Mineral Broker vs Drilling (Operating) Company

Looking for advise on whether it is becoming a common factor to have landmen from lease brokerages negotiating gas leases for a drilling companies? I have a landman offering to lease my gas minerals on behalf of a "secret drilling company" who he says is Ironwood Oil & Gas (but not to let anyone know). All the leases my parent's negotiated were always with the drilling company. I have even signed 2 leases from other drilling companies.

I don't feel all that comfortable signing a "paid up" lease with a broker, San Luis Energy, that I can't find any information about online.

Has anyone ever heard of either company? Have you ever leased with a broker representing the drilling company?

It is common now for leasing companies to do leg work for oil co's. I wouldn't lease with anyone who didn't show up if you google their name. I don't buy the secret client, stuff. The oil co's name should be at the top of the lease or you are probably dealing with a flipper trying to get a cheap lease and flip it for more bonus and an overide. I suggest not taking a draft which is usually OPTIONAL whether they pay / honor it or not. They may record the lease and cloud your title so you can't do anything with your minerals until you go to trouble and legal expence to clear your title and you may miss legitimate oportunities.

he is trying to sub lease it so he can turn around and get top dollar for himself with a major gas company

Sounds like a variant of a scam I've read about before. I've heard about Pete Dailey & Associates "brokering"
a deal between a mineral rights owner and San Luis Energy for $150/acre in Sabine County, only for the mineral rights owner to later find out the going rate was actually about $800/acre at minimum.

I'd be extremely cautious when approached by a company that doesn't have any online presence.

We have leased with Empire Oil Company which is a brokerage company in North Dakota. This lease occurred back in 2008 and at the time, I was new to this leasing game and didn’t understand what I was doing and the options that were available. The lease terms were ok and no problems were encountered as they paid on time. Since that time, I have educated myself much more and today I will only lease with a drilling company on my terms. We hold 500 net mineral acres in the Bakken play and I’m sure that a top lease offer will be coming as the lease expires next year. Again, I had no problem with the broker but I’m sure you can get a better deal with the drilling company. I have created a file which is updated monthly as to who is drilling in different areas and these files contain contact numbers to land departments of these companies.

You folks need to distinguish between an agent (like Empire usually is) of a drilling company who is leasing on the direct instructions of a company for a set fee, and who later assigns the leases to that company, and a speculator, who is acting on their own behalf with hopes of later selling the lease to a company for a profit. Leasing to an agent is no different than leasing directly to the main company, because the main company is the one setting the terms that the agent offers.

It's important to remember that both speculators and brokers are out to make a profit.

I would assume that the company hires the broker so that it doesn't have to deal with the tedious nature of lease negotiations. The broker probably gets rewarded based on how cheaply he negotiates the lease. If you are able to find out about the going rate in the surrounding area, that will give you a good starting point on price. It's unlikely that anything will happen soon to make the lease offer worth less money, so it doesn't hurt to wait a while and ask around.

Thank you all for sharing your comments and experiences. I'll have to talk more with this guy and see what I can learn. He was pretty quick to access my terms. However, my gut feeling is that he is going to flip the lease and that really bothers me.

I'll let you know the outcome.

Dear Mr. Dukes,

Here is how it works with Brokers. I have been one for years, so I speak from experience.

Years ago, the majors all had their field landmen as employees. When projects grew to the degree where they needed additional help, they hired independent landmen, who reported to the head field broker (or his delegate) who was the company employee.

As to smaller independents, they never had field landmen as employees. If they had a project, they hired independent landmen, who reported to the inhouse landman.

In about the mid 1970's, the broker concept began to take off. The majors began not hiring anymore field landmen as employees and did not use the field landman job as a training position prior to moving inhouse to a desk. Having field landmen as employees was just too expensive. The industry has typically been one of eating chicken or eating feathers. When it is in a downturn, the companies had to lay off the field employees or have them sitting around staring at each other.

I know of very few brokers who actually hire field staff. Most do as I do, treat them as associates in the nature of independent contractors.

A client will call a broker and tell him (not sex descrimination, but most brokers are men) that he has a "ticket" for him and send him the particulars. The brokers assembles a crew (which could be a few as one or two contractors) to go get the work done. The office landman only has to deal with one person, the broker, rather than numerous independent landman. In this way, the broker is acting in the role of a manager for the company landman, buffering him and sending reports as to progress, etc.

