Does anyone have a working interest, either consent or non-consent in ND? How to calculate?

Oil and Gas Leasing Help
1

Would an actual working interest mind giving some numbers about their positions?

The current offer in my area in ND is 20% royalty and 1200 /ac signing bonus. I have 80 ac of unleased land. The lease I sign now will most probably be the last until all the oil is gone. So is getting 96K for 80% of my mineral rights now and then collecting the 20% royalty for 30 - 40 ??? years a good deal. I suspect not. But how bad a deal is it? My 80 ac is 6.25% of the 1280 ac drilling unit. If the wells are costing 7 million my share would be 420,000. That's a big chunk of money to put down for a complete rookie. I'd like to estimate when I would get it back. So here are some questions for someone with a working interest:

(I know this is all dependant on how good the well is)

Using the oil produced from the well, what % do you calculate you are getting for your WI.

First thing as the oil comes out is 11.5% severance tax. Next is the MO royalty- let's say it is ~ 18%. So that is 29.5% of the oil. What are the ongoing operating expenses on a WI? What is the operators overhead? What are you pocketing every month? What are your operating expenses if you are holding it in an LLC or other legal shell. What are your insurance costs? Are you covered by a blanket policy for well owners? How is the AFE paid? Did you have to put up the full cost of the well at the start or are you billed first for the drilling and then completion?

If anyone is a non consent WI what are your numbers? Can you estimate when you will be paid up? Do you think it would have been possible to take a few of your acres as consenting WI when you were given notice of the forced pooling? When you were paid up were you able to sign onto the JOA?

Ideally, I would like to be a consenting owner but maybe after a few more wells have been drilled in my area and I've made some income on this first well.

Thanks

2

I have yet to see anyone spell it out Ms. McNab. My wells lately have been costing between 8.4 and 9.4 million each. I think you can participate in later wells if you are carried on the first but once you are leased and HBP you will never have that option again. Also being carried on the first well could be considered derisking to some extent as it will allow you to find out what your well could do and apply that knowlege to the follow on wells. Good luck. If you get any real answers you would be the first person I have seen ask who did.

3

Thanks R. W.

Thanks for actual numbers on your wells.

From some of your other posts I see you are a non-consent WI. I'm considering that option too. It seems to have some benefits for a newcomer like me.

If you don't mind could you give some information how it is going?

I assume you received an invitation to participate with an AFE before the well was drilled. Did you continuing to get AFEs as the drilling progressed and then for completion? How did you determine the cost of your wells?

Does your royalty check show the monthly production of the well so you can keep track of the pay off of your "loan" to the operator?

Do you think there is some way to "pay down your debt" early and somehow reduce the penalty? I am thinking of using the 16% royalty from the wells to fund this.

Can you talk with anyone at the operator's office?

Have you explored if you will be covered by a well insurance policy when you become a paid up partner?

thank you,

andrea

4

(re-phrase of question)Does anyone know what % a WI in a Bakken well makes? What % of the oil that comes from the well is a WI mineral acre share. The mineral owner royalty is 20%. Severance tax is 11.5%. So the WI % must be somewhere between 30% and 70%.

5

I am now retired, but I have spent 30 years as a Landman and Land Manager for a major oil company as well as an independent. I have negotiated operating agreements for that entire time and participated in hundreds of forced pooling negotiations. My sincere advice to you as an individual mineral owner is to avoid being a working interest owner in almost every case. The costs to drill the initial well, while very substantial, are not the only costs you will or can incur. Operating costs, additional wells, workovers, pipelines, surface equipment, insurance, remediation, etc all have to be paid once you sign the operating agreement and the other partners are not going to give you advice on what to do. In fact, it is in their best interests for you to remain in the dark about their plans. You can hire consultants, lawyers, geologists, engineers etc and attempt to be on equal footing with the other working interest owners, but in the end you will lack data and expertise that they have and it will cost you money. A non-consent election on a well can sometimes be the most expensive decision you ever make, but you might be forced to make that decision with little or no knowledge of what you should really do. You should not think of signing a lease with a 20% royalty as giving up 80% of your mineral rights, you should look at it as what it is, a cost free, risk free 20% of the production from the well. If the trend is very active and productive, you may even be able to increase that royalty percentage to 25-30%.

