Surface lease question

[grassfarmer]

Cowman or anyone else with oil field experience I have a question. We have a surface lease that has been in place for 10 years and so received a notification that we can appeal for a compensation review shortly. What happens in these cases? do oil companies increase compensation or decrease it generally? what are the facts that would alter a compensation payment up or down - change of use of land, appreciating land values? Any advice appreciated.

[Horse]

Drawing on my own experience on several leases, I'll advise the following: The letter is sent as a requirement because of the impending aniversary of the signing of the lease.
If you wish to discuss increased compensation you should send a letter to that effect.
The company will no doubt send you a letter indicating that they feel you are getting fair compensation, at which time you should respond requesting to meet with the company landman and have him or her provide you with their facts to support their claim that you are getting fair compensation.
In preparation for a meeting you should get as much info as possible from neighbours or people in the area with leases of the same size etc., to justify your request for additional compensation.

No oil company will offer more money unless you have been grossly under compensated.
If the company denies your request for additional compensation you have the option of asking for a review by the Suface Rights Board.

[farmers_son]

The Surface Rights Board has a website that allows you to review Board decisions, rental reviews etc.

See: http://www.surfacerights.gov.ab.ca/SRB/decisions.aspx

A good way to get a feel for what rental rates are in your area is to contact real estate agents who will have land for sale with surface rental revenue and they will be open about the annual rent.

Land values would not affect the annual rent. Generally the rents do not go down, very poor public relations. Contact the Surface Rights Board at Phone: (780) 427-2444 or the Farmers Advocate at (780) 427-2433 for more information.

A change in the use of land could affect the rent but usually only upwards unless for some reason it was impossible to revert back to the higher use. Example: past rent was determined when land was intensively farmed with lots of machinery use and high value crops. Now land is in pasture. Land agent might try and argue that rent should be reduced because of the change in use but the SRB would consider the higher use as long as the land could still be reverted back to the previously demonstrated intensive practice.

The fact that the company does not actually use all the land in the well site is not an issue. At any moment, without your consent they could take the entire site back and you would no longer be farming it. It is recognized that the company and you mutually benefit from allowing you to farm most of the site and rentals are not reduced because of this common practice.

Without exact knowledge of rents in your area I would not be surprised to find rents in excess of $3000 per year on land that was cultivatable even if not cultivated at the moment assuming 4 acre or larger well site. I have pasted a link to a SRB decision dated March 14, 2001 where annual rent in your area was determined to be $3400 annually. See:

http://www.surfacerights.gov.ab.ca/downloads/retrieve.aspx?file=2001.0100.pdf

[silverback]

Are they not supposed to have a review of compensation every 5 years? That is the norm in this area. If so, I would suggest they owe you for 5 years at the higher price. In this area the value of the lease will never go down due to increasing land values.

[cowman]

Unlikely you'll get more. The rent is based on production and if it used to be in grain and hay and now is in pasture, the company might argue it is less productive!
Oil and gas companies routinely will try to pay you less for pasture when signing a drilling lease. About three years ago I was dealing on a lease and they were paying $350 production on the grain land and $200 for the pasture. I told the landman I'd go out and run the cultivator around that portion if it would help, but it might take awhile! I got the $350...but then they were hot to go!

[silverback]

Sorry, the point I missed in making was that around here, every time they drill a new well, the value of that lease site is going up. The value they used 5 years ago no longer applies. What is happening is that we are asking for the value that the new wells are getting and it is done.

[silverback]

I always tell them I grow BEEF on pasture land and last year one of them tried to use the BSE issue to say the land was not as productive, he found out why I have red hair !!!!

Surface Rights groups have sample contracts that are helpful but some of the members like Karl Zajes are radical and in my view harm more than they help with some of their comments.

[farmers_son]

Cowman: I would disagree about not getting more. Without knowing the rent that grassfarmer is receiving I would expect he would get more. I have always received an increase every time our wells come up for rent. Just like jacking up a car. I have never had a land agent come out for a rental review though, it always have been over the phone and fax. Typically rents have increased around the province.

And while rental reviews lack some of the leverage farmers enjoy when negotiating for new well sites, that is not to say that nothing can be done to convince the company that an increase in rent is not good business practice. I recall one time I was negotiating a rental review and the company was being somewhat difficult. I did a search of the well licence and compared it to the Surface Lease and found the well was built about 100 meters off of the lease. The rental increase came through right away.

