Mr. McCann, I would consider being a carried interest if you could not afford to participate. Depending on well cost, that well probably isn't that far from being paid off, and is still producing a goodly amount of oil. If you were a force pooled carried interest, you would get the weighted average of whatever everyone else in the spacing leased for or 16% ROYALTY FROM THE VERY FIRST BARREL, lately you could just say 16%, which is very close to 1/6th [16.67]. The other 84% goes to pay for your drilling costs, penalty of 50% of actual drilling costs, and dollar for dollar expense of operating and equipment costs. It would be a shame to have to go carried instead of participate when it's this close, being carried it would probably take another year to year and a half allowing for declining production to pay off your costs and penalty, which would still be worthwhile to me, and you still get the 16% until it gets to that point. I think the other options would be to try to negotiate a lease where the operator would scream that it was unheard of, but unless they want the amount they can make off of your acres capped to 50% of actual drilling cost, they had better start listening hard. The operator didn't pay you up front and assume all risk in leasing you, there is no reason I can see why the operator should now get the same deal as they would have gotten had they put cash in your pocket up front, if the well was dry, do you think they would want to lease you ? Heck no! You have already shared the risks, you just haven't paid your up front money yet, nor have they asked for your share yet, and they will not until you refuse to lease, they have to offer you a chance to participate before they can petition for the risk penalty. The Brigham lease offer is the hail mary pass to make a killing off your acres. I think you could do considerably better any number of ways, including a lease offer, but they didn't frontload the money so they shouldn't expect to make as much off the back end of the deal. It will be your job to make them understand this, with participation [ worst for them] or carried [ still not good for them] or making you a really good lease offer, which would be their best option. Sell them on the idea. Nobody has to know what % royalty you held them up for, that's what memorandums of lease are for. Be firm whatever you decide.
Jim McCann said:
Mr. Kennedy, Many thanks for the information regarding the Kjorstad 5300. I'm familiar with leasing in OK and TX, but not so in N.D. Are you saying to not lease in section 21since there is a producing well? My understanding is any non-percipient is entailed to 1/6 th royalty after 100% production covers the total well costs? I’ve heard if you get pooled, that means you have a working interest if you don’t have a lease. I haven't seen any division orders or JOA’s on the Kjorstad 5300, but production probably has not covered the drilling cost thus far. Sorry I’m so naïve about leasing in N.D., but Oklahoma pooling almost always benefits the operator. Sincerely yours, Jim
r w kennedy said:
Mr. McCann, there is a well drilled by Oasis that the wellhead is in section 22 but the wellbore goes west into section 21 so you already have a well, the Kjorstad 5300 24-22 H, 109,565 barrels of oil in 14 months, a very respectable well. I would think they could offer more money as the well still produced almost 4900 barrels of oil last december which is the last month I have production information for. Your two sections are in two different well spacings, I wouldn't lease them together. If I had your acres they couldn't lease them from me for what they are offering you. Remember that the first offer usually isn't all they are willing to pay. Good luck with your negotiations.