Lease to expire end of January

Oil and Gas Leasing Help
#1

Hi,

I just received an offer to top lease my minerals for $1,000 an acre and 18.75% royalty from the company that has the majority of the lease. 20% now and 80% when our other lease expires. I have also been in contact with the operator that has already got a permit and has put a 2 well pad on our spacing area. We have also contacted another company that says they have the majority of the lease. I am worried about letting the lease expire due to the fact I was told that if we had no lease and they drilled that we would have to take what the operator offered with no negotiation or become a partner which is very expensive to us or do nothing and pay a penalty.

Any advice would be appreciated.

#2

Thelmarule, I'd say check your lease, there may be a clause that extends your current lease in the primary term for continuing operations. Building a pad may well be enough to extend your current lease, unless you have language that says a well must be spudded with a rig on site capable of reaching target depth, etc. If you signed a standard lease form that a landman sent you, likely you are held by operations. If you are not held by operations, the operator will likely still be trying to lease you even after the well starts producing, if they don't mess it up. I know you have oil, there is production all around you, good production. If you are not held by operations and do nothing, you will become a carried interest automatically. As a carried interest you will receive a 16% royalty from the first barrel and when the operator recovers 150% of your portion of the well costs from the sale of 84% of your oil you will receive 100% royalty less the cost of production. If you have oil, it's not a bad position to be in. After the operator recovers what he can by law from your oil, you will make as much or more than the oil company would from your acres. Believe me Thelmarule, the operator does not want to carry your interest. I'd like to give the landmen trying to scare you a piece of my mind. The words I have for them would probably get me banned from this forum.

#3

It wasn't KDM Petromanagement making the threats was it? They threatened me several times to get me to sign a lease and take what they offered and again to sign various other documents. The owner lied to me and was flat out hateful to me.

#4

Joel, Inquiring on my brothers behalf of SM Energy, who is carrying his interest in a well, they informed me that my brother is entitled to a year end statement detailing what he owes as a carried interest (well cost), how much he has paid off in the prior year how much has been deducted for expenses. I spoke to my brother just yesterday about requesting this accounting, because I know he won't if I don't bug him. He doesn't even cash the checks he gets from the well. I think he believes that since the well isn't going to be paid off immediately he can just wait and tackle all the issues at once. I don't like surprises, I really don't like surprises that can be avoided. Joel, I think you have as many rights as someone who paid up front. There are people who start paying up front and can't pay all and they wind up being carried by the operator, until their production pays the operator back, with I'm sure interest or penalty. Joel I look at most leases as a way to delineate that for a small fee and retaining a royalty interest you are giving up all but a few of your rights. When you do not sign a lease, where is all the language that says you can't demand an accounting ? The operator does not even have a joint operating agreement to fall back on. I think if they fiddle with the numbers, it would not be a business dispute as it would be if you signed a lease, or a JOA but might well be considered fraud. joel, I haven't run across a lease yet that said the mineral owner has a right to audit, have you ? I think you would have to sue to open the books, if leased. I think if between your check stubs a yearly statement and watching barrels produced and sold verses what you were paid, any discrepancies should show up. Joel, Mineral Joe taught me something in a discussion we were having one time. How much of your oil do you still own after you sign a lease ? Ready ? The answer is 0. You transferred all of it to the lessee only retaining a royalty interest should they produce. The lease only allows for a possibility of reversion at the end of the primary term if nothing is produced and after production ceases in the secondary term. Something to think about.

#5

Joel:

I have never been fond of toying with the idea in well participation. First, the cost to drill, you will incur. Other costs, such as operating, workovers, surface equipment, insurance and so on creates alot of variables which will end up costing you in the end. Further, if arguments over $ figures occur between you and the operator, which is a good possibility, the cost of consultants/lawyers may have to be utilized to protect your interest. It's always been my opinion just to sign a lease (with terms in your favor) and enjoy cost free and risk free conditions during the life of the well. Bottom line is to negotiate the highest royalty and cash bonus with the lease amount of lease terms. Again, this is my personal opinion and others may seek to the more adventurous lifestyle in this industry.

#6

Joel, I hope you will accept my friend request, as I would enjoy discussing things further with you......without hijacking Thelmarules thread anymore than we already have.

#7