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"The meek shall inherit the earth, but not the minerals."
—J.P. Morgan
By Lana Robinson
Field Editor
A giant gas field encompassing much of North Central Texas could have as much as a trillion cubic feet of natural gas every seven square miles, according to engineering studies. This vast reserve has remained in the ground untapped until recently, when the technology emerged to successfully produce it. Known as the Barnett Shale, early wells indicate the formation is living up to its potential, setting off a "gold rush" of sorts in Denton, Wise, Tarrant, Parker, Johnson, Hood, Somervell, and parts of Hill and Bosque counties as companies frantically lease up land. Many landowners have benefitted while others, lured by generous premiums, eagerly signed leases without first reading the fine print. On the surface, some leases seem to favor the landowner, but as with most contracts, the devil can be in the details.
In order to help landowners avoid some pitfalls, and understand the complexities of mineral leases, several county Farm Bureaus—some with the participation of the Texas Cooperative Extension—have held informational meetings, led by Judon Fambrough, Texas A&M attorney and real estate specialist who has taught Oil and Gas Law at Texas A&M for the past 22 years.
Following a newspaper and radio advertising blitz, Johnson County Farm Bureau had 400-500 folks attend their December 2004 meeting in the Cleburne Civic Center.
"Half of them came to figure out what they needed to do and half to see what they should have done," said DeWayne Burns, Johnson CFB president. "Lack of knowledge has hurt some people. I think if a lot of our landowners and members had been more prepared, and communicated better before signing leases, they might not be facing some of the difficulties now. If they had had the foresight to get answers to questions beforehand, they might have been able to resolve problems before they occurred. That's what we hoped to accomplish with the meeting."
Burns said the primary complaints he heard voiced were mistakes made in agreeing to a lease in which the shut-in provisions were not favorable to the landowner.
"Now they've got that acreage tied up with very little or no production," he said. "Once it's drilled, what's done can't be undone. If I had advice for anyone, it's to make sure you are aware of the different clauses that will protect you, whether you are leasing one acre or 100,000 acres. Get some advice from a person that is landowner-friendly. Judon is one of those kind of guys. You need a crystal ball, but you don't have one. Tapping sources, talking to someone who has been there or done that, can help a lot."
One of the things Burns learned through the seminar is the value of a Freestone Rider, or Pugh Clause. These provisions restrict the number of acres that any well can hold after expiration of the primary term of the lease to the minimum number of acres necessary to obtain a maximum production allowable from the Texas Railroad Commission.
"Otherwise, a single marginal well would hold the entire acres leased forever, or as long as they were willing to produce the well," he noted.
The Johnson County Farm Bureau office sits on an acre of land that is pooled with a larger block of property with existing production. Burns said the signing bonus alone did not persuade the board, but a hefty donation to the JCFB's Youth Foundation helped them make up their minds.
"We didn't see how it would hurt. Under the agreement, they would never drill on our property—just in the pool. They have never set foot on our land, and we're getting a royalty check every month for one producing well. There's a rig out back right now drilling another well 75 feet from that one," Burns reported Jan. 24.
Pooling can be advantageous if you have a small tract of land, like the Johnson County Farm Bureau. But it may not be a great advantage if you are a large landowner, who prefers not to divide the royalty money. Still, if a large tract is not productive, having it pooled with adjacent land that is could be beneficial. Something is better than nothing.
Bear in mind that your property will likely be pooled with adjacent acreage once you lease unless you have a provision in the lease that prohibits pooling. One landman suggested that you insert language that says "no pooling without the express consent of the lessor." That gives you the option to go either way.
First and foremost, when looking for a company to lease and drill on property, experts suggest it is prudent to find one with experience and a quality track record in the industry as well as the technology and proven ability to extract the gas from the rock. After all, the big money is in the minerals. Judon Fambrough said landowners can research prospective lessee's production records at the Texas Railroad Commission's website (www.rrc. state.tx.us).
Before negotiating a lease, you should first determine for sure how many net mineral acres you own out of the tract proposed for lease, and also exactly which tract is being leased. The lease should specify by section number, block, and survey name what they want to lease. Lease bonuses are priced on a per net mineral acre basis. Usually a person would own an undivided fractional interest in a section or tract.
On Dec. 13, Fambrough gave a similar presentation to an estimated 350 people packed into the Hamilton Junior High cafetorium. Hamilton CFB President Rusty Harris said when the increase in oil company interest in gas production in Hamilton County began, some land owners jumped off early, signing leases for as little as $10 an acre. Harris indicated that leases are now being offered for several hundred dollars per acre.
"It behooves us as landowners to know what's going on," Harris told those present.
Milton Peterson, president of the Hill County Farm Bureau, was among those attending the Hamilton symposium. He returned home and helped organize a meeting which was held Jan. 4 in Hillsboro.
"We went around and solicited donations from organizations and individuals to reimburse Judon Fambrough for some of his traveling expenses, and to provide cold drinks, cookies and snacks. It was a very good program, about three hours long with a break. We had 150 attend," said Peterson. "It helped for me to repeat the program. Some things that didn't register the first time, I caught the second time around."
Texas Farm Bureau Education and Policy Development Director Glen Jones agreed, stating, "It's worth attending more than one meeting. It reinforces some points that you need to look at and be aware of. I've gone to several in the Central Texas region. They provide excellent information and are well attended, with typically 135 to 150 participants. Especially with this Barnett Shale, most people in this area haven't dealt with oil or gas exploration. This new information is helpful in understanding when you sign a gas lease what you're actually committing to."
