Common Practices in leasing minerals

Oil and Gas Leasing Help
1

I posted this earlier, but as a reply, so it was probably in a place it won't be noticed very soon. So here it is again.

I have read the distinction Buddy Holley made between ‘non-participating’ mineral interests and ‘non-executive’ mineral interests. Here’s the essence of what I've recently heard about bonus payments in regard to these ownership interests,

For minerals to be fully leased, the company needs to pay non participating owners of mineral interests their proportionate share of the bonus. However, the company may secure a lease by paying bonus only to the executive owners, and later pay bonuses to the remaining owners when the client decides to drill. This was represented to be common practice in the industry.

Is it common practice in the industry to lease minerals but to not pay any bonus to the‘non-participating’ owners until the company decides to drill?

Is it common practice to lease minerals but to not pay any bonus to ‘non-executive’ owners until the company decides to drill?

And then, here’s one more question. Is it common practice for a company to pay an executive owner his share of the bonus but not reveal until after he signs the lease and cashes the bonus check that the company is paying bonus only to him because he is an executive owner, but won’t pay any bonus to his non-executive (but participating) relatives until the company is ready to drill?

Thanks for your help.

Carlos Higgins

2

Carlos:

Maybe I'm not understanding your question completely but if an individual owns mineral interests in a an area being leased, this individual has the opportunity to lease these minerals to anyone (not just the company doing the majority of the leasing). When the person leases, they aree normally paid a lease bonus per acre and a set % royalty for their minerals. If this individual elects not to lease while all others sign leases, and if a well is drilled on the spacing unit, this individual will participate in the well and payments, if any, will be paid over to this individual over time at 100% for their share in the spacing unit. This might take a long time to recieve payments and if the well is unsuccessful, the individual recieves nothing while the others were at least paid bonuses up front. Again, this may not be your question. Also, I believe you are referring to a post from Buddy Cotten and not Buddy Holley (the singer).

3

Mr. Higgins, I think the answer is yes. That it is probably "common practice" even if it doesn't happen in the majority of cases. The executive leased the non-executives acres without assuring that the non-executive nineral owners would be paid and the lessee saw an opportunity to get some acres leased [the non-executives] for free. What do you do in this case ? I think you will find that the executive had a duty to you. There is alot of good information on this board but I think you have come to the point that you need to ask an oil and gas lawyer, now that you know the questions you want to ask.

4

I think the differences are due to the wording in the mineral deed. I have a tract where a non-participating interest was deeded to another party. The Non-Participating deed is clear that the non-participating interest owner will not share in lease negotiations or lease bonus. They will not receive anything unless there is production, and they're guaranteeded a minimum of 1/8th royalty.

5

Dear Mr. Higgins,

There is some comparison to apples and oranges in your question. Let us define non-participating as a royalty interest that is only entitled to a share of production. Let us define non-executive as a mineral owner who has all of the attributes of the mineral estate except the capacity or standing to execute a lease.

If I were to answer the question as an expert witness as to the non-executive, I would have to answer that while not customary, it is not necessarily uncommon either. There is much honor that has left our business over the past 20 years or so. Did I dance around your question sufficiently?

If the non-executives found out that their interest was burdened, they could force a release of the existing lease or compel the oil company to pay them. If the oil company erroneously paid the executive for a full interest, then your action would be against the executive.