I'm seriously considering taking a working interest rather than leasing. I own only a small fraction of the mineral interests in a tract located near some very good wells. I've been doing my research on formation of an LLC, the effect on my tax return, the risks and rewards, etc. I'd be interested in learning how others who took a WI may have fared. Am especially interested in knowing the "horror stories" any of you may have, so that I am fully informed about the worst-case scenario.
Several large dangers possibly loom- 1) The well runs into mechanical problem and the costs are 2-10 times of what was estimated; 2) a pollution problem occurs and you get named in a pollution suit; 3) the operator doesn't market your gas and you have to threaten, cajole and deal with the marketing of your gas; 4) After the initial well is drilled, the operator proposes a six well package that you have to consent to or go non-consent. The cost of the six wells is fairly great. If you go non-consent, then you may have relinquished your interest. 5) the well gets shut-in. I.e, you spent your money and continue to pay joint interest billings every month, but no revenue is coming in; 6) the well runs into mechanical problems, there are cost overruns, the well gets shut-in (so no revenue is coming in) and the operator proposed six more wells in which you have to elect to be in or out.
I'm sure there are other issues, but these are the ones I come up with off the top of my head.
If you can't afford to lose your money, don't do it.
You are in the geologic province known generally as the Permian Basin. It is old and well known geologically. As with most real property, value potential is predominately based in LOCATION LOCATION LOCATION. You apparently understand the income and tax advantages of participating. Given Tim and Kirk's sage advice, get your acceptant and an independent Permian Geologist to help you assess the risks for your particular location. If the geologic prospect and production future is good enough, you may be able to spread your independently assessed risk on a promoted basis. Never use money set aside for your kids education on working interests.
Thanks Tim for this detailed explanation. I was wondering what the risks are so this really helps.
tim dowd said:
Several large dangers possibly loom- 1) The well runs into mechanical problem and the costs are 2-10 times of what was estimated; 2) a pollution problem occurs and you get named in a pollution suit; 3) the operator doesn't market your gas and you have to threaten, cajole and deal with the marketing of your gas; 4) After the initial well is drilled, the operator proposes a six well package that you have to consent to or go non-consent. The cost of the six wells is fairly great. If you go non-consent, then you may have relinquished your interest. 5) the well gets shut-in. I.e, you spent your money and continue to pay joint interest billings every month, but no revenue is coming in; 6) the well runs into mechanical problems, there are cost overruns, the well gets shut-in (so no revenue is coming in) and the operator proposed six more wells in which you have to elect to be in or out.
I'm sure there are other issues, but these are the ones I come up with off the top of my head.