The Other Side of the Table - The Mineral/Royalty/Landowner’s Perspective A Presentation to the San Antonio Association of Professional Landmen January 24, 2015
The Other Side of the Table - The Mineral/Royalty/Landowner’s Perspective I. Know your prospect and your prospective client. Our clients are either large mineral owners and/or landowners. Today, I will address the mineral side of oil and gas exploration, and my colleague, Jeff Petter, will address the surface side. Catoico Resource Management LP operates somewhat like a bank trust department, as we have numerous owners with properties in numerous states, but is really more like our clients own management team. Some of our clients are strictly mineral owners, while others are surface and mineral owners. Having been in the oil and gas business, buying leases, rights-of-way, preparing agreements from unit agreements to joint operating agreements for over forty years, and having spent time working livestock, and dealing with operators, pipeline companies, railroads, and highway departments, as a landowner, I believe I have a unique perspective in negotiations and performance of oil and gas contracts between the two principal sides of the oil and gas industry. My first experience in the oilfield was working as a roustabout, during the summer in the Spraberry Field, just east of Midland. Oil was at around $1.80 per barrel, and I earned $1.50 per per hour, but I got 10-15 hours of overtime a week. At that time open pits were the standard and were permanent fixtures. One of our jobs was to clean in and around tank batteries. This entailed taking off the side hatch and climbing inside a crude oil 210 barrel tank with about 6 inches of tank bottoms. We would squeegee out the tank bottoms from inside, directly onto the ground, and do so without the benefit of gas masks. We tried not to stay in longer than about five minutes at a time. In January of 1974 I began my career as a landman with Phillips Petroleum Company. This was the era of one-eighth royalty, ten year primary term, one to ten dollars an acre bonus, and one dollar an acre per year rentals. I am a witness to many great changes in the oil and gas industry. By 1981 I paid $10,000 per net mineral acre, one-quarter royalty for a one year lease in Caddo County, Oklahoma, to participate in a Springer well. It paid out in 41 days. It was not until the Barnett Shale play that I saw prices and production remotely similar again. As a professional managing properties for individuals and companies that have been in business in most cases more than 50 years, I expect to deal with knowledgeable professionals as well.
A. Check the records. If you are going to call a prospective lessor, know what it is you are trying to discuss. Have a reasonable guess as to the interest you are trying to buy and the description. B. Know the prospect. Take a look at the last lease negotiated with the prospective lessor. Chances are, if it is a company, they are professionals, and you need to decide if you should contact them first or last. II. Know your oil and gas lease. The oil and gas industry and its contracts have evolved greatly over the life of the industry. The 1865 oil and gas lease I reviewed while working in Pennsylvania would be about one-half of a page of a modern printed oil and gas lease form. As I am sure that a great number of you are working South Texas and the Gulf Coast, you have become very familiar with the attorney’s fifty page typewritten lease. There is a reason that the oil and gas lease, rights-of-ways, surface leases, etc., have changed so much. A. Granting Clause. At one time the granting clause in oil and gas leases allowed the lessee to construct houses, plants, and numerous outbuildings on the landowner’s property. Likewise, rights-of-way allowed unlimited pipelines across undefined areas and switched from crude, gas or products lines to salt water and telecommunications. That was then, now you you should Include what would be normal for drilling and completing a well. Anything not directly dealing with drilling and production should be considered a separate surface negotiation and either a separate instrument, or an addendum emphasizing its separate nature. B. Royalty. The royalty payment is the real bone of contention between the royalty owner and the lessee. The royalty owners have to often been the “victim” of the “pipeline owner” at the wellhead. The “free royalty” clause was the result of operators being their own purchaser. This clause was developed more to insure arm’s length transactions, rather than a landowner not being responsible for post production costs. Unless a lessor has such a financially powerful interest in the leasehold (i.e. the well makes enough money to
justify the complete monitoring of post production costs), this should be an insignificant issue. I recommend that in most cases you accept the clause. C. Pooling. With the advent of horizontal drilling this clause has become extremely important. Our lease form only allows pooling with written consent, i.e. a designation of pooled unit. Pooling has been a very abusive clause to the lessor in too many cases. Be prepared to accept all Pugh clauses, or variations of same. As the lessor’s representative we will accept a variation of the Pound printing horizontal pooling clause, i.e. the minimum amount of acreage pooled for the maximum allowable, but all vertical poolings are by designation of pooled unit only. D. Mother Hubbard Clause and Warranty Clause. I have become a grumpy old man over these clauses. 1) Don’t try to take what you didn’t ask for and 2) don’t try to make me responsible for your work. You are the one buying the lease, not me. III. How to Impress Your Lessor. The Barnett Shale play resulted in a new type of land play, introducing the compartmentalized landman. The bust of the 1980’s left the oil and gas industry without any replacement parts. There were no young landmen, much less, engineers, geologists, geophysicists, or anyone with 5 to 10 years experience in the industry. The young people in the industry were in their late 30’s to early 40’s. Because of this experience gap, the land profession has become compartmentalized. At this time brokers are only receiving limited experience in land work. They seem to be trained as 1) lease and mineral buyers; 2) abstractors; 3) record checkers; 4) contract specialists; 5) surface and right-of- way agents; and 6) curative agents. I am disappointed that young landmen are not a more rounded exposure to all of the aspects of the land business. It seems a rarity that I receive a well written business letter, and I am finding it alarming that I receive more contacts by email than phone, and the absence of any effort to develop some common ground and a business relationship.
EXAMPLES These are some of my experiences during the last year alone, and in some cases I will no longer take their calls, or read their correspondence. Landmen and their offers . 1) Landman’s response regarding a lease in New Mexico. My Initial Communication I personally new the owner of the company trying to lease one of my clients’ acreage, and advised the broker that he should have the owner send me a drilling proposal at such time as he was ready to drill. Since the brokerage company was not a firm I was familiar with, nor did they seem familiar with New Mexico, or other Jeffersonian descriptions, I also advised him of what we are used to seeing for descriptions. Mineral Buyer Response …Seeing as how you’re on a first name basis with (Lessee Company Name), feel free to tell him to “send [you] an AFE when he’s ready to drill” yourself. Let me know how well that works out for you….If, at some point, you become the man paying my invoices I’ll be happy to craft a legal description that suits both you and your etiquette.” 2) Landman’s response regarding a turndown on the purchase of Mineral Classified Lands in Reeves County, Texas at a rate below then current bonus rates Mineral Buyer Offer …______________ is currently extending cash offers to purchase mineral classified surface interests in Reeves County… My Response …We have received better lease offers. Please do not bother us with insulting offers again… Mineral Buyer Response ...My apologies if I offended you with the initial offer. Keep in mind this is Mineral Classified acreage, not surface and minerals,… 3) Landman using email for offers
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