Ten Acres or What?

Although KCC regulations require 10 acres for a drilling unit and 330 feet between a well and a lease line, in Eastern Kansas we’ve been drilling on 2.5 acre spacing for decades. This was based on another KCC regulation that specified in this part of the state a well only had to be 165 feet from the lease line. If that’s the “radius” from the well bore, the diameter would be 330 feet and, if a square, 330′ x 330′ makes 2.5 acres. However, the same regulation did not go on to say that, although a well only had to be 165 feet from the line, wells could be drilled on 2.5 acre spacing. Now, suddenly, the KCC is starting to require operators to apply for “well location exceptions” if they want to drill  on less than 10 acre spacing. The trouble is, Eastern Kansas is stripper well country and if you can only drill one well per 10 acres, you may not get enough oil to make “paying quantities” which is required to keep the lease alive (held by production). Even if an operator can get paying quantities, with production being cut 75%, who’s going to want to develop and operate in these parts? This suits a lot people fine because they don’t want oil wells around these parts, anyway. They aren’t thinking, of course, about all the tax revenues the counties get from that unwanted oil. Maybe without all those pumps clogging up the surface there’ll be more development of housing and commercial buildings that will generate more real estate taxes to make up for the loss of oil taxes. One thing seems certain, the landscape is in flux, and the future of oil in Eastern Kansas is uncertain.

Only Real Men Need Apply

Over the years I saw quite a range of private placement memoranda, prepared to coax money out of investors to drill oil and/or gas wells. They ran the gamut from thick slick magazine quality presentations with full color photos, graphs, diagrams and reports by petroleum engineers and geologists (that only petroleum engineers and geologists could understand) to things that looked like school reports written by 6th graders using a typewriter for the first time. It never ceased to amaze me that presumably well educated men wrote checks for thousands of dollars payable to somebody they’d never met in order to get in on oil well drilling programs that were grossly inflated as to cost and unlikely to yield a return on investment regardless of how good the wells turned out if they ever were, in fact, drilled. Even the 6th grade quality memorandum could attract enough money to fund the proposed program whose unstated goal, I sometimes suspected, was really a two-week spree in Vegas for the promoter and a few good buddies followed by a “sorry, dry hole” letter to investors.

I had a theory that it didn’t really matter to many investors if they ever saw a return; they just wanted to be able to tell their golfing buddies about their oil wells in Montana (or wherever). Regardless of whatever else they contained, most private placement memoranda had at least a couple of pages in capital letters “warning” about the high risk of putting money into drilling wells. Rather than serving to emphasize the need to think carefully and think twice before investing, it seemed that the warnings served to emphasize that “Only Real Men Need Apply”. There never seemed to be a shortage of potential investors who, in their own minds, were “real men” or, perhaps, who were easily persuaded that “real men have oil wells”. Over the years, I received several calls from women whose story began, “My husband invested in this oil well venture…”

It also never ceased to amaze me how such promoters avoided jail. Many of them probably gave little, if any, thought to federal and state securities (“blue sky”) laws. The ones who did probably assumed their “private” drilling programs were exempt from securities laws and regulations. Many programs probably were exempt from registration by reason of the Uniform Limited Offering Exemption (ULOE), though not from the “notice filing” required under ULOE. Exemption from registration did not mean exemption from the general fraud (“bad boy”) provisions of blue sky laws. Those provisions make it unlawful to misrepresent the facts (i.e., dozens of highly successful wells have been drilled all around our lease), as well as unlawful to not disclose important facts (i.e., nothing but dry holes have been drilled all around our lease). State securities regulators would periodically crack down on “oil well scams” and find a particularly egregious case to prosecute and “make an example”. And, yet, well educated men still write checks for thousands of dollars to somebody they’ve never met to get in on oil well drilling programs.

Speaking of petroleum engineer and geologist’s reports, after reading quite a few, one begins to wonder if they all use the same template and just fill in different names for the state, county and target formation. A humorous take on such reports can be seen here.

 

Oil & Gas Leases Continue Flying

Oil and gas leasing activity is still going on at a rapid pace and I continue to be amazed, sometimes appalled, at the variety of lease forms I’m seeing. It seems like every landman and every oil company has their own customized lease form. Some are more faithful to the “tried and true” standard provisions we’ve seen for decades; some can only be described as “imaginative”.

I recently came across some articles that might be of interest to landowners who’ve been approached about signing leases on their land, and thought I’d pass them along: Oil & Gas Leasing: Top 10 Things To DoOil & Gas Leases: 10 Common Mistakes During Mineral Lease Negotiation and Oil & Gas Production 101 for an introduction to what’s involved in drilling and producing. Each of the pages those links go to contain more links a person can follow in the process of becoming knowledgeable about the subject. As they say, knowledge is power, and it’s especially important when it comes to letting strangers use your land.