March 2008                                                            Volume 6, Issue 1

LLANO GAS LEASE ISSUES

Some homeowners have received packages from Llano Royalty Company to lease their mineral rights in order to drill a natural gas well.  After several phone calls with Llano and other research we have found the following:

1. Llano will be drilling at the Hilliard Airfield property near FM 2499.

2. They will be drilling about 5,000 feet deep and then horizontally to where they think the gas is located.

3. They like the Hilliard property because there is an existing pipeline on one side that they can tap into.

4. Mr. Hilliard owns about 95 acres and the first well will be his.

5. They sent out offers to one in five homeowners in the area north and east of the Hilliard property to get a 160 acre pool for a second well as required by the Texas Railroad Commission.  They do not need a block of land, but a pool of lots to add up to 160 acres.

6. LISD has 138 acres adjoining our subdivision and has signed a lease agreement with Llano, which leaves only 22 acres needed from other landowners to complete the 160 acre pool.

7. Llano’s goal is to sign a total of 100 homeowners from the subdivisions they have sent offers to.

8. If there is a third well it will require another 160 acre pool of lots.

9. There has been four gas wells drilled near us in Flower Mound in the last ten years that have been dry holes.

The HOA received an offer from Llano for the common areas and the board voted to sign the lease on November 7^th.  The terms are $500 per acre and 18.75% royalty on the gas produced.  This is roughly calculated by taking the profits from the well multiplied by the 18.75% and a ratio of acreage of the land owned to the 160 acre pool.  The term of the lease is five years, which means they have five years to drill that second well.  The royalty payments will continue for as long as the well produces, which may be 20 years.

There is a group of homeowners from the subdivisions Llano has sent offers to that would like to organize all homeowners in order to negotiate for more money and better terms.  This may be an exercise in futility given the low number of homeowners needed by Llano to complete the 160 acre pool.  Llano only sent offers to one in five homes in our subdivision in November, which means only 55 out of 269 homes were offered a lease. 

When we spoke with Bob Neves of Llano Royalty he assured us that they were not open to any negotiations and “the numbers are the numbers” and we could take it or leave it, as they considered their terms to be generous.  He explained that the reports of HOA’s holding out and negotiating are in larger pools of 320 and 640 acres where many more participants are needed.  He said that since our pool is only 160 acres the royalties are much higher per leaseholder.  He has rejected Bryn Mar HOA’s demands for better terms and to use the lease that their oil and gas attorney prepared.  The board considers this to be found money if we ever do get a royalty from a second well that may never be drilled in the five year term of our lease. 

The board has not found any reason to believe that Llano has not told the truth in several phone calls with them since November, but we are not experts in this field. The area homeowners group may be correct in believing that Llano will negotiate if presented with a unified group that will not sign their lease offers. The risk is that the 160 acre pool will be completed and those homeowners will not receive anything for their efforts.  We recommend that homeowners do their own research in deciding whether to sign or not.