Lease and Contract paperwork

Oil and Gas Leasing Help
1

I recently received an offer to lease my mineral acres in ND. I've read through the lease agreement and terms but I don't know enough about all the clauses and wording to know if it may be missing something, or have something in it that wouldn't have my best interest in mind.

Do you recommend having a Lawyer in ND look over the papers? (I don't live in ND). If so, are there any recommendations? Costs?

Has anyone seen a "sample" lease agreement out there that might show terms or items that you definitely want or things you don't want?


Thanks in advance, Elad

2

Actually, you don't need a ND lawyer to look it over. If it's a good deal, it's good. If it's a bad deal, it's bad, no matter where the lawyer that looks it over is located. The bad thing about having a lawyer look over a lease is that they are not required to give you business advice. It could be a really bad deal but not illegal to sign and they could tell you you can sign it. You need more of a friendly landman or mineral manager to explain it to you. I think you could do it yourself if you have about 6 months to study what you need to know. Rest assured that the lessees lease form has almost nothing in your favor. I have seen alot of things in leases that sound innocent enough, largely because the language used, the words used could have a different meaning and there is the fact that clause 3 may sound good but it is modified by clause 5 to have a different meaning, so you have to consider the lease as a whole. You need someone to explain it to you, one step at a time. Don't count on a lawyer to give you business advice. I have heard several times people burning mad that the lawyer didn't tell them that something could happen, or never mentioned protections for the lessor that could have been added to the lease. I recommend quite a bit of study just so you can have some idea if the help you are getting is actually better than just signing and then pray, which I certainly suggest you not do. Take as much time as you need, 6 months or more to make sure your lease is good. A bad lease is worse than no lease at all in ND. In ND they can force pool you and have to pay you 16% royalty from the first barrel, the other 84% going to pay for expenses, your part of the well and equipment and a 50% risk penalty, but when it's paid off you will get 100% less the cost of production. The well will eventually pay this off as long as it keeps producing. I am doing this myself and I like it. Don't let them pressure you into a bad lease. A bad lease is like a bad marriage but you can't get out of a bad lease. Good luck.

3

Hi,

I agree with the previous comment. If the oil company provided the lease, don't sign it. In any transaction, the author of the lease has an advantage. There are plenty of sample leases on the internet, but may not apply to you. Don't get in any hurry. The offer will only go up if you wait. Find a good oil and gas attorney in ND, if possible, and there should be plenty by now, and let him negotiate the lease for you. Find some of the neighbors of this land and ask to see their leases, if done by an oil lawyer. Don't believe anything the land man says to scare you. ND is an incredible location and the geology will not change because of something you are told or believe. Leases are going for an incredible premium now. You can almost certainly get more Good luck.

Gary Wofford

4

Thanks for your replies. There is much to learn. I don't live in ND now so I need to do it from a distance. I will continue reading and learning.

5

Hello rw,

Elad's situation is similar to ours (out of state landowners) but our land is in Montana. Oil companies and lease hounds have been sending us lease agreements to sign for nearly two years. The first offer was for $25 net acre paid up for five year primary term and a 1/8th royalty. They have gotten somewhat better. From your experience you say you like the force pool route in ND. Does this arrangement cap the percentage of minerals the oil company can claim? Once the well is paid off? Thanks for any advice you care to share. jr


r w kennedy said:

Actually, you don't need a ND lawyer to look it over. If it's a good deal, it's good. If it's a bad deal, it's bad, no matter where the lawyer that looks it over is located. The bad thing about having a lawyer look over a lease is that they are not required to give you business advice. It could be a really bad deal but not illegal to sign and they could tell you you can sign it. You need more of a friendly landman or mineral manager to explain it to you. I think you could do it yourself if you have about 6 months to study what you need to know. Rest assured that the lessees lease form has almost nothing in your favor. I have seen alot of things in leases that sound innocent enough, largely because the language used, the words used could have a different meaning and there is the fact that clause 3 may sound good but it is modified by clause 5 to have a different meaning, so you have to consider the lease as a whole. You need someone to explain it to you, one step at a time. Don't count on a lawyer to give you business advice. I have heard several times people burning mad that the lawyer didn't tell them that something could happen, or never mentioned protections for the lessor that could have been added to the lease. I recommend quite a bit of study just so you can have some idea if the help you are getting is actually better than just signing and then pray, which I certainly suggest you not do. Take as much time as you need, 6 months or more to make sure your lease is good. A bad lease is worse than no lease at all in ND. In ND they can force pool you and have to pay you 16% royalty from the first barrel, the other 84% going to pay for expenses, your part of the well and equipment and a 50% risk penalty, but when it's paid off you will get 100% less the cost of production. The well will eventually pay this off as long as it keeps producing. I am doing this myself and I like it. Don't let them pressure you into a bad lease. A bad lease is like a bad marriage but you can't get out of a bad lease. Good luck.