Peterson said activity in Hill County, so far, is pretty much west of I-35. Locally, landowners have signed leases offering the standard 3/16 or 18.5 percent of the revenue generated by any well, although a number have negotiated a 20-percent lease.
Some 300 people crammed into the Meridian Civic Center, Jan. 13, for advice on negotiating a lease offered by Fambrough, and sponsored by the Bosque County Cooperative Extension and the Bosque County Farm Bureau. At that meeting, Fambrough warned landowners not to jump into a lease without studying it (or having your attorney go over it with you). He said: 1) ask for more than the going rate, but be reasonable. In other words, "ask high and negotiate down"; 2) insist on explicit terms in the contact in order to avoid misunderstandings and/or confusion; and 3) don't be afraid to ask for additional conditions in the lease.
"You have not, because you ask not—that's the secret to lease negotiations," said Fambrough. "All clauses are subject to negotiation, but you've got to know what to ask for."
He explained the superiority of having "conditions" as opposed to "covenants" in the contract.
"If a lessee breaks a `condition' stated in the contract, the contract can then be terminated, and they have to call you back, if they want it back," he said, noting that with the breaking of a covenant, the landowner's only option is to sue for damages, which is a less desirable remedy. " Avoid litigation by negotiating conditions and not covenants."
He also recommended a depth clause be included in the lease. "Lease formation by formation," advised Fambrough. "Don't let them go to the center of the earth. Put in the lease, `This lease shall be limited to the Barnett Shale and no lower.'"
Fambrough said that cleanup responsibilities after any well is finished should be stipulated in the lease (including saltwater disposal). He said a strong surface protection clause should be negotiated. He also said that landowners should be compensated for any seismic testing on their property.
According to Fambrough, companies offering a bonus check are actually giving you a sight draft that typically will have a 30-day collection date in the upper left hand corner (which lessee's say is needed in order to do a property title check to make sure there are no issues that must be addressed). He warned that either party can back out of the lease prior to the draft being paid and he recommended shortening the period of time to 10 days. However, he pointed out that it could work against the landowner, in the event a better offer comes in before the draft is paid, in which case you can revoke the lease.
"Once you receive the money, you can't revoke it," explained Fam-brough.
Finally, he said to make sure any changes to the contract are in written form and attached to the lease form. The contract can be altered in one of the four following ways: 1) strike, initial, and date; 2) attach an addendum (which is the most practical way); 3) draft your own lease; and 4) letter agreements.
The Texas Real Estate Center at Texas A&M has a number of publications to assist mineral owners that can be purchased or downloaded at: http://recenter.tamu.edu/pubs/catleas.html.
Drilling activity in Barnett Shale heats up
Encompassing 15 different counties (approximately 150 to 200 thousand acres per county) in North Central Texas, the Barnett Shale is said to be the largest natural gas "unconventional" play—meaning that the shale must be stimulated to produce gas—in North America. Accessing and extracting the natural gas, until recently, has been difficult because the Barnett Shale's formation is shallow and dense, and the gas is scattered rather than pooled into a few large reservoirs.
Horizontal drilling allows experts to make 90-degree turns in only a few feet in order to tap into several pockets from a single well pad to recover six or seven times as much gas as a traditional vertical well. The horizontal technique also makes it possible to remove natural gas from under cities, lakes, or other properties without harming the environment above ground.
Wells must be fraced (fractured) in order for the natural gas to escape the shale. Drilling companies must be careful not to stimulate the shale too much because the formation under the Barnett Shale—the Ellenburger formation—is filled with salt water.
Texas Railroad Commission guidelines call for 320 acres for a horizontal well. Landowners with smaller acreages often pool them together to have enough land for a well. A few companies are drilling vertical wells on smaller tracts in the Barnett Shale. Most geologists believe the saucer-shaped formation is a slow producer, with a 30-to 40-year life span.
In late November 2004, Oklahoma City-based natural gas producer Chesapeake Energy struck a deal to pay Hallwood Energy Corp. of Cleburne $277 million for 18,000 acres of leases and 42 wells in the Barnett Shale in northern Johnson County. Chesapeake, with revenues in the billions last year, plans to spend $100 million and will devote three rigs full time to drill 45 to 50 wells around Johnson County in 2005. In addition to expansion, Chesapeake hopes to increase the existing wells' daily production of 25 million cubic feet to 86 million cubic feet by 2006. Chesapeake has opened an office in Joshua that will employ about a dozen people initially.
Chesapeake has worked with Hallwood as a minority owner in Hallwood's leases south of Cleburne.
Devon Energy, also of Oklahoma City, David Arrington Oil & Gas of Midland, and EOG Resources of Houston, along with Fort Worth-based XTO Energy and Quicksilver Resources and Chief Oil & Gas Co. of Dallas, are some other producers with operations in Johnson, Parker and Hood counties. Development of pipeline and processing infrastructure will likely boost activity in the region.
On Jan. 11, 2005, XTO Energy of Fort Worth expanded its Barnett Shale operations in Tarrant County with a $685 million purchase of Denver-based Antero Resources Corp. According to the Fort Worth Star-Telegram, plans are to drill up to 400 new natural-gas wells, mostly north of Fort Worth around Saginaw and down south, between Mansfield and Cowtown. With the deal, XTO acquired 165 producing wells that Antero drilled in Tarrant County since 2003. Also included are more than 60,000 acres of leases and about 450 billion cubic feet of proven natural-gas reserves.
XTO had already previously taken some 90,000 other acres of leases, giving the company potentially up to 2 trillion cubic feet of gas reserves in the Barnett Shale play in Tarrant, Johnson, Parker and Hood counties.
