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California Oil and Gas Law Blog

Oil and gas service providers may see positive growth

Oil company contract service providers in California and elsewhere in the United States have had to adjust their expectations for growth, and many now struggle in the market. Nasdaq points out that those who provide support to energy companies focused on exploration and production are apparently suffering from what may be long-term issues.

In order to compensate for low revenues during the oil slump in 2014, exploration and production companies began taking care of their own support services. While servicing contractors are still necessary, the initial losses continue in the form of reduced day rates, diminishing backlogs and forced efficiencies. Now, although energy explorers and producers do still make some capital investments, many have turned those investment funds inward to develop their own technology for maintaining in-house support services.

Understanding your contract and preventing disputes

You have recently discovered a promising opportunity to initiate a new oil exploration effort in California. This will require you to coordinate and implement a contractual agreement that will protect your rights, as well as the rights of the landowner and his or her property and assets. At Ehrlich Pledger Law, LLP, we have helped many people to secure beneficial contract agreements that provide protection and clarification. 

While you may be influenced by the promise of making considerable money once your contract is in place and exploration begins, it is imperative that you remember that securing a good contract is about more than negotiating significant financial agreements. According to geology.com, other important parts of the contract that you should read thoroughly, and verify that all parties understand the language of, include the following:

  • Property reservations where mining is not allowed.
  • Guidelines and agreements related to the protection of the owner's property, including buildings, livestock and roads.

Tips on negotiating an oil and gas lease

Oil and gas leases can be complex documents. Proper negotiation is crucial in this case to ensure a lease is legally binding but also reflects your best interests. MineralWeb.com offers the following tips in this case, which can help mineral owners in California protect their highly valued assets.

Be Conservative During Negotiations

Can your company benefit from a joint operating agreement?

As you are probably aware, the oil and gas industry can be a highly lucrative business to be involved in. As one of the many competitors in California, one of your biggest challenges will be to strategize and come up with creative ways to stay ahead of your competition. One of your options is to collaborate with other industry leaders to form a joint operating agreement. Understanding how this type of relationship functions is critical to pursuing an agreement that is rewarding, trustworthy and successful. 

According to Chron, a joint operating agreement is often decided when a certain project or end goal is in need of being completed. The agreement itself consists of a few important parts including the following:

  • Description of operations: This portion will discuss how you and the other parties have arranged responsibilities. Notes should be included to describe how certain components will be delegated and under what parameters goals will be accomplished. Examples of what you could include are hours of operation, drilling zones and approved drilling techniques. 
  • Financial interests: Under this section of the contract, you should clarify how financial interests will be protected in various circumstances such as dissolution or in scenarios where your agreement does not work out as planned. 
  • Rights and responsibilities: Chances are you and the other party both have desired outcomes to the agreement. This section allows you to determine what each other's rights are and what each of your responsibilities are in order to uphold a functional agreement. 

The number of oil exploration rigs is increasing in the U.S.

The exploration of oil and gas has played an integral role in establishing an impressive economy in the United States. Without access to these natural resource, everyday life would be significantly more complicated. What many people may not realize is that exploration efforts are still in full swing in California. With the discovery of new potential sites for rigging, an added benefit is created. 

Recently, the number of oil exploration rigs in the United States has increased. Two more rigs were added to the 1,060 already in operation. The highest number of rigs ever operating at one point was in 1981 when the reported number was a stunning 4,530 rigs. On the contrary, the industry was struggling to survive in 2016 when the number of functioning rigs was at 404. 

Understanding the nature of your joint operating agreement

Recently, you have decided to explore your options with joining forces with other owners of oil and gas royalties in California. One of your options is called a joint operating agreement and if pursued the right way, could potentially result in a wildly successful outcome. At Ehrlich Pledger Law, LLP, we are experienced in providing oil and gas owners with advice regarding partnerships and contract law. 

Creating a partnership agreement with another oil and gas company can have many exceptional advantages. Among the most notable, is that you can enjoy access to advanced technologies and core competencies from another company that you may be lacking in yourself. Likewise, your partner can gain benefits from your strengths. Through a synergistic relationship, both your company and your partner's company may be able to become more competitive in the industry. 

How can a surface damage clause protect your property?

You want to be able to benefit financially from the rich oil deposits under your California property, but you do not want the beautiful land around your home destroyed. Is there anything you can do to enjoy both the surface beauty and the riches underneath?

According to MineralWeb.com, you may be able to include one of these surface damage clauses to the lease:

Fewer wells drilled despite state's continued dependence on oil

Owners of wells and real estate rich in minerals in California appear to have many advantages thanks to the state's massive underground reservoirs of oil. The state's economy and many of its individual and corporate residents have relied on the bounty that mining crude oil has provided. With the wealth of buried riches, many people may wonder why production is not increasing to meet the demand for gasoline.

In one of the largest oil producing locations in the state, San Joaquin Valley's Midway-Sunset field, production has dropped by 100,000 barrels per day over the last 20 years. The problem is not a lack of oil. Instead, it stems from environmental regulations that force California refineries to ship oil from overseas rather than produce its own.

What is hydraulic fracturing?

If you own land in California, you may at some point be approached by a company wanting to drill for oil or gas. Some companies may pitch the idea of hydraulic fracturing, or as it is more commonly called, fracking. While you have probably heard this term, you may not know exactly what it means or if you should allow it on your property. 

According to Western Land Services, fracking involves opening up natural fractures in the rock to release trapped gas or oil. Chemicals sand and water are mixed and pumped into the ground to open the fractures. If you are approached by a company for use of your land for hydraulic fracturing, you may be offered a lease, which usually extends a time period in which the company has to find oil or gas. If they find the product, a second part of the contract kicks in and you may have the company there for many years until the supply runs out.

Factors that could complicate your effort to create new contracts

Whether you have been involved in the oil and gas industry for decades or are relatively new to the scene, you have probably noticed that the process of finding, extracting and selling natural resources is highly competitive. You have probably been involved in your fair share of contract meetings where potential agreements are discussed and negotiated to create advantages for both parties. At Ehrlich, Pledger Law, LLP, we are familiar with the challenges of working in the oil and gas industry in California.

While all industries face competition from other successful companies, your involvement in oil and gas has probably exposed you to the excessive competition that can quickly deteriorate smaller companies if they are unprepared to make strategic moves in an efficient manner. According to Investopedia, some of the challenges you may face that could prevent you from being able to create new contracts include the following:

  • The availability of alternative options for consumers who are looking for solutions that create less impact on the environment. 
  • The pulling, pushing and shifting power and influence that both buyers and sellers exert on the industry. 
  • The possibility that new entrants will enter the market and compromise your position.
  • The constant competition with rivals who are also trying to build their presence and market their brand.

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