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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• Lessee is responsible for attorney’s fees in the
event that the lessor prevails
Surface Use Agreements
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
Surface Use Agreements
• 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
Surface Use AgreementsSpills
Surface Use Agreements
• 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
Surface Use Agreements
• 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 Pad5 acres
• Insert Pic
Surface Use Agreements
• 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
Surface Use Agreements
• 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
Surface Use Agreements
Surface Use Agreements
• 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 AgreementsSlope/Topography
Surface Use AgreementsReclamation
Surface Use AgreementsStockpiled Topsoil
Surface Use Agreements• 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
Surface Use Agreements
• Roads–Location–Material–Maintenance and Repair
Road Material
Roads-Erosion
Roads• Consider Drainage/Run-off
Roads
Surface Use Agreements
• Ranch Rules–Material condition of the lease–Liquidated damages for failure to
adhere to Rules, or exclude employees who violate the Rules
Surface Use Agreements
• 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
Surface Use Agreements
• Mark pipeline/flowline clearly with a sign on a post, not a fence
Flowline Construction
Eagle Ford Traffic
Surface Use Agreements
• 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
Surface Use Agreements
• 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)
Surface Use Agreements
• 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 waterfloodproject
• 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 AgreementsEagle Ford Frac
Surface Use Agreements• 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)– 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
Questions?
