Confirming Oil and Gas Lease Proposal Daniels Co, MT/JAYHAWK/SHALE

Shales Bakken Shale
1

Mineral Rights Forum question:

Getting answers seems to be quite a challenge regarding the Shale Exploration. My family is looking for some "experienced" direction on the following scenario.

Key points:

Family of 5 children are included for minerals rights (Father (now passed away) was included in Uncle Edward's Will -in the 1800's. - owned land in Montana and we are informed that we have mineral rights.

LETTER RECEIVED - Oil and Gas Lease Proposal Daniels Co, MT

Dear Prospective Lessor,

Shale Exploration, LLC is currently leasing in Daniels County, Montana for oil and gas production. According to our completed title research of the public records, you own minerals under the above referenced lands, and we are excited to announce we will begin drilling our first wells in Daniels County this year. Shale Exploration, LLC wishes to lease your mineral interest in these lands so that your minerals can be included in the future drilling program.

Shale is extending a Special Offer to you and other select mineral owners in Daniels County. You have three offers to choose from:

Option 1:

Bonus: $325.00 per net mineral acre

Primary Term: Five (5) years with five (5) year option @ $600 per net mineral acre

Royalty: One-sixth (1/6th)

Option 2:

Bonus: $325.00 per net mineral acre

Primary Term: Five (5) years with three (3) year option @ $500 per net mineral acre

Royalty: One-sixth (1/6th)

Option 3:

Bonus: $300.00 per net mineral acre

Primary Term: Four (4) years with four (4) year option @ $550 per net mineral acre

Royalty: One-sixth (1/6th)

In order to be included in the future drilling program, Shale needs to acquire an oil and gas lease from you as soon as possible.

If you’ve already received a lease offer from Shale and would like to choose one of the options above, simply contact your Shale Landman and they can provide an addendum, that will become part of the lease, that will include the desired terms.

Shale (Jayhawk project). ___________________________________________________________________

Well, (a punt), there are many unanswered questions. While we are interested in cooperating, and expressed as much; however, we are not getting answers in hard copy from them. Also, this project, as I understand it, is now under the JayHawk project. The last communications (several weeks ago) was a request, from the family, to see a copy of the proposed lease, and to have an understanding of what that translates to.

So, while the pressure was being built to respond to Shale, they did not fulfill their communications in the requests we had made. Per your experience, can you advise what to do with this? If they can't give clear answers, then one can't make an intelligent decision.

Thanks for your input! Karen

2

A few initial thoughts that I have :

1) 1/6th seems to be the going offer...Note that this is BELOW the 18% we signed on for 3 years ago

2) 4-5 years plus 3-4-5 year options...again...we signed on for a 3 year with a 2 year option. And, from the readings from others...many are suggesting making leases a maximum of 3 years.

3) About the rates: others in this area need to let you know what the going rates are. When we signed on they didn't offer bonuses to us...the the price per acre has radically increased in just the past three years. Thus, need others to give input as my stuff is already really old.

4) Be sure to have your attorney look over the hard copy of the lease...as they will have to provide one for you to sign!!

5) If you don't sign up, it's my understanding that Montana law dictates the percentage that they oil company needs to pay you...and (correct me if I'm inaccurate please) I believe it's in the 12% area.

Thus, you do need to keep the communication going and work with them as much as possible while all the time working with your legal folks. At lease with the landmen I've worked with, the more I'm upfront and asking questions and "being pleasant", the better answers we have received.

Good Luck,

3

Karen,

It seems that Shale's offers are always a bit one sided. Our family signed with another Company about 8 months ago with a fair offer of $300 per acre with a 3/2 deal at 18%....This may not be the best deal as time goes by but it is certainly better then anything I've seen from Shale so far as far as this venue is concerned. Don't tie yourselves up for several years.....Good Luck to you and yours.

4

18% seems to be the going rate...and has been for some time. Thus, I was surprised by the offer of 1/6th. While it's "only" a percentage or so lower...that percentage over time adds up in a big way!!

5

I should clarify that 1/6th seems to be THEIR going offer. As I mention later...it seems low to me...



David Peterson said:

A few initial thoughts that I have :

1) 1/6th seems to be the going offer...Note that this is BELOW the 18% we signed on for 3 years ago

2) 4-5 years plus 3-4-5 year options...again...we signed on for a 3 year with a 2 year option. And, from the readings from others...many are suggesting making leases a maximum of 3 years.

3) About the rates: others in this area need to let you know what the going rates are. When we signed on they didn't offer bonuses to us...the the price per acre has radically increased in just the past three years. Thus, need others to give input as my stuff is already really old.

4) Be sure to have your attorney look over the hard copy of the lease...as they will have to provide one for you to sign!!

