Throughout 2021, SWN Production Company, LLC (a subsidiary of Southwestern) has been very active in Ohio County, Marshall County, and Wetzel County, West Virginia. My office, Gold, Khourey & Turak, has negotiated many different oil and gas leases with SWN—whether it’s a half-acre lot in Bethlehem or a 60-acre parcel in the Proctor area. Through our negotiations on behalf of dozens of landowners, we’ve been able to establish a “going rate” for our clients miles above SWN’s initial offers. From what we’ve recently learned, that is all going to change in 2022—and not just for us. Read more to find out how we anticipate SWN’s oil and gas lease rates to change in 2022. If you have any questions, give me a call or email me, Christian Turak, at firstname.lastname@example.org.
Delay Rentals and Per Year “Bonus” Payments
Since the beginning of the Marcellus and Utica boom in West Virginia and Ohio, oil and gas drillers have almost always made lease offers that included a paid-up bonus.
What is a paid-up bonus?
Simply stated, a paid-up bonus is one lump sum payment typically made within 90-120 days of signing a lease for signing the lease. It allows the driller to hold the lease without commencing operations to drill for the primary term of the lease, which is typically 5 years.
Now, we’ve learned that SWN will not be offering a paid-up bonus to landowners. Instead, we understand that in 2022, SWN will be offering delay rentals. This will significantly impact the oil and gas lease rates from SWN.
What are delay rentals?
Delay rentals are yearly payments to “delay” commencement of drilling operations. If and when drilling operations are commenced, no further delay rental payments are due.
Mr. Smith and Mr. Jones are neighboring landowners in Marshall County, West Virginia and both have 50-acre parcels. SWN approaches both to have them sign an oil and gas lease.
Mr. Smith signs an oil and gas lease providing for a $5,000 per acre paid-up bonus. He signs his lease, and 90 days after doing so, he receives $250,000 ($5,000 x 50).
Mr. Jones signs an oil and gas lease providing for $1,500 per acre delay rentals. He believes that after the end of the 5-year primary term he will have received $7,500 per acre or $375,000 ($1,500 x 5 x 50). However, what he did not anticipate is that SWN commences operations in year 2 of his lease, and he does not receive his yearly delay rental payments for years 3-5. In the end, he only receives $150,000 ($1,500 x 2 x 50).
SWN’s 2022 Lease Offers
We anticipate that SWN’s lease offers starting in 2022 will be these delay rental payments. We anticipate that they will start at or below $1,000 per acre per year. We also expect that they may offer some landowners 4-month lease extensions of $450 per acre. While SWN may be willing to negotiate, the truth of the matter is that leases that provide for delay rentals are only very rarely in the best interest of a landowner.
Don’t Fall for the Trap
Oil and gas leases that provide for a delay rental payment may seem attractive. If (and it’s a big “if”) all 5 delay rentals would be paid, the total amount would likely be more than what is available as a paid-up bonus. Read my blog, Don’t Delay Your Bonus With Delay Rentals for more information.
The truth is that when a landowner signs a Marcellus or Utica oil and gas lease in 2022, it’s extremely likely that the acreage will be drilled in the next 2-3 years. Oil and gas companies, like SWN, are only leasing property that they intend to drill within a 2-3 year timeframe. There is virtually no competition between different drillers at this stage of the industry, and thus there is no desire to lease property if they have no plans to drill soon.
GKT Can Help Landowners
As an oil and gas lawyer representing landowners in lease negotiations, the question I’m most often asked is “what are the going lease rates?” My answer is always the same—there are no “going rates.” Each and every parcel is unique. One person’s 100-acre parcel may be essential to a driller’s production unit slated to be drilled in 2023. Another person’s 15-acre parcel may have no activity around it and have no near-term interest from drillers. You can probably guess which landowner could reasonably expect a higher bonus and better royalty rate and other terms. There are many pieces to the puzzle that I or another experienced oil and gas lawyer would look at to negotiate the very best deal possible.
At Gold, Khourey & Turak, we put the pieces of the puzzle together for our clients to maximize their leasing opportunities. That means a higher bonus payment, better royalty rates, and an agreement on your terms. Simply put, our job is to put more money in your pocket through our services—not take money from you in exchange for “looking over” your lease.
We are proud to bring real value to our oil and gas clients. And when it comes to leasing in 2022 with SWN, we will insist on a paid-up bonus as a condition to any oil and gas lease for our clients.
If you have oil and gas questions, contact GKT today—Live Chat at GKT.com, call or text us at (304) 845-9750, complete our online form, or email me, Christian Turak, at email@example.com. There is no fee to retain us, and we will discuss your situation at no cost to you.