Certain covenants which are unique to oil and gas properties should be considered when preparing a Deed of Trust, Security Agreement, Financing Statement and Assignment of Production including:
•To operate the properties in the manner of a prudent operator. If the borrower is not the operator, a covenant to cause the properties to be operated in the manner of a prudent operator and in compliance with applicable rules and regulations.
•To keep the oil and gas properties free of liens and encumbrances.
•To pay or cause to be paid all rentals, delay rentals, royalties and the like and to take all necessary steps to keep the properties in effect.
•Restricting the ability of the mortgagor to pool or unitize.
•That the mortgagor will not use funds belonging to third parties for its own purposes, particularly where the borrower is the operator.
•To pay all ad valorem taxes when due.
•To maintain insurance.
•Not to sell the oil and gas properties without the Bank’s consent.
•To deliver production and financial information on a regular basis.
•To deliver reserve reports audited by independent petroleum engineers acceptable to Bank (typically delivered semi-annually).
•To deliver to the lender all notices from third parties affecting the properties.
CAUTION: Oil and gas lending is a highly specialized field. Consult Bank counsel when taking this type of collateral.
•To deliver a list of the Borrower’s first purchasers of oil and gas
•To provide regular certification by an officer of Borrower as to reserves, gas imbalances, first purchasers
•To operate the properties in careful and efficient manner consistent with industry standards
•To maintain the properties in good working order
•To comply with applicable contracts and government laws, rules and regulations
•To timely pay delay rentals, mineral royalties, expenses and indebtedness
•To comply with all applicable environmental laws
•To not release hazardous materials
•To comply with investigations and remedial obligations required under applicable environmental laws
•To not allow gas imbalances or prepayments that require delivery without receiving full payment
•To not enter into agreements to sell oil and gas in excess of what is reasonably estimated to be produced
•To not enter into hedging agreement for speculative purpose
•To not assign terminate, unwind or sell any hedging agreements
To not enter into hedging agreements that cause notional volumes to exceed a certain percentage of proved developed producing reserves listed on last delivered reserve report