Surface Use Agreements

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2 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

3 Leasing Issues Depth Limitations, Termination as to nonproducing formations and termination of well tracts Environmental Indemnification Consent to Assign Clause Pooling Offset Issues Bankruptcy and 1 st Purchaser Most Favored Nations Clause Lessee is responsible for attorney s fees in the event that the lessor prevails

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5 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

6 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

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8 Spills

9 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

10 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

11 Drilling Pad 5 acres Insert Pic

12 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

13 Eagle Ford Frac Pond

14 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

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16 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

17 Slope/Topography

18 Reclamation

19 Stockpiled Topsoil

20 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

21 Roads Location Material Maintenance and Repair

22 Road Material

23 Roads-Erosion

24 Roads Consider Drainage/Run-off

25 Roads

26 Ranch Rules Material condition of the lease Liquidated damages for failure to adhere to Rules, or exclude employees who violate the Rules

27 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

28 Mark pipeline/flowline clearly with a sign on a post, not a fence

29 Flowline Construction

30 Eagle Ford Traffic

31 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

32 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)

33 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 waterflood project 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.

34 Eagle Ford Frac

35 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 (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

36 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

37 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

38 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 companies involved in fracing have been asked about the practices they employ by the EPA

39 Other Water Issues New York State Senate voted 48-9 in August 2010 to issue a temporary moratorium on hydraulic fracturing for natural gas

40 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

41 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

42 Seismic Lessor should be a co-licensee of any geophysical/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

43 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

44 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

45 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

46 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

47 Questions?