Comprehensive Notes on Oil and Gas Lease Administration and Systems

Visual Learning and the Transition to Digital Administration

  • Objective of the Session: The meeting aims to provide a visual walkthrough of the operational systems used in lease administration. Even if concepts have been discussed previously, showing the actual interface helps "close the loop" and provides a more relaxed environment for deep understanding.

  • Shift from Physical to Digital Files:

    • Historically, the office maintained a massive physical file room for oil and gas leases.
    • The company has transitioned to a fully digital workflow. Once a physical packet passes through the administration desk and is reviewed, it is scanned and digitized, marking the "last stop" for the paper copy.
    • Reviewing Challenges: Reviewing work is significantly easier on hard copies compared to digital copies. Digital review requires excessive clicking and scrolling, which becomes nearly impossible and highly inefficient during remote work weeks.

  • Presentation Context: A specific presentation titled "A Day in the Life of Lease Administration" was previously created for the accounting department to explain the intricacies of the team's role.

Basic Overview of QLS (Quorum Land System)

  • The Agreement Header: This is referred to as the "face of the lease."

    • Manual Data Entry: The system requires a high volume of manual work. Required fields are marked with red asterisks (∗*).
    • Key Data Points: Users must enter the lease name, the type of lease, and lessee information.

  • Critical Dates:

    • Primary Term: The initial period of the lease (e.g., 5 years\text{e.g., 5 years}).
    • Effective Date: When the lease begins.
    • Expiration Date: When the primary term ends.
    • Extension Expiration: Leases often include an "option to extend."
      • An extension is at the company's discretion; there is no obligation to exercise it.
      • If the company has plans for development but has not yet reached it, they pay an extension fee to prolong the primary term for another set period (e.g., another 5 years\text{e.g., another 5 years}).

  • Secondary Term and Production:

    • A lease is only extended if it is NOT in a producing unit.
    • If a lease is producing, it is considered "Held by Production" (HBP) and moves into its secondary term, where different rules (such as shut-in clauses) apply.

The Geography of Leases: Units, Parcels, and the Pugh Clause

  • Unit Visualization: Units are typically visualized as a grid where lateral wells are drilled.

  • Pugh Clause Implications:

    • If a parcel of land sits partially inside a unit and partially outside, a "Pugh Clause" dictates what happens to the acreage.
    • If the clause is present, the company may lose the acreage outside the producing unit unless they pay to extend just that specific portion.
    • This requires ongoing maintenance to ensure the system accurately reflects the real-time state of the lease acreage.

  • Acreage Calculations:

    • The system tracks gross acreage and net acreage.
    • Net Acreage is calculated based on the mineral interest owned within a specific tract.

  • GIS and Mapping (GAV):

    • All parcel data entered into QLS populates into GAV (the mapping tool).
    • Data Quality Issues: GIS pulls data from the county, while administrators set up data based on signed documents. If these do not "jive," an investigation is required.
    • Pick Lists and Standardizing: A "pick list" is used for tax parcel numbers to prevent "fat-fingering" or manual errors. If a parcel number (like an out-sale) is missing from the list because the dataset is stale, administrators must notify GIS to have it added.
    • Temporary Placeholders: A free-form field exists for use as a placeholder when a parcel is not yet in the drop-down options.

Hierarchical Organization: Trees and Depth Levels

  • The Data Tree Structure: Data follows a hierarchical path:

    • Agreement Header (Lease level) -> Aerial (Surface level) -> Depth (Sub-surface level).
    • Information entered at the bottom (Depth/Aerial) rolls up to the top level.
    • Aerial Layer: Represents the surface and contains related agreements (like trades or assignments).
    • Depth Layer: Represents the layers underneath the surface. This is where related well information is stored.

  • Stratified Charts and Formations:

    • The system has background configurations for "strat charts."
    • Users can specify "All Depths" or specific zones (e.g., top of the Utica to the bottom of another formation\text{e.g., top of the Utica to the bottom of another formation}).
    • This allows the company to run reports on exactly how much acreage they own in specific geological zones.

Financial Participation and Statuses

  • The Three Pillars of Interest:

    1. Working Interest (WI): The company's share of costs and operations.
    2. Royalty Interest (RI): The share of production paid to the mineral owner.
    3. Mineral Interest (MI): The percentage of minerals owned in the tract.

  • Net Revenue Interest (NRI): This value populates automatically based on the input for WI and RI.

