We currently have a lease with Continental Resources that expires on 5-10-2014.
400 acres 142N 100W, Section 13 (tree top field). We have had an initial offer for 3yr lease for $750 acre w/20% royalty.
Diamond resources has leased for past 30 years. Would like to see offers from another source any suggestions or input regarding dollar amount?
Rodney
Rodney,
My family has mineral right South of there at 138N 100W and signed for $700 per acre and 20% royalty on 480 acres. That was 3 years ago, and our lease is up april 20, 2014. I don't think we will sign another offer right away unless they were to accept a royalty in the range of 23-25%. I'm not really concerned about the bonus per acre up front. In my opinion we should be doing better on the royalty and not be as concerned as much about the bonus. If they don't take your offer, the worst that happens is you keep your oil a little longer until someone accepts your offer, or you get force pooled. With that amount of acreage that would be unlikely that you would get forced to my understanding, but it also gives you better leverage to get the royalty you are looking to sign for...I think you will get more technical and better advise from some of the members here, especially RW kennedy.
Hi John
Thanks for the info. I have a good friend of mine who is a land man in Dickinson and his opinion is if you push the royalty rate to high the drilling companies will simply hold and keep renewing the lease but will not drill.
While this may or may not be true it is worth consideration. His approach is to get the going royalty rate with a big up front bonus. I do agree that the real money is in the royalties; but, what good are royalties if you have no wells. Eventually they will drill but from reports that may take 10 or more years. Kind of a bird in hand is worth two in the bush.
Rodney, interesting concept. Lets look at it logically. 20% lease, $100 oil, the operator clears $60 a barrel. 23% lease, $100 oil, the operator clears $57 a barrel. Do you really think $3 a barrel is going to stop the operator from drilling? Is that a good enough reason to keep paying lease bonuses over and over again, or walk away from a spacing in which they already $2,000,000 invested, with bonuses and landman/legal work?
An oil man once said, don't get mad at your money. I take this to mean don't get mad at 28 million doallars just because it's not 29 million dollars that you made.
In my opinion, and quite a few others, drilling is geology driven. Operators drill what they believe to be the most profitable areas first, also taking into consideration lease expirations. If you have your ear to the ground, the greatest majority of leases that are drilled are still drilled in the last 6 months of the majority of the leases in the spacings expiration. $3 a barrel may move you farther back in line but how far? How many years back in line are you right now and is it going to make a significant difference? Would not demanding shorter lease terms with no extension be more likely to move up drilling?
The bird in the hand is a malleasble concept. If you really believe it to be true that lower royalty will get you drilled faster, and a bird in the hand is worth 2 in the bush, you should be leasing for 12.5% so you get the one bird as quickly as possible.
I would like to caution you about something you may not have considered. You may not want to be the first one on your block with a well. Usually the first wells in an area are substandard, I would much rather my well were the 20th and not the first, allowing the operators to get drillbit input before my well is drilled. I have 4 wells that were drilled in 2007-2008 the first in the area and wells drilled just 2 years later produce twice as much oil in half the time. Getting an early well for your area may cut your royalty income by alot more than what you are thinking to voluntarily give up to attract the drilling. In my searches I see it time and again, the second and third wells being a great deal better than the first. If this does not deter you, I would like to thank you for your civic mindedness and the great thing you are doing for the neighboring spacings who will benefit from information gathered from the drilling of your well.
I believe that people are in somewhat of a hurry because of all the activity, and that it works against them. Step back and look at the timeline. 1954 they drilled into the Bakken on Mr. Bakkens property, 45 years later or so, a few companies start a low key search for how to produce it. Six to seven years ago the boom begins to really take off, driven by oil prices near $140 a barrel. The frenzied drilling of wells began in known good areas and in places that were totally unproven in an attempt to find something good, as yet undiscovered and get in on the ground floor. It hasn't been that long since the boom took off. I am as subject to impatience as much as the next man but the evidence is overwhelming that impatience is not good for your future earnings in oil and gas and that is what this is all about. Make sure you make enough from that oil beneath you.
