Last Thursday, we sat down with Lewisville Mayor Gene Carey and City Manager Claude King to see if we could get some insight into the city's behind-the-scenes work to make a market and get some oil and gas exploration going in Lewisville.
In the Beginning It all started in 2004, when Lewisville acquired the land that would become Railroad Park. Along with the deal, the city acquired mineral rights, but in those days, there were a number of factors working against oil and gas exploration in the area:
- Only one known lease, the Duwe (pronouced Doovee) had been made in the area. (We wrote about that one here)
- Most of the exploration up to that point had taken place far to the West of here.
- There was no "take line" or pipeline to get the gas to market. Although there are gas pipelines in the area, these are distribution lines carrying processed gas, and it would be difficult to use those without processing the gas on-site.
- The area under consideration was very close to the "killing fault" known as the Muenster Arch, the formation marking the dead end of the Barnett Shale.
City leaders were anxious to see if they could get some exploration to Lewisville, because they wanted the benefit of being able to collect lucrative property taxes on the value of the wells. The land on the East side of Lewisville is largely undeveloped or covered with large landfills.
The thinking was that if the city could find a company that could combine the city's acreage with the various large commercial and industrial tracts in the area, such as Waste Management, and City of Farmer's Branch, they might be able to attract a big enough exploration company that they could create a market for other properties in the area.
King noted that rather than have the City of Lewisville put the mineral rights up for open bid, where it may not command a good price or attract a large enough company to effectively develop the resources, the city decided to transfer its mineral interests to the Lewisville Local Government Corporation. The local government corporation could then legally make contracts on the rights without putting them out for bid.
Enter Tracker Holdings The city entered into an agreement with Tracker Holdings to try to pull together a sufficient mass of mineral acres to attract a major operator like Chesapeake or Devon.
At the time, it was thought that by focusing on royalties rather than signing bonus, and by working with other nearby mineral owners to create enough of a pool, it would be incentive to one of these large operators, which would then have to get pipelines installed in order to produce the gas.
Options, Options In February of 2005, the Lewisville Local Government Corporation (LLGC), was formed as an offshoot of city government. By August of that year, it had acquired the City of Lewisville's mineral rights from the City, and then granted Tracker the option to a 4 year oil and gas lease for the city's acreage.
Unfortunately, the agendas and minutes from those first meetings of the LLGC are missing from the City's website, though they should be located here. (We've made another request for those.)
A check of Denton County tax records indicates that the land is still owned by City of Lewisville, and there was no indication of any ownership of mineral rights. (And the title search feature is not working tonight) but we have requested more information about the transfer.
The terms of the option agreement laid out the lease contract that would be used, and set a bonus of 20% royalty, before transportation, marketing, and taxes, which would be deducted from the city's share pro-rata. The bonus was originally set at a mere $100 per mineral acre, though the option was later amended to $200 per mineral acre.
In exchange, Tracker paid $100 for the option contract (Total, not per acre), and agreed to grant the city a 1% overriding royalty interest in any of several specified properties in the area belonging to private companies, land holders, and governmental entities if the City could bring these landowners on board with Tracker. This list of "target" properties was amended twice, and finally included these:
Governmental: - City of Farmers Branch - City of Carrollton - U.S. Army Corps of Engineers (Lewisville Lake) - Denton County - Lewisville Independent School District - Upper Trinity Regional Water District
Non-Governmental - BFI Waste Systems (Lewisville Landfill) - Waste Management of Texas - Brookfield (Convergence) - Accelerated Christian Academy - Creekside Mobile Home Park - IDI - Majestic - Payne - Cobb - Huffines - Arthur James - Baruch - Billingsley - Ken Good - Bright - Prologis
What we don't yet understand, though we have asked the city for clarification, is whether many of the entities involved ended up signing with Tracker. When asked what the incentive would be for these other entities to cooperate with the City, given that the amount available to pay their royalty would be reduced by 1%, King replied "Our gratitude and good will". King went on to explain that a city and a landfill need to get along, even if it meant that these entities were not getting as much as they could otherwise on their own.
Chesapeake Exercises the Option In August of 2008, as residents around the Mid-Cities were getting $25,000 - $30,000 per acre as signing bonuses, and 25% royalties, Chesapeake Exploration, L.L.C. stepped in and bought Tracker's Option, exercising it on 289.7763 net mineral acres, sending the city a check in the amount of $57,955.26.
Mission Accomplished One of the stated goals of leasing out the city's minerals was to make a market for minerals in the area, where virtually none had existed before in Lewisville. The logic was that even though the city might gain less than the going market rate for its own minerals, it would be able to collect property taxes on the value of the wells.
King pointed to the fact that there were now offers in the Lewisville area in the $2,500 to $4,000 per acre range with 20 - 25% royalty rates, as evidence that the city's strategy worked.