Unless you are an experienced person in oil and gas and have very substantial finances, my advice is to negotiate the highest royalty rate and cash bonus per acre possible, keep the lease term as short as possible, and let someone else spend the money to drill and operate the wells. Remember, dry holes are bad, but a well that is a poor producer that you keep putting money into hoping it will improve can be even worse.

Knowledge is the key to getting the best possible lease terms. Contact a reputable oil and gas attorney to draft and negotiate the lease document, hire a landman for a few days to find out what the maximum lease terms being paid are and what how wells in the area have been performing.

I wish you all the best

God bless

Ed

6

Thanks Ed!

Ed said:

I am now retired, but I have spent 30 years as a Landman and Land Manager for a major oil company as well as an independent. I have negotiated operating agreements for that entire time and participated in hundreds of forced pooling negotiations. My sincere advice to you as an individual mineral owner is to avoid being a working interest owner in almost every case. The costs to drill the initial well, while very substantial, are not the only costs you will or can incur. Operating costs, additional wells, workovers, pipelines, surface equipment, insurance, remediation, etc all have to be paid once you sign the operating agreement and the other partners are not going to give you advice on what to do. In fact, it is in their best interests for you to remain in the dark about their plans. You can hire consultants, lawyers, geologists, engineers etc and attempt to be on equal footing with the other working interest owners, but in the end you will lack data and expertise that they have and it will cost you money. A non-consent election on a well can sometimes be the most expensive decision you ever make, but you might be forced to make that decision with little or no knowledge of what you should really do. You should not think of signing a lease with a 20% royalty as giving up 80% of your mineral rights, you should look at it as what it is, a cost free, risk free 20% of the production from the well. If the trend is very active and productive, you may even be able to increase that royalty percentage to 25-30%.

Unless you are an experienced person in oil and gas and have very substantial finances, my advice is to negotiate the highest royalty rate and cash bonus per acre possible, keep the lease term as short as possible, and let someone else spend the money to drill and operate the wells. Remember, dry holes are bad, but a well that is a poor producer that you keep putting money into hoping it will improve can be even worse.

Knowledge is the key to getting the best possible lease terms. Contact a reputable oil and gas attorney to draft and negotiate the lease document, hire a landman for a few days to find out what the maximum lease terms being paid are and what how wells in the area have been performing.

I wish you all the best

God bless

Ed

7

Andrea, being carried so far is pretty painless. The royalty checks come in as usual. I think my latest wells will pay out and pay penalty around 200k barrels total production in a little over 2 years, as they are in a very good area. The AFE's I receive from Kodiak ask for the estimated total up front. Well and completion cost is $7,000 or a little more per acre, by their numbers. I haven't audited them yet but I look forward to it. The checks my brother has been receiving from St.Mary's for his carried interest do not have a running tally of how much has been credited to the well. I have inquired about this and they say that it will be in an end of year statement. Funny they were late enough paying so they didn't give a statement for last year. I don't think it would do you any good to pay for your part of the well early as the 50% is a penalty and not interest. I am now on much better terms with my main point of contact with Kodiak. I think I earned some respect when they couldn't buy me off for chump change or steamroller me. Andrea, I have been so busy with getting leases I was never paid bonus for released and dealing with a fraud case I need to file against a leasing co that, I am actually glad I don't have to deal with any of the wells being paid off. I am sure that I will have to sign on to the JOA, or get my own insurance, or team with my brother and possibly another unleased person to get insurance. I don't think it's as dim an outlook as landmen make it sound. Consider that they have a vested interest in people leasing. On my old wells (2008) I was only being offered 1/6 ( 16.67% ) and $75 per acre, no reason not to take a free gamble and 16% cost free. This was in blazing hot 2008 McKenzie county with oil over $120 bbl. Half of my wells then were drilled with an incentive of reduced taxes on the first 75,000 bbls. The 2 from 2009 and the 1 from 2010, may take 5 or 6 years to pay penalty, which is ok, as I still receive royalty, and not much less than others that signed leases. Operators squeal pretty loud when you go non-consent. It caps the amount of profit they can make off your acres. Operators do not drill wells to make a 50% profit. You also have a right to look at their books, that you probably wouldn't have if you were leased. A lease like an automobile purchase contract can try to make money on the back side of the deal by piling fees on the mineral owner. If you are negotiating a lease, ask for straingt % with no charges or fees whatsoever and see what they offer. After that all you pay is taxes. see what they come up with. When you hear about 300% penalty and you don't get a dime til it's all paid off if you are non-consent, just remember that doesn't apply to you as a mineral owner in ND. Wyoming might be a different story.

