Subject: oil and gas lease
Question: I sold some property in Louisiana and retained 50% of the mineral rights. 2 years prior to the end of the 10 year period I signed a 3 year oil and gas lease. Before the end of the lease Oil and gas was discovered. They are saying I am not entitled to royalties because the 10 year period was up. I contend the lease extended the time period.

Answer: (April, 2010)
James R. Morton | Taggart Morton L.L.C. | 1100 Pydras Street, Suite 2100 | New Orleans, LA 70163

I'm afraid I likely don't have very good news for you here. It is the actual operations for the discovery of minerals that interrupts the running of the 10 year prescription period, not the signing of the oil and gas lease. You will need to find out exactly when the operations for the new well commenced. If that occurred prior to the expiration of the ten year period, you would have another ten years on the mineral servitude. It likely would have been better to enter into a two year lease so that oil company would have been forced to commence the operations prior to the expiration of your mineral servitude, but hindsight is always 20/20.

Subject: Oil
Question: An oil company negotiated a lease with me and we all agreed to the lease. I have signed, notarized and sent the lease back. The landsman then took two weeks to review the leased then he can back to say that the oil company has decided not to accept my signed lease. I believe that the leased has been executed. I could not believe that this happened. Do I have any rights to close this deal? Or is it a lost situation? Now I feel they may want to try and make me an unleased owner.

Answer: (April, 2010)
James R. Morton | Taggart Morton L.L.C. | 1100 Pydras Street, Suite 2100 | New Orleans, LA 70163

Unfortunately, there isn't much you can do here. In order to have a contract (an oil and gas lease is a contract), you need two parties to sign the contract. It sounds like the oil company sent you a lease, you agreed to their terms, you signed the lease and sent it back to them. The oil company then appears to have changed their minds, didn't sign the lease, didn't send it back to you, and didn't pay you the lease bonus. I don't think there is much chance that you will become an unleased owner, as the oil company appears to have lost interest in leasing your property. That could change and they might be back again in the future. Next time, I would suggest rather than signing and mailing the lease to them, you arrange to have the landman come pick the lease up from you and exchange your copy of the signed lease for their check for the bonus money. They can then mail you a fully executed copy of the lease, but at least you will have the bonus money in hand. You can tell them what happened here as the reason why you won't be signing a lease, mailing it back to them and keeping your fingers crossed that they honor their part of the bargain. While you can have an oral lease in Louisiana, that is a hard thing to prove. I suspect the oil company will argue that they never agreed to the terms of the lease. You would have to sue them to try to enforce the oral lease, and the cost to do that would likely be prohibitive.

Subject: Expired Lease
Question: I had a lease with an Oil company from Feb 2008 thru Feb 2009. In November 2008 they began production on a re-entry well. The orginal lease expired in Feb 2009. The company now wants us to sign a new lease back dated to Feb 2009. My question is if we leased when production began why do we need to sign a new lease wouldn't the orginal lease still be valid ?

Answer: (January, 2010)
James R. Morton | Taggart Morton L.L.C. | 1100 Pydras Street, Suite 2100 | New Orleans, LA 70163

You have pretty much hit the nail on the head. Something doesn't add up here. If they did in fact have production from the property in question on February, 2009, when the primary term of the lease expired, the lease would normally continue until 90 days after production ceased without a resumption of operations. You just need to get the facts. It's possible that only part of the acreage was in a valid Commissioner's unit when the lease terminated, and if the lease contained a Pugh Clause, it's possible that the acreage outside the unit terminated and they need to acquire a new lease on that outside acreage. I would have to review the lease in order to give you the best advice, but if all of the acreage under the lease was in fact maintained by production at the end of the primary term of the lease, there would be no need for the oil company to lease the property again. I suspect that unless the oil company has made a mistake in the facts surrounding your property, the property was not held by production when the primary term expired.

Subject: Gas Rights
Question: I have some drilling going on about a mile from my house. The land that my house is on is currently being tested. If they offer a lease on my .8 acres do I have to sign it? If I do not sign it do I become a working partner? Instead of 4/16 would my interest them be 16/16? Why would that not be the best option for someone who has .8 acres in the middle of all the oil?

Answer: (December, 2009)
James R. Morton | Taggart Morton L.L.C. | 1100 Pydras Street, Suite 2100 | New Orleans, LA 70163

