Oil and Gas Leasing from the Operator's Perspective

What to Expect When You’re Leasing:Oil and Gas Leases from

the Operator’s Perspective

Lisa C. McManusVice-President, Legal

Pennsylvania General Energy Company, LLC

Evolution of the Oil and Gas Lease

To have and to hold for a term of five years and for so long thereafter as oil or gas are produced.

This Lease shall remain in force for a primary term of FIVE (5) years from 12:00 AM. April 23, 2010 (effective date) to 11:59 P.M. April 22, 2015 (last day of primary term) and shall continue beyond the primary term as to the entirety of the Leasehold if any of the following is satisfied: (i) operations are conducted on the Leasehold or lands pooled/unitized therewith in search of oil, gas, or their constituents, or (ii) a well deemed by Lessee to be capable of production is located on the Leasehold or lands pooled/unitized therewith, or (iii) oil or gas or their constituents are produced from the Leasehold or lands pooled/unitized therewith, or (iv) if the Leasehold or lands pooled/unitized therewith is used for the underground storage of gas or for the protection of stored gas, or (v) if prescribed payments are made or (vi) if Lessee's operations are delayed, postponed or interrupted as a result of any coal, stone or other mining or mining related operation under any existing and effective lease, permit or authorization covering such operations on the leased premises or on other lands affecting the leased premises, such delay will automatically extend the primary or secondary term of this oil and gas lease without additional compensation or performance by Lessee for a period of time equal to any such delay, postponement or interruption.

vs.

Initial Considerations

• The Lessee’s Reputation• The Leasing Landscape• Developing a Rapport with the Lessee• Early Agreement as to Key Terms• Guarantees• Professional Responsibility

The Lessee’s Reputation

• Financial stability• Operating or Speculating?• Experience• General Reputation

– Google Alerts– Skytruth Alerts - NOVs– MarcellusGas.Org– GoMarcellusShale.com

The Leasing Landscape

• County• Price of Gas• Geological formations• Competing E&P Companies• Neighborhood Grapevine• Enhanced Technologies

The “Small Stuff”

• Developing a Rapport with the Lessee• Early Agreement as to Key Terms• Guarantees• Professional Responsibility

Lease Form

• Producer’s 88• Operator’s Lease Form

Commonly Negotiated Lease Terms

• Bonus– No inclusion of actual bonus– Value of Tract: Location and Size– Impact of Technological Advances– Community Leasing

• Lease Term– Number of Owners to Be Leased– Environmental Concerns– Geological Challenges

• Extension of Primary Term – Right to renew/first refusal

Commonly Negotiated Lease Terms, contd.

• Royaltieso Skirting the GMRAo Impact of Post-Production Deductions

Those paid to the operator’s affiliate/subsidiary Those paid to third-parties in arms’ length, commercially reasonable

transactions

• Delay Rentalso Paid-up Lease v. Delay Rentals

• Most Favored Nations Clause• Shut-In/Delay in Marketing

o Time limitations and Alternatives

Lease Development/Implied Covenants• Primary Covenants

– The Prudent-Operator Standard– Initial Exploratory Well Covenant– Implied Drilling Covenants– Protection Covenant– Development Covenant– Further Exploration Covenant– Marketing Covenant– Covenant to Use Reasonable Care and Diligence

• May be Waived• Caldwell v. Kriebel Res. Co., LLC

– No implied duty to drill all horizons

Pooling, Unitization, and Pugh Clauses

• Pooling generally refers to integration of smaller tracts of land to obtain a drilling permit to comply with the state’s spacing rules – applies only to drilling penetrating Onondaga

• Unitization refers to the consolidation of fee or leasehold interests covering a common source of oil or gas in order to most efficiently extract the oil and gas

• Pugh Clause v. Unitization Limitations (e.g., 50%)• Depth v. Acreage Unitization Limitations

Surface Use

Provisions regarding surface use often include the following:a. setback requirementsb. consent to the location of pipelines and drill padsc. burial depth of pipelinesd. compensation for damage to growing crops, pastures, and timber; erosion of soil; fences, barns, and other structures; water pollutione. road constructionf. reclamation

• The dominant tenement has the right to access its oil & gas estate even if injury to the surface/servient tenement occurs provided the use is reasonable and necessary.

• Operator may pay a negotiated sum for damage for well location and other surface use in exchange for release.

Questions?