leasing in the eagle ford shale from a mineral and land owner's persective

Leasing Issues

•  Modern Lease Should Include: – Royalty payment should be a condition of the

lease – Royalty valuation should be free of cost and

valued at the higher of “market value” or “proceeds” at the point of sale or use (Not at the wellhead)

– Right to inspection, records, information and audit

– Define “paying quantities” – Environmental Indemnification – Lessor contractual lien on the working interest

to secure performance

Leasing Issues •  Depth Limitations, Termination as to non-producing

formations and termination of well tracts •  Environmental Indemnification •  Consent to Assign Clause •  Pooling •  Offset Issues •  Bankruptcy and 1st Purchaser •  Most Favored Nations Clause •  Make sure it covers everything – not just “oil and gas

lease” Samson Lone Star LP v. Hooks (2011) •  Lessee is responsible for attorney’s fees in the event that

the lessor prevails

Surface Use Agreements


•  Provide for agreed amounts of damage payments for specific uses of the surface estate – Well locations, roads, tank batteries, etc.

•  Damage payments have varied in the Eagle Ford – Surface damages have tripled

•  Surface Owner contractual lien on the working interest to secure performance

•  Liquidated damages


•  Absent an agreement, Texas Law provides no duty for an operator to reclaim the surface

•  Lessee should have obligation to fully restore and remediate any damage to property

Surface Use Agreements Spills


•  Primrose Operating Company, Inc. v. Senn, 2005 – Owners of 23,000 acre ranch brought

suit against oil company for contamination of soil

– Case illustrates the importance of temporary v. permanent injuries to property


•  Multiple Well Drill Pads – Could exceed 6 acres in size – Construct berms for visual

screening – Reduction in size after well is

completed or plugged as a dry hole

Drilling Pad 5 acres

•  Insert Pic


•  Frac Ponds – Fresh water only

• No produced frac water • No drilling mud, or • any other fluid in the frac ponds

– Design for use as livestock/wildlife impoundments

– Reclamation – Fencing

Eagle Ford Frac Pond


•  Quarterly or Annual Plan of Operations – Lessee needs to detail the operations for the

next quarter/year – Surface owner and lessee both approve plan

of operations in writing – Should contain an enumerated list of

operations – Map of Property

•  Includes boundaries and the locations of the operations


•  Consider slope and topography to prevent run-off and erosion

•  Reclaim surface locations back to original contours

•  Segregate and stockpile topsoil for future surface reclamation

Surface Use Agreements Slope/Topography

Surface Use Agreements Reclamation

Surface Use Agreements Stockpiled Topsoil


•  Lessee’s access to the property –  Preferred right of ingress/egress? – Keep gates locked? – Type of gates/cattleguards the Lessee needs to

install? –  Should the Lessee remove the gate/cattleguard

when the lease expires? •  Excluding Lessee from operating on portions

of the leased premises – Homes – Hunting areas


•  Roads – Location – Material – Maintenance and Repair

Road Material

Roads-Erosion

Roads •  Consider Drainage/Run-off


•  Ranch Rules – Material condition of the lease – Liquidated damages for failure to adhere

to Rules, or exclude employees who violate the Rules


•  Pipeline/Flowlines –  Potentially heavy truck traffic on Eagle Ford

Leases, so want to consider having lessee transport oil/gas from the premises by pipeline as well as lines for transporting salt water produced

–  Lessee and owner should agree on locations and locations should be made part of the Plan of Operations

–  “Double-ditch” pipelines –  Provide for removal after lease expires


•  Mark pipeline/flowline clearly with a sign on a post, not a fence

Flowline Construction

Eagle Ford Traffic


•  Water Usage – Each horizontal well fracture simulation is

similar to fracture treatment for one vertical well

– Negotiate for water sales – However, the production demands on some

water wells are unprecedented and it is unknown if they can keep up with the demands of large scale production


•  Water Usage (continued) – Eagle Ford still in its infancy, but multistage

fracs may need 155,000 to 400,000 barrels of water in the Eagle Ford

– Barnett Shale Water Usage Studies •  Some industry reports say approximately over

13,500 bbl during drilling and approximately 129,000 bbl to drill and hydraulically frac

•  Other reports show typical horizontal Barnett completion requires 112,900 bbl (10.74 acre feet)


•  Water Usage (continued) – Absent agreement, Lessee has the right to use

water from wells and surface –  Sun Oil Co. v. Whitaker (1972)

•  Surface owner tried to prevent mineral estate from using groundwater from aquifer for waterflood project

•  Texas Supreme Court held that “to hold that Sun can be required to purchase water from other sources or owners of other tracts in the area, would be in derogation of the dominant estate.”

