Bell Creek Offers

Montana Mineral Rights Powder River County, MT
1

If you own minerals under the Bell Creek oil field you have received offers to purchase your minerals. Typically these offers amount to 50 or 60 times your current monthly royalty payment. I'd discourage anyone from selling at those rates. The field operator Denbury Resources is about to start an enhanced recovery program with CO2 injection. It is expected to begin within the next few months.

Estimate vary as to how much this might increase production. Some show it will increase current production between two and three times (for the next few years). However, these are only estimates. It is uncertain how much production can actually be increased. None the less, accepting an offer today based on 60 times last month's production is the likely equivalent of selling for only 30 times what it may be producing a year from now.

On the other hand, Bell Creek is a very old oil field. It went into production nearly fifty years ago (1967). The past couple decades it has been water flooded for secondary recovery. That is they injected water to try to force out additional oil. This new enhanced recovery will use CO2 gas (in lieu of water) for essentially the same purpose. Although the amount is unknown, this will increase the field's production for the next few years and likely extend the field's life.

Though existing mineral owners need to also be aware Denbury (the field operator) intends to reduce your "participation factor". That is, they will be reducing the percentage of the oil you're entitled to. The amount of the reduction depends upon which "Tract" your minerals are under. So while production will increase, your share of that will be decreased. Though the net result is the amount of royalty you should receive in the future is more than you're being paid today.

Bottom line, a good rule of thumb is never sell minerals. However, if selling is attractive to you (for whatever reason) don't sell your Bell Creek minerals too cheap. In my opinion selling for 60 or 70 times current production is just too low. If you wish to sell, before accepting a low offer contact me, I may offer you better terms and add to my position there.

2

Eastern MT,

How do you know that Denbury intends to reduce participation factors within the units? Are they allowed to do that? And do you know what their basis for their new participation factors would be?

Also, do you happen to know any online services for deed indexes and imaging for Montana? Powder River and Fallon Counties in particular?

With all this information are you saying that you would not even consider selling all or part of your minerals in the Bell Creek area for even a price at say 120-130 months cash flow?

Any additional info you could provide would be greatly appreciated.

3

Jeff, CO2 injection costs money. As Eastern MT has already said, it's more costly than waterflooding and someone has to pay for it and reducing the participation factor is the common way to pay for it. Denbury double dips because they own the CO2 also.

It may be possible to opt out but you might receive nothing from production in the future if you did so, from what I have read. I'd do more study on it but I think I will be dead before my minerals become subject to unitization.

4

Jeff,

Personally I have no interest in selling my Bell Creek minerals. I don't need the money today, and in fact have some cash I'm uncertain where I'll invest. So receiving the future monthly revenue over the long term suites our financial needs better. Though everyone's situation is a little different. In my opinion the 100 or 120 times cash flow is probably a fair price for Bell Creek valuations, unlike the 50 to 70 month offers I've received.

On Montana deeds; I'm unaware of any online services for Montana records. Besides physically going to Broadus or Baker, your only other possible option may be calling a Abstract Firm which may be able to sell you the information you seek. I believe there is one in Baker, I'm not sure about Broadus. Though one in Miles City may be able to help with both?

Regarding participation factors; Exxon initially proposed this CO2 recovery project back in the 1990's as part of the Bell Creek Field Unitization. Exxon was unable to secure the needed volume of CO2 so never completed this recovery project. Though the Unitization Agreement did specify participation factors would be adjusted upon the completion of the CO2 project.

Last year I met with a Denbury executive in Plano to discuss this project. He told me they intended to use Exxon's adjusted factors when they were running since that was incorporated into the Unitization Agreement. However, Exxon's proposal also gave a specific date by which the CO2 project must be operational. That date came and went decades ago. He responded as if that was inconsequential when I pointed it out. So while I don't believe they have the right to adjust the tract factors, this executive indicated they would. So I can only take him at his word.

I retained my copy of the Unitization Agreement and the proposed adjusted factors. There are about 100 different "Tracts" so I'm not going to post them all. Though if you (or anyone else) want I can look up yours if you give me which Tract, or Tracts, your interest is in. A few of them will actually see an increased factor, maybe you're one of the lucky ones. However, the vast majority of the Bell Creek Tracts will be reduced. If you don't know your "Tract" I can determine it via your legal description. However, in any case I'd have to dig this up and it may take a little time to give you an answer. Hope this information makes everything a little clearer.

5

Thank you both for your replies. Very educational for some from the outside trying to understand how things work in the area.

6

Actually, another question I meant to ask before - Is this area mostly Fee/Federal/State owned?

7

HI Eastern,

I'm a little more optimistic than you about this project.

