeper shale gas.
If you have an old oil and gas well on your property, don't just trust the gas company when it tells you that it still holds the property. You may be entitled to negotiate a new lease for substantially higher upfront money and better royalty rates as well. Even if the land is partially held by an older oil and gas lease, you might have a significant amount of bargaining power to better your terms and gain more protection for your property. Bordas & Bordas is actively involved in this oil and gas related work
and we look forward to working with those people who want to fully investigate their potential oil and gas rights.
This article is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Use of and access to this website or any of the links contained within the site do not create an attorney-client relationship between Bordas & Bordas and the user or browser.