Twin Cities confirms "no group negotiations" policy

SHREVEPORT, LA (KSLA) A major lease-broker in the Haynesville Shale confirms they will not be negotiating with groups anymore.  It's not good news for many of the dozens of neighborhood organizations that have formed over the past several months in search of better lease terms.

Monday night KSLA News 12 reported that the East 80 Oil and Gas Leasing Coalition has run into a roadblock in their attempts to negotiate with Chesapeake Energy: they've been told the company's leasing broker, Twin Cities Development, will only deal with individuals.

We asked Twin Cities today about that, and the Director of Community Affairs Clay Baskin confirmed it.   "It's our new policy for 2009, and what we are doing is, we're giving the individual lessor the opportunity to negotiate on their own behalf for their own oil & gas mineral lease." Baskin says the new policy is in response to problems they've encountered in dealing with large groups, "Past experience hasn't turned out to be as productive as we had hoped. And also whenever you have the spillover of the acreage that's not contiguous to the section that we're focusing on, then it's in effect at that particular time not acreage that we're interested in because, A, we don't have a drill site, B, there might not be pipeline access at that current moment."

As the market has slowed, Baskin says, the focus for leasing has turned from grabbing up as much leasehold to what he calls 'controlled development.'  "We have the same  manpower, it's just much more controlled and much more focused. So yeah, for individuals living in sections where we have drill sites and we have pipeline access, you're going to see that activity begin to pick up." 

"So what we want to do is focus on section by section, and as I said before, 'controlled development,' and then move forward from one section to another as opposed to taking on maybe 4, 5, 6 or several different ranges as opposed to taking on whatever we can't develop all over, "  Baskin explains. "What we have to do is we have to put them together and we have to turn them over so that Chesapeake can start drilling and see a return on their investment."

Chesapeake Energy Corporation (NYSE: CHK) currently claims 460,000 net acres of leasehold in the Haynesville Shale.  About 110,000 of that is in a joint venture with Plains Exploration and Production Company (NYSE: PXP).

In addition to lower bonus offers, Baskin says Twin Cities' lease terms in recent offers are now longer.   "The primary term (is) generally on a 5 plus 5 basis. And once again it has to do with the fact that if you take into account that the intricate parts of putting together an urban environment such as Shreveport and Bossier City, you need that extra time in order to fulfill your committment, not only to us to our operating parter Chesapeake, but also to the individual lessor.   If you sign a lease with a lessor, you expect to have your minerals produced.   But in effect, whenever we deal with so many people and so many landowners, it takes us longer over here in an urban environment to put that together. "

In other words, the longer lease terms give Chesapeake more time to develop all the acreage they've been leasing up.   So what's in it for the landowner looking at signing a five year mineral lease?  Who's to say natural gas prices - and therefore mineral acreage values - won't go up again in a few years?  "That's exactly what it is," says Baskin, "Who knows?'  And that's what  we want to project to people is, first thing, we want to educate them.   Second thing we want to do is give them the opportunity. What everybody has to understand is that they have the opportunity to wait.   Or they have the opportunity to sign. "

Or be force-pooled.   This happens when a majority of mineral owners in a unit (640 acres, or about one square mile) have agreed to lease their minerals. The operator can ask the Department of Natural Resources' Department of Conservation to "force pool" the remaining un-signed mineral owners so that the well can be drilled. Since they haven't signed a lease, force-pooled mineral owners do not receive a per-acre bonus and will get not get paid until the cost of the well has been recovered by the operator.  For example, if you own 32 acres in a 640-acre unit, you would responsible for 5% of the well cost. These deep wells into the Haynesville Shale have typically cost anywhere from $5-8 million each to drill. After that, however, you would receive your full proportionate share of the revenues, ie., 100% royalty on your share of the unit. That could mean big returns - if the well is successful. The downside: if the well never breaks even, force-pooled mineral owners won't see a dime.

Baskin says forced pooling has to become economically feasible for the producing company to do so, but that decision is up to Chesapeake.   "A lot of people ask me, 'When will you stop leasing?'  Well, we won't stop leasing until there's 100% or until we effectively cannot lease anymore acreage and then if it is economical to go ahead and produce the well and go ahead with force pooling that's Chesapeake's call and they go forward with that process."