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FROM THE TRENCHES

ONE BAD APPLE

BY FRED A. DAVIS II, PETROLEUM LANDMAN

Let me preface this article with a reminder that I am not an attorney. This article discusses material of a somewhat legal nature. The assumptions made herein and the statements made are in no way meant to be legal advice. Please consult an Oil and Gas Attorney like Lewis before acting on the things discussed in this article.

There is always a stick in the mud. The one who won't see reason. He will not lease period. Double the bonus or give him a royalty and he still won't lease. What do you do? Is it legal to have a doughnut hole in a unit? Can some lone idiot really hold up an entire drilling project? Is there recourse for the (Texas) Landman? The results are as follows:

No, No, Yes

Let's presuppose that the tract(s) in question are owned in fee by one entity or individual and they do not want to participate.

Here are some real world examples for your consideration:

Another Landman with the crew I am now working on received a letter from a lady who he had approached by mail with our normal terms. The tract in question is of fair size and in the target area. Her response spun a web of militant Green Party prattle so obtuse as to make one's head spin. The upshot of it all was that since we were going to dump oil all over the ground and kill the worms that give life to the soil and otherwise be evil, she would rather die a pauper than receive one cent of our vile oil money. She was offered no surface operations and still refused. This lady will probably not sign a lease no matter what.

There was a man I once dealt with who owned three lots in a subdivision being leased. His theory was that the technology existed to leave his minerals in place and produce all of the oil and gas from the surrounding property. He wanted to wait for a better offer. He was the last hold out. He was offered 20% royalty and $150.00 per lot, by far the best deal in the subdivision, and he still refused to lease. 

There are crazy and/or uncooperative people everywhere.

Many landmen believe there is no recourse in Texas and their inability to make a deal dooms a project. There is no forced pooling here and woe unto he who would dally with the sanctity of minerals in place. Oh contraire my friends. There is way too much tax money involved in a successful oil or gas well for the state to ignore this threat to their coffers.

There is a remedy. The Small Interest Mineral Owner's Participation Act, Texan for forced pooling, was made to take care of such cases. It is my understanding that this is a very tedious and time consuming process and something that is to be avoided if possible. The illustrious patriarch of this newsletter is much better placed to discuss the finer points of this remedy. Suffice it to say that it is not what the average Landman wants to get into.

There is a much easier path to take, however. Cut the uncooperative sucker out of the unit and let him worry about it. There is nothing in the law, that I am aware of, that states that a well cannot be drilled if there is an outstanding fee interest in a proposed unit. Several unhappy circumstances can occur if the interest is under the drillsite tract, but for a pooled interest, do not worry more than necessary.

Some CYA (Cut Your liAbility) steps should be taken. Usually before someone opts out of leasing, there is at least one face to face contact and some negotiating. These events, however, cannot be proven. Make sure that there is a paper trail of an offer that is at least as good, if not better, than the best given in the rest of the proposed unit. A registered letter, return receipt requested, containing a cover page outlining the more salient lease terms and a prepared lease and draft with a self addressed, stamped return envelope is a nice touch. Additionally, inform the reluctant Lessor of the very great possibility that he will be cut out of a potential unit, again with a registered letter, return receipt requested. Once the offer has been put in written parlance and there is proof that it has been delivered, the bulk of what we can do as Landmen is finished. The rest is mostly an inhouse worry, but to see the scenario through let us continue.

Once the well has been drilled and production established, weird things may happen. If, however, there is production, money should be put back for the potential Lessor's reentry into the world of the sane. Money has trumped ideals and conviction on more than one occasion. This should be handled much like money set aside for those unfound mineral and royalty owners put into suspense. Put back an amount equal to the royalty that would be paid to the individual or entity if they had accepted the terms last discussed and mailed to them. This should cover the eventuality of the potential Lessor actually signing a lease after production is established.

There is always the possibility that these folks will want to drill a lease well. God love 'em and more power to 'em. If they are surrounded by an existing unit and have enough acreage to make a legal location we cannot be stop them. Of course, the Railroad Commission may have something to say about it and the possible APO payments to the surrounding interest owners will be a bit of a drain on their income to say the least. These people have already demonstrated their bullheadedness, so do not be surprised by anything.

The bottom line is that by the time the well is in production we as field Landmen are usually out of the mix. Remember that it is always best to lease everyone in a proposed unit; but in this case, one bad apple does not have to spoil the whole bunch.

 

Copyright © 1996 - 2007
 by Lewis G. Mosburg, Jr.

"Lewis Mosburg's OIL & GAS NEWSLETTER"™ and "Lewis Mosburg's OIL & GAS PRIMERS"™  are trademarks of Lewis G. Mosburg, Jr.