Paper Promises

Some North Texas landowners found out their gas leases were just hot air.
0
Posted October 31, 2007 by Peter Gorman in News

While the Barnett Shale may be one of the largest natural gas plays in the United States, causing a frenzy among drillers and making millionaires out of many a small rancher in several North Texas counties, at least one group of landowners over in Ellis County has discovered that the Shale is just a sham if you can’t enforce your lease agreement.

Don McCrary is one of them. He and his wife, Hazel, live in Kennedale, south of Arlington, and raise cattle on another 81 acres they own in Ellis County. No one has yet drilled for gas on it, though they’ve leased the mineral rights a couple of times, including a lease three years ago to XTO Energy. In April, when time was running out on that lease, someone contacted them from TriStar Gas Partners, LLC, out of Arlington. “We had a meeting over at my neighbor Wayne Blackwell’s house,” McCrary told Fort Worth Weekly. “The Blackwells and Sammy Crocker and his wife, Mary, as well as Hazel and me were there, and one of the partners in TriStar, Troy Cave, was there.” The conversation was about drilling for gas on the couples’ contiguous properties. “He was offering $1,500 an acre in bonus money, just for signing the leases,” said McCrary. Bonus money is usually paid at the time — or right after — a lease is signed, before the oil and gas companies can begin the geological and seismic work that precede drilling.

Within a few days of the initial meeting, another TriStar partner, Rush Geter, called, and the three couples met for a second time, this time at Sammy Crocker’s home on May 7, to sign leases. “We were to be paid bonus money in 10 days,” said McCrary. “And now it’s October, and I still haven’t seen one dime. Neither have the Blackwells.” A similar meeting was held around the same time at another Ellis County landowner’s office. Nearly two dozen people, owners of more than a dozen properties, were present at Dickey Ray’s place in Midlothian. Most of them signed leases with TriStar by the end of May — but only a few have received their bonus money. The rest, like Don and Hazel McCrary, have gotten nothing.

Despite that fact, the owners have found that some of those leases were filed at the Ellis County courthouse, with language indicating the bonus money had been paid — effectively diverting other gas companies from offering to drill on those properties. On top of that, McCrary’s lawyer discovered that the front page of the lease had been changed to give TriStar a longer time to drill. And they weren’t the only ones it happened to. Reporters — and some law enforcement officials — started asking questions. Geter, who’d ducked leaseholders’ questions for months, eventually told the Weekly there’d been no impropriety — just the “normal problems” that oil and gas companies create when they start putting together lots of parcels for leases. With the public spotlight turned on TriStar, things started happening. But not enough to make Ellis County landowners happy. After all, when you’ve signed a lease that could conceivably make millions of dollars for you over a couple of decades and have turned away other potentially lucrative deals, a gift card and a “sorry” don’t cut the mustard.

Ellis County is at the eastern edge of the Barnett Shale field. Many drillers have shied away from it because its gas reserves aren’t considered as rich as those under Tarrant, Johnson, and other counties to the north and west. Also, there’s a geological formation, called an overthrust, in the area that makes drilling wells there more difficult and costly. “It’s geological chaos down there,” with operators as likely to hit oil as gas or water, said Dr. John Baen, a University of North Texas business professor who has worked as an expert for several Barnett Shale drilling companies. But the southeast corner of Ellis is also at the juncture of several other oil and gas fields, he said, making it a potential gold mine for those who can get through the overthrust.

Despite the potential difficulty, when the boom began in earnest three years ago, companies like XTO decided it was worth leasing in Ellis. They started offering farmers and ranchers leases with $200 to $300 an acre in bonus money. For owners whose land turns out not to have gas or oil reserves, or reserves not valuable enough to offset the cost of drilling, that may be the only Barnett bucks they’ll ever get. Others will cash a second check if a drilling rig is set up on their property. And if the companies get lucky and wells begin producing, the landowners get a share — a royalty —of the monies earned. Across the Barnett Shale, companies are hitting at nearly a 100 percent success rate, and some of the pockets of gas they’re hitting are earning big royalty checks for lucky landowners. For companies already bringing in money from successful wells, leasing the mineral rights on some land in Ellis for a few hundred bucks an acre was a no-brainer, even considering the potential difficulties. It cost XTO just $27,000 to lease Don McCrary’s 81 acres, and for that the company got a three-year window in which to decide whether to drill. If new technology turned up to deal with the difficult geological formation, well, they’d come away big winners for a small investment.

