Deadline to sign lease?

North Dakota Mineral Rights Burke County, ND
1

First, let me say this forum is an incredible resource, and I really appreciate that it, and it's members, are here.

I was recently contacted by Diamond Resources, representing Continental. I own 5 acres of mineral rights in T160N, R94W, Section 18. Based on my research (which is somewhat difficult, given I am new to this and my knowledge is very limited), the mineral rights are part of a 1280 acre unit, on which there is a single operating well, BARMOEN 1-18H.

Diamond wants me to lease to Continental (through Diamond) at 20% royalties, and $1000/acre bonus. I have a couple of questions...I'm hoping those of you here who have a LOT more experience can maybe help out.

1. Diamond included with the lease a "draft check" that expires in 30 days (the check is for the lease bonus - $5000), and Diamond has referred to this deadline for getting the lease signed. I know that there are some situations where a person who doesn't sign a lease can inadvertently become a non-working owner or something, at 16% royalties and deductions for operating costs. Is the deadline for signing this lease with Diamond the same as the "non-working owner" situation? Are there repercussions if I don't sign this lease by Diamond's deadline? I am trying to learn as much as I can before signing something so important as a mineral lease.

2. Diamond has repeatedly told me that they aren't able to "capture" the natural gas coming out of the well, but when I looked at a NDIC monthly report, of the 3800 units of gas produced, 3700 were "Sold". I'm having trouble understanding why Diamond is saying this about the gas production.

3. There are some things I'm going to want changed in the lease, such as the fact that it only indemnifies me against "crop damage". I feel like I want this to be a blanket indemnity for any damages caused by Continental's operation of the well, not just crops. Also, they want me to "warrant the title" and "defend them" against any title issues. Since they did the research and are issuing the title opinion, I don't feel like I should be warranting their work. Also, they want to deduct some kind of "enhancement for market" costs from the royalties, which I am uncomfortable with , as this sounds very vague.

Has anyone had any experience getting clauses like these changed? Should i expect resistance from the landman when I propose these changes?

Thanks for reading! And thanks for any advice you guys have!

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Eric, land men will issue the ultimatum such as has to be signed by friday or next week or whatever. I always tell them that the decision is too important to be rushed and so my immediate answer is no. They then extend the time limit, I find it pitiful.

They can't make the kind of money they want if you do not lease and are non-consent. If it costs them $8,000 per acre to drill a well and you are non consent, then other than chump change, the most they will make off your oil will be the 50% cost of drilling and completing risk penalty, so $8k per acre cost + 50% penalty means they net $4k per acre profit. If they can recover $25,000 worth of oil per acre, you would be receiving 1/2 of the value of the oil instead of 20%, less taxes, production costs and so forth. As an owner you would also have deductions that you would not have as lessor. Not necessarily recommending you be non-consent, but you need to know the economics of the situation.

You can still lease to anyone you want if, you have not been served with an AFE, after which you will have 30 days to lease, decide to participate, decide or default to be non-consent. I suggest you get more offers for your lease because if negotiations don't go as you like, you will have options. Make no secret to Diamond Resources that you have options, they would have no reason whatsoever to actually negotiate with you otherwise. If Diamond is the only game in town, the deal is what they say it is, or you can be non-consent, so look/ask for other offers. You could list your minerals for lease on the home page of MRF near the bottom of the Home page you will find listings.

Eric, you should get more than one offer for your lease. There may be some who would like to participate in a well already drilled. At 57,987 barrels of oil as of April [11 months] and 3,680 barrels oil in April, this well is not setting the world on fire, but I think it will be profitable. Gas has been sold for 8 months as of April but gas is going to be a very small part of your royalty in any case and I would consider the market enhancement clause for gas to be a bargaining chip to be spent in negotiations.

I think your changes are reasonable in #3 and it would cost them little to agree, if they write the clauses, you must have your lawyer look them over and approve them, the crafting of the language is a specific skillset, punctuation, the words like (may) can be slippery and, from time to time, means forever, but does not imply that they must perform whatever action.

The draft "check" is no sort of check, it's totally voluntary for them to honor/pay it or not and they will not get in trouble if they do not pay as they may for writing a hot check. The draft is a contract in itself giving an option to lease your property subject to title, most likely. The dafts time limit does not start to run until you present it to your bank, your bank forwards it to the lessees bank. The time starts to run when the lessees bank receives the draft.