Surface Use Agreements Eagle Ford Frac


•  Groundwater Conservation Districts (GCD) – Landowners own the groundwater beneath

the surface – But if land is in a GCD, then the GCD can

regulate the use of groundwater – Texas Water Code Section 36.117 (l)

•  Chapter 36 of the Water Code is unclear as to whether a GCD can limit the volume of water produced from wells

•  Mineral owner has the right to as much water as is reasonably necessary to develop the mineral estate

Surface Use Agreements •  Water Usage

•  Water in rivers, creeks, lakes, Gulf of Mexico, etc.—owned by the State of Texas

•  Need a permit from the Texas Commission on Environmental Quality (TCEQ) –  Permit gives “water right”

»  Specifies the volume may take »  If not enough to satisfy all water rights,

water rights belonging to domestic and livestock users have priority

»  TCEQ generally concludes that there will be enough water to issue permit

Other Water Issues

•  Energy Industry attempting to find efficient ways to reuse/recycle produced water and drilling fluids

•  GE’s brine evaporator can process 500 gallons per minute or 17,142 barrels of waste water per day and return about 70% of it as re-usable distilled water that is safe to return to aquifers

Other Water Issues

•  2004-EPA found that hydraulic fracturing did not contaminate drinking water wells

•  Currently, hydraulic fracturing is regulated by the states, but opponents are urging the federal government to regulate under the Safe Drinking Water Act

•  EPA now conducting new study about groundwater contamination that is scheduled to be completed in 2012 or 2013

•  9 companies involved in fracing have been asked about the practices they employ by the EPA

Other Water Issues

•  New York State Senate voted 48-9 in August 2010 to issue a temporary moratorium on hydraulic fracturing for natural gas

Pipelines

•  Common carrier pipeline or gas utility has eminent domain authority to condemn right of way

•  Private lines – Only transports oil/gas produced by operator

of the line, not oil and gas of others – Condemnation not used for private lines – Not subject to state regulation

Pipelines

•  Still a need for more midstream infrastructure to meet producer demands in Eagle Ford

•  Eagle Ford rich in natural gas liquids (NGLs) – Production ranges between 4 and 9 gallons

per thousand cubic feet of natural gas – Need infrastructure to remove NGLs

Seismic

•  Lessor should be a co-licensee of any geo-physical/seismic license agreement that includes data to be gathered from the leased premises (or after-acquired properties)

•  “Ownership” and “right to license” are different concepts and can be split. Lessor should have both

•  Carve out “licensee interpretation” to be shared with lessor, not exclusive property of any one Licensee or the vendor. Do not let a “licensee interpretation” become the intellectual property of any one licensee or the vendor

Case Law

•  Exxon Corporation v. Pluff (2002) – After purchasing land, Owner brought

suit against oil company. – Equipment left by oil company on

property prevented the owner from raising livestock and prevented him from using his tractor on the property

Case Law

•  Exxon Corporation v. Pluff (2002) – Court overturned jury’s award of damages

since the right to sue belongs to the person who owns the property at the time of injury

– Lease gave Exxon the right to remove all of its equipment from the premises, but the court said Exxon had no express duty to remove the oilfield materials

– The lease determines the rights and duties of Lessee

Case Law

•  Holland v. EOG Resources, Inc. (2010) – EOG agreed to spud a well by a certain

date or pay a penalty – EOG did spud a well on property pooled

with the tract – Court ruled that EOG upheld the

agreement

Case Law

•  Shell Oil Co. v. Ross (2010) – Opinion Withdrawn, being reargued this year –  Shell entered pooling agreement with Forest Oil (Shell

had 62.5% of the land in the pooled unit) –  Ross had a lease with Shell providing that Ross’

royalty on unprocessed gas be based on “amounts realized.”

–  Shell sold gas based on weighted average price based on their sales price and Forest Oil’s sales price.

–  Shell concealed the facts of its sales price on the royalty stubs

–  Court ruled in favor of Ross stating that pooling deals with volume but not value

RRC Update

•  EOG has recently been trying to get the RRC to adopt new field rules for the Eagle Ford – 330 foot well spacing – 80 acre oil units

Questions?

leasing in the eagle ford shale from a mineral and land owner's persective

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