Things got so hot in other counties, however, that only a handful of wells were tried in Ellis. Why waste time, money, and the services of a much-in-demand rig and crew on a gamble there when you could stick a straw down to a producing well in less than 45 days in Johnson or Tarrant? McCrary and his neighbors, therefore, were nearing the end of their three-year leases with no wells in sight when TriStar came calling. The TriStar representatives’ initial calls produced two meetings. Sammy and Mary Crocker got in touch with two neighbor couples. A couple of miles away, where Dickie Ray and his father own just under 1,000 acres, Ray called a larger meeting of about two dozen people. At meetings with both groups of landowners, TriStar offered a pleasant surprise: bonuses far above the usual $200 to $300 an acre. Ray, his father, and the neighbors from their group were promised bonuses of $1,000 an acre. The McCrarys, Blackwells, and Crockers were to get $1,500 an acre. (Geter later told the Weekly those figures were correct.)

The landowners later described Cave and Geter as disarming talkers who made frequent references to being good Christians. Several said that Geter in particular talked about his regular attendance at Bible study. “They told us everything we wanted to hear, all right,” Don McCrary said. “Smooth as oil and as tough to grab ahold of,” Hazel McCrary added.
At both meetings, some property owners expressed concern that existing mineral rights leases on their land still had several months to run, and some of those leases included renewal options. “They told us not to worry,” Ray said. “For land that was tied up, they’d pay 10 percent of the bonus money when we signed and the remainder on the day our leases were released from the previous contracts. It’s called a top lease, and it’s a gamble to give one, but that fellow Geter told us it was a worthwhile gamble for TriStar. For those whose leases had already run out, they’d get the whole bonus money right after they signed.”


In each group, the landowner who had called the initial meetings was paid the bonus money, or part of it, right on time. Not surprisingly, that helped convince their neighbors to also sign on the dotted line. It was a development that Dickie Ray and the Crockers would come to feel terrible about. “I just feel like they used us to get our neighbors to sign,” Mary Crocker said. Landowners said Geter told both groups that TriStar had two rigs, was planning on getting a third, and would be drilling on each of their properties — more good news, since landowners generally get a flat fee of $25,000 to $50,000 for each well drilled on their land. The leases also set royalties at 23 to 25 percent if a well came in. For owners of larger properties, that could have meant royalties running into the millions of dollars over the course of the lease — in some cases $50,000 or more every month, potentially for decades. It should have been a dream come true. It wound up being a nightmare.

Don McCrary is a big-boned handsome 80-year-old with a shock of white hair, born and raised in Texas. His wife Hazel came to Texas from California nearly 60 years ago to help her sister and brother-in-law run their restaurant. That’s where she met Don. They’ve been married 57 years. Don worked 38 years for the company that started out as Western Electric and became TXU, retiring as a general foreman in 1987. He then worked as an independent electrical consultant until 2005. They raised two children and now have six grandkids. The McCrarys bought the farm in Ellis in 1965, built a house on it, and lived there for nearly 12 years, until the demands of Don’s work forced him to move closer to Fort Worth. They leased the land to a cotton farmer and then, when the prices of that crop fell, started raising cattle. They still keep a few head there and go out to check on them frequently. In Kennedale, they have five head of cattle and 30 goats on five pristine acres. The land is gorgeous because the McCrarys work at it. They’ve worked for everything they have.

Sitting at his kitchen table, Don talked about how the idea of making some “free money” for once just tickled them.
“You can always use extra money. And $122,000 in bonus money feeds a lot of cattle,” McCrary said. “Don’t it, Hazel?”
“It sure does,” she said, and laughed. The McCrarys don’t actually need the money to feed their cattle. But they would like to build up the college funds they’ve set up for the grandkids and be able to afford to put the farm into a perpetual trust. “That way, when they subdivide over there and build houses everywhere, there will still be this nice green place. I’ve got a running creek back there that’s got lots of trees on it, and it sure would be a shame to have someone cut that up for houses,” Don said. Pushed, he admitted he might buy something for himself, too. “I’ve been burned by the sun on tractors my whole life. I’d love to have a new tractor with air conditioning just once,” he said.

