As the boom continues, landowners have called us because they have been unable to join in the action for up-front bonuses and enhanced royalties because of the existing lease burdening their land. The existing lease, of course, grants the rights to produce the oil and gas to the lessee (the producer, typically).
These rights can be, and frequently are, assigned to other producers. It is no secret that the shallow producers are assigning these rights, or portions of these rights, to companies capable of producing the shale formations. In a previous article, I discussed how the lack of production of the shallow well can terminate the existing lease.
However, there are other lease provisions that can affect the “shallow” producer’s ability to assign to a “deep” producer, or to even hold the lease at all. You must read your lease. We have encountered the following issues:
• Anti-assignment clauses. Some leases have language that specifically prevents the lessee from assigning the oil and gas rights to another entity. This is contested by both sides. Lessees have claimed that the law will not permit lessors to “unreasonably” withholding consent. This remains to be settled by the courts.
• Pooling restrictions. “Pooling” is the practice of aggregating contiguous leased properties into an amount of acreage that the government requires, or the industry needs, for drilling operations. Typically, the deeper the well, the greater the required acreage. Today, the horizontal shale wells require 640 acres.
In some leases, the lessor and lessee had originally agreed that the lessee could not “pool” the lessor’s acreage at all or limited the acreage into which it could be pooled. Assigning this type of lease to a horizontal producer presents problems: the landowner can object to being pooled into a 640-acre (or even a 1,280-acre) unit.
Of course, the existing lease remains valid. Contesting on this basis can result in making the property profitable for no one.
Defined production. Most leases have the nebulous “production in paying quantities” language. However, a select few specifically define the amount the annual production required to hold the lease. Has your well produced that amount?
• Depth restrictions. Do not assume that your existing lease grants the rights to the center of the earth. Some leases specifically reserve only “shallow” rights for the lessee, even from the inception of the lease. Have you looked?
• Indefinite promises to produce and delay rentals. This could consume and entire article. Nonetheless, shallow producers have been attempting to hold acreage by claiming that the indefinite payment of “delay rentals” holds the lease open. Recent Ohio court decisions confirm the general national consensus that “delay rentals” (payments made to keep a lease active during periods of lack of production) apply only during the primary term of the lease, not indefinitely.
You must analyze those checks you receive. Are they royalties or purported “delay rental” payments? Is the lessee claiming an indefinite right to hold your land?
Disclaimer. As with all articles on legal issues, this article is intended for educational and informational purposes. The reader should not rely on this article as a substitute for actual legal advice regarding his or her particular case. You should consult an attorney regarding the specifics of your situation. Ethan Vessels is an attorney in Marietta, Ohio with the firm of Fields, Dehmlow & Vessels, LLC. His firm is actively representing landowners throughout East and Southeast Ohio regarding oil & gas lease forfeiture actions, royalty disputes, and other oil & gas matters. Visit www.fieldsdehmlow.com for more information.