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Lease Compliance and Resolution of Data

Lease compliance issues in domestic shale have become critical to E&P asset protection. Lease jeopardy has grown into a major component of risk management of upstream resources.

It demands a well-defined, cohesive data management strategy that creates business intelligence from disparate sources.

Land Administration Information Systems Inadequate

Land Administration is a traditional role within an E&P enterprise.  Within Royalty complianceits domain falls the safeguarding of all of a company’s land assets, among them the oil and gas leases.

Landmen are highly specialized members of an E&P exploration and production team whose duties include assisting in the analysis of deeds, leases and other contracts.  A landman’s responsibility typically includes ensuring that the company’s land assets database is maintained and key attributes of lease provisions recorded and updated.

Unfortunately, these talented and versatile members of the upstream resources team are increasingly handicapped in their lease administration duties. This is because information technology hasn’t kept pace with changing demands in the leasing arena.

The data they’re so meticulously maintaining is in a static data repository. As a result it’s unused by advanced oil and gas software with lease analysis and business intelligence capabilities.

Changing Aspects of Lease Compliance

Several factors are driving changes in shale lease compliance.  As competitors move rapidly in vying for a shrinking pool of unconventional land assets of increasingly significant value, lessors are reexamining the royalty structure of their existing leases.

This and falling natural gas prices have helped motivated lessors, newly focused on their monthly royalty payments, to analyze their lease provisions, often with professional legal advice.  This has become a highly litigious area, with more and more attorneys building a lucrative practice area in oil and gas lease compliance and its growing body of case law.

“Royalty and land and lease rights disputes were the most common types of unconventional oil and gas litigation during 2012,” reports Navigant.

“Oil and gas companies involved in unconventional exploration continue to face not only the challenge of differing state laws, but also a constantly evolving legal landscape as landmark cases make their way through state courts,” noted Navigant, referring to Butler v. Powers Estate, litigation based upon the provisions of a 19th century oil and minerals’ lease.

If an E&P company isn’t performing due diligence on lease provision compliance, it is exposing itself to the potential of costly litigation and risking the devaluation or loss of key productive assets. Overnight what was regarded as a stable corporate asset can become a legal liability if lease oversight has failed.

A company lacking a consistently reliable system for proactive lease compliance is apt to be blindsided by an eager attorney who’s found a non-complaint lease under which he can get his fingernails.

Consolidating Disparate Lease Data into Business Intelligence

Most companies already have on hand the data needed to be proactive in their unconventional E&P lease compliance.  It often exists in various forms that convey different meanings in non-integrated data stacks. Examples include the property management data base, the financials system, the reserves model, and the drilling information.

With the right analytical methodology, this disparate data can be consolidated into an information system that provides reports and alerts that help lessen lease jeopardy.

Building a Viable Lease Compliance System

A multi-part, iterative process is used to build and deploy a viable lease compliance application.

First, leases are identified and reviewed, with their critical provisions defined, e.g., key dates, key quantities.  Next, the different systems of record are identified, and the key attributes that define the leases’ critical provisions are mapped to the destination system, with inconsistencies corrected.

At this point the source data is cleansed — incorrect or inaccurate data is modified, deleted or replaced. The resulting “good” data is synchronized to the master data set, with links established to the various source systems.

Integration with the initial lease provision inventory now occurs, with processes put into place to ensure the lease provision inventory remains accurate and current.  Lastly, lease provision tracking is established, with sensitivity cases defined.

Some of the critical sensitivity issues are royalty escalation, cessation of production and continuous drilling. Business process owners are assigned to the system and critical, sensitivity-driven alerts established for key users.

For more, read our post on leveraging unconventional information assets for Upstream…


Nate Richards
Nate has over 18 years of software engineering and consulting experience. He founded Entrance in 2003. Nate is the past President of the Board of LifeHouse Houston, a Christ-centered maternity home ministry, and is past Executive committee member and Treasurer of Houston Achievement Place, a foster care and social skills training non-profit organization.
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