Curtis Talley Jr. Farm Management Educator MSU Extension, Hart, MI

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1 MINERAL RIGHTS TOWN HALL MEETING Sponsored by State Representative Tom Cochran Ingham County Mason Historical Museum 200 East Oak Street, Mason, MI Curtis Talley Jr. Farm Management Educator MSU Extension, Hart, MI talleycu@anr.msu.edu

2 MSU is an affirmativeaction, equal-opportunity employer. Michigan State University Extension programs and materials are open to all without regard to race, color, national origin, gender, gender identity, religion, age, height, weight, disability, political beliefs, sexual orientation, marital status, family status or veteran status.

3 For Some, Where is the Best Place to Produce Energy?

4 SOMEWHERE ELSE ALL ENERGY SOURCES HAVE TRADEOFFS

5 Current Energy Situation U.S. energy costs envy of the world U.S. became largest natural gas producer in world in 2010 U.S. produces more liquid petroleum (11 million barrels/day) than Russia or Saudi Arabia Germany $.35/KWh vs U.S. $.12/KWh Why don t we celebrate our abundant energy? There are responsible exploration and production companies in MI

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7 Utica & Collingwood Shale

8 The Mineral Rights Owner Conundrum in Suburban Areas Why am I being contacted if I only own a few acres? Is oil and gas drilling and production safe? Will any future development affect my quality of life? What if I do nothing? Can I just not participate?

9 LANDOWNER INFORMATION FOR OIL & GAS LEASING By law, to drill oil and gas well company needs lease with mineral owner or statutory pooling approval (formerly compulsory pooling) Every company has standard lease. I discuss typical standard lease Not adequate time to discuss entire lease MSU Extension oil and gas web page has additional info: as

10 Statutory Pooling Can I be Forced to Lease? No If cannot negotiate acceptable lease Compulsory (statutory) Pooling an option Deals with one well not all your land It is not a lease an order from Supervisor of Wells No lease bonus Royalty begins with oil and gas sales Mineral owner receives 1/8 cost free royalty Non development no trespass

11 Statutory/Compulsory Pooling Continued 7/8 pays your share to drill, equip and complete well plus penalty No cash is required from mineral owner After well paid for you receive 1/8 plus your owned share of well Non development no trespass Does not ruin it for your neighbor Threat of statutory pooling not a reason to sign a lease you do not like

12 PSYCHOLOGY of LEASING Key Participants in Leasing: Landowner = negotiator = price maker not taker Land man = paid by and loyalty to oil company, experienced check out their statements use multiple info sources

13 Psychology of Leasing (cont.) Negotiating Points: Lease can be a win win but you must FIGHT FOR IT * Use Dogged Determination Know what you want, be firm tough as nails May not arrive on an agreement OK Good leases take time and last a long time Seek oil and gas attorney advice understand what you are signing

14 An oil well pumps in a newly constructed neighborhood in Signal Hill, California, Long Oil Field

15 Conundrum Continued A cash bonus is offered as incentive to lease: Bonus = up front cash payment; likely a sure thing; hard to turn down vs. Lease; if you get oil/gas production this is where you can make your money & still protect resources Lease written by company for company Lease can be a win win situation= negotiate What you are willing to accept? Will not get all that you want

16 Conundrum Continued What is important to you? Make sure lease addresses it Company may not negotiate Consider saying no until your goals are met Standard leases are changing and some initial terms more acceptable to mineral owners

17 What Should a Mineral Rights Owner Think About? The oil and gas lease = marketing plan for mineral rights Lease language can be used to help protect land and water quality Don t treat your minerals as second class citizens! Mineral income can be substantial (larger land tracts) Even with a good lease you need to manage all activity

18 Environmental Protection Begins with the Oil and Gas Lease Water protection can be put in lease: if such tests reflect a material adverse change in the Lessor s water quality or quantity, then it shall be presumed that the same was caused by the Lessee s operations Lessee then required to furnish water supply until remediated Some oil and gas production companies agree in lease there will be no Hydraulic fracturing; Jackson, Oakland, Washtenaw counties

19 Environmental Protection Begins with the Oil and Gas Lease DEQ Oil and Gas Administrative Rules Part 14 Hydraulic Fracturing Groundwater baseline testing required(company paid) Use water withdrawal assessment tool Monitor well(s) Disclosure of chemical additives Water protection not offered in Standard lease

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21 Oil Well Adjacent to Crop Field

22 A pump jack operates in the parking lot of a McDonald's restaurant in Signal Hill, Long Beach Oil Field

23 Magnitude of The Royalty Ideal Situation Using Gross Income Situation: 1 acre in a 40 acre drilling unit, one oil barrels/day for 200 $60/barrel 25 x 200 x $60 = $300,000/ year well gross 1/8 royalty = $37,500/yr = 1 ac = $937/yr 1/6 royalty = $50,100/yr = 1 ac =$1,252/yr 3/16 royalty = $56,400/yr = 1 ac = $1,410/yr.20 royalty = $60,000/yr = 1 ac = $1,500/yr

24 Royalty Terms Lease Terms Royalty 1/8 (12.5%) federal government 1/6 (16.7% ) State of MI 1/8 (12.5%) to 25% private leases TX, CO, PA 20% not uncommon Gross proceeds of Oil and gas (including all substances contained in such gas) produced from the leased premises in marketable condition at no cost to lessor