Tract participation will always add up to 100 % and presumably participation will move around among tracts. But has the unit been expanded ? That would dilute tract participation.

Addressing rw's comment, I don't see why added costs sould have any effect on royalty paid.

Does anyone know the status of CO2 injection. Denbury stated they expected to start by 'the end of May'.

Thanks for any responses.

8

Mr. Elmore, for your sake I hope you are right but when they must ask you to agree to something, provided that your lease did not already give permission, it usually means the money is going to change. CO2 injection is not going to be cheap and it will have to be paid for somehow. Denbury owns the CO2 that will be used and where do you think it will come from? You can get water on site. There should be some articles online about Denbury and CO2 injection, I would suggest reading them.

9

Hi rw,

I've read everything available on the 'net about Bell Creek.

According to Denbury, Bell Creek initially consisted of 7 individual units. Some of these units may have been terminated. Exxon (re-)unitized the entire field in '92 in anticipation of CO2 injection, so naturally tract definition and therefore tract participation changed, but tract participation still adds up to 100 %.

Perhaps some leases expired and were re-negotiated. Beyond that, what authority does Denbury have to alter participation ? None.

CO2 injection will be paid for out of the working interest owner's operating margin.

10

They probably can't force you to pony up but the rule of capture may apply. When they start pushing oil around, which wells do you think they are going to be pushing the oil towards, yours or someones well where they have agreed to pony up for the cost?

I recommended you read up on Denbury and CO2 operations, not just Denbury and your field. Since the CO2 injections have not started in Bell Creek yet, information on how it gets paid for is going to be scarce. I think you may gather some valuable information on what happened in tertiary recovery in other fields, including how it was paid for, but if you think your field is different from other fields "special" and what happened to others can't happen to you.....have a great day!

11

Gentlemen, there is much I don't know, but here's a few facts which may muddy the water further.

Yes there are seven units in the field, "A" through "F/Ranch Creek", with "A" being the largest by a wide margin. Although the separate units are contiguous, they were created because it is believed there is little communication between them. So participation adds up to 100% within each separate unit.

The 100 or so existing Tracts are spread among these units. Let's say Unit "A" has 30 (too lazy to look it up). If I own in "Tract A-25" and you own in "Tract A-7" we each share production in all Unit A wells. Though the various Tract Participation Factors (& your net acres) dictate to what degree we each share in that. If your minerals happen to stretch beneath both units "A" & "B" you'd receive royalty from all the wells in each of those units, but none from wells with C, D, E, etc... There are production wells and injections well within each of the units.

Exxon's proposed re-unitization into the Bell Creek Consolidated Unit was done. Though all Tracts remain part of it, this consolidation included reallocating the Tract Participation Factors contingent upon the CO2 project being functional by a certain date. Essentially the seven "Units" are dissolved, and the single consolidated unit remains. The result is a reduction within most of the Tracts with the increase being allocated to a few (? within "C" and "E" ?). The overall net is still 100%, yet a real decrease is realized by most mineral owners in "A", "B", "D", etc...

However, this raises a couple of points; Exxon's date certain came and went. Exxon did implement the revised factors briefly, then returned to the original ones when their date passed. I believe legally those revised participation factors died back in the 1990's. Secondly, the concept of the seven existing units is based on distinct and separate producing areas (same formation, though unconnected). Exxon's revision implies their CO2 injection somehow would enable the entire Bell Creek field to produce as a whole (as if the CO2 created communication between "A" and "E" where none is thought to exist).

Denbury is incurring significant expense on this CO2 project. They've invested to buy the CO2 at the source, they've built a 300 mile (or so) pipeline to ship the gas to Bell Creek. Their efforts will likely extend the field life and certainly increase production. All mineral owners will benefit from their actions. However, they will benefit the most. All working interest owners were bought out long before Denbury acquired the field. The leases were done in the 1960's at 1/8th royalty. Throw in some misc. overrides and their net interest is in the neighborhood of 85% or close to it.

Let's pretend Denbury's CO2 project eventually pumps another 1,000 bbls of oil from beneath my minerals. I benefit from their project with 125 bbls of oil I wouldn't otherwise have seen (thank you Denbury!). Yet Denbury also gained another 875 bbls of MY oil (or 850 if deducting someone's 2 1/2% override). That is fair. It is what a 1/8th lease entails (12.5% for me, balance to them). Now should I also accept Denbury wanting to essentially alter the terms of my lease (via reducing the Tract Factors) possibly reducing my 12.5% down to 8% or so? I'd still be paid for oil not otherwise recovered today. Yet Denbury isn't just the operator, they are THE Working Interest Owner. Isn't their take of 7/8th of that additional recovery of my oil compensation enough for their investment in this project?