But the bonus money they dreamed of spending never materialized. “I’ve got six witnesses who were there when Mr. Geter said we’d be getting the bonus checks in 10 days. He said he just needed to check that everyone owned their mineral rights,” Don said. When the money didn’t come, Don called TriStar and was told it would be there soon, but that it would only be half of what was offered, as he owned only half the mineral rights on his farm. “I should have known something was wrong right then,” he said. “How could I only own half the mineral rights? I already leased that land three times before and never had a problem.” Others didn’t even get so much as an excuse for the missing royalty checks. Sharon Simms, Dickey Ray’s cousin, signed with TriStar on 175 acres she and her daughter own in Ellis County. “Our lease called for $1,000 per acre in bonus money, which I could have used. But I had a funny feeling about dealing with TriStar from the beginning. I should have followed my feeling,” she said.

Her unease came not only from the smoothness of Geter’s spiel but from the fact that he didn’t show up for the first lease-signing appointment. “And he didn’t call to cancel. But then a few days later, he set up a second appointment,” she said. “That was on Friday, May 25. And he told us that we would have 10 percent of our money — our land was still under lease with someone else at the time — by the following Tuesday or Wednesday, at the latest. And I have never heard another word from TriStar. They have never returned a single call, not one.” The same thing happened with the Blackwells. “I signed my lease on May 7, along with the Crockers and the McCrarys,” Wayne Blackwell said. “We were all to get $1,500 an acre and were to be paid in 10 days. But there’s never been any payment made to me.” The question, of course, is why TriStar would legally bind itself to pay out many thousands of dollars in bonuses if it never intended to honor the leases. Blackwell said he’d heard that TriStar was intending to “flip” the leases, selling them to another company as soon as they were signed, but that for some reason, “the other company backed out.”

If that was what happened, McCrary said, Geter and Cave “should have come to us and explained it and then given us our leases back so we could lease to someone else.” When the checks didn’t show up for most of the landowners, they started trying to get the leases voided. Don McCrary tried dealing directly with TriStar for a month, but after company officials stopped returning his calls, he hired a lawyer. The lawyer discovered that despite not having paid the couple, TriStar had nonetheless filed the lease with Ellis County — on May 17, the day the McCrarys were to have been paid. The lawyer also noticed that the front page of the lease had been changed, committing the landowners to 36 months with TriStar when they’d signed on for only 24.

Don McCrary alerted his neighbors; they checked the courthouse, and several discovered that their leases had also been filed without bonuses being paid and with pages altered from what their own signed copies showed. In some cases, the length of the lease was extended from 24 to 36 months. In others, agreed-to addenda had been dropped. In at least one case, a clause allowing a two-year extension of the lease had been added. Among those whose lease terms were changed were the Crockers, who’d received their bonus money but still had issues with TriStar. “Just about the time we were to get paid, Troy Cave came down to the house with a check,” Mary Crocker said. “Now, we were expecting a check for $143,000 for our 95 or so acres, but he had a check for only 10 percent. I told him my old lease was up nearly a month earlier and I wanted the whole bonus money.”


Cave said he’d return to the office and have a second check cut for the whole amount, but Mary Crocker told him no, that her son worked right around the corner from the TriStar office, and he would come by and pick up the check that afternoon. “And he did, so we got paid, and we were happy. But then I went to the courthouse and saw that the lease they’d filed said 36 months, not the 24 months we’d signed. So I called him and told him we needed to get that fixed.” Crocker said Cave promised several times to get it done, but it didn’t happen. “We’d have been happy to sign a lease for 36 months,” she said. “In fact, I thought that was fairly standard. But he gave us a lease for 24 months, and so that’s what I wanted to have filed.” When Cave stopped returning her phone calls, she went down to the TriStar office with her signed copy of the lease in hand and told the receptionist she wanted to see either Cave or Geter. “I told them I wanted them to look at some papers I had, and that my name was Jean McCoy. Which wasn’t a lie: My full name is Mary Jean McCoy Crocker. But I knew they’d say they were out if I told them I was Mary Crocker.”

Cave showed up a few minutes later, and Crocker said the TriStar man’s jaw dropped when he saw who was waiting for him. “I told him we needed to get the lease fixed, and he said he’d do it. I said no, I had a copy of the lease I signed, and we would do it right then, and I would file it myself. And we did. And then I paid $24 to file it.” Like McCrary, she’d leased the land previously, for $200 per acre in bonus money. “And we thought that was a lot of money. This time it is a lot of money, even if they don’t drill on it.” But Crocker said that while she and her husband are happy to have things straightened out with their own lease, she feels bad about bringing in neighbors who haven’t been paid. “I feel like they used us. We had a number of phone calls from neighbors asking how things were, and we told them we got our money, and then they signed. So I feel badly that we were used to rope others in. I think it was just a sort of game, and I don’t believe they’ll ever drill out here.”

