CHAPTER 6 ASSEMBLING THE LAND POSITION

• Jurisdiction: United States

Oil and Gas Agreements: The Exploration Phase
(May 2004)
CHAPTER 6
ASSEMBLING THE LAND POSITION
Don E. Schroeder
Team Leader - Northern Rockies Land
EnCana Oil & Gas (USA) Inc.
Denver, Colorado

Don E. Schroeder began his career in 1978 as a landman with Amoco Production Company in Denver. He later worked in various landman, management and executive positions for CSX Oil & Gas, Leede Exploration, Meridian Oil, Samson Resources, Summit Resources Ltd. and Dudley & Associates, LLC. He has worked many different areas of the U.S., with emphasis in the Rocky Mountains, and has also worked in Canada and Russia.

Don holds a Petroleum Land Management degree from the University of Texas at Austin, and a Master of Business Administration degree from the University of Denver.

He is currently the Team Leader for the Northern Rockies land group at EnCana Oil & Gas (USA) Inc.

I. SCOPE

A basic assumption underlying this paper is that a company has no significant amount of acreage in a new natural gas play area and needs a relatively large acreage position in order to make its project economically feasible. Therefore, the main focus will be on the methods of acquiring an interest in a relatively large amount of contiguous acreage. This would be representative of the "unconventional" natural gas play - which is becoming more and more conventional, especially in the Rocky Mountain region.

Since a predominant amount of land in the Rockies is owned and/or administered by the federal government, more focus will be placed on federal acreage issues in this paper.

II. INTRODUCTION

Improvements in well completion techniques and increased gas prices have vastly lowered the risk and improved the economics of plays that were previously uneconomic or marginally economic. Most of these are tight-reservoir gas plays and coalbed methane plays, which are often referred to as "unconventional" plays. They tend to cover broad geographic areas and hence allow for, and sometimes necessitate, the accumulation of a significant amount of leasehold acreage. As more plays have become economic, or at least more alluring, more areas have been experiencing active leasing - not only frontier areas, but also mature productive areas as well, with new targets. A company's approach to assembling an acreage position will depend largely on the type of area and the activity level being experienced, as well as other considerations. Some plays have been made more economic on a relative basis due to a competitive advantage over similar plays which are in areas more prone to environmental opposition, permitting delays, and pipeline take-away constraints that result in huge pricing differentials.

Advances in all technological aspects of exploration and exploitation have caused a renaissance in several basins. Some fields have been "rediscovered" and exploited because of new technology. New targets include the unconventional continuous type accumulations - tight-gas sands, coalbed methane and gas shales. ¹

Once a geographic area has been determined to be of prospective value or at least of geologic interest by your technical personnel, there are different approaches to take in acquiring rights to explore. These approaches will vary depending on the type of play, the company's philosophy or financial commitment in the play, and the nature of the mineral ownership and/or regulatory arena within the play area. There are also measures the landman can take in the initial stages of geological and geophysical investigation (i.e., when the geologist and geophysicist are doing regional work through examination of existing well and seismic data), which are relatively inexpensive and of strategic value. These measures would include ascertaining the general nature of land ownership (federal, state, private, etc.), which can be done quickly and inexpensively by utilizing maps from a commercial lease ownership map service. Also, a review of BLM Land Status maps, BLM OG plats, plat books, tract books, serial register books, and BLM case files would provide more detail on the status of federal lands and leases. State records are also very helpful and relatively easy to navigate through. Determining the timing and frequency of state and federal sales, the time lag between nomination of tracts and offering of leases for sale, are also quick and inexpensive, but can give your asset team and management enough critical information to support going ahead with the project. Reviewing the Resource Management Plan (RMP) for the area will give you a feel for possible stipulations and off-limits areas. If the lands are predominantly federal, NEPA (National Environmental Policy Act) review can never start too soon.

These initial investigations allow you to "hit the ground" running once you get the go-ahead from management to start acquiring rights. Once it has been determined that the play is viable and worthy of possible exploration and investment, the land position must be assembled as quickly as possible.