Again I don't believe they have the right to resurrect those old proposed participation factors. Though that is what I was told they intend to do. As to the timetable, at one point they said "1st Qt", then like you I heard "May". Perhaps they've begun injection though I haven't heard that confirmed.

12

R.W.,

'Rule of capture' ? All oil and gas within the unit is common ownership. Rule of capture is addressed by unit participation. In other words, it doesn't matter where the oil and gas is recovered, the oil and gas is owned by each and every mineral owner, proportional to their tract ownership multiplied by tract participation.

The owners of each tract shares oil and gas according to the terms of their lease. Each tract shares oil and gas from the Unit according to that tract's participation factor.


r w kennedy said:

They probably can't force you to pony up but the rule of capture may apply. When they start pushing oil around, which wells do you think they are going to be pushing the oil towards, yours or someones well where they have agreed to pony up for the cost?

I recommended you read up on Denbury and CO2 operations, not just Denbury and your field. Since the CO2 injections have not started in Bell Creek yet, information on how it gets paid for is going to be scarce. I think you may gather some valuable information on what happened in tertiary recovery in other fields, including how it was paid for, but if you think your field is different from other fields "special" and what happened to others can't happen to you.....have a great day!

13



Eastern MT said:

Gentlemen, there is much I don't know, but here's a few facts which may muddy the water further.

Yes there are seven units in the field, "A" through "F/Ranch Creek", with "A" being the largest by a wide margin. Although the separate units are contiguous, they were created because it is believed there is little communication between them. So participation adds up to 100% within each separate unit.

The 100 or so existing Tracts are spread among these units. Let's say Unit "A" has 30 (too lazy to look it up). If I own in "Tract A-25" and you own in "Tract A-7" we each share production in all Unit A wells. Though the various Tract Participation Factors (& your net acres) dictate to what degree we each share in that. If your minerals happen to stretch beneath both units "A" & "B" you'd receive royalty from all the wells in each of those units, but none from wells with C, D, E, etc... There are production wells and injections well within each of the units.

Exxon's proposed re-unitization into the Bell Creek Consolidated Unit was done. Though all Tracts remain part of it, this consolidation included reallocating the Tract Participation Factors contingent upon the CO2 project being functional by a certain date. Essentially the seven "Units" are dissolved, and the single consolidated unit remains. The result is a reduction within most of the Tracts with the increase being allocated to a few (? within "C" and "E" ?). The overall net is still 100%, yet a real decrease is realized by most mineral owners in "A", "B", "D", etc...

However, this raises a couple of points; Exxon's date certain came and went. Exxon did implement the revised factors briefly, then returned to the original ones when their date passed. I believe legally those revised participation factors died back in the 1990's. Secondly, the concept of the seven existing units is based on distinct and separate producing areas (same formation, though unconnected). Exxon's revision implies their CO2 injection somehow would enable the entire Bell Creek field to produce as a whole (as if the CO2 created communication between "A" and "E" where none is thought to exist).

Denbury is incurring significant expense on this CO2 project. They've invested to buy the CO2 at the source, they've built a 300 mile (or so) pipeline to ship the gas to Bell Creek. Their efforts will likely extend the field life and certainly increase production. All mineral owners will benefit from their actions. However, they will benefit the most. All working interest owners were bought out long before Denbury acquired the field. The leases were done in the 1960's at 1/8th royalty. Throw in some misc. overrides and their net interest is in the neighborhood of 85% or close to it.

Let's pretend Denbury's CO2 project eventually pumps another 1,000 bbls of oil from beneath my minerals. I benefit from their project with 125 bbls of oil I wouldn't otherwise have seen (thank you Denbury!). Yet Denbury also gained another 875 bbls of MY oil (or 850 if deducting someone's 2 1/2% override). That is fair. It is what a 1/8th lease entails (12.5% for me, balance to them). Now should I also accept Denbury wanting to essentially alter the terms of my lease (via reducing the Tract Factors) possibly reducing my 12.5% down to 8% or so? I'd still be paid for oil not otherwise recovered today. Yet Denbury isn't just the operator, they are THE Working Interest Owner. Isn't their take of 7/8th of that additional recovery of my oil compensation enough for their investment in this project?

Again I don't believe they have the right to resurrect those old proposed participation factors. Though that is what I was told they intend to do. As to the timetable, at one point they said "1st Qt", then like you I heard "May". Perhaps they've begun injection though I haven't heard that confirmed.

