SAN ANTONIO – The rush is on in the Eagle Ford Shale, and some of it has more to do with legal contracts than extracting oil and gas from miles below the surface.
The clock is ticking on many of the mineral leases that South Texas landowners signed a few years ago after the first successful Eagle Ford well in La Salle County in 2008.
If oil and gas companies don’t start production soon, they could lose rights to drill. People who own mineral rights would be free to sign leases with other companies.
Leases vary but typically include an upfront bonus payment that holds the property for three years. Many leases signed in 2009 will expire this year, and those signed in 2010 expire in 2013.
Even after the initial period, many leases have clauses requiring companies to continue drilling.
“Why are you seeing so many people down here?” asked attorney John Petry, a shareholder with Langley & Banack in Carrizo Springs. “The production is very prolific. It covers a very large area of South and Southwest Texas. And it is incumbent upon the oil company to protect their leases.”
“The oil company is compelled to get production and keep drilling to maintain the acreage,” he said.
Bobby Tudor, chairman and CEO of Tudor, Pickering, Holt & Co., an energy-focused investment bank in Houston, said many companies, particularly those working in areas that produce more natural gas than crude oil, are drilling quickly simply to meet the terms of their contract and keep their leases – not because they want to drill gas wells now.
“You have to drill a well to hold acreage,” said Tudor, who spoke recently at a media tour hosted by BHP Billiton Petroleum.
Natural gas prices have fallen from more than $12 in 2008 to less than $4 today, making it largely unprofitable to drill gas-producing wells.
Tudor considers the Eagle Ford the second-most economical gas field in the United States, behind the Marcellus Shale in the Northeast. But even in the Eagle Ford, companies still have made a massive shift to drilling primarily for oil.
“The vast majority of the gas in this country is not economic,” Tudor said.
Instead, most gas companies are biding their time until prices rise into the $4-to-$6 range and will only drill what they have to before then, Tudor said.
One well won’t do it
J. Michael Yeager, president of BHP Billiton Petroleum, said the truck traffic that has inundated South Texas is probably at its worst right now as companies build drilling pads and place rigs in a race to meet lease obligations.
“We’ve got all kinds of service vehicles running around,” he said. “It will dissipate. It is this peak level.”
San Antonio attorney James Barrow said many leases stipulate how many wells can hold a lease, ensuring that companies can’t drill one well to hold thousands of acres.
“The oil company has no obligation to even set foot on the place. But they have an economic incentive,” he said. As long as they are producing or at least conducting operations, then all or some part of the lease will remain in effect.”
If there’s no production after a period of time, companies might lose the right to drill any deeper than they already have.
Looking deeper now
Barrow has a copy of the 1933 minerals lease for the King Ranch. It’s 17 pages long, and only about three pages “are the guts” of the lease. The rest is a legal description of the property.
Leases have become vastly more complex since, and some companies have even built strategies on searching for expired rights.
Colby Williford is vice president of land with Momentum Oil & Gas in Houston, a company focused on geologic formations that run deeper than the Eagle Ford, including the Edwards Limestone, Glen Rose Limestone and Pearsall Formation.
He said the leasing for those formations involved blocks of land already leased for Eagle Ford production.
“Everybody was leased. You couldn’t just look at the courthouse and find the landowner that wasn’t leased. We looked for deep rights that had expired,” Williford said. “There’s multiple ways for deep rights to drop off and other rights to come open.”