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LEASING

IT'S IMPORTANT FOR LESSORS TO UNDERSTAND SOME BASIC FACTS ABOUT LEASING

Many private mineral owners have told us that they would like to learn more about the leasing process and how they can encourage prudent exploration for oil and gas on their mineral holdings with minimal environmental impact and maximum financial gain. In addition, some mineral owners who have been contacted by one or more of our lease brokers might be naturally curious about Vision Exploration, our background, and our reasons for offering to lease their minerals at the terms that we've proposed. We have taken this opportunity to address some of these topics in a brief, informal manner. If you have further questions, you are always welcome to contact us and discuss any issue in more detail. We would also ask that you please take a brief moment to read our Disclaimer. Thanks for your interest.


Our Brokers

Perhaps you have been contacted by one of our lease brokers. These gentlemen are veteran landmen who have been carefully selected by our Land Department for their honesty, integrity, and experience in our areas of interest. We hope that you will always find them to be courteous and respectful of your privacy and property. If they are not, call or contact us immediately. Please allow us the opportunity to promptly address your concerns.  


Our Lease Form

Vision Exploration LLC provides its lease brokers with a modified version of a standard lease form to submit for consideration by mineral owners and/or their attorneys. The modifications address the prevailing lease bonus consideration (i.e., the typical cash payment) per acre in your area, the prevailing mineral owner royalty in your area, and the term (duration in years) of the lease. Different areas have different prevailing lease bonus considerations, royalty, and term - depending on the level of interest in the area, the success rate of oil and gas exploration in the area, proximity to problem areas such as urban development or protected lands (such as parks, national forests, etc.), and other environmental or legal restrictions. For example, if you are contacted about leasing your minerals in an area that is far removed - say, over 100 miles - from any known oil and gas production (i.e., a "frontier" area), it's a safe bet that you will be offered less bonus and royalty and asked to agree to a longer lease term than if your mineral holdings were in the middle of a very active, producing trend. For a broader discussion of the reasons why, please read on.


The Recent Evolution of Our Domestic Oil & Gas Industry

Dramatic changes have swept through the domestic oil & gas industry in the last thirty years. Enormous consolidation has taken place as large public companies such as Exxon & Mobil, Chevron & Texaco, BP & Amoco & Arco, and Conoco & Phillips Petroleum - to name just a few - have merged and grown into even larger multinational corporations. As this wave of consolidation ran its course, these large corporations began to shift their exploration focus from the United States onshore and offshore areas to foreign lands and the deeper waters of the Gulf of Mexico in order to search for the very large oil and gas fields necessary to sustain their growth, replace what they were producing on a daily basis, and satisfy the demands of their shareholders.

At the same time, production from most of the large oil and gas fields that had been found in the United States in the past 75 years declined to "stripper" well status, with average output per well falling to below 10 barrels per day. Until recently, our domestic supplies of natural gas had also begun to decline. A somewhat unforeseen consequence of the departure of the multinationals from our shores has been this:   Until the 1990's, large US companies - especially Shell, Texaco, Getty, and others - spent a considerable portion of their exploration budgets within the Lower 48, drilling key exploratory wells in new "frontier" areas of the country - areas that previously had seen very little drilling activity. In many instances, hard work and good science paid off, resulting in the discovery of significant new oil and gas reserves right here at home - and, consequently, creating thousands of new jobs and funneling billions of dollars into local economies.  In the last twenty years, however, much smaller domestic oil & gas companies have spearheaded the effort to find meaningful new supplies of oil and gas here at home, for the benefit of all of our fellow citizens. Unfortunately, most small oil & gas companies have much less working capital, and can have difficulty finding investors who understand the risks (and potential rewards) associated with the deliberate drilling of wildcat wells in domestic "frontier" areas. As a result, very little true "exploration" is actually being conducted in the United States today.  The shale resource plays are wonderful examples of ingenuity freeing up previously known but previously inaccessible "tight" reserves of oil and gas, but they do not represent "conventional" exploration (wildcatting) for new, undiscovered reserves (for the shale resources had been identified many decades before the industry figured out how to economically extract those reserves, principally through the use of horizontal drilling and multi-stage fracture techniques).  These "unconventional" resource plays more resemble mining operations than conventional oil & gas exploration and development.  Exploration for, and development of, "conventional" oil & gas resources has greatly diminished since the ascent of the shale resource plays, primarily due to a lack of capital, as most of the capital previously available for conventional E&P has instead been diverted to the unconventional resource plays.

Does that mean that there aren't any new "conventional" oil and gas fields to be discovered, here in our own country?   Certainly not.   But if no one's looking for them, well, they're not going to be found, are they... ?

The point is simple. It seems logical to presume that it is in everyone's best interest to encourage those small companies that are trying to find oil and gas here at home, to directly benefit Americans, not send more money out of the country to foreign interests.