Eric, with more offers you would improve your negotiating power, you might even negotiate for $1500 dollars per acre bonus or possibly 22% royalty but I doubt you could get both. You can negotiate hard knowing that you can't be totally shut out because you would receive a royalty as non-consent and when the well pays out, you have a working interest that you could lease or sell or keep, that's having options, if you are leased, your options other than selling your mineral acres ends for a very long time. This is probably not the only well that will be drilled in that spacing, if you were non-consent there could be an opportunity again in the future to participate in a well or sell the AFE on your already proven acres. I know this is alot to absorb, I would act immediately on getting some more offers, the rest I would think over.

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r w kennedy,

I have to admit, I knew I would get great answers on this forum but that post far exceeded my expectations.

I was thinking about how to get the best lease I could with Diamond, but your reply made me realize I need to explore other avenues as well. Your breakdown of non-consent was especially useful.

Once I figure out what to do, I will report back here. Maybe my decision will help other people in similar situations.

Thanks again!

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Eric, you are welcome. It doesn't matter to me what you chose to do, it does matter to me that you be in possession of as many facts as possible to make an informed choice. The actual law on forced pooling is NDCC 38-08-08, the language is very plain, it does require close attention when reading but there isn't a bunch of latin in it or anything. Options and time are always good things to have. Don't hesitate to ask questions,

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r w kennedy said:

"if you are leased, your options other than selling your mineral acres ends for a very long time. This is probably not the only well that will be drilled in that spacing, if you were non-consent there could be an opportunity again in the future to participate in a well or sell the AFE on your already proven acres."

Am I correct in interpreting this to mean that if I lease my mineral acres now at xx royalty, that the lease (and royalty) would also cover any subsequent wells drilled in the same unit, and I would not have an opportunity to be a participating or nonparticipating owner in those wells?

Also, I think I have the non-consent thing down, but I'm not sure. If I do not sign, and become non-consent, my reading of NDCC tells me that the oil company must pay me 16% (or weighted average) and can recover half of my share of the drilling costs from the remainder (50% of my share would be something like $20,000).

Does this mean that I would receive the 16% (or weighted average) until they had recovered $20,000 and then I would receive 100%? What if the well stopped producing before my $20,000 was paid back, do I have to write a check?

I really appreciate your feedback. Until I found this forum, my family was running around like chickens with our heads cut off. Being informed is so critical in something like this.

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Eric, you are correct that if you lease, you are leased for all wells drilled in your spacing, there is no going back.

You have a good grasp of the risk penalty and royalty paid from the first barrel.

Yes, you would receive the 16% the whole time the well was paying out. If the well never pays out, you owe nothing out of pocket. The operator could place a lien against the PRODUCTION of your minerals but that presumes someone else will drill them after a failed well.

If the lessee is offering $1k and 20% royalty per acre, essentially, they want to buy 100% of your oil for $1k and 4% more royalty per acre than you would have received anyway, not just for this well but for all wells that could be drilled in the future, and there will be no more bonuses for future wells.

I also find that operators sometimes take a year or more to pay people who have leased. On my non-consent, they pay quickly because while the state may allow them to produce my oil and withhold a large portion of it to pay for my part of the well, the operator/lessee does not have title to my oil as he would if I had leased. If you lease and the operator does not pay you, it's a business dispute and you have every right to sue them, if you want to spend $50k to $100k. If someone who you do not have an agreement with, who does not have title to your oil takes it and does not pay you, you can reasonably call it theft. I get paid fast. One of my operators people thought they were not going to pay me because I did not return a division order, which by ND law I need not do to get paid, when they found out I knew the law and I specifically asked them if they were going to hold my royalty because I did not return a division order, they told me "no sir, we are sending it" the check was on it's way. When you have a business agreement with them "lease" they can do about anything they want and all you could do is sue them. In the lease it says they agree to pay you, but what happens if they do not? Absolutely nothing unless you sue them, see costs above. Even if you win a suit, they pay you and they still have 80% or more of your oil. If you ever go to court against them, the most you are fighting for is your royalty % and they are fighting with their 80% or more, they can spend you into the ground and still profit from what was once your oil. Even if it were less money, I wouldn't want to lease. I have been dissatisfied with every lease attempt and more than satisfied with being non-consent in several wells.