  • Company Net: This is the value reported by Gulfport Appalachia based on their specific ownership interest (often 100%100\%, though joint ventures like a previous 10$-\text{year agreement with Rice} have seen split interests).\n\n- **Property Statuses**:\n - **Working**: Used when a lease is entered but the bonus payment hasn't been made yet. The company doesn't "take credit" for this acreage yet.\n - **Non-producing**: The status after the bonus is paid.\n - **Producing**: The status once production begins.\n - **Other statuses**: Include "Protection Leases" or "Top Leases."\n\n# The Lease Entry Workflow and Logs\n\n- **New Lease Queue**: \n - Text dumps and PDF packets from brokers arrive in a centralized queue.\n - Administrators create folders for each and add them to a "Lease Log" (an Excel spreadsheet).\n\n- **The Lease Log**: \n - Crucial for the budget process. It tracks the count of outstanding leases, total acreage pending, and the dollar amount due.\n - **Budget Accuracy**: The company’s budget is now refined "to the dollar." The log bridges the gap between leases "in hand" and leases "in system."\n - There are often 80toto100 leases pending at any given time.\n\n- **Document Verification**: \n - Administrators check unexecuted copies against recorded versions (MOGLs).\n - **LPR (Landman’s Purchase Report)**: A summary document provided by brokers. While helpful, they are prone to human error ( ext{e.g., incorrect expiration dates like 2026 for both start and end}) and must be cross-verified with the actual lease.\n - **Verification Points**: Addresses must be consistent across the W-9, Order of Payment (OP), and the Lease itself.\n\n# Legal Documents and Public Records\n\n- **Memorandum of Oil and Gas Lease (MOGL)**:\n - This is the recorded portion available to the public. It does NOT show financial terms or acreage costs, only that a lease exists for a certain term.\n - Recording is essential for the lease to be valid in "Race" or "Notice" states.\n\n- **Recording Process**: Done mostly online by uploading PDFs to county systems, though some counties still require mail-in stamps from the courthouse.\n\n- **Strategic "Holding" of Memos**: \n - Sometimes the company intentionally avoids recording memos immediately as a competition strategy. This prevents competitors from seeing where Gulfport is leasing and driving up the "bonus trade"/acreage prices through competing bids.\n\n# Provisions, Deductions, and Post-Production Costs\n\n- **Exhibit A**: This document overrides the standard lease form. If there is a contradiction, the Exhibit A clause wins.\n\n- **Royalty Deductions**:\n - **Gross Proceeds**: The lessor gets 100\% of their royalty without deduction for costs.\n - **Post-Production Costs**: Costs like transportation, gathering, and compression.\n - **Taxes**: Even if a lease says "No Deducts," it often specifies "except for taxes" (Ad Valorem, Severance, or Production taxes).\n - **Silent Leases**: If the lease is silent on deductions, the company generally cannot deduct costs.\n\n- **Market Enhancement (MEG)**: Specific clauses detailing how the company can or cannot enhance the value of the gas and how that affects royalty payments.\n\n- **Division Order (DO) Provisions**: \n - Previously, Lease Admin only cared about the royalty rate. Now, they capture all provision data in QLS to standardized treatment.\n - This prevents a scenario where two different analysts treat the same lease differently in two different units, which would open the company to legal risk.\n\n- **Administrative "Backbone"**: The team considers themselves the "backbone" of the company, handling operational requirements, penalties, fines, and early pay interest triggers ( ext{e.g., paying royalties within 60 days to avoid interest}).\n\n# The Payment Approval Process (eCal)\n\n- **Order of Payment (OP)**: \n - Typically mandates payment within a set window ( ext{e.g., 120 calendar days from receipt of original executed OP}).\n - The price per acre is fixed ( ext{e.g., } $7,200/acre), but the total amount is adjusted if the company determines the lessor owns less or more minerals than stated.\n\n- **The Approval Chain (The "Silver Platter")**: \n - Leases are entered and set for approval in "eCal" (the Quorum calendar).\n - Approval routes depend on the dollar amount. Higher payments require a chain of command: **Landman -> Manager -> Director/VP -> Senior VP (Stu) -> CEO level (Brad)**.\n - **Frustrations**: Landmen are often moving "at warp speed" and may delay approvals until title is 100\% clear, leading to last-minute scrambles to get checks out before the weekly "check run" deadline (Wednesday morning).\n\n# Protection Leases and Clouded Title\n\n- **Protection Lease Definition**: Used when ownership cannot be 100\% confirmed.\n- **Process**: The company pays a small "protection payment" (a down payment, often 10\%) to secure the lease while a title attorney or a court determines the true owner. Once title is clear, the remaining bonus is paid.\n- **DMA (Dormant Mineral Act)**: Decisions regarding the DMA have historically caused "huge messes" where the company took a stance on a likely winner, but the court ruled the other way, rendering thousands of acres of leases questionable or in trespass.\n\n# SOX Controls and Business Associates (BAs)\n\n- **SOX (Sarbanes-Oxley) Compliance**: These are mandated controls to prevent fraud and ensure data integrity.\n - **Separation of Duties**: The person entering the lease cannot be the same person setting up the financial profile for the payee.\n\n- **Business Associate (BA) Setup**:\n - Every lessor must have a BA profile.\n - **Setup Workflow**:\n 1. **Erin** enters the data (Address, SSN/TIN) and requests a BA.\n 2. **Jill** reviews the request against the W-9.\n 3. **Megan** sets up the BA in the system.\n 4. **Erin** does a final review of the setup.\n - System Sync: Databases must "talk" to each other. It usually takes 24 ext{ hours}$$ for a new BA to sync so they can be added to the participation screen in QLS.

  • Usage Types:

    • Vendor Usage: Necessary for a check to be cut without a system error.
    • Interest Owner Usage: For tracking ownership in a well.

Questions & Discussion

  • Clarification on Quorum vs. QLS: Quorum is the software company. QLS is the specific Land System. QDO is the Division Order system. The company uses the full suite, though many people use the term "Quorum" interchangeably for all of them.
  • Intern Experience and Rotation: The intern is rotating through Title (with Mindy), Lease Admin (with Sarah/Jake), and Division Orders (with Katie). Sarah and Jake emphasize that DO analysts often speak a "different language" involving specific codes (MEG 4, MEG 5) instead of specific lease terms.
  • Collaboration Request: The team offers to help the intern with her final presentation for HR/Accounting, suggesting she keep it "high level" rather than getting bogged down in the specific "weeds" of deduction codes.
  • Dialogue on the "List": A humorous exchange occurs regarding how landmen often tell administrators that a task is "on the list," which translates to it not being a priority for them, despite being an emergency for the administration team.