The broker makes his money just like a lawyer. His associates send in invoices based on billable hours, or days, with expenses. The broker takes that invoice and adds a head charge per hour or per day and passes through the expenses. Any time the broker spends on the job, he puts that on the invoice as well.

It is RARE for a broker to work on commission or have incentives. Sometimes a bone will be tossed if he does an outstanding job, but that is much the exception rather than the rule.

Being a field landman or broker can be rewarding financially. Typically, contractors for a broker make a decent living, but that is about it. Their pay varies depending on experience and demand and region of the country, but most make between $300-$400 per day. That, on the high end, is about $100K a year, if they work every day. No benefits, no retirement, no medical. When things are tough, such as the last half of 2008 and all of 2009, they may have no work at all.

The broker system in my opinion is broken. There is too much incentive to be dishonest. For example, if the broker is running 40 landmen and he adds 1 day per month for each one over what they actually worked, he is unjustly profiting by $16,000.00 per month. That is in addition to the head charge of $25-$100 per day of more he is making anyway. It is very difficult for a company to catch a crooked broker, particularly if he rewards his company landman with fishing trips, strip bars, etc.

In a nutshell, that is the broker system.

Buddy,

Thanks for the overview of what actually takes place within this Landman/Broker scenario. I have a question for you. Is it typical for a mineral rights owner to pay for "marketing" of O/G within a mineral lease? And, exactly what would the "marketing" include?

Thanks,

Sharon



Buddy Cotten said:

Dear Mr. Dukes,

Here is how it works with Brokers. I have been one for years, so I speak from experience.

Years ago, the majors all had their field landmen as employees. When projects grew to the degree where they needed additional help, they hired independent landmen, who reported to the head field broker (or his delegate) who was the company employee.

As to smaller independents, they never had field landmen as employees. If they had a project, they hired independent landmen, who reported to the inhouse landman.

In about the mid 1970's, the broker concept began to take off. The majors began not hiring anymore field landmen as employees and did not use the field landman job as a training position prior to moving inhouse to a desk. Having field landmen as employees was just too expensive. The industry has typically been one of eating chicken or eating feathers. When it is in a downturn, the companies had to lay off the field employees or have them sitting around staring at each other.

I know of very few brokers who actually hire field staff. Most do as I do, treat them as associates in the nature of independent contractors.

A client will call a broker and tell him (not sex descrimination, but most brokers are men) that he has a "ticket" for him and send him the particulars. The brokers assembles a crew (which could be a few as one or two contractors) to go get the work done. The office landman only has to deal with one person, the broker, rather than numerous independent landman. In this way, the broker is acting in the role of a manager for the company landman, buffering him and sending reports as to progress, etc.

The broker makes his money just like a lawyer. His associates send in invoices based on billable hours, or days, with expenses. The broker takes that invoice and adds a head charge per hour or per day and passes through the expenses. Any time the broker spends on the job, he puts that on the invoice as well.

It is RARE for a broker to work on commission or have incentives. Sometimes a bone will be tossed if he does an outstanding job, but that is much the exception rather than the rule.

Being a field landman or broker can be rewarding financially. Typically, contractors for a broker make a decent living, but that is about it. Their pay varies depending on experience and demand and region of the country, but most make between $300-$400 per day. That, on the high end, is about $100K a year, if they work every day. No benefits, no retirement, no medical. When things are tough, such as the last half of 2008 and all of 2009, they may have no work at all.

The broker system in my opinion is broken. There is too much incentive to be dishonest. For example, if the broker is running 40 landmen and he adds 1 day per month for each one over what they actually worked, he is unjustly profiting by $16,000.00 per month. That is in addition to the head charge of $25-$100 per day of more he is making anyway. It is very difficult for a company to catch a crooked broker, particularly if he rewards his company landman with fishing trips, strip bars, etc.

In a nutshell, that is the broker system.

Best,

Buddy Cotten

www.cottenoilproperties.com

Dear Ms. Davis,

Marketing costs could include things like treating, compression, dehydration, pipeline charges and many more --- treating the product to make it saleable and transporting the product to an end user.

Typical, I suppose so.