Eastern,

Thank you for the additional details. Geologists believed in 1968 that Bell Creek contained 4 separate reservoirs. That according the the 1968 Wyoming Geological Association Guidebook.

14

I haven't read your agreements. If you are trying to say that the pooling and unitization agreements are set forever and can never change, great.

Elwood Elmore said:

R.W.,

'Rule of capture' ? All oil and gas within the unit is common ownership. Rule of capture is addressed by unit participation. In other words, it doesn't matter where the oil and gas is recovered, the oil and gas is owned by each and every mineral owner, proportional to their tract ownership multiplied by tract participation.

The owners of each tract shares oil and gas according to the terms of their lease. Each tract shares oil and gas from the Unit according to that tract's participation factor.


r w kennedy said:

They probably can't force you to pony up but the rule of capture may apply. When they start pushing oil around, which wells do you think they are going to be pushing the oil towards, yours or someones well where they have agreed to pony up for the cost?

I recommended you read up on Denbury and CO2 operations, not just Denbury and your field. Since the CO2 injections have not started in Bell Creek yet, information on how it gets paid for is going to be scarce. I think you may gather some valuable information on what happened in tertiary recovery in other fields, including how it was paid for, but if you think your field is different from other fields "special" and what happened to others can't happen to you.....have a great day!

15

If Denbury has 100%, they can probably do as they like. From my experience in other states, the working interest owners alone negotiate participation factors. Approval by a threshold % (possibily 70%) by the Royalty owners and approval from the Montana Oil and Gas Commission after notice and hearing is required. If substantial state and federal minerals are involved, that may be a foregone conclusion. Your only opportunity to object, if you do object, may be with the Oil and Gas Commission.

On the other hand, that could possibly be at least part of the motivation for Denbury to aquire minerals -buying votes. I think it is doubtful a lot of royalty owners would appose the injection of CO2 aside from participation factors.

I am a little confused though. From your discussion it seems approval for full field unitization has not been achieved. I wonder if Denbury would inject CO2 without full field unitization ? I suppose they could within the existing units. It sounds as though that may be what they intend to do, at least initially.

The existance of 7 Units doesn't necessarily mean there is not communication (at least within individual zones) between units. Full field unitization would allow Denbury to recover oil more effectively.


Eastern MT said:

Jeff,

Personally I have no interest in selling my Bell Creek minerals. I don't need the money today, and in fact have some cash I'm uncertain where I'll invest. So receiving the future monthly revenue over the long term suites our financial needs better. Though everyone's situation is a little different. In my opinion the 100 or 120 times cash flow is probably a fair price for Bell Creek valuations, unlike the 50 to 70 month offers I've received.

On Montana deeds; I'm unaware of any online services for Montana records. Besides physically going to Broadus or Baker, your only other possible option may be calling a Abstract Firm which may be able to sell you the information you seek. I believe there is one in Baker, I'm not sure about Broadus. Though one in Miles City may be able to help with both?

Regarding participation factors; Exxon initially proposed this CO2 recovery project back in the 1990's as part of the Bell Creek Field Unitization. Exxon was unable to secure the needed volume of CO2 so never completed this recovery project. Though the Unitization Agreement did specify participation factors would be adjusted upon the completion of the CO2 project.

Last year I met with a Denbury executive in Plano to discuss this project. He told me they intended to use Exxon's adjusted factors when they were running since that was incorporated into the Unitization Agreement. However, Exxon's proposal also gave a specific date by which the CO2 project must be operational. That date came and went decades ago. He responded as if that was inconsequential when I pointed it out. So while I don't believe they have the right to adjust the tract factors, this executive indicated they would. So I can only take him at his word.

I retained my copy of the Unitization Agreement and the proposed adjusted factors. There are about 100 different "Tracts" so I'm not going to post them all. Though if you (or anyone else) want I can look up yours if you give me which Tract, or Tracts, your interest is in. A few of them will actually see an increased factor, maybe you're one of the lucky ones. However, the vast majority of the Bell Creek Tracts will be reduced. If you don't know your "Tract" I can determine it via your legal description. However, in any case I'd have to dig this up and it may take a little time to give you an answer. Hope this information makes everything a little clearer.

16

Update:

The Montana website shows the original units were terminated when the field-wide unit was formed. The field-wide unit is still in effect, as far as I can tell. Ranch Creek was also incorporated into the field wide Unit.

The Montana statute requires 70% approval of the cost paying interests and 60% approval of the revenue recieving interests. So Denbury has the stroke to do about anything they like, as long as they can get it past the Montana Oil and Gas Commission. If the field-wide Unit Agreement was terminated because of not being able to inject by a certain date, I think that is mute - I doubt there needs to be a unit agreement, as long as the O&G commission approves.

