Issues Facing Landowners in

The Brown Dense

By James D. Rankin III

Perkins & Trotter, PLLC

The information provided in this presentation should not be taken as legal advice.

For specific questions regarding your rights, please consult an attorney.

DISCLAIMER

What is it?Where is it?Who’s here looking for it?What should I be concerned about?

The Brown Dense

Lower Smackover FormationOrganic-rich limestone Typically 200-300 feet thickSource rock to the Upper and Middle

SmackoverHistorical production, first discovered in

Smackover Field in 1937.

What is it?

Where is it?

Photo – Lowell Georgia, Oil & Gas Investor, Jan. 2006.

Fracture Stimulation

Leasing in the Brown Dense

“The meek shall inherit the earth - -

but not the minerals.”

- J. P. Morgan“Sometimes you get, and

sometimes you get got.” - Mark Twain

Oil & Gas LeaseA lease is a binding contract that creates legal rights and responsibilities for the landowner (lessor) and the production company (lessee).

Cash BonusAn up-front payment or “signing bonus” paid to the landowner by the leasing company. In a “paid-up” lease, this is the only significant cash paid to the landowner until and unless a producing well is established on the property. This amount is nearly always negotiable.

Primary TermThe primary term is the number of years that the lease will be in effect unless a well is being drilled or a producing well is completed on the property. A typical primary term offered today in Arkansas is three to five years, but may be more or less.

Secondary TermThe duration of the lease extending beyond the primary term if a producing well is developed on the property, or on other land that has been “pooled” or combined with the leased property for production.

RenewalMany leases also have an option to renew, which allows the lessee to renew for additional years (without drilling a well) by paying a second specified bonus before the end of the primary term.

RoyaltyThe landowner’s share of production or profit from oil or gas produced from the leased property. Royalty may be calculated before or after expenses, and may be based on various factors.

Shut-in RoyaltyPayment to the landowner when a gas well is capable of production, but is shut down for some period of time. Landowners should understand that when a well is shut-in, there is no gas being produced and no royalty being paid on production.

Pooling ClauseAllows the lessee to “pool” or combine your property with other nearby property to produce gas from one or more wells designed to drain the entire pool as a unit.

WHY ESTABLISH DRILLING UNITS?

• Protection of correlative rights

• Protection of the oil and gas producing reservoir

•Prevention of waste by overproduction

•Establish area for sharing of production proceeds and production costs

Damages ClauseThe lease should state clearly that the operator or lessee is liable for surface damages to crops, timber, roads, and other improvements.

Warranty of TitleMost form leases contain a clause whereby the lessor “warrants and agrees to defend the title to the lands herein described.” This could require the landowner to defend the Lessee in court.

10. Lessor hereby warrants and agrees to defend the title to the lands herein described, but if the interest of lessor covered by this lease is expressly stated to be less than the entire fee or mineral estate, lessor’s warranty shall be limited to the interest so stated. Lessee may purchase or lease the rights of any party claiming any interest in said land and exercise such rights as may be obtained thereby but lessee shall not suffer any forfeiture nor incur any liability to lessor by reason thereof. Lessee shall have the right at any time to pay for lessor, any mortgage, taxes or other lien on said lands, in the event of default of payment of lessor, and be subrogated to the rights of the holder thereof, and any such payments made by lessee for lessor may be deducted from any amounts of money which may

Pugh ClausePut simply, when operator finishes the drilling started in the primary term, the lease becomes severable, freeing up the lands the operator failed to develop.

If at the end of the primary term, a part but not all of the land covered by this lease, on a surface acreage basis, is not included within a unit or units in accordance with the other provisions hereof, this lease shall terminate as to such part, or parts, of the land lying outside such unit or units, unless this lease is perpetuated as to such land outside such unit or units by operations conducted thereon or by the production of oil, gas or other minerals, or by such operations and such production in accordance with the provisions hereof.

Statutory Pugh Clause

Prevents extending the term of a lease to lands with no activities. Parties can agree to extension.

15-73-201.  Lease extended by production -- Scope.

  (a)  (1) The term of an oil and gas, or oil or gas, lease extended by activities on lands in one (1) section or pooling unit, whether established by rule or by order of the Oil and Gas Commission or the lease, shall not be extended to sections or pooling units under the lease where there has been no activity.

What is integration?A statutory process to protect the

correlative rights of mineral interest owners.Drilling imminent.Unleased mineral interest owners.Application – Notice – Hearing.Options.

LeaseParticipateElect Non-consentNo Response

Lease after Integration?

15-day election period.Options.

LeaseParticipateElect Non-consentNo response.

AOGC Rule 43 – Fayetteville Shale

Developed to accommodate horizontal drillingEstablishes well spacing and drilling unit sizeDrilling Units – Governmental Sections

(~ 640 acres)Maximum of 16 wells per Drilling Unit

Standard Governmental Section drilling unit (640 acres) in north Arkansas gas

producing area

Variable Set Back 560 ft to 1320 ft

5280’+_

5280’+_

Set Back Area are off limits for completions, without approved exception location.

Variability of Drilling Unit size in southern Arkansas oil producing region

5280’

5280’

Completion Areas

Completion Areas

Set Back Areas in Red

Set Back Areas are off limits for completions, without approved exception location.

If property is sold, who receives future royalties?Royalties are paid to the recorded mineral

interest owner.

Mineral rights transfer with property absent a reservation.Contact Operator

Deed - Name - Address - Tax ID.

Surface Use and DamageMineral Estate is Subservient to Surface

Estate.

Mineral Owner – Reasonable Use of Surface.

Lessee Required to Return Property to Original Condition “As Near As Practicable”.

Who Protects Surface Owner?Arkansas Oil and Gas Commission

Arkansas Department of Environmental Quality

Private Attorney

How Thorough Are Title Searches?Record Mineral Interest Owner

Land Grab = Ownership Map Leasing

Division Order Before RoyaltiesAttorney Title OpinionLocate Mineral Interest Owner

Fair Market Value for Mineral LeasesLocation, Location, Location

Established ProductionInfrastructure

Coffee Shops and Water Coolers

Negotiate

Can You Renegotiate After Signing?Lease = Binding Contract

Breakable?FraudMistake

Virtually All Are Enforceable.

SOURCES OF INFORMATION

www.aogc.state.ar.us

http://www.gohaynesvilleshale.com/group/brown-dense-lower-smackover

www.perkinstrotter.com(870) 863-4949

Question & Answer