More later We're still researching some of these issues and have submitted a list of questions that we would like to see answered and documents that we would like to see. Until this thing came along, we had never heard of a "Local Government Corporation" so perhaps we will learn together.
-------- Other things we learned: - The city leased some of its rights near the Dallas Gun Club recently for a $2,000/ac bonus and 25% royalty. - The city has been informed of probable pipeline routes from its property near the landfill.
I received this response from the city to my follow-up inquiry:
Q: Am I correct that it was the City of Lewisville (or the LGC) that made the first contact with Tracker, and not the other way around?
A: We have no records documenting “first contact,” so this cannot be determined.
Q: The first discussions of bringing O&G to Lewisville began in 2004, correct? Anyone know about what time of year, and whether there were any specific events that brought the idea to the forefront?
A: We have no records documenting “first discussions” but believe discussion of potential exploration began in late 2004. There were no specific events other than general information of gas exploration progressing eastward and into the DFW airport area, and the acquisition of the Railroad Park property.
Q: What was the process that enabled the city to transfer its mineral rights to the LLGC? Did that require approval by the City Council in regular session? I'd like to get whatever documents you may have related to that transfer.
A: a) Chapter 431 Texas Transportation Code (Ed. Note: Subchapter D) b) Council on February 7, 2005 approved Resolution No. 3168-02-2005 authorizing staff to proceed with all matters to form the corporation. Adopted Articles of Incorporation February 18, 2005/filed with Secretary of State February 22, 2005. (Ed. Note: City website only has archived minutes back to 2006.) c) The City of Lewisville conveyed all oil, gas, and other minerals to the Lewisville local Government Corporation (LLGC) on August 15, 2005, Agenda Item No. 8. (Ed. Note: City website only has archived minutes back to 2006.)
Q: In the options contract, where the 3rd party "target" properties were listed, it wasn't very specific as to the locations and acreages of the tracts. Was there a separate document describing such tracts?
A: No
Q: Also regarding target properties: Who at this point is responsible for paying out the 1% overriding royalty: Is it Chesapeake, or Tracker? Are they only payable if the leases passed through Tracker? What properties and acreages to date will the city stand to earn the 1% on?
A: a) Payment by Chesapeake b) Payment of 1% override is based on identified properties c) City of Farmers Branch, Waste Management of Texas, Inc., Allied Waste (acreages depending on permits with RRC)
Q: It was stated that the city "didn't want drilling on its own land", and that part of the motivation for the deal was to "make a market" for gas in Lewisville. Was there ever any discussion, whether in writing or informally, about whether the citizens themselves would want to have drilling in such close proximity to their residential neighborhoods if the city was successful?
A: Regardless of any city leasing activity, urban area drilling was and is always a possibility under Texas law. Such drilling is dependent on the property owner’s own participation in the form of voluntary leasing. Without leased property, there can be no drilling. Opportunities for further public comment on drilling are built into the City’s oil/gas ordinance.
Q: It was mentioned that the city was motivated to bring in oil and gas so that it could collect property tax revenues. Was there ever any quantitative analysis done that would suggest whether the declining property values and loss of future conventional use would be offset in the long run by having O&G wells? (Or was it more of a "conventional wisdom" sort of thing?) Any documents or pro-formas you may have on this would be helpful.
A: No studies were conducted. “Declining property values” and “loss” of future conventional use would be assumptions in any such study and could not be made without knowing well locations, productivity levels, leasehold interests by properties inside the pools, predictions on future use, etc.
Q: The city's lease contract seemed to indicate that the city would bear a proportionate share of taxes paid by the operator. Is this your understanding too? If the minerals are coming from the city's land, are they still taxable for property-tax purposes?
A: [Assessed value] taxes related to equipment/infrastructure owned by Chesapeake, not the land, and would be subtracted from the royalty as described in the lease. Taxes regarding production and transportation are paid by the operator and deducted proportionately.
Q: It was mentioned that a lease near the Dallas Gun Club with Chesapeake brought $2,500/acre and 20% royalty. Is it correct that this is the city's land, or was I being given an example of a lease the city knew about?
A: City property, $2000 per mineral acre/25% royalty
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Anonymous
Posted: 2009/8/17 19:26 Updated: 2009/8/17 20:48
Re: Update on Lewisville's Oil and Gas Contract
i think i am one of the last landowners to sign this lease. original lease was for $4000 and now they offered me only $1500 per acre. does anyone know how many people are in this pool. original lease offer saaid 25% royalties. any idea what that could be. i ask the landman who approached us with this lease offer about the pool and of course he didnt know. well who does. i turned him down by the way. he needs to stick with the original lease. he did say that the pool was smaller then originated. i think that could be a good thing but he still had no answers for me. any info is greatly appreciated. thanks
Hard to say without knowing where you are. This blog post was about the city's contract, but there have been several companies working within Lewisville.
What area of town do you live in, and what operator?
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Re: Update on Lewisville's Oil and Gas Contract
