Education and advice needed....my father owns mineral rights in Richland County, MT and has rec'd a lease agreement and a letter from the drilling company

General Mineral Rights Discussion
1

Found out in May 2012 that my father owned mineral rights in Montana. He received notice from the state that a company had applied to drill. Then, December 31, 2012, he received a letter from a company (I believe part of the drilling company) with an offer to lease his mineral rights… bonus of 500.00 draft, 3 year lease, 1/5th of gross proceeds. Then January 10, 2013, a letter from the drilling company with four choices… 1-participate with an invoice attached… 2-don’t participate with a risk penalty involved… 3-lease your rights… 4-sell. This letter’s lease agreement was 3 years, 20% royalty, 500.00 bonus per acre.

I have been reading on this site and I do understand more than I did but would love more information. The last letter said contingent on rig availability, they have plans to spud on or before Jan 23, 2013.

Help please!

2

Linda:

You didn’t specify the exact location of these minerals (Township/Range/Section) or the total net mineral acres involved but if plans are in the works to drill soon, I would think that you would be in line to get a very good lease. Of the four choices you stated, I would lean towards leasing your minerals as the other involves factors that you may not fully understand. You can read posts on this forum dealing with participating in a well but familiarize yourself fully before engaging in this type action. I would counter this $500/acre with $1000/acre and see what they say. The 20% is norm and the 3 year agreement is good. Again, it also depends where your minerals are located in Richland County and more important, the wells within the proximity of your area. If you have some good producers close to your area, your negotiating power is much greater but if your area is somewhat undrilled (risky) then the opposite applies. Good luck in your negotiations.

3

Thanks Charles for the information and here is the exact location: Township 23 North, Range 54 East of the M.P.M. (what does M.P.M. mean?) Section 22: N 1/2. Also how can I see where the drilling is taking place?

Thanks again Charles!

4

Linda:

You can pull up the Montana Map as follows: Google “Montana Oil and Gas”; Click on “On - Line Data”; Click on “Live Data Access”; Click on GIS at top; a map of MT will appear; use your cursor to click on the area where your minerals are located (hint: you may have to try several times before you find your exact Township/Range/Section area; click several times to magnify; once you locate your area, click on the “i” in circle at top; now click on the individual dots (which are wells) and identify the well operator, etc. Hope this helps.

5

Linda:

The GIS map indicates that Continental Resources has already spudded the Joseph 1-22H on your mineral area. If this is the case, you want to be very firm in your negotiations in regards to bonus, etc. Again, I still believe your best choice would be to lease but you do understand that you don’t have to lease with Continental as you could shop around for the best deal.

6

Linda:

I have read some confusing information regarding the bonus…should I ask for the money up front and in check form, not a bank draft? One post suggested to not lease as you may not get the royalties promised. Does it depend on how the contract is written? What do you think? Is the only negative with not participating and being forced pooled the risk penalty?

7

Linda:

I would require payment be a check and not a bank draft. You might want to go to the search engine (white box at top) and google in “cold draft” to view posts dealing with this topic. Your lease will specify the details of your agreement including the % royalty, etc. You might want to negotiate the lease whereas you will not be responsible for the transportation costs. Also, you might want to add a “pugh clause”. You can also google this for an explanation. Again, how many net mineral acres are we talking about? Do some homework before signing anything.

8

Should I seek legal advice and do you have any recommendations? I am in Tennessee and it is not possible to travel to Montana.

charles s mallory said:

Linda:

I would require payment be a check and not a bank draft. You might want to go to the search engine (white box at top) and google in “cold draft” to view posts dealing with this topic. Your lease will specify the details of your agreement including the % royalty, etc. You might want to negotiate the lease whereas you will not be responsible for the transportation costs. Also, you might want to add a “pugh clause”. You can also google this for an explanation. Again, how many net mineral acres are we talking about? Do some homework before signing anything.

