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Celia Flowers and Eric Schmalbach March 20, 2014

FLOWERS DAVIS, P.L.L.C. NOW THAT THERE IS NO STANDARD LEASE FORM – WHAT PROVISONS CAN WE EXPECT TO SEE MINERAL OWNERS NEGOTIATE?. Celia Flowers and Eric Schmalbach March 20, 2014. The Oil and Gas Lease is No Longer a Form. +. = No Standard Form. How to Determine What New Terms Mean.

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Celia Flowers and Eric Schmalbach March 20, 2014

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  1. FLOWERS DAVIS, P.L.L.C. NOW THAT THERE IS NO STANDARD LEASE FORM – WHAT PROVISONS CAN WE EXPECT TO SEE MINERAL OWNERS NEGOTIATE? Celia Flowers and Eric Schmalbach March 20, 2014

  2. The Oil and Gas Lease is No Longer a Form + = No Standard Form

  3. How to Determine What New Terms Mean • Understand how courts interpreted old provisions • Contract Interpretation: Read the lease carefully

  4. Roadmap • Initial Lease Negotiations: Bonus and Royalty • Secondary Lease Negotiations: Lease Clauses • Unusual Clauses • Surface Use

  5. Initial Lease Negotiations - BONUS • What to Expect from Lessor: • Unconditioned check • Clause increasing bonus if more net acreage is discovered

  6. Initial Lease Negotiations - ROYALTY • VALUATION: • Amount realized vs. Market value • Lessor may add language protecting decline in market value • POST PRODUCTION EXPENSES: • Dehydration, Processing, Transporting • Lessor may add “no costs provision”

  7. Secondary Negotiations – Lease Clauses • Habendum Clause • Shut-In Royalty Clause • Temporary Cessation of Production Clauses • Force Majeure Clause • Pugh Clauses

  8. Habendum Clause • Defines duration of lease • “So long thereafter as operations are conducted” • Lessor Wants: • So long thereafter as oil, gas, and minerals are being produced

  9. Shut-In Royalty Clause • Payments in lieu of production • No market • Lessor may attempt to negotiate: • The amount paid • The amount of time can be used • The number of times which can be used

  10. Shut-In Royalty Clause - Examples • AVOID: “Lease may not be maintained by shut-in longer than two years past primary term.” • AVOID: “Shut-in royalty paid in same amount as delay rentals” if no delay rental clause. Make sure to read carefully for problems:

  11. Temporary Cessation of Production • Implied judicial doctrine • Mechanical problems • Operations Clause strictly interpreted • Lessor Wants: • Limit or define operations • Limit the time to get production restored

  12. Force Majeure Clause • Lessee wants: • Events that are unforeseeable AND • Events that are inconvenient • Long list of events • Lessor Wants: • Limit the events • Strike or omit inconvenient acts

  13. Pugh Clauses • Vertical Pugh Clause • Horizontal Pugh Clause (Depth Severance)

  14. Horizontal Pugh Clauses – Examples • Lessor wants to release everything above and below depth • Severance at a particular depth: • 10,000’ below the surface • 100’ below the stratigraphic equivalent of the deepest well drilled • Avoid using terms which could be open to interpretation (zone, strata, horizon)

  15. Insertion of Unusual Clauses by Lessor • Entire tract to be included in unit • Anti-dilution provisions • Assignment upon approval of lessor • Changes to warranty language • Rights to title opinions, accounting and other documents, access to rig floor • Payment clauses for tracts with a horizontal wellbore

  16. Surface Estate – Rights to Use Surface • Rights of Lessee: • Rights to develop and produce • Rights to ingress/egress • Rights to use as much of tract as reasonably necessary

  17. Surface Estate – Limitations • Limitations of Lessee to use surface: • Not to use more than is reasonably necessary • Non-negligent use • Due regard/Accommodation • City ordinances • Express provisions

  18. Surface Estate – Use by the Mineral Owner ? • Rights under the lease and case law • Roads? • Use of sand/gravel? • Well location? • Can lessee drill the opening weekend of deer season?

  19. Surface Estate – Use by the Mineral Owner • Can lessee conduct seismic operations on the land without further permission? • Does Lessee have to pay damages? Even to crops? Improvements? • Any duty to fence? Any duty to restore? • Can Lessee use the water from a lake, drill a well?

  20. Surface Estate – Lease Granting Clause • Grants the ability of the lessee to produce and explore for minerals • Watch for the placement of the word “exclusive”

  21. Surface Estate – Express Provisions • Restrictions to Lessee’s use of surface • Limit the location of drilling • Limit the location of roads, pipelines, etc. • Require the lessee to bury pipelines • Require the surface to be restored to its original condition • Restrict the Lessee’s use of both surface and subsurface water

  22. Surface Estate – Express Provisions • Damages for Use • Pay for reasonable damages to land, pastures, crops, fences • Pay for use of water • Payment may be a rate or fee schedule • Limited to the imagination of the drafter

  23. Lease Negotiation Checklist • Get preliminary information on the operation • Look at the tract size • Know the lease form you are sending • Read Carefully: • Use the same terminology • Modifications/Alterations • Logical Consistency

  24. Questions?

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