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r w kennedy:

Thanks for all your help with this. I do have one more question. We have decided to go non-consent. Diamond Resources is currently waiting for us to return the lease they sent us.

When you go non-consent on your wells, do you send a letter to the oil company saying as much? We're not sure if we should just contact the oil company and say "ok, we'll take our money now that you've been holding in our name from that well for the last year", or if we should actually send them some kind of letter saying we want to be "non-consent".

r w kennedy, how have you handled this when you went non-consent?

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Eric, you are free to send a demand letter for payment, in which you could tell them you are non-consent. Normally non-consent occours after the operator sends you the AFE and 30 days passes without you electing to participate. I see no reason why you must wait for that to happen, you could inform them now that you are non-consent, but later you could not complain that you never received the AFE. if you have marketable title, and payments are more than 150 days past due (from first sales not production), they operator also owes you interest, by law.

I personally had the AFE's before the wells were drilled and found them fascinating, the breakdown of what everything costs. I didn't have the cash, at the time didn't know of anyone to contact to do a farm out, so I just defaulted to being non-consent, which was actually fine, probably the best I could have done. I did e-mail the particular landman I was dealing with and told them not to expect a check, but that was just a courtesy.

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Great Discussion!!

I also am just beginging to learn about what I and 6 siblings inherited in min. rights in Burke County, ND. We were contacted a few weeks ago by Diamond Resources, representing Continental, to bottom lease acres we just top leased to Petro a few months ago. We all, along with mutiple relatives/owners (we're not really aquainted with) signed the TOP lease with Petro.

Maybe we screwed up with leasing to Petro and not going non-consent?

Now that we're being aproached by Diamond for a bottom lease I know I should investigate our options more intencely.

Question for RW :

What is an AFE you refer to in your previose discussion?

I've been reading some of your replies to others from ND and really appreciate your candor and contributions to this really helpfull website!

David D Schwen

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David,

From what I've read so far, an AFE is an "Authorization for Expenditure". It's basically a statement of all the costs involved in drilling and completing a particular well, and is sent out as part of the package when they are offering you the choice to (1) lease, (2) Buy into the well in advance for 100% of cost, or (3) go non-consent for 150% of cost. I guess it's so you can see how they come up with the amount you're going to have to come up with if you choose to buy in, or if you end up having your payments docked if you go non-consent. I've never seen one, and I generally have no idea what I'm talking about, but I think that's pretty close.

I'm sure r w kennedy will have a more articulate answer. I just thought I'd throw that out there until he responds.

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Eric, I don't think I could have said it any better.

I will say this, it's easy to get sticker shock when they talk about 6k-8k dollars per acre and then a 50% penalty on top of that. The thing is, the operator believes the value is there, a minimum of $25k per acre is not alot of oil at todays prices. 16% royalty is not horrible while you are waiting for the well and penalty to be paid off. If the well only pays $25k per acre, less than 3,000 barrels per acre over a perid of 30 or 40 years, that's equal to 40% or 50% royalty, after well cost and penalty, and nobody is offering that kind of money for a lease. If the well never pays out and pays off the penalty, you owe nothing out of pocket. Worst case, if the well pays off the cost and the penalty and they decide to plug it immediately, by law you can assign your part of the well to the operator, the oprator has to pay you, for the salvage value of your share of the equipment, and you are no longer responsible for the wells bills. Instead of paying to plug a well, you can get paid when your well is plugged. It's all there in the law. It's one of those things where you just shrug and say, who knew? If it was common knowledge 6 years ago, I think there would have been changes in the law to make being non-consent less advantageous.

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Thank You Eric!

Eric Melby said:

David,

From what I've read so far, an AFE is an "Authorization for Expenditure". It's basically a statement of all the costs involved in drilling and completing a particular well, and is sent out as part of the package when they are offering you the choice to (1) lease, (2) Buy into the well in advance for 100% of cost, or (3) go non-consent for 150% of cost. I guess it's so you can see how they come up with the amount you're going to have to come up with if you choose to buy in, or if you end up having your payments docked if you go non-consent. I've never seen one, and I generally have no idea what I'm talking about, but I think that's pretty close.

I'm sure r w kennedy will have a more articulate answer. I just thought I'd throw that out there until he responds.

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Thank You RWK!