I, myself, have an issue with the landowner paying for his share of the costs with no benefit for tax treatment. For example, if the company had to build a plant to take SO2 our of oil (oil that is produced as "sour" with high sulphur dioxide content), the landowner pays his share. The oil company gets to recover the investment with depreciation, etc. The landowner does not.

I have no problems with including language in leases to prohibit the oil company from making those charges.

Sharon Davis said:

I have a question for you. Is it typical for a mineral rights owner to pay for "marketing" of O/G within a mineral lease? And, exactly what would the "marketing" include?

Buddy,

Thank you, very much, for your answer. I objected to "marketing" being included in an O/G lease that I was negotiating - telling them that I thought my having to pay for wine-ing and dining potential clients, and all of those types of costs that I consider a part of marketing, and was told that it did not include that type of marketing. I was told that it is normal for the Lessor to participate in the costs. I was exhausted after trying to negotiate every single point with them, so I allowed marketing to be included in the final lease that I signed. Now I regret it and am hoping that it doesn't come back to bite me.

I am waiting for the bonus payment. I did put a clause in the lease that the lease was NOT to be recorded until I received the full bonus payment and would be null and void should they attempt to record it beforehand. I only hope that I worded it strongly and correctly enough to make it stand, should I have to rely on legal means to unrecord a lease. Scary stuff, this O/G leasing - for a lay person anyway.

Sharon



Buddy Cotten said:

Dear Ms. Davis,

Marketing costs could include things like treating, compression, dehydration, pipeline charges and many more --- treating the product to make it saleable and transporting the product to an end user.

Typical, I suppose so.

I, myself, have an issue with the landowner paying for his share of the costs with no benefit for tax treatment. For example, if the company had to build a plant to take SO2 our of oil (oil that is produced as "sour" with high sulphur dioxide content), the landowner pays his share. The oil company gets to recover the investment with depreciation, etc. The landowner does not.

I have no problems with including language in leases to prohibit the oil company from making those charges.

Best,

Buddy Cotten

www.cottenoilproperties.com

Sharon Davis said:

I have a question for you. Is it typical for a mineral rights owner to pay for "marketing" of O/G within a mineral lease? And, exactly what would the "marketing" include?

I’ve leased with more brokers than actual companies. There are many reasons companies use brokers. For one, they don’t want other industry people to know their area of interest. I do not see what difference it makes as long as you are knowledgeable on leasing. You may request a cashier’s check rather than a draft.

What is the difference between these types of leases?

One says: Oil and Gas Lease,

the other says: Paid-Up Oil & Gas Lease

I've found both on newly leased minerals in Billings county, on the NDRIN site. Both of these were from the same company, however, most of the leases they've posted were of the Paid-Up Oil & Gas Lease format.

I've also noticed that most leases I see on the NDRIN from other companies; are Oil and Gas Lease format.

Snues:

An oil and gas lease is a contract between the mineral owner (lessor) and a company (lessee) where the lessor grants the lessee the rights to explore, drill and produce oil and gas for a specified primary term. The lease is granted in exchange for royalty payments to the lessor. A Paid-Up oil and gas lease is a lease in which the delay rentals for the entire primary term are paid in advance with the bonus consideration.

Snues said:

What is the difference between these types of leases?

One says: Oil and Gas Lease,

the other says: Paid-Up Oil & Gas Lease

I've found both on newly leased minerals in Billings county, on the NDRIN site. Both of these were from the same company, however, most of the leases they've posted were of the Paid-Up Oil & Gas Lease format.

I've also noticed that most leases I see on the NDRIN from other companies; are Oil and Gas Lease format.

Charles,

Thanks for your answer, I am not sure I quite understand the Paid-Up part where you said (the delay rentals for the entire primary term are paid in advance with the bonus consideration). Can you explain that further?

We've had previous leasing done on our different tracks of lands over the years, the one that recently expired, had been for $75 an acre @ 15% for 5 years. We did receive $$ checks for the acreage that was leased, within the same time frame of signing the lease. The land was never drilled, and never has in all the years of having leases. (Still hoping). On the previous contracts/leases, it was labeled as Oil and Gas Lease, never Paid-Up Oil & Gas Lease.

In your opinion, what do you think is the better lease, Paid-Up Oil & Gas Lease or just the Oil and Gas Lease; and why?

Thanks.