This project will be implemented in phases, with the boundaries of the old units apparently defining the area of each phase. Unit participation can also be implemented in phases, I suspect that is what will happen.

Denbury hasn't done a very good job of communicating their plans, in my opinion. The Montana Oil and Gas Commission isn't much help either.

A 1972 SPE paper refers to 6 separate reservoirs in the main Bell Creek field, Ranch Creek was probably considered sepatate also, making a total of 7. Still, that probably doesn't mean there is not communication across unit boundaries within individual zones.

Elwood Elmore said:

If Denbury has 100%, they can probably do as they like. From my experience in other states, the working interest owners alone negotiate participation factors. Approval by a threshold % (possibily 70%) by the Royalty owners and approval from the Montana Oil and Gas Commission after notice and hearing is required. If substantial state and federal minerals are involved, that may be a foregone conclusion. Your only opportunity to object, if you do object, may be with the Oil and Gas Commission.

On the other hand, that could possibly be at least part of the motivation for Denbury to aquire minerals -buying votes. I think it is doubtful a lot of royalty owners would appose the injection of CO2 aside from participation factors.

I am a little confused though. From your discussion it seems approval for full field unitization has not been achieved. I wonder if Denbury would inject CO2 without full field unitization ? I suppose they could within the existing units. It sounds as though that may be what they intend to do, at least initially.

The existance of 7 Units doesn't necessarily mean there is not communication (at least within individual zones) between units. Full field unitization would allow Denbury to recover oil more effectively.


Eastern MT said:

Jeff,

Personally I have no interest in selling my Bell Creek minerals. I don't need the money today, and in fact have some cash I'm uncertain where I'll invest. So receiving the future monthly revenue over the long term suites our financial needs better. Though everyone's situation is a little different. In my opinion the 100 or 120 times cash flow is probably a fair price for Bell Creek valuations, unlike the 50 to 70 month offers I've received.

On Montana deeds; I'm unaware of any online services for Montana records. Besides physically going to Broadus or Baker, your only other possible option may be calling a Abstract Firm which may be able to sell you the information you seek. I believe there is one in Baker, I'm not sure about Broadus. Though one in Miles City may be able to help with both?

Regarding participation factors; Exxon initially proposed this CO2 recovery project back in the 1990's as part of the Bell Creek Field Unitization. Exxon was unable to secure the needed volume of CO2 so never completed this recovery project. Though the Unitization Agreement did specify participation factors would be adjusted upon the completion of the CO2 project.

Last year I met with a Denbury executive in Plano to discuss this project. He told me they intended to use Exxon's adjusted factors when they were running since that was incorporated into the Unitization Agreement. However, Exxon's proposal also gave a specific date by which the CO2 project must be operational. That date came and went decades ago. He responded as if that was inconsequential when I pointed it out. So while I don't believe they have the right to adjust the tract factors, this executive indicated they would. So I can only take him at his word.

I retained my copy of the Unitization Agreement and the proposed adjusted factors. There are about 100 different "Tracts" so I'm not going to post them all. Though if you (or anyone else) want I can look up yours if you give me which Tract, or Tracts, your interest is in. A few of them will actually see an increased factor, maybe you're one of the lucky ones. However, the vast majority of the Bell Creek Tracts will be reduced. If you don't know your "Tract" I can determine it via your legal description. However, in any case I'd have to dig this up and it may take a little time to give you an answer. Hope this information makes everything a little clearer.

17

I believe Elwood has it about right. It is confusing though. The "Consolidated Unit" is in effect. However at the same time, payment for production remains allocated from within each separate Unit (A, B, C...). As a result, it's hard to say just what the consolidated portion of the "Consolidated Unit" actually entails. Any new change to the allocation of the Units participation factors would have to be signed off on by the MT O&G Commission. Essentially that would be the one and only opportunity for mineral owners to have any say on the matter.

18

I'm a new member of this group, primarily because we are mineral owners in a number of states and have only recently become interested in Montana; was a little surprised to see that this discussion ended in June. Have there been any mineral transactions in Bell Creek recently?

19

Bill, Sorry I have no information on transactions involving Bell Creek. I haven't heard anything and that material isn't posted online. You'd need to run the records in the Broadus courthouse to find out what has changed hands.

20

Hi Eastern, its been a long long time.

The Montana website shows April 2014 production of 1679 bopd, 48849 bwpd. That compares to 963 bopd, 44728 bwpd for June, 2013 - the first full month of CO2 injection. So response is for real in terms of both bopd and oil cut.

My elwoodelmore account expired so I may be posting under a new pseudoname.