Some people thought what happened was more serious than any game. One landowner, who asked that her name not be used, was so frustrated when she and her husband didn’t get their bonus money that she eventually went to the Ellis County Sheriff’s Department. “We signed on a Friday before a holiday weekend and were told we’d have our money on Tuesday. Well, there was no money on Tuesday. So we called, and they promised to get it to us, and when they didn’t, we called again and again until finally they wouldn’t even return our calls. So we hired a lawyer who found that our lease had been filed and changed. TriStar wouldn’t even answer his letters.” She got so angry, she said, that her husband finally had their lawyer draw up papers to release them from the contract, and her husband hand-delivered them to TriStar. “He just sat in that office and wouldn’t budge until they signed and notarized them, and then we went down and filed them. And then we went to the sheriff. He told us he thought it was criminal and began an investigation.”

Several of the landowners said they’ve received calls from Lt. Robert Polley of the Ellis County Sheriff’s Department, asking about the leases. Polley didn’t return calls seeking comment for this story. Ellis County District Attorney Joe Grubbs said he’s not so sure that the lease shenanigans are a criminal matter. “If someone filed a lease with the county without paying [bonus money] for it, it might be a breach of contract,” he said. “It’s clearly a civil case, but it might or might not also be a criminal case, depending on whether someone could prove they were deprived of something because of it.” Grubbs said if landowners could show him proof that signed leases had been changed before being filed, he would prosecute. Several of the lease signers told the Weekly they intend to take their originals and copies of the altered documents to him.

Rush Geter and Troy Cave have been in the gas business for two years. Previously they worked in real estate. “We were buying and selling land, and over time we began to acquire leases to mineral rights along with the land,” Geter said. “And so we finally started this company dealing with leasing minerals with the idea of drilling.” Geter said that TriStar mostly acts as a middleman, acquiring mineral rights leases and then selling them to the actual drillers. But, he said, “We have drilled in the past in joint ventures.” However, Geter said he wasn’t sure where the wells were or who the other partners are, other than that they were from West Texas. “We’re minority partners. We own 10 percent of the rigs,” he said. “I don’t handle that end of the business, so I can’t be more clear.”

Although the Ellis County property owners said they’d been told TriStar itself would drill on their land, Geter said the company was acting as a middleman there. Any drilling, he said would be done “in partnership. We were, and still are, planning to drill, but it will be in partnership with others. And of course we can’t drill until we’ve got the leases, so first we’ve got to act as landmen before we can be producers.” He laughed at a question about lease documents being filed before bonuses were paid. “We are allowed to file before payment. Then, during our period of due diligence, we make certain that the land- owners are the actual owners of the mineral rights. And after that we begin our geological work. Now normally that takes a few weeks, but in this case it took some months,” he said.

After the Weekly and law enforcement officials began making inquiries about TriStar’s actions regarding the Ellis County leases and after various landowners hired attorneys who started asking questions, the company sent out letters to most of the landowners saying they were “not interested in leasing your acreage.” “In this case,” Geter said, “when our geologists came back to us with their reports, we determined that some of those properties were not viable for us, and so we didn’t pay them, but we did release them. I believe there are six parcels we’re going to keep, and those have been paid. The remainder are no longer bound up with us, and those people have the ability to sign that acreage with whomever they want.” However, the leases reviewed by the Weekly didn’t include any clauses allowing the cancellation of the leases without the bonuses being paid, nor did they include any clause allowing TriStar to void the leases after a “due diligence period.” “That may be so,” Geter said, “but I told everyone that we would be doing due diligence on those leases, checking for mineral ownership — and there were problems with that on several of those properties — and doing our geological work prior to executing those leases with financial payments.”


He denied telling any of the Ellis County landowners that they would get their payments in 10 days of signing or by any certain date. “We told everyone that payment would depend on title and geological work,” he said. “One person did ask how long that would take, and I told them that I couldn’t be definite. You’ve got to understand that this area in Ellis is difficult geologically, and we had to assess that prior to payment. But I never told them when they would get their checks. I never told them a week, two weeks, a month.” He said the numerous property owners who recounted the 10-day promise are wrong. “But if I’d have known it would take two months to get the title work done, four months to have the geology work done, I never would have leased those lands,” he said.