The landman offering the Top lease (for only the Shallow rights) for Petro never mentioned an AFE or other options and we all signed. Now, so far neither has Diamond suggested options other than a lease offer for the bottom rights for the same parcels. Is there a trigger of some sort that prompts landmen or operators to offer offers other than "Here's a very good lease for your land so you should really accept It"

Thank you again for being on and contributing so much to this forum!

David D Schwen

r w kennedy said:

Eric, I don't think I could have said it any better.

I will say this, it's easy to get sticker shock when they talk about 6k-8k dollars per acre and then a 50% penalty on top of that. The thing is, the operator believes the value is there, a minimum of $25k per acre is not alot of oil at todays prices. 16% royalty is not horrible while you are waiting for the well and penalty to be paid off. If the well only pays $25k per acre, less than 3,000 barrels per acre over a perid of 30 or 40 years, that's equal to 40% or 50% royalty, after well cost and penalty, and nobody is offering that kind of money for a lease. If the well never pays out and pays off the penalty, you owe nothing out of pocket. Worst case, if the well pays off the cost and the penalty and they decide to plug it immediately, by law you can assign your part of the well to the operator, the oprator has to pay you, for the salvage value of your share of the equipment, and you are no longer responsible for the wells bills. Instead of paying to plug a well, you can get paid when your well is plugged. It's all there in the law. It's one of those things where you just shrug and say, who knew? If it was common knowledge 6 years ago, I think there would have been changes in the law to make being non-consent less advantageous.

14

David, the terms toplease and bottom lease have nothing to do with the various depths, formations and strata.

Unless there is other limiting language in the lease, top lease/bottom lease are both from just below the surface to the center of the earth. A top lease is only a lease taken in anticipation of an already existing lease in it's primary term expiring without production. By acquiring a top lease, the lessee can assure that the mineral owners lease will not again be on the open market where it's true market value could become known, unless they decide to pass on the toplease.

Many lessees use the toplease as an unpaid option. Most mineral owners are not aware that this can or is happening, that they are giving a free option and clouding their title for nothing in many cases.

There are many triggers, the nearness of the expiration of a lease for lessees, buyers would like to buy before you know you are about to get a well, or if you have a well, before a second well is drilled, completed, starts producing, before you get a check for a new well, in any case and they very likely can find out the production of a new well before you even know you have a new well. This kind of information gives a huge advantage. Also if some operator hits the mother load right next to you, you may get a few offers on that basis. I personally have some spacings with early wells that the production has been mediocre. I have been getting some desultory offers to buy these minerals. Someone whose minerals border mine have started getting infil wells, 6 of them drilled on one side of the spacing only [leaving room for another 6 or more] and suddenly I am getting offers of 2-3 times of any offers I have received before, based solely on the activity right next to my minerals, with not a thing happening on mine, yet.

Probably 90% or more of offers are suitably analyzed by follow the money. What is different now from what things were 6 months ago that is prompting this offer now? The GIS map on the NDIC site can be helpful to watch for these trigger events, new permits, rig symbols, green circles that mean DRL status (usually means the well is awaiting fracking) a new black dot or black dot with a line. You can actual follow rig movements on the NDIC site and you can find out how much oil is being sold from even a confidential well. David, you can turn these things to your advantage if you learn to keep an eye on your minerals and spacing. Once you get the hang of it it's just a couple of minutes a week to keep a close eye on things. The NDIC site is your friend, become proficient in it's use. Every thing you need on the NDIC site is free until you get a well. You can always ask questions here too.

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Eic - I want to thank you again for your insight - My laptop ran out of power while I was responding to you and RKW - apology to you if you were not thanked earlier by me. Wow is this a GREAT forum!!

David

Eric Melby said:

David,

From what I've read so far, an AFE is an "Authorization for Expenditure". It's basically a statement of all the costs involved in drilling and completing a particular well, and is sent out as part of the package when they are offering you the choice to (1) lease, (2) Buy into the well in advance for 100% of cost, or (3) go non-consent for 150% of cost. I guess it's so you can see how they come up with the amount you're going to have to come up with if you choose to buy in, or if you end up having your payments docked if you go non-consent. I've never seen one, and I generally have no idea what I'm talking about, but I think that's pretty close.

I'm sure r w kennedy will have a more articulate answer. I just thought I'd throw that out there until he responds.