Presentation by Jim Rankin, with Perkins Trotter PLLC, at an Oil and Gas Leasing Workshop in El Dorado on June 21.

1. By James D. Rankin III
Perkins & Trotter, PLLC

2.  The information provided in this presentation should
not be taken as legal advice.
 For specific questions regarding your rights, please
consult an attorney.

3.  What is it?
 Where is it?
 Who’s here looking for it?
 What should I be concerned about?

4.  Lower Smackover Formation
 Organic-rich limestone
 Typically 200-300 feet thick
 Source rock to the Upper and Middle Smackover
 Historical production, first discovered in Smackover
Field in 1937.

5. Where is it?

9. Fracture Stimulation
Photo – Lowell Georgia, Oil & Gas Investor, Jan. 2006.

10.  “The meek shall inherit the earth - -
but not the minerals.”
- J. P. Morgan
 “Sometimes you get, and
sometimes you get got.”
- Mark Twain

11. Oil & Gas Lease
A lease is a binding contract that creates legal rights and
responsibilities for the landowner (lessor) and the production
company (lessee).

12. Cash Bonus
An up-front payment or “signing bonus” paid to the landowner by
the leasing company. In a “paid-up” lease, this is the only significant
cash paid to the landowner until and unless a producing well is
established on the property. This amount is nearly always
negotiable.

13. Primary Term
The primary term is the number of years that the lease will be in
effect unless a well is being drilled or a producing well is completed
on the property. A typical primary term offered today in Arkansas is
three to five years, but may be more or less.

14. Secondary Term
The duration of the lease extending beyond the primary term if a
producing well is developed on the property, or on other land that
has been “pooled” or combined with the leased property for
production.

15. Renewal
Many leases also have an option to renew, which allows the lessee to
renew for additional years (without drilling a well) by paying a
second specified bonus before the end of the primary term.

16. Royalty
The landowner’s share of production or profit from oil or gas
produced from the leased property. Royalty may be calculated before
or after expenses, and may be based on various factors.

17. Shut-in Royalty
Payment to the landowner when a gas well is capable of production,
but is shut down for some period of time. Landowners should
understand that when a well is shut-in, there is no gas being
produced and no royalty being paid on production.

18. Pooling Clause
Allows the lessee to “pool” or combine your property with other
nearby property to produce gas from one or more wells designed to
drain the entire pool as a unit.

19. WHY ESTABLISH DRILLING UNITS?
• Protection of correlative rights
• Protection of the oil and gas producing
reservoir
• Prevention of waste by overproduction
• Establish area for sharing of production
proceeds and production costs

20. Damages Clause
The lease should state clearly that the operator or lessee is liable for
surface damages to crops, timber, roads, and other improvements.

21. Warranty of Title
Most form leases contain a clause whereby the lessor “warrants
and agrees to defend the title to the lands herein described.”
This could require the landowner to defend the Lessee in court.
10. Lessor hereby warrants and agrees to defend the title to the lands herein
described, but if the interest of lessor covered by this lease is expressly stated to be less
than the entire fee or mineral estate, lessor’s warranty shall be limited to the interest so
stated. Lessee may purchase or lease the rights of any party claiming any interest in
said land and exercise such rights as may be obtained thereby but lessee shall not
suffer any forfeiture nor incur any liability to lessor by reason thereof. Lessee shall
have the right at any time to pay for lessor, any mortgage, taxes or other lien on said
lands, in the event of default of payment of lessor, and be subrogated to the rights of
the holder thereof, and any such payments made by lessee for lessor may be deducted
from any amounts of money which may

22. Pugh Clause
Put simply, when operator finishes the drilling started in
the primary term, the lease becomes severable, freeing up
the lands the operator failed to develop.
If at the end of the primary term, a part but not all of the land covered by this
lease, on a surface acreage basis, is not included within a unit or units in
accordance with the other provisions hereof, this lease shall terminate as to such
part, or parts, of the land lying outside such unit or units, unless this lease is
perpetuated as to such land outside such unit or units by operations conducted
thereon or by the production of oil, gas or other minerals, or by such operations
and such production in accordance with the provisions hereof.

23. Statutory Pugh Clause
Prevents extending the term of a lease to lands with no
activities. Parties can agree to extension.
15-73-201. Lease extended by production -- Scope.
(a) (1) The term of an oil and gas, or oil or gas, lease extended by activities on
lands in one (1) section or pooling unit, whether established by rule or by order of
the Oil and Gas Commission or the lease, shall not be extended to sections or
pooling units under the lease where there has been no activity.

24.  A statutory process to protect the correlative
rights of mineral interest owners.
 Drilling imminent.
 Unleased mineral interest owners.
 Application – Notice – Hearing.
 Options.
 Lease
 Participate
 Elect Non-consent
 No Response

25.  15-day election period.
 Options.
 Lease
 Participate
 Elect Non-consent
 No response.

26.  Developed to accommodate horizontal drilling
 Establishes well spacing and drilling unit size
 Drilling Units – Governmental Sections
(~ 640 acres)
 Maximum of 16 wells per Drilling Unit

27. Variable Set
Back 560 ft to
1320 ft
+ 5280’
_
+ 5280’
_
Set Back Area are off limits for completions, without approved exception location.

28. Completion
Areas
5280’ Set Back
Areas in Red
Completion
Areas
5280’
Set Back Areas are off limits for completions, without approved exception location.

29.  Royalties are paid to the recorded mineral interest
owner.
 Mineral rights transfer with property absent a
reservation.
 Contact Operator
 Deed - Name - Address - Tax ID.

30.  Mineral Estate is Subservient to Surface Estate.
 Mineral Owner – Reasonable Use of Surface.
 Lessee Required to Return Property to Original
Condition “As Near As Practicable”.

31.  Arkansas Oil and Gas Commission
 Arkansas Department of Environmental Quality
 Private Attorney

32.  Record Mineral Interest Owner
 Land Grab = Ownership Map Leasing
 Division Order Before Royalties
 Attorney Title Opinion
 Locate Mineral Interest Owner

33.  Location, Location, Location
 Established Production
 Infrastructure
 Coffee Shops and Water Coolers
 Negotiate

34.  Lease = Binding Contract
 Breakable?
 Fraud
 Mistake
 Virtually All Are Enforceable.

35.  www.aogc.state.ar.us
 http://www.gohaynesvilleshale.com/group/brown-
dense-lower-smackover

36. Question & Answer
www.perkinstrotter.com
(870) 863-4949