III. ACQUIRING RIGHTS BEFORE NEW GEOLOGICAL/GEOPHYSICAL DATA ARE GATHERED

You may have enough encouragement through your early evaluation (i.e., prior to acquiring much geological and geophysical data), or through comparison to an analogous play, to go ahead and pursue the acquisition of new leases -- especially if the capital costs are low. Otherwise, you may need more technical data before you are ready to proceed to that level of commitment.

Regardless of whether the company's interest is casual or quite serious, the big question is going to be how much acreage you must acquire before testing your play concept. This is an ongoing balancing act between the level of risk you are willing to accept and the amount of capital you are willing and/or able to invest in the play.

Another issue to consider at this phase is whether to record your instruments (e.g., options and leases) and consequently, run the risk of revealing your activity and interest in an area. There is a definite trade-off between tipping your hand to competitors and the comfort of having your rights put of record. In many states you may reasonably run this risk, but be careful in Louisiana, which is for all intents and purposes a pure "race" jurisdiction. ² If you are acquiring existing leases from another company, you can make the deal, get the assignment(s) and not put them of record until you are in a position to do so. (It's prudent to get the seller to agree to this, at least for a period of time.) Recording may tip off the curious and encourage the speculators. It can have a very negative impact on your ability to secure a significant amount of land within the play, especially in frontier areas, where the price of entry is relatively low.

For coalbed methane plays, the very nature of the play usually necessitates a contiguous block of lands because of needed communication between the wells. ³ In most cases you would not be doing extensive seismic surveys prior to undertaking the acquisition of leases for your coalbed methane project.

In many cases, however, your team will require your help in acquiring rights to conduct seismic surveys over unleased lands. Set forth below are descriptions of certain rights, including seismic permits and seismic options, among others. You should be aware of the potential for geophysical trespass. Many articles have been written on the subject of geophysical trespass, ⁴ and it is beyond the purpose of this paper, and the qualifications of this author, to attempt to address the topic further. One leading paper is Professor Owen Anderson's and Dr. John Pigott's presentation to the 42%gnd%g Rocky Mountain Mineral Law Institute on 3D seismic technology and its legal consequences. ⁵ This paper not only covers the technical fundamentals of 3D seismic, but also the legal requirements of permitting, or how to "avoid geophysical 'trespass."' ⁶

Each of the following approaches assumes you have utilized the appropriate records (BLM, state, county records) for proper determination of surface, mineral and leasehold ownership.

A. Seismic permits

1. Purpose - to acquire the legal right to conduct geophysical exploration.

2. Procedure

a) unleased fee minerals - The permit should be taken from the mineral owner(s).

b) leased fee minerals - The permit should be acquired from the lessee(s) of record, or the mineral owner(s), depending on who has the exclusive right to explore (review the granting clause in the respective oil and gas lease).

c) state minerals - The permit must be acquired from the appropriate regulatory agency. Most state oil and gas leases do not grant the exclusive right to explore - in those that do, you will need to permit the lessee(s) as well.

d) federal minerals - The permit must be acquired from the appropriate federal surface management agency and/or BLM. Federal oil and gas leases do not grant the exclusive right to explore.

3. Advantages - The process is relatively quick (except for BLM permitting) and inexpensive. It allows you to high-grade the acreage you want to lease (you may be willing to run this risk and pay more for the high-graded acreage after the shoot). If the program doesn't get completed, or doesn't pan out, there's not much lost.

4. Disadvantages - The process tips off your competitors. If the results of the geophysical program do give you some encouragement, the mineral owner is going to be in a much better negotiating position. Industry competitors may have already taken options or new leases, while your company has taken all the risk.

5. Comments - Normally, the geophysical contractor acquires the appropriate seismic permits. In a proprietary survey, it is prudent that you require the contractor to utilize competent and experienced landmen to search the county records to ascertain the rightful parties to permit. The landmen should be knowledgeable of the particular state laws on geophysical trespass. ⁷ It is also...