8

You folks have no idea what you are getting into. If you aren't in the O&G business, being part owner of well is not a good way to learn. You won't find one industry professional advising anyone to learn "as you go" as far as working interest.

If you don't pay your cost up front and participate in the well, the operator almost always considers you a hostile interest. An operator is not a bank to fund your enterprises. They want to drill wells and have the others pay their costs when due just like they have to. JOAs and the operators umbrella insurance coverage are usually offered by operators only to WI owners who participate in the well costs up front, not those who don't.

Being a hostile interest, the operator has no interest in catering to anything you want. You are an annoying fly buzzing around that needs to be swatted. You want an accounting, they will get around to it when they feel like it. You want the lien on your share of production lifted (assuming they ever admit that the well has "paid out," as new, unexpected expenses keep arising all the time you know), they will do it when they feel like it. Repeat this process five years down the road when they want to refrac and you can't pay your share of those $2M costs upfront. Your lawyers will love you for all the business you are giving them. And repeat over and over again when all the next major well expenses come up and you can't pay for them out of pocket.

This isn't some "scare tactics." There is a big difference in how the operator treats participating vs. non-participating owners. Being an oil industry novice and a WI owner is ridiculous in itself, but being a novice and a hostile WI owner against operators with legal teams funded with billions of dollars is just silly in my opinion. Ed here summed the whole situation up pretty well. Good luck, and let us know how it goes.

9

Gee Dusty, you make the operator sound like the Evil Empire who should be opposed at all costs. I keep hearing that the operator isn’t the bad guy from oil professionals, and here you are saying they will yank you around just because they can. Thank you for your professional insight into the kind of people they are. I never asked them to pay my bills, Dusty. The operator forced me into a well. I even accepted their lease offer which they recorded and they didn’t pay me the lease bonus and I had to force them to release it. They have no one to blame but themselves.

Dusty said:

You folks have no idea what you are getting into. If you aren't in the O&G business, being part owner of well is not a good way to learn. You won't find one industry professional advising anyone to learn "as you go" as far as working interest.

If you don't pay your cost up front and participate in the well, the operator almost always considers you a hostile interest. An operator is not a bank to fund your enterprises. They want to drill wells and have the others pay their costs when due just like they have to. JOAs and the operators umbrella insurance coverage are usually offered by operators only to WI owners who participate in the well costs up front, not those who don't.

Being a hostile interest, the operator has no interest in catering to anything you want. You are an annoying fly buzzing around that needs to be swatted. You want an accounting, they will get around to it when they feel like it. You want the lien on your share of production lifted (assuming they ever admit that the well has "paid out," as new, unexpected expenses keep arising all the time you know), they will do it when they feel like it. Repeat this process five years down the road when they want to refrac and you can't pay your share of those $2M costs upfront. Your lawyers will love you for all the business you are giving them. And repeat over and over again when all the next major well expenses come up and you can't pay for them out of pocket.

This isn't some "scare tactics." There is a big difference in how the operator treats participating vs. non-participating owners. Being an oil industry novice and a WI owner is ridiculous in itself, but being a novice and a hostile WI owner against operators with legal teams funded with billions of dollars is just silly in my opinion. Ed here summed the whole situation up pretty well. Good luck, and let us know how it goes.

10

I would never say that operators are owned and staffed by evil people who intentionally seek to inflict economic hardship on others. I know better, I have worked with/for these people for 30 years. However, they are running a business for profit, not a charity. Like all business owners, some are more ethical and reasonable than others. When you as a mineral owner elect to participate in a well, you are making the same decision, to operate in a business environment for a profit, your own. This decision makes you responsible for the actions you and your partners take, subject to the contracts you are a party to. In the initial well, the penalty for not paying your share of costs up front is 50%. While some may view this as placing all the dry hole risk on the operator (and it does), it is also a very expensive finance charge for you to avoid that risk should the well be productive. This rate makes credit cards look like a windfall.