You are correct that if you don't sign an oil and gas lease and your property is included in a producing oil and gas unit, you would become an unleased working interest owner. As such you are entitled to, as you put it, 16/16 of the oil produced from your property. There is a very big catch, however. Before you will see a dime, you also have to pay for 16/16 of your share of the cost to both drill the well, and operate it thereafter (i.e. if you had one acre in a 100 acre unit, you would have to pay 1% of the costs). What that means is that the oil company has to recover all of its costs for drilling and operating the well (called payout) before you will be entitled to your net share of future production. Now if the well is a barn burner and pays for the cost of drilling the well many times over, you could theoretically make out better as an unleased working interest owner. The problem in my experience has been that when unleased working interest owners are involved, the well never pays out and the unleased working interest owner never receives anything. On the other hand, if you had leased your land, you would have received some money in the form of a lease bonus and your would receive the royalty (apparently 1/4 based on your message) from the date of first production because royalty owners don't pay for the cost of the well. Accordingly, royalty owners receive their royalty regardless of whether or not the well pays out. One other problem for the unleased working interest owner is the issue of monitoring the costs the oil company can tack onto the well. Your interest isn't big enough to make auditing the oil company practical. In my experience the oil company may tend to lop a lot of costs onto wells that have unleased working interest owners in the picture, which again makes it more difficult for the well to pay out. On balance, my advice is to sign the oil and gas lease and at least get something for the minerals produced from your property, but that is up to you.

Subject: oil and gas
Question: everything in my section is leased except my 30 acres.. Do you think they will come back to leases me before they drill??? what will happen if i decide not to lease because they want pay me what they payed everybody else in my section?? and if they drill without leasing me what kind of royality will i get??

Answer: (October, 2009)
James R. Morton | Taggart Morton L.L.C. | 1100 Pydras Street, Suite 2100 | New Orleans, LA 70163

I don't have many happy answers for you on this one. It is always a tough decision on how hard to negotiate with an oil company. While it is understandable that you want to get the very best terms on the oil lease on your land, oil companies don't have unlimited pocket books and they have a breaking point. If they have leased up everything else in you section and have stopped calling you, they may have reached the breaking point with you and have decided to proceed without a lease of your property. There are not too many positive things that can happen at this point unless you get very lucky. First of all, if they drill a well in your section, they may determine that the geology is such that your 30 acres aren't being drained by their well. In that case, you wouldn't be entitled to anything. On the other hand, if your property is included in the unit around the producing well, that is far from a guarantee that you will ever see a dime. You will become an unleased working interest owner. What that means is your share of production has to first go to the cost to drill the well and pay expenses to maintain the well (your proportionate share). If the well ever pays out (production covers the entire cost of the well plus all expenses), you would then be entitled to a share of production based on the amount of acreage you have in the well. You production would still be used to pay ongoing expenses, but after that, you would receive the balance of the production (again, your proportionate share). That could work out positively if the well pays out and the well is a barn burner, but in my experience, whenever there is an unleased working interest owner in the picture, the well never pays out, as the expenses are always very high. You don't really have practical way to monitor any of this, and the well may be plugged and abandoned before you know what happened to you. My best advice is that it would probably be best for you to try to make a deal with the oil company on the same basis as your neighbors. If they do come back to you with a better offer than before, you may want to consider taking it seriously. You could try calling them, but the offer they previously made to you may no longer be available. Your calling them has a ring of desperation to it, and they may try to play hardball with you. In case you were wondering, the difference between royalty and the unleased working interest is that the royalty owner doesn't have to pay a share of expenses and shares in the production from day one and will receive some funds even if the well never pays out. Also, if the oil company has your property under lease, they are more likely to include you in a unit around any producing well. Additionally, you will receive some money in the form of a bonus payment and possibly a rental payment if the well isn't drilled in the first year and the oil company desires to keep the lease alive for a second year.

Subject: Reserving Minerals
Question: If I sell my property and reserve the minerals, will I own the minerals in perpetuity?

Answer: (February, 2009)
James R. Morton | Taggart Morton L.L.C. | 1100 Pydras Street, Suite 2100 | New Orleans, LA 70163

Unlike every other state in the union, in which the minerals can be severed from the surface in perpetuity, that is not the case in Louisiana. In Louisiana, if the landowner sell the property and reserved the minerals, a mineral servitude is created. If no production or drilling occurs on the land on which the mineral servitude was created for a period of time of ten years, the mineral servitude terminates, and the minerals revert to the owner of the surface. The ten year prescriptive period can be interrupted by drilling or production, and the minerals will remain in the mineral servitude for ten years after production ceases. There are other rules dealing with contiguous property. If it is one large contiguous tract, production on any part of it will interrupt prescription from running on all of the tract. On the other hand, if the servitude is created on two distinct tracts that are divided by property of another, production on one tract will not interrupt the ten year prescriptive period on the other tract. There are several other nuances dealing with the mineral servitude, but that should answer your basic question.

Subject: Pugh Case
Question: What is a Pugh clause, and do I want one in my oil and gas lease?