6

Small MT Holder, there were some changes to the regulations on forced pooling in MT. If you look online for them make sure you get the 2011 version. The operator is allowed to collect the risk penalty on cost of drilling as before with the addition of penalty on supervising and operating expenses and so forth. It's somewhat nickel and diming but it's better than a bad lease. You would receive 12.5% royalty from the first barrel as before. Well expenses can be very low. I have a well that has been flowing for years in a 1280 and the operating expenses come to a couple dollars per acre/ month. I received a letter saying the cost would go up by $1,000 per year. I will just have to scrape up the 80 cents per acre somewhere, maybe get it from the hundreds of dollars I make from the well? Being non-consent does cap how much the operator can make off your minerals because as soon as your production has paid for the well and penalty, you only pay the operating cost with no penalty and you receive 100% of the value of the production, less actual expenses. The old rules were better, the new rules sound alot worse but really sound worse than they are, by design. If you have only a few acres and you can negotiate a decent lease, I would say that would be the route to go. You probably don't want to learn a complicated trade as oil and gas is for just a couple of acres. For 20 acres, we are starting to talk the potential for real money. If someone started their offer at 1/8 and moved up to say 15%, they would not have my attention, they can just force pool me because it's not enough extra to give up the future upside of eventually receiving 100% less expenses. There is something to be said about not putting your name on a contract until the dollar value reaches a point at which it's worthwhile to enforce the contract. I'm sure we will talk more about this after you find the regulations online.

7

RW, thank you for responding. I was just reading Montana's 82-11-202 rules I found at [http://projects.propublica.org/tables/forced-pooling] when your message popped up.

The header is "Montana Code Annotated 2011" so should be the version you recommended.

Sec. (ii) talks about "200% of the refusing owner's share..." and I am wondering if a "non-consent owner" is different than a "refusing owner"? Reason being is that the applications for well spacing in our neighborhood are for 640 acre units. Our holding comprises a half section which would result in us and the oil company having equal shares in the pool. So 200% would represent 100% of the unit's entire costs outlined in (ii) if they were to drill a well on their half section before we signed a lease and they subsequently applied for force pooling. And that would be in addition to one half the other costs: well, surface equipment, etc? If I am reading it correctly?

Did you get to deal with the oil company on any of the pooling terms in your case? Or did the "non-consent" response prevent that?

8

Small MT Holder, I think you have a good grasp of the regulations. Yes your half section would with penalty be subject to the cost of 100% of the well. Sounds scary doesn't it?

Once you get past the shock value of that and take stock, they can only recover from production..... say it again, nothing out of pocket and they can only recover from production, then consider your 12.5% from the first barrel, if the well is really poor and never paid out, you could make alot more money off it than the operator did right there.

Then there is the matter that the operator does not drill wells if he thinks he might double his money before it goes dry. He could be mistaken or get a poor well through mechanical failure, but he hopes to make 3 times the cost of the well back at least on a well that I would call barely comercially profitable because of the time frame involved, could be 30 years.

If the well does only recover 3 times what it cost, that's after the penalty you wind up with 1/6 of the production and half ownership in the well equipment not to mention you will have been able to take at least some deductions that a lessor wouldn't, depreciation on the equipment, that you would be paying for the use of as lessor anyway.

Practically speaking, no operator in his right mind is going to want to carry your 50% of the spacing. If he gets a decent well, your part could be as much as a 33% lease, a good well equal to a 50% lease.

There is seldom gain without risk. How much percent are they offering you on the front end to make you give up the potential for larger earning on the back end? I would gladly give up a few percent royalty in the front end to possibly double or more my money. If the well is poor, really a skunk of a well, you will have missed out on the bonus and if the well is that bad, the royalty probably wouldn't make that much difference.

You have to do your research, get the best idea you can of the possible productive nature of your minerals and make the choice that best suits your needs.

When it comes to pooling, you still have your rights as in a lease you probably wouldn't. With an acreage as large as yours 50% of the spacing I think the operator would do better at respecting your rights because he will probably need something from you in the future.