Davis 1-30-99-3c

FROM THE TRENCHES

SEISMIC OPTIONS:

COME ON, LET ME HAVE A PEEK

BY FRED A. DAVIS II, CPL, PETROLEUM LANDMAN

Seismic options, the right to shoot seismic and take a lease later, seem to be the latest vogue in the ever-evolving realm of the United States domestic petroleum industry. Here on the Texas gulf coast there are 3D seismic shoots going on even in this era of depressed oil prices. Natural gas has maintained its economic luster to a certain extent and activity continues, although greatly reduced. 3D seismic requires the acquisition of a lot of contiguous property to be effective. As a direct result, a new specialty has developed – seismic permitting.

There are several problems related to 3D shoots that are rarely found in the other aspects of field land work. These include:

1)the reduced amount of money given for an option

2)the rigors of attaching a lease form to the option

3)the perceived "death penalty" for the Lessor's property

4) the practicality of working from a minority mineral interest

As an anthem, and as a reality, there is less money given for the right to enter a property and shoot seismic than there is for the taking of an actual lease. Many landowners don't see a difference between a seismic option and an oil, gas and mineral lease. What they do see is an oil company coming on their property to disrupt their lives and make a lot of money. They want their piece of the pie too, and rightly so.

Most landowners have leased their property at one time or another and are used to oil, gas and mineral lease money. The fact is that oil companies can no longer afford to give lease money for the large blocks of land needed for a 3D shoot. Thousands of acres are involved and the expense of shooting and processing data precludes the unnecessary expenditure of lease money. These two points, increased expenditures and lower prices, can be an effective argument when coaxing reluctant owners into an option. They can also see the sense in taking something rather than nothing, with the possibility of more to come. The nothing comes when the potential Lessor is passed over for an option. Small tracts can be shot around with little effect on data. The more to come is the lease if their property is selected. This then presents another question, what is the best time to negotiate a lease?

Large landowners are the ones with whom leases must be negotiated at the time the option is taken. There is always the possibility that a discovery will be all or mostly on a single large tract of land. In this case, it is better to negotiate from a position of uncertainty. If the Lessor is almost positive that there is a potential discovery on their land, as they will when the option is exercised and lease negotiations begun, the price of poker is sure to go up. While this can be tolerated with small tracts that will make up only a small part of a potential unit, the chances of having an entire unit held for ransom is intolerable. In this case, the time and effort spent negotiating the option and lease concurrently will save money.

Small landowners are often in the shoot area by the bushel. Companies want options taken in as timely a fashion as possible, but if a lease is attached to every option taken negotiations can be interminable. It takes up precious time and money, and competitors and interlopers do lurk. After the attorneys are finished playing badminton with the lease form and its amendments, time that could have been spent acquiring other options is forever lost. Normally, the odd ten or fifteen acre tract will not mean a lot in the makeup of a unit, no matter what the terms turn out to be. This is especially true if a deep gas or horizontal unit is anticipated. These take up very large blocks, and terms less favorable to the contracting company are proportionally reduced. In a small shoot, it may be possible to negotiate a lease with everyone, but in large shoots it is impractical.

Many people view an option as a "free look" at their property. The possibility, in their minds, of their land being reconnoitered and condemned forever as far as oil and gas exploration is concerned can cause a great deal of fear. This is somewhat valid, but it is also valid in a straight 2D shoot. When this is raised as a problem, talking about the times that old seismic has been reprocessed and successfully used as a tool for further exploration can assuage them. Despite all of the ballyhoo, 3D is not perfected. With the inevitability of further innovation, potential hydrocarbon bearing formations overlooked now are sure to be identified later. Relating this to them as having their property on file for exploration now and in the future works.

Now for something really sticky. Some companies are taking options from an agreeable minority mineral owner and using this alone to gain access to the property for seismic work. Now we are talking about some very angry people. Getting a letter or a phone call from some oil company yahoo informing a surface owner that a seismic crew is coming on their property like it or not is no way to start the day. It is legal, but there are practical questions about this approach. If an anomaly is found, lease negotiations are going to be very tense. Herein lies the rub. In order to work successfully, there must be an air of trust in the community for the man on the ground.

Solutions are hard to come by. Never blame the oil company for this problem; you work for them, they do not work for you. Blaming the law is a dead end. Being looked upon as a minion of government regulations will not endear you to anyone. If the situation comes down to a court order, then that is just the way it is. The company's name will be on the order, but it will not deflect all of the heat. The result of this situation is the public loss of trust in the Landman. Not only does it poison the waters at the time; it also sticks in the memory of the community. Doing business in the area at a later time will be all the more difficult. Remember, however, that you took the job - it just has to be lived with. There seems to be no graceful way around it.

The seismic option seems to be here to stay. As with everything, it is a double-edged sword. There are good and bad points to it for the field Landman. Doubtless, it will continue into the next millennium and therefore must be mastered.

Editor's Note:

For more information on Seismic Options, see Lewis Mosburg's five-part series on "The Use of Seismic Options and Exploration Agreements as Exploration Tools," located by accessing Petroleum Land Practices – Titles, Leases and Contracts in the "Archives" section of this Newsletter.

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