Answer: (February, 2009)
James R. Morton | Taggart Morton L.L.C. | 1100 Pydras Street, Suite 2100 | New Orleans, LA 70163

I have a funny Pugh Clause story that I will share. When I was going to law school, I worked for a major oil company during the day in the land department. One of the old hand landmen was relating a story when he was out leasing property for the oil company. He was trying to lease a rural tract of land from the farmer who owned the land. The farmer asked the landman "What's this I hear about a Pugh clause." The landman looked the farmer int he eye and kind of made a face like he had just smelled a skunk and said "I wouldn't have one of them in my lease." Actually, a Pugh clause is a provision that is very favorable to landowners, and you in fact want to include it in your lease. Under the standard oil company lease form, if production from a well is obtained that encompasses multiple properties, the oil company has to go to the Commissioner of Conservation and obtain a unit that takes the reservoir from which the well is production and depicts that area of production on the surface. By way of example, let's say that you had a 100 acre parcel and ten acres of your property were included in this unit. Under the standard oil company lease, production from those ten acres included int he unit would maintain the entire 100 acres the oil company leased as long as the well continued to produce. What a Pugh clause does is change that arrangement. It states that production from a unit only maintains the acreage in the unit. In our example, the unit well would only maintain ten acres of the 100 acre lease. That would mean that the oil company would have to maintain the other 90 acres in some other fashion (drill another well, pay a delay rental, get a new lease from you). Accordingly, a Pugh clause is a very valuable provision that all landowners should want in their oil and gas lease, the potentially offensive sounding name notwithstanding.

Subject: Obtaining Seismic Data
Question: I have been approached to have seismic activity conducted on my property. Can I obtain the seismic data when the project is completed?

Answer: (February, 2009)
James R. Morton | Taggart Morton L.L.C. | 1100 Pydras Street, Suite 2100 | New Orleans, LA 70163

Like most contracts originally presented to you by the oil company, pipeline right of way company, or in this case seismic operator, the terms are somewhat negotiable. Each company will have a breaking point, and to some extent the negotiations can boil down to a poker match, but most of the time you can improve on the form originally sent to you. With the standard seismic permit form presented to you by the seismic operator, the right of the landowner to review the seismic data is generally not contained in the form. That is one of the provisions that the seismic operator will generally agree to add. You might say what good is the data to me, as there is no way I can review it and understand it. While that may be true, the information could be valuable to someone who might be interested in obtaining an oil and gas lease on your property in the future. If several years from now you are approached by someone seeking an oil and gas lease and you are asked the question about whether or not you obtained the seismic data, you will be in a much better position if you are able to answer in the affirmative. There are some other changes I normally make to the standard seismic permit, but obtaining a copy of the data after the seismic work is completed is an important change from the landowner's perspective.

Subject: Oil and Gas Lease
Question: I have been approached to enter into an oil and gas lease on property I jointly own with my brothers and sisters. My brothers and sisters have already entered into an oil and gas lease, but I don't like the terms the oil company is offering. What happens if I don't lease my interest in the property to the oil company? Can they still drill a well on the property?

Answer: (February, 2009)
James R. Morton | Taggart Morton L.L.C. | 1100 Pydras Street, Suite 2100 | New Orleans, LA 70163

I will answer the second question first. The oil company will have a right to drill a well on property you jointly own with your brothers and sisters even if you don't grant the oil company a lease. What will happen to you is that you will become an unleased working interest owner. What that means is that you will only participate in any production achieved from a well that is drilled on your property after the oil company recovers your share of the costs to drill the well from your share of production from that well. An example might be easier to understand. Let's say you owned 10% of the property and the oil company went forward with drilling the well in spite of the fact that you didn't lease the oil company your 10% interest. If the well cost $1,000,000 to drill, the oil company would be entitled to recover your share of that well (10% of $1,000,000 = $100,000) from the production of that well. Only after the well paid out (i.e. the oil company recovered all of its costs to drill the well from production) would you be entitled to a share with your share of the cost of the well, you many not receive any of the revenues from the well unless it paid out. On the other hand, if you had entered into an oil and gas lease you would receive a share of production (the royalty reserved by the landowner in the oil and gas lease) from the date the well first started producing. Accordingly, you are taking a risk in not leasing your land. If the well turns out to be a huge success, you would likely do better with an unleased working interest owner position, but most of the time you will have done better leasing your property on a good landowner oriented oil and gas lease form, on terms equal to the highest prices the oil company has paid either your brothers or sister, or your neighbors from whom the oil company has likely also required a lease.

Subject: Leasing Forms for Property
Question: I have some property that an oil company is interested in leasing. They have presented me with the standard printed Bath form. Is there anything wrong with my accepting the standard form everyone signs, which is what the oil company is telling me?

Answer: (February, 2009)
James R. Morton | Taggart Morton L.L.C. | 1100 Pydras Street, Suite 2100 | New Orleans, LA 70163

There's nothing really wrong with accepting the standard printed form of lease as long as you know going in that this is a standard oil company release form, written heavily in favor of the oil company. There are a number of standard changes that favor the landowner that the oil company will readily accept, but you have to ask for them to make the changes. An example of one is the Pugh clause, discussed more fully below. They won't do so voluntarily, however, and most of the printed forms don't contain them. On balance, if enough land is involved, it probably is worth your while to have an experienced oil and gas attorney review the lease and suggest several changes that will improve the form of lease and better protect you.