By electing to be carried in a forced pooling you have elected to become a party to an operating agreement that allows any party to propose an operation, a well, a workover etc subsequent to the initial well. The remaining parties have only two elections, to participate and pay their share of the operation or elect not to participate and become subject to the non-consent penalties (300% or more is common). This isn’t a tactic the operator is using against you personally; it applies to all the working interest owners. The operator will want you to pay your share of costs and will not view your inability to do so as a reason to change their plans. They will expect you to pay your share of costs, comply with the agreement you signed or face liens on your share of production, legal action etc. The same business attitude will likely prevail if they elect not to market your share of oil and gas, for whatever reason might make more money for them or simply to put pressure on you to sell your interest to them.

Most operating agreements require the operator to purchase insurance for the participating parties in an operation, but the insurance this applies to is more often than not for things like workers compensation claims, auto insurance, and other insurance that is required to be carried by employers by law. It usually does not insure against catastrophic events such as blowouts, environmental damages, loss of life in an accident etc. The JOA usually specifically requires each co-owner to provide their own insurance for these purposes. This coverage will certainly be expensive and very likely will not be even offered by an insurance company to a non-operating individual with no prior experience in the oil and gas business. Again, the decision not to provide umbrella liability coverage to all working interest owners is not done by the operator to punish you, it is done because each co-owner has different situations regarding insurance and can face very different costs. The operator may face very minimal costs to insure while yours may not be affordable. The operator is under no obligation to help you insure your decision to participate in the well.

I don’t want to scare people out of participating in wells if they truly think that is the best alternative for them, and in some cases this decision has worked wonderfully for people. However, I would not do so with my own money and I would not recommend it to my friends or family. I just want to pass on some of the risks that you may not be aware of involved with owning a working interest. Believe me, the issues above are just scratching the surface of potential problems. My advice, if you are going to participate as a working interest owner, is to ABOVE ALL, limit your investment to what you can afford comfortably to lose. Examine the downside as much or more as you do the upside of this investment. Protect yourself against liability with your ownership status (LLC or other, never as an individual personally) and insurance, pay for good legal, contract and negotiating advice before you sign anything and remember that you just bought an interest in a multimillion dollar business for which you are now responsible, whether the results are good or bad.

11

Ed, I think there is a slight difference in electing not to participate in a forced pooling and having to terminate a lease for non-payment. If they were ethical and wanted a lease they should have paid the bonus, not so? They then lied for weeks, via landman then VP for land saying the lease was still valid. I felt I had no choice at that point, but to get the lease released. You can’t partner with people who lie about money. As for forcing me to sell my share to them, not while there is someone else with pockets deep enough. If they wanted to do business, I was amenable, I signed a lease. They broke the bargain. Who do they have to blame?

12

R.W.,

I certainly am not fully aware of your circumstances and you are. However, if both parties agreed to lease terms and the operator failed to honor that agreement for reasons that were not clearly agreed to beforehand, then yes, I would consider that un-ethical and I very well might have demanded a release just as you did.

One option you might consider is this. Review the operating agreement, see if it contains a preferential right to purchase clause. If not, you might consider selling a portion or all of your working interest (not your mineral interest from which it is derived) to a third party. The interest transferred can be limited as to depth, acreage conveyed, or even as far as simply your share of production that can be extracted from that one existing well. That way, once the current well is depleted and the operating agreement terminates, you maintain your original mineral interest. There are auction companies that you can list the interest with and set a minimum price if you desire. This usually is the best way to let the maximum number of bidders know you might consider selling for the right price.

If the initial well has already been drilled and you want to ride out the investment, just be aware that future costs can still be incurred.

Good luck to you.

Ed

13

Thank you Ed. It sounds like good advice I will keep in mind. The operator constructed an eco pad from which they have dirlled 2 Bakken wells and 1 TFS well. I am told that a 4th well is coming this year from that pad. The same operator has sent me AFE’s for 2 wells they intend to drill on another parcel my brother and I have ownership in. Thanks again for the advice, Ed and the luck is appreciated. RWK