5) If you don't sign up, it's my understanding that Montana law dictates the percentage that they oil company needs to pay you...and (correct me if I'm inaccurate please) I believe it's in the 12% area.

Thus, you do need to keep the communication going and work with them as much as possible while all the time working with your legal folks. At lease with the landmen I've worked with, the more I'm upfront and asking questions and "being pleasant", the better answers we have received.

Good Luck,

6

I would like to add to this that the state says the operator has to pay you 12.% until the operator recovers his cost then you receive 100% less expenses. Alot different than just thinking you get 12.5% until the well goes dry, which could happen if it were a poor well but if the well is that poor, the difference between 12.5%, 16.67% and 18% is not going to be too significant. If the well were that poor the signing bonus would probably be far more significant.

David Peterson said:

A few initial thoughts that I have :

1) 1/6th seems to be the going offer...Note that this is BELOW the 18% we signed on for 3 years ago

2) 4-5 years plus 3-4-5 year options...again...we signed on for a 3 year with a 2 year option. And, from the readings from others...many are suggesting making leases a maximum of 3 years.

3) About the rates: others in this area need to let you know what the going rates are. When we signed on they didn't offer bonuses to us...the the price per acre has radically increased in just the past three years. Thus, need others to give input as my stuff is already really old.

4) Be sure to have your attorney look over the hard copy of the lease...as they will have to provide one for you to sign!!

5) If you don't sign up, it's my understanding that Montana law dictates the percentage that they oil company needs to pay you...and (correct me if I'm inaccurate please) I believe it's in the 12% area.

Thus, you do need to keep the communication going and work with them as much as possible while all the time working with your legal folks. At lease with the landmen I've worked with, the more I'm upfront and asking questions and "being pleasant", the better answers we have received.

Good Luck,

7

GL with them, we were contacted by Shale and they acted like we had to move immediately but now have not heard back from them for about 2 months...don't think they know what the hell they are doing

8

They need you to move quickly to maximize THEIR profit, but that moment has probably passed if you are looking into it.

Dana Zirkle said:

GL with them, we were contacted by Shale and they acted like we had to move immediately but now have not heard back from them for about 2 months...don't think they know what the hell they are doing

9

Thank you for these valuable pieces of information that help to put some of the puzzle pieces together. Much appreciated!

Another question that surfaces is the following:

Has anyone ever estimated what these lease values mean in terms of dollars and actual payouts/money stream? Is there an approximate value to be estimated, i.e. $500 to $5000 ... not certain how to translate to an actual "return."

10

From my perspective...the ONLY money stream that you can "predict" is what you get paid for your lease and bonus...based upon what you agree on. After that....WOW!!


Variables include how much acreage you own in the spacing unit, cost of oil per barrel, actual production and production curve, the oil companies ability to sell the oil, transportation costs, etc... and more.

Our landman has suggested to us the they anticipate each well on our lands "should" have a lifetime production of 300-000 to 450-000 barrels of oil over the next 20-30 years. It's not rocket science to realize that this allows for tremendous ups and downs in terms of an actual "return"!!!

Thus, as we noted in another discussion thread...while this is great and we enjoy the checks that are coming, it's way to early to consider doing anything but "keep the day job"!!

We figure our place is to enjoy the ride and make the best and smartest decisions we can make..

Dave

11

Ms. Lee, you can't depend on oil income unless you have widely separated interests with multiple wells. Wells do not operate 24-7 hours and 30 days per month. The operator may decide to produce less than the maximum rate feasable, I know that when the price of oil drops the production on most of my wells drop also. I have an interest in a well that has produced about 13k bbl oil in the past year and then in 15 days in Sept that same well produced 14,800 bbl of oil in 15 days! If you only have 10 to 20 net mineral acres each and you lease at 18%, you would be paid the equivalent production of 1.8 or 3.6 acres that may produce $25,000 per acre but that would be spread out over 20, 30 or more years. Now for the really bad news, everybody wants a piece of your royalty, production and severance taxes, state income taxes, federal income taxes. all of which could reduce your check by 30%, 40% or more. Also beware any deductions that your lease allows the operator to make to your royalty. Considering all of this I suggest that people use the royalty calculators, then divide what it says you will receive in half, this has proved to be remarkably accurate for me. I believe that many people, if they knew how little they would actually realize from leasing would decide to leave it in the ground, I have heard several people say so.

karen j lee said:

Thank you for these valuable pieces of information that help to put some of the puzzle pieces together. Much appreciated!

Another question that surfaces is the following:

Has anyone ever estimated what these lease values mean in terms of dollars and actual payouts/money stream? Is there an approximate value to be estimated, i.e. $500 to $5000 ... not certain how to translate to an actual "return."