Linda Downey said:

I have read some confusing information regarding the bonus…should I ask for the money up front and in check form, not a bank draft? One post suggested to not lease as you may not get the royalties promised. Does it depend on how the contract is written? What do you think? Is the only negative with not participating and being forced pooled the risk penalty?

charles s mallory said:

Linda:

The GIS map indicates that Continental Resources has already spudded the Joseph 1-22H on your mineral area. If this is the case, you want to be very firm in your negotiations in regards to bonus, etc. Again, I still believe your best choice would be to lease but you do understand that you don’t have to lease with Continental as you could shop around for the best deal.

charles s mallory said:

Linda:

You can pull up the Montana Map as follows: Google “Montana Oil and Gas”; Click on “On - Line Data”; Click on “Live Data Access”; Click on GIS at top; a map of Montana will appear; use your cursor to click on the area where your minerals are located (hint: you may have to try several times before you find your exact Township/Range/Section area; click several times to magnify; once you locate your area, click on the “i” in circle at top; now click on the individual dots (which are wells) and identify the well operator, etc. Hope this helps.

Linda Downey said:

Thanks Charles for the information and here is the exact location: Township 23 North, Range 54 East of the M.P.M. (what does M.P.M. mean?) Section 22: N 1/2. Also how can I see where the drilling is taking place?

Thanks again Charles!

charles s mallory said:

Linda:

You didn’t specify the exact location of these minerals (Township/Range/Section) or the total net mineral acres involved but if plans are in the works to drill soon, I would think that you would be in line to get a very good lease. Of the four choices you stated, I would lean towards leasing your minerals as the other involves factors that you may not fully understand. You can read posts on this forum dealing with participating in a well but familiarize yourself fully before engaging in this type action. I would counter this $500/acre with $1000/acre and see what they say. The 20% is norm and the 3 year agreement is good. Again, it also depends where your minerals are located in Richland County and more important, the wells within the proximity of your area. If you have some good producers close to your area, your negotiating power is much greater but if your area is somewhat undrilled (risky) then the opposite applies. Good luck in your negotiations.

9

Linda:

That’s your call but if you feel that you don’t fully understand what you are signing, it might be wise to seek advice from a professional source. I would first negotiate my own lease terms and you might decide that additional help is not needed. If you do need to seek help, you might find an oil and gas attorney in your area who could look over the lease and provide advice.

Linda Downey said:

Should I seek legal advice and do you have any recommendations? I am in Tennessee and it is not possible to travel to Montana.

charles s mallory said:

Linda:

I would require payment be a check and not a bank draft. You might want to go to the search engine (white box at top) and google in “cold draft” to view posts dealing with this topic. Your lease will specify the details of your agreement including the % royalty, etc. You might want to negotiate the lease whereas you will not be responsible for the transportation costs. Also, you might want to add a “pugh clause”. You can also google this for an explanation. Again, how many net mineral acres are we talking about? Do some homework before signing anything.

Linda Downey said:

I have read some confusing information regarding the bonus…should I ask for the money up front and in check form, not a bank draft? One post suggested to not lease as you may not get the royalties promised. Does it depend on how the contract is written? What do you think? Is the only negative with not participating and being forced pooled the risk penalty?

charles s mallory said:

Linda:

The GIS map indicates that Continental Resources has already spudded the Joseph 1-22H on your mineral area. If this is the case, you want to be very firm in your negotiations in regards to bonus, etc. Again, I still believe your best choice would be to lease but you do understand that you don’t have to lease with Continental as you could shop around for the best deal.

charles s mallory said:

Linda:

You can pull up the Montana Map as follows: Google “Montana Oil and Gas”; Click on “On - Line Data”; Click on “Live Data Access”; Click on GIS at top; a map of Montana will appear; use your cursor to click on the area where your minerals are located (hint: you may have to try several times before you find your exact Township/Range/Section area; click several times to magnify; once you locate your area, click on the “i” in circle at top; now click on the individual dots (which are wells) and identify the well operator, etc. Hope this helps.

Linda Downey said:

Thanks Charles for the information and here is the exact location: Township 23 North, Range 54 East of the M.P.M. (what does M.P.M. mean?) Section 22: N 1/2. Also how can I see where the drilling is taking place?