All the Ellis County landowners who spoke to the Weekly said no geological work was done on their properties. Sharon Simms said someone claiming to be a geologist did approach her. “I told him he could start working the day the check cleared,” she said. “And that was the last I saw of him.” Asked about what geology work his company had done, Geter said, “Well, we’ve been keeping an eye on a well being drilled in that area by Range Resources.” Geter said he understands why the property owners are upset. “If I put myself in their shoes, I’d be irritated too,” he said. “We might not have handled it as well as we could have.” But he said he knew nothing of any changes being made to lease documents after the landowners had signed them. “Changes to leases? That’s the first I’m hearing of that,” he said. “I will have to look into that, because I have no idea how something like that could have happened. And if it did happen, well, that’s certainly something to be concerned with. That would be something of an issue for us, that’s true. I’ll have to look into that.”

“A mineral rights lease is a binding legal document that is governed by the terms of the lease,” explained Adam Haynes. He’s executive vice president of the Texas Independent Producer and Royalty Owner Association (TIPRO), the leading statewide trade association for mineral rights owners. Haynes said that it’s true that in some cases it takes a few days after a lease has been signed and royalties marked “paid in full” for companies to actually cut royalty checks. “But signing leases and not paying people for months is not usual,” he said. “I’d say it’s very unusual, as a matter of fact.” The problem, he said, is that the industry has not set any standard for what is acceptable in those circumstances. In general, however, Haynes painted a picture of mineral rights leasing law and practice that’s very different from what TriStar representatives did and said in the Ellis County cases.

Take the “due diligence period” that Geter talked about. Normally, Haynes said, that’s what happens before a lease is signed, not after. And if there is no specific clause in the lease allowing the company to withdraw the offer, then there is no such right, he said. Most leases do have a “self-invalidating clause,” he said, which provides that the lease is voided if the bonus money is not paid within a certain period. “What you’re describing, if it’s true, is certainly not a normal business practice and not one TIPRO would condone.” Terry Pratt, owner of the Barnett Shale Market Exchange, a private organization that connects mineral rights owners with oil and gas operators, agreed with Haynes’ assessment. “The only thing checked after the signing of a lease and before payment is a double-check on the ownership of the mineral rights,” he said. “And the ‘consideration’ has to be paid to make the lease good. … [I]f no consideration has been paid, the lease may not be filed. There is no due diligence period built into the state law.”

Kitty Sue Quinn, executive director of the nonprofit Texas Land and Mineral Owners’ Association, said the Ellis County stories didn’t surprise her. “That sort of thing happens more often than you’d think,” she said. “Throughout Texas there are a number of good [oil and gas] operators and a number of operators who are not as good. Traditionally there has been very little legislation that prevents things like this from happening. That’s why this association was formed — to get legislation in place to protect the mineral owners and regulate the operators.” As it is, she said, leaseholders’ only remedy for unpaid bonuses or other problems is to sue. But lawsuits are time-consuming and expensive, she said, and “Texas courts tend to lean toward the industry.”

On Sept. 10, more than four months after the McCrarys signed their lease with TriStar, they received a letter from Geter that talked about the alleged “due diligence period,” mentioned a review by “our Geology Department,” and concluded that TriStar no longer wanted to lease their mineral rights. At about the same time, several others received the same unnotarized form letter. It took nearly another month before a notarized copy arrived. When the copies were delivered, each included a $100 Visa or Mastercard gift card, TriStar’s way of apologizing for any inconvenience suffered. “You know what you can do with that,” Don McCrary said. “I don’t even have to tell you. But I will say I’m not gonna spend it, because if I did, they’d probably be able to say I was OK with everything they did. And I’m not OK with any of it.” In those five months, the McCrarys could have been investing the $121,500 in bonus money they’d been promised by TriStar, but they never got any of it. Or they could have been making money from one of the other drillers who came knocking during that time. “I turned them down,” McCrary said. “I was honoring the TriStar lease. Somebody has to have some honor around here.”

You can contact Peter Gorman at peterg9@yahoo.com


0 Comments



Be the first to comment!


Leave a Response

(required)


8 − = five