Your cooperation as a mineral owner is vital in this matter.


We Need your Help

Consider this hypothetical scenario: Your great-great-grandfather acquired your family's land and mineral holdings over 100 years ago. He had four children. They inherited the minerals. All four married, had children, and two later divorced, remarried and had more children. They divided their share of the mineral interests among all of those children. Then those children grew up, and had children of their own; some went on to get divorced, then later remarried, and had more children.   And so on.   Along the way, records got lost, deeds were misplaced, disputes and feuds arose. Some family members sold their land and minerals to outside parties. In time, many family members died, some having failed to prepare wills; their children squabbled over who inherited what, but no one was really sure of what they were legally entitled to.  And, of course, they had more children, got divorced, remarried, and so on...

By the time you inherit your share of your great-great grandfather's original mineral holdings, you're not exactly sure what you've actually inherited. All you know is that your mother thinks that you're entitled to a 2% ownership in the "old Home Place" - but your second cousin is convinced that he owns it, too. You've never seen the actual deed or the will that gave you title to the minerals, but you've been told that your Uncle John has been keeping up with it, and he says that it's somewhere down at the courthouse...

Now put yourself in our place.   At great financial risk, we've decided to attempt to lease an area that includes your great-great-grandfather's original mineral holdings (the old Home Place). We go to the courthouse to try to determine exactly who owns the rights to the minerals in the area. What we find is 40 to 50 individuals that claim to own some interest (exactly what, they're not sure) and evidence of "clouded title" - great uncertainty regarding actual mineral ownership. Being optimists, we spend weeks in the courthouse and pay brokers and lawyers thousands of dollars to study the courthouse records in an attempt to determine the chain of mineral title for the property. Finally, when we think that we have identified a key family member, we attempt to contact him or her, often only to find that that person is uncooperative or reveals additional information that indicates that the title to the land is severed (subdivided) even worse than our preliminary investigations had suggested.

Faced with high legal bills and a seemingly insurmountable obstacle to our lease efforts, we reluctantly withdraw from the area, and seek another area where records were better kept and the chain of title is clearly evident.

Meanwhile, you have another baby, as does your cousin, and Uncle John passes away unexpectedly, leaving neither a will or any records as to who owns what...and so on...

The scenario that we've just described is a very real one. In much of the United States, the advanced subdivision of private mineral interests through inheritance, sale, and foreclosure has reached a critical point. In other words, private mineral owners in this country need to realize that clouded title and/or the existence of dozens of partial interest owners effectively drives away the very people who are trying to create value for everyone by attempting to lease and develop their minerals. It is getting to the point where large areas are comprised of mineral interests that are so severely "cut-up" that it costs more to pay the brokers and lawyers to figure out who owns what, than it actually costs to lease those myriad owners once the chain of title is successfully determined. If the trend continues, those factors will severely impact the value of such "cut-up" mineral holdings - because no oil & gas company is going to attempt to lease those minerals in the future.

What can you do to help?

It is always beneficial to have good records of the chain of title to your property, including copies of wills, quitclaim deeds, and other relevant legal instruments. And, if you do own a very small interest and are contacted via telephone by one of our land brokers, please remember that he is not a telemarketer, or conducting a survey - he is simply trying to lease your minerals and create value for you and your family. Your assistance and cooperation is not only helpful, it is often critical, and we appreciate any help that you can give us. Thanks in advance for your time. You will be the greatest beneficiary in the long run.


A Common Superstition

Contrary to a common mineral owner superstition, energy companies do not discover a commercial (economic) reservoir of oil and/or gas and then surreptitiously plug and abandon ("cap") the well with the intent of returning to produce that same well (or "pool") sometime in the future.

That makes no sense.

When a well is plugged and abandoned, it is done so at considerable cost and often renders the wellbore uneconomical (or mechanically difficult) to re-enter. The plugging and abandonment of a well almost always means that - in the opinion of the investors that put up the money to drill the well - there was not enough evidence of producible reserves to support (pay for) the expensive process of cementing casing and testing the well, let alone make a profit. This second phase of wellsite operations - the "completion" phase - can cost as much as 50% (or more) of the total cost to drill the well to total depth.

If a company has spent two million dollars to drill a well to total depth on your property, you can be assured that it will carefully study the economics of what it has found before spending another million dollars in an attempt to "complete" the well. If nothing was found, or a very small reservoir was discovered, the odds are very good that the company will be forced to abandon the well. If the wellbore yielded enough evidence that commercial quantities oil and gas were located not far from its location, sometimes a company will sidetrack (plug back and redrill) the well to that new target - but that is a rare and costly decision.