The smart companies realize that a portion of the rental payment is not for adverse effect or loss of use but for the ongoing cooperation of the land owner. Decreasing rents is not good PR and increases every five years help smooth over a lot of the annoying nuisances that are part and parcel of having to farm around a well. One advantage rental reviews have over new leases is farmers have the right to apply to the SRB to have the rent reviewed where new sites only the operator can apply. Still the farmer needs to be informed about what the SRB would be expected to award before applying.

It is my impression that grassfarmer may not have owned this land 5 years ago so would not have been contacted to have the rent reviewed. If that is not the case, and if the company did not contact him 5 years ago for a review of rental, then that is a big error on their part and I would think that could be used as leverage for a bonus this time around.

[grassfarmer]

Thanks for all the help - this is a complicated matter if you aren't familier with it. Regarding dates - the well was drilled July 1996 and so I assume the notice to appeal after 5 years would be sent out in July 2000 (given that I am getting the 10 year appeal notice now only 9 years after the well was drilled) If that is the case the previous owner failed to appeal the 5 year renewal as I didn't buy the place until March 2001. There was no mention of any lease renewal negotiations in the farm purchase deal and I get the original compensation level so they must not have contested the renewal.
Cowman, I wouldn't lose out on converting grain land to pasture as a friend of mine has multi-year records of management intensive grazing profitability far outyielding the potential as grain land. His records have been used to establish land values on new leases successfully. In any case this was pasture originally - but how much more is it worth under intensive management when productivity has doubled?
What I don't understand is how rising land values factor into annual rental. When a new well is dug they pay you $x per acre to "buy" the site, an entry fee, nuisance and inconvenience fee on a one off basis. They also pay for loss of use and adverse affect which are the two things that comprise the annual compensation. How do either of these things change over the years? How do you make the case that you should be paid more money now than 5 years ago?

[cowman]

I wonder just what the profitability might be on intensive grazing? Would it be more than the standard rate the oil companies quote of $200/acre?
The fact is the price the oil companies put in for production is fairly decent? Probably worth quite a bit more than anyone could actually make? Thus three years ago when they offered the $350 for grain land they were basing it on 100 bu. at $3.50/bu.? That was the drought year and we got about 80 bu. and sold it for $3.31! Pasture was right around that $30/AUM so even if you could graze a cow on one acre for 6 months the oil company was still over paying you $20/acre?
Maybe I don't have enough information on how heavy you can stock an "intense pasture"? It sure must be heavy if you can sqeeze more than $350/acre out of it?
The boy is doing a little experiment on 60 acres this year with electric fences dividing the pasture into 10 acre parcels. It seems to be working fairly well even though it a pain to be moving cattle every few days and getting my butt shocked! I truly hate electric fences!
With all the rain I'm not sure it is much of an advantage. Around the water troughs(pasture lines) it is a mud hole and the bull in there slipped or something and came up lame, so we had to hook him and haul in another one. After a few days in the corral he was okay.

[cowman]

cowman, I guarantee you that the average lease in this area pays $450.00 an acre. The leases on my property are all at $450.00 and some of them have been paying that amount for over ten years.

[grassfarmer]

Cowman I said "...management intensive grazing PROFITABILITY far outyielding the potential as grain land."
This is different from the output potential of the land. Without considering the input costs of both systems to achieve a measure of profitability it is a worthless excercise (kind of like growing grain on marginal land in west central Alberta.)

[SW1-32-5-4]

The negotiations that I do this spring are all $700 an acre in the Special areas-- cultivated & deeded. I work for the landowner.

[silverback]

Are you saying the value for loss of use of production - per acre has been $450 ????? That seems unbelievable. (Not that I will say you are lying. lol)

What area is that in?? How was that calculated?? What type of well site?? (not that it should matter) That would jump our coalbed wells over $3000 per year!! If that is true we are getting shafted east of Airdrie

Thanks

[cowman]

I was just talking about the production portion of the rent, not the nuisance factor or adverse effect portion? If you factor in those then the lease rent should be in that $800-$1000/acre area? A normal 3 to 4 acre lease should be bringing in a rent of about $3,000/yr.?
grassfarmer: I realize the net profitability is different than the overall production capability, but the oil companies pay on overall production and do not factor in net profitability at all?
I have never seen any lease where the production portion of it pays more for pasture, over grain or hay land? In fact the oil company might pay the highest rate on export timothy land!
Still $350/acre is pretty decent rent for grainland and $200/acre is pretty darned good for pasture land? The problem is when in fact the pastureland is as good as the cropland! Then it might be very good economics to rip it up before they drill...or at least point out to them that, that is your intention if they insist on paying you for pasture!