The Haynesville Shale and Mineral Leasing

What every land owner needs to know

Presented by: Kassi Fitzgerald

What is the Haynesville Shale?

•  Unconventional gas deposit – Methane gas located in hard “shale” rock

instead of porous rock formations. – Between 10,500 and 17,500 ft deep – Reported by Chesapeake CEO as being one

of the “4 largest natural gas deposits in the world”

– Extends from NW LA to E TX

Parishes Impacted

•  Boarders not currently definitively defined •  All of: Desoto, Jackson, Red River,

Bienville •  Southern: Caddo, Bossier, Webster,

Claiborne, Lincoln, Caldwell •  Northern: Sabine, Natchitoches, Winn

Drilling Basics

•  Usually takes 20-30 days, 24 hrs/7 days •  Completion rig put into place •  Frac trucks complete the fracturing

process (takes about a week) •  Well head is installed (Christmas Tree)

along with storage tanks

Drilling Basics

•  Drilling & fracing processes are very loud •  Noise abatement (sound barriers and

sound blankets) help reduce noise. •  4-5 million gallons of water per day, per

well for drilling & fracing process. •  Only 5%-10% (some say up to 30%) of

water used can be recycled

Drilling Basics

•  Drilling mud: Combo of fresh water, bentonite clay, barium sulfate & calcium carbonate

•  Disposed of by separating solids from water – Solids mixed with the land surface & must not

be able to migrate to other land surfaces – Salt water goes in injection wells

Drilling Basics

•  Water used for fracing must be disposed of in deep formations in wells regulated by state and federal agencies due to potentially hazardous waste products

•  Naturally occurring radioactive material: (NORM): can build up in well piping, storage tanks & other surface equipment.

Drilling: Potential Problems

•  Air Pollution from Diesel engines •  Water quality and quantity issues •  Improperly drilled or cased wells or

corroded casing can serve as pathways for contamination of aquifers

•  Oil based muds commonly used for high pressure shales or during directional drilling. Oil contaminated cuttings contain hazardous chemicals

Drilling: Potential problems

•  Muds usually contain bentonite clay: very expansive soil. Common practice to dispose of drilling mud either by burying the reserve pit or discharge the mud to the surface

•  If building on a former drill site you must remove all unstable and toxic materials & fill the pit with compacted materials to qualify for FHA mortgage insurance.

Drilling: Potential problems

•  Soaps and other substances sometimes used to remove drill cuttings may migrate from the borehole into the ground water zone that supplies private wells.

•  Well blowouts: can completely destroy rigs and surrounding homes may have to be evacuated

Drilling: The Land Owner Should

•  Negotiate protections in their lease such as: – Testing of water wells prior to beginning of

drilling activity or stipulation that the quality and quantity of water is adequate.

– Payment for repair or replacement of water sources/wells if damaged

– Payment for surface damages (take “before” pictures of the land/homes)

Drilling: The Land Owner Should

•  Negotiate protections in their lease such as: – Re-contouring and re-seeding the land – Minimum distance from inhabited dwellings for

wells – Noise abatement technology and low pollution

equipment – Off site disposal of waste products from

drilling

Seismic Exploration

•  By blasting dynamite from a hole drilled several hundred ft in the ground OR

•  By dropping a heavy wt from a truck (thumper truck) on hard ground such as paved roads

•  By shaking the ground with a vibrasizer

Seismic Exploration: Potential Problems

•  Seismic lines destroy vegetation & may cause erosion

•  3-D tests –cause greater surface disturbance than 2-D tests

•  Dynamite “shot holes” may intercept the water table & water may begin to flow or seep to the surface.

•  Can cause water wells to become “dirty”

Seismic Exploration: The Land Owner Should

•  Ask Co. to avoid steep slopes, surface water areas & any ecological sensitivity areas

•  Negotiate more payment and stronger surface damage provisions if 3-D testing is done

•  Get water wells tested before Seismic testing is done

•  Review state regulations and ensure the Co. follows them

Legal Issues

•  Community Property: Both spouses must sign the lease

•  Co-owned land: Must have 80% ownership to lease without the other owners but “every effort” must be made to contact and contract with the other owner(s)

•  If no drilling for 10 years minerals revert to surface owner

Legal Issues: Force Pooling

•  Typically 640 acres based on section lines •  Land owners must be notified & hearing

held (typically in Baton Rouge) •  Costs taken out of production •  The “risk charge” of 200% of expenses

does not apply to unleased interest not subject to an oil, gas, and mineral lease

Lease Details

•  Never sign a standard lease! •  Minerals: Limit lease to petroleum and

natural gas and related hydrocarbons only except coal, lignite and uranium.

•  Negotiate the best possible bonus payment and try to stick to a 3 year primary term only

Lease Details

•  Minimum royalty should be 25% •  Ask for a “no cost” royalty •  Royalty payments should begin within 120 days

of production in paying quantities •  Stipulate what constitutes timely payment and

what penalties will result from late payment. •  Royalty payments should be based on price of

gas at the casinghead or market price.

Lease Details

•  Stipulate a minimum royalty per acre per year or define production in paying quantities.

•  Shut in provision should include: – Monthly or annual payment during shut in – Time limit on shut in (No more than 2 years)

•  Allow for reasonable time in the event of a force majeure but stipulate what constitutes a force majeure

Lease Details

•  Request removal of any liability of warranty on the title

•  Include an indemnification clause •  Include a vertical Pugh clause i.e.: you

retain depths from 100 ft below the deepest formation produced by the production company in the Haynesville shale

Lease Details

•  Request horizontal Pugh clause •  Do not allow clauses that allow units larger

than 640 acres without state approval •  Include a clause allowing you or your

agent reasonable access to the Company’s books

Lease Details

•  Request strongly worded water protection including testing of wells if you utilize well water

•  Negotiate surface rights separately •  Limit proximity of wells and storage tanks

to inhabited dwellings •  Include payment for all surface damages

How do I get what I need?

•  Organize your section/neighborhood •  Collectively bargain •  Ensure person negotiating for the group

has adequate knowledge, business sense and negotiating skills

•  Do not sign anything without reading it and understanding it.

•  Pay for representation if necessary

How do I get what I need?

•  Be patient, time is on your side •  Research and educate yourself •  Never allow yourself to be pressured into

anything

Where do I begin to organize?

•  Get a map of your section including property owners from the tax assessor’s office

•  Get in touch with people in your section •  Communicate, Communicate,

Communicate •  Hire help if needed •  Watch out for the elderly

Most important advice!

•  Remember this is a long term business deal. It may last longer than many marriages!

•  The O&G Companies are not evil but they are smart business people. Insist on being treated as a business partner.

•  Do not go into mineral leasing lightly, read, ask questions, get help if needed.

Needed Mineral Code Changes

•  Mandatory Horizontal Pugh Clause •  Separation of Mineral Leasing from

Surface Leasing •  Requirement for Disclosure of Activity •  Three Day Waiting Period •  Discussion & Lease in Native Language •  Potable Water protection requirements

Needed Mineral Code Changes

•  Full disclosure of chemicals and concentrations used for drilling including “trade Secrets” to the governing body providing environmental oversight

•  Requirement for site cleanup in the event of residential building

•  Hearings either in person or via Skype or other electronic media within 50 miles of sections impacted by drilling activity