Thanks again Charles!

charles s mallory said:

Linda:

You didn’t specify the exact location of these minerals (Township/Range/Section) or the total net mineral acres involved but if plans are in the works to drill soon, I would think that you would be in line to get a very good lease. Of the four choices you stated, I would lean towards leasing your minerals as the other involves factors that you may not fully understand. You can read posts on this forum dealing with participating in a well but familiarize yourself fully before engaging in this type action. I would counter this $500/acre with $1000/acre and see what they say. The 20% is norm and the 3 year agreement is good. Again, it also depends where your minerals are located in Richland County and more important, the wells within the proximity of your area. If you have some good producers close to your area, your negotiating power is much greater but if your area is somewhat undrilled (risky) then the opposite applies. Good luck in your negotiations.

10

Linda, you can get a local oil and gas attorney to help with the lease. It would be easier to work with an attorney face to face. You may have to set the terms in bonus and royalty because your local lawyer may not know the rates, but a good oil and gas lease with protective clauses is a good lease no matter where the lawyer is from, as long as he is experienced in oil and gas.

11

Thanks RW…do you agree with Charles that I should request a check and not a draft? And should I get it upfront before the lease is signed? Does it really matter if the lease is with a subsidiary of the drilling company? r w kennedy said:

Linda, you can get a local oil and gas attorney to help with the lease, it would be easier to work with an attorney face to face. You may have to set the terms in bonus and royalty because your local lawyer may not know the rates but a good oil and gas lease with protective clauses is a good lease no matter where the lawyer is from, as long as he is experienced in oil and gas.

12

I wrote an article on the home page that talks about when you should consider hiring an attorney under the Blog section.

13

Thank you Wade.

I read your blog and I think it is a good idea to have an attorney review but this is my father’s decision and it is confusing for me and it is a challenge to explain it all to him. Were you describing the pugh clause when protecting your acreage? Hope that made sense. His deed says: an undivided 1\320ths interest…does that mean he has 1 acre? And if so would you still need to worry about a pugh clause?

Thanks, LD

Wade Caldwell said:

I wrote an article on the home page that talks about when you should consider hiring an attorney under the Blog section.

14

Linda, I would definitely not accept a draft, check only. It sounds like your interest is small enough that there is nothing you could do if they didn’t pay the draft. I believe that their check would be good because it would be easier to pay than to have to deal with it when you dropped the check on the desk of someone in law enforcement if the check bounced. A draft is an unenforceable, conditional, IOU and for such small amounts it wouldn’t be cost effective to sue. Don’t return the lease until you have a check. Good luck.

15

I would never ever sign a lease without an attorney. They work for a percentage, so you have no upfront costs.

Good luck!

16

I would not suggest giving an attorney a percentage of a lease if you can possibly avoid it. There is an article on the home page with tips on how to lower legal costs.

17

Wade, you are absolutely correct! I meant to say a percentage of the initial bonus money. Sorry!

18

Leasing I sort of comprehend, but it is in the royalties where it gets kinda sticky. 20? My own lease reads 1/8 while I see others reading 3/16, but what is that really about? 20% of what gets pumped up is yours in royalties? I have my doubts. More than likely it is a total percentage, and I believe Oklahoma has at least 18% by law??? But then that 20% the lease expresses is divided by 139 other people who also share in it? I do not know the answer to it, but I do know this, the oil company is going to make it as evasive as they possibly can for you, and any attorney is going to make it as complicated and full of loopholes as they can. If you have a thousand acres plus of minerals, sure, it would probably pay you to consult the best minerals attorney you can afford with upfront money or put on a credit card. But if the minerals have passed down 3 or 4 generations, and there are 117 great-grandchildren splitting what comes up, and most of them own half an acre or even less of minerals, if it was me, I would just let it ride and not make it so easy for the attorneys and the oil companies to rip me off, because that is what they do best, all the time.

19

I assume this is $500 per acre? How many acres does he have that they want to lease??? A 20% Royalty IS 1/5 so nothing has changed; but you should lease rather than being subject to paying expenses out of your part of the money which the MT Board of Oil and Gas can collect. Here is what is going on right now in MT as far as applications… http://bogc.dnrc.mt.gov/PDF/February2013Docket.pdf That sounds like a decent price unless there is a producing well on the next section!!!

20

Linda, For what it’s worth, I got a property of mine not far from yours leased to Continental using Kris Birdwell (406-538-2623) in Lewistown, MT. I was very pleased with his work and integrity.