So if a well has been drilled and abandoned on or near your mineral holdings, it usually is abandoned for sound economic reasons and will have some - possibly great - negative impact upon enthusiasm for additional drilling within a certain radius of that dry hole. This is true even if that dry hole offered some encouragement in the form of oil and gas "shows" - evidence that a hydrocarbon trap might be found somewhere else in the vicinity.

Therefore, if you are subsequently approached by a lease broker who desires to lease the mineral interests under or near a plugged and abandoned well, you need to understand that he represents an optimist who has decided to try his luck in the area, despite the negative impact of the existing dry hole. You should want to encourage such efforts, recognizing that some incentive - in the form of more favorable lease bonus, royalty, and term - could greatly assist that optimist in his efforts to overcome the previous failure.


Time - A Precious Commodity

These days, it seems like there are endless sources of news that are available to all of us, including the Internet that you are currently accessing. We're sure that everyone is aware of the dramatic price swings that have buffeted the energy sector as of late. In 1998 & 1999, oil prices sank to an inflation-adjusted price of just over $8.00 / barrel. At the same time, natural gas prices also declined to less than $2.00 / thousand cubic feet. The effect was devastating. Had prices not begun to recover in late 1999, the entire independent oil and gas industry in the United States would have collapsed. Those small companies that did survive were badly weakened. Tens of thousands of workers lost their jobs in that two-year period; in fact, it is estimated that over one million energy-related jobs have been lost in the United States since 1986.   Nationwide, during that bleak time, leases that had been acquired at a cost of hundreds of millions of dollars, paid to innumerable lessors  - including countless private mineral owners - were lost when companies could not afford to drill the wells they had planned to drill, on the leases that they had taken in the preceding 3 to 5 years, and had to allow those leases to expire.   When prices did recover in late 1999, having recently been brought to the brink of financial ruin, most energy companies chose initially not to resume exploration; instead, they focused on paying down debt and drilling what was left of their lease inventory. Renewed exploration did not really commence on a wide scale until the summer of 2000, and those recent efforts have been overwhelmingly focused on the exploration for natural gas, not oil.   Unfortunately, when oil & gas prices spiked upward in the fall of 2005, so did the daily contract rate for drilling rigs. These rig rates increased by over 150% in many areas, an incredible surge in drilling costs. And, although the number of utilized rigs in the United States rose from record low levels to around 2,100 rigs by the spring of 2008, by that summer the price of oil and gas had already begun another cycle of decline, which caused rig utilization and rates to fall, and again crippled the efforts of small companies to raise capital and conduct exploration - especially in today's depressed business climate, and especially when the bulk of the capital has been diverted to the shale resource plays.  Though the rig utilization rates have once again begun rising, this is attributable to the need for the shale resource players to "drill up" their vast lease holdings (and hold as much as possible by production - "HBP"), not necessarily the economics of such plays.  As a result, while oil prices have risen significantly (driven primarily by unrest in the Middle East and speculation), natural gas prices have declined to less that $3.00/MMBtu for some time, and are forecasted by most analysts to remain in the $2.00/MMBtu-$3.00/MMBtu trading range for the next 3-5 years, if not longer.

The point of this discussion is the fact that we've just recounted the gut-wrenching rise and fall of energy commodities and drilling costs, which have now cycled up and down within three successive (and narrow) two-year periods. During that time, there were extended periods where a small independent company either (1) could get a rig, but be unable to drill a well because the commodity price was too low, or (2) because of demand, not be able to get - let alone afford - a rig when commodity prices were (briefly) high.   Yet the term (duration) of the leases that a company acquires rarely accommodates the factors that create economic uncertainty and unforeseen delays. One can easily perceive, given recent history, that the minimum lease term that allows a company to overcome such obstacles and perform is three years in duration. In "frontier" areas - those far removed from established oil and gas producing trends - the need for longer primary term (up to 10 years) is critical, because the company taking the risk to explore in such remote areas needs more time to gather seismic and subsurface information, assemble the requisite leases, and find partners who are equally optimistic about such an unproven area - while riding out the turbulence that frequently buffets today's chaotic energy market.


We Can Help You

 Perhaps you are generally aware of these issues or appreciate this discussion, and are interested in encouraging small reputable companies like Vision Exploration to lease your minerals. Perhaps you simply have questions about activity in your area. We encourage you to contact us. All information discussed is held confidential - in fact, you don't even have to reveal your identity, or the location of the mineral holdings in question, if you don't want to. You may be as specific or vague as you wish in the provision of information; our answers will be correspondingly specific or vague. Some larger mineral owners might consider consulting with us on a regular basis, or as the need arises. At the end of the day, our goals and yours are one and the same: the creation of value from your mineral holdings for mutual benefit, at little or no cost to you, and with a sincere desire to minimize the environmental impact of our exploration and development upon your land.

Thank you for considering Vision Exploration LLC.

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