The Pearsall Shale formation is the latest buzz in South Texas. Many landowners are now wondering if their current leases with companies such as EOG Resources convey the rights to both the Eagle Ford Shale and the Pearsall Shale. EOG and other companies are reportedly testing the Pearsall Shale in a number of locations, and the potential for overlapping Pearsall / Eagle Ford Shale acreage is very high. So, what about that oil and gas lease that you signed with EOG a couple of years ago, does it give them the right to the Pearsall shale as well as the Eagle Ford?
It all boils down to the fine print in your oil and gas lease agreement. In many cases, the language on an EOG Resources lease reads such as this:
“Production or operations on said allotted area by the lessee shall maintain this lease in effect only with regard to the land within the described area, and down to a depth of 100 feet below the stratigraphic equivalent of the deepest sand or strata from which the well located on the spacing unit around the well is producing or which reasonably appears productive of oil or gas in commercial quantities as depicted on the electric log of such well and no further.“
Although I am not an oil and gas lawyer, it would seem to me that an unproven, unconventional oil and gas reservoir, such as the Pearsall Shale, would not appear to be productive in the conventional sense on an electric well log. EOG’s chairman, Mark Papa, seems to agree. He stated the following in an August 2012 investor conference call:
(Question asked by Biju Perinicheril of Jefferies and Company Inc.)
Going back to the Pearsall question earlier, have you drilled any wells to test the Pearsall? And drilling Eagle Ford, does that hold your Pearsall rights?
(Mr. Mark Papa, Chairman and CEO of EOG Resources)
Second question first. Yes, drilling an Eagle Ford well generally does not hold the Pearsall rights because the Pearsall is deeper than the Eagle Ford. And generally, most of the leases, you only earn to the depths drilled. In terms of — we have done a little bit of testing of the Pearsall and really haven’t disclosed any results yet on it. So you can take that as either a positive or negative. What we will say again are there are 3 or 4 zones both above and below the Eagle Ford that have the potential maybe to be productive, and we’re kind of testing them in time. But they’re really so secondary or almost tertiary to the potential of the Eagle Ford that they’re — not given it a very high priority relative to optimizing the Eagle Ford. In other words, if we can figure a way to improve our recovery factor by 2% or 3% in the Eagle Ford, it dwarfs whatever we might find in some of the other intervals in terms of magnitude. So that’s kind of what’s driving our priorities.
Further, it seems that Eagle Ford Shale production probably can’t hold the rights to the deeper Pearsall shale, however if during the term of the lease a company drills a productive Pearsall shale well it appears as if they could then hold all zones above it, including the Eagle Ford Shale. (“Earned to the depths drilled.”) For new lease contracts being written, I would advise having depth limits written into stone at the onset, to avoid any problems later down the line.
If anyone has any clarification on this issue, feel free to share it below.
Post Author: Roger P.