25 What Should a Mineral Rights Owner Think About? Don t sign a lease if you do not support drilling Not fair to the oil/gas company Leasing is a choice Bonus of $150/acre for 5 years = $30/ac/yr If you plan to develop property to residential, a regular oil and gas lease may not be compatible

26 Types of Oil/Gas Leases Oil and Gas Lease: Per acre annual rent paid until royalty received State of MI lease has Oil and Gas Lease (Paid up) No annual per acre fee; included in bonus Oil and Gas Lease (No Surface Use) Also called Non Development Lease No surface disturbance or structures No pipelines w/o owner permission

27 GRANTING CLAUSE Lessor, for and in consideration of $, the receipt of which is hereby acknowledged, does hereby grant, lease and let unto Lessee the land described below, including all interests therein Lessor may acquire by operation of law, reversion or otherwise, (herein called "said land"), exclusively, for the purposes of exploring by geophysical and other methods, drilling, mining, operating for and producing oil and/or gas, together with all rights, privileges and easements useful or convenient in connection with the foregoing and in connection with treating, storing, caring for, transporting and removing oil and/or gas produced from said land or any other land adjacent thereto, including but not limited to rights to lay pipelines, build roads, drill, establish and utilize wells and facilities for disposition of water, brine or other fluids, and for enhanced production and recovery operations, and construct tanks, power and communication lines, pump and power stations, and other structures and facilities.

28 Lease Contract Primary term: Allows company time to begin exploration: 5 year primary term with 5 year lease extension option is really a 10 year primary term lease

29 Landowner Assns Mineral owners can work as a group to negotiate oil and gas leases Three Types Landowner Info Sharing Group no lease marketing Landowner Coalition markets contiguous acres, but not binding on members Landowner Bargaining Unit members must accept lease terms agreed to by majority

30 Negotiated Lease Changes that Require no Extra Up Front Cost to the Oil Company Warranty of title do not warrant the title Mineral owner lease termination ability; example bonus paid late Settlement of differences other than litigation = mediation or arbitration Limit lease to oil, gas and other hydrocarbons, not other minerals or gases

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33 Negotiated Lease Changes that Require no Extra Up Front Cost to the Oil Company Continued Landowner notification of lease assignment and written approval necessary from landowner Can negotiate certain portions of your property as non development areas Add: Lessee agrees to indemnify, defend and hold harmless Lessor from all claims.(deals with subcontractors)

34 Negotiated Lease Changes that Require no Extra Up Front Cost to the Oil Company Require screening well site using trees Limit noise reduction i.e. elec motors when available Standard lease allows drilling within 200 feet of house

35 Timber Specify how timber will be handled, you want to have the option to remove yourself Cut in sawlog lengths/8 foot lengths for pulpwood Have your forester value the timber before it is cut Reclamation plant back same species?

36 Other Mineral Owner Alternatives Do not release signed lease until bonus received relates to Order to Pay Surface Damages; Should be paid for soil disturbed for roads, well site, crops, pipeline; include tile, buildings, etc.

37 Placement of Tanks, Drill Site, Etc. In lease can require: Lessee and Lessor shall mutually agree on the location of drill sites, tanks and necessary structures for production equipment, and the course, route and direction of roads and pipeline installations. Include map of leased parcel Photograph your site before any operations

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40 Shut In Wells Well capable of producing but markets or other reasons prevent sales Require Pugh Clause: All lands not receiving royalty from any unit or pool after primary term shall be considered un leased and returned to full control of Lessor Lease in effect as long as producing in paying quantities, not until permanently ceases

41 Horizontal and Directional Drilling Each horizontal well can replace vertical wells = surface owner friendly Neither automatically uses hydraulic fracturing Hydraulic fracturing is a well completing method to stimulate oil and gas production after drilling takes place Some horizontal and directional wells are hydraulically fractured and some are not

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43 Directional Drilling by West Bay Exploration Urbanized/Residential Areas such as Schoolcraft College and the City of Livonia Recreational Areas such as Kensington Metro Parks Environmentally Sensitive Areas such as Spider Lake Courtesy of West Bay Exploration

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45 Post Production Costs b: A person who enters into a gas lease as a lessee after shall not deduct from the lessor s royalty any portion of post production costs unless the lease explicitly provides for the deduction of post production costs. Costs allowed if in lease: Removal of C02, N2, H2S, transport into non affiliated pipeline system and OTHERS IF IN LEASE Can reduce owner income >50%

46 An oil well next to a residential area in Signal Hill, California

47 MSUE Landowner Resources on the website: Landowner Info For Oil and Gas Leasing (Curtis Talley) Video: Understanding and Negotiating the Oil and Gas Lease State of Michigan Oil and Gas Lease Oil and Gas Expert Resources for Private Landowners (attorney list) Grant of Easements: Information for Landowners

48 MSUE Resources Cont. Fact Sheet: Compulsory Pooling and the Landowner that has not Leased Lease addendum on website Free Oil and Gas Newsletter contact MSU Extension news articles News article series: Survey of Oil & Gas Attorneys Your county MSU extension office

49 QUESTIONS?