Many people are dismayed by how little they make from the leasing and production of their minerals. Suppose you lease for a lower royalty and possibly the operator takes out some post production costs of 3%, the state takes out 11.5% combined production and severance tax and up to 4% state income tax. Right now we have a 15% depletion deduction against federal taxes but there are those in Washington who want to abolish the depletion deduction. If you get that first, less productive well in your area, I hope you have enough left after deductions to satisfy you. I know people with 20% royalty whose effective royalty is less than 10%. Be careful how much you give up on the front end. If you pocket 60% of your royalty you are doing well in my opinion. There is the matter of the price of oil, it's really good right now. I personally believe that $80 commodity price is the floor now, but that is commodity price, your oil will probably sell for $10-$23 less than that commodity price, I've seen both in just the last year. I suggest you really refine the calculation as to how little you will accept in royalty and be satisfied. I respect your opinion, I just don't know if you are using all the same factors I have used to come to your conclusion that lower royalty is the way to go. Good luck whatever you do.
Hi RW
I did not say I fully buy into this concept I merely threw it out for discussion. As stated “I do agree that the real money is in the royalties” and what you say I agree with.
When I said “Kind of a bird in hand is worth two in the bush” I was referring to the money. Maybe I should have said a dollar in hand is worth two in the bush.
“In my opinion, and quite a few others, drilling is geology driven”. I cannot say I disagree with that. However, profitability is a consideration as well.
“Would not demanding shorter lease terms with no extension be more likely to move up drilling?” This option is the one we have considered the most. We have considered pushing for a two year lease.
You state “You may not want to be the first one on your block with a well. Usually the first wells in an area are substandard”. No doubt about that in my book.
The area in which our minerals lie in Tree Top Field and we have been surrounded by both Bakken and Madison wells for years and new wells have been drilled to include Pronghorn. The entire area has been de-risked so we would not be the first on the block. But, as you stated impatience is not good for your future earnings.
Thanks for your reply you confirmed a lot of my beliefs.
Rodney, I have some small acreage (11) right next door to you. (Sect 18, 142/99) It was a 3 year lease, 20%, and a $1500 bonus from XTO. (XTO leased after they bought the previous lease from Headington.) The lease expires next June. Right now, I am hoping XTO does not drill, as that and my small acres might give me a chance to somehow participate in a well. (and do better than 20%.) The Petro-Hunt Osadchuk 24777 I think is still in the confidential status. Will be interesting seeing how that one did. I have done oil production spread sheets on all wells in 142/99 and in all the St. Demetrius field wells. The Basaraba well has done 251,000 bbls to date. Continental’s newest wells (2012) are doing great in 141/99. Looks like they will beat the Basaraba well. R W Kennedy’s comments about newer wells doing so much better than the older wells is right on. Don’t know if you are aware that XTO has approval for up to 8 wells per 1280 acre units to the east of you and the north of you. (152 wells approved 23 Aug 2013) Four wells each unit into the middle member of the Bakken, and 4 wells each unit into the Three Forks. Based upon my calculations, your 400 acres only contains about $120,000,000 of oil. But it does not seem like XTO is in any rush to do anything in Billings county now. They have pulled 252 permits in the last 18 months. And all of them are in McKinzie, Williams, and Dunn counties where their three rigs are. At least you have Continental with a lot of ongoing operations in Billings county. Take what I say with a grain of salt. I am brand new at all this, just trying to learn. With $300,000 worth of oil in one acre, you would think there would be a lot more people willing to pay the mineral right holder better prices?
Be careful with Continential/Diamond they are shifty. My mother passed away, ownership went to myself and siblings, her lease set to expire 4-2-14, they offer to renew lease with bonus, we received the lease to sign 3-19-14, then a letter 2 months later first saying, they could not find the title to show my mother owned it (although they had been paying her for years) then once we supplied those documents, they came back and said "no bonus or lease renewal because the well was spud on 3-17-14 prior to the lease expiring"
I do not understand most of this but seems to me they should have been aware of the spud date which was prior to lease expiration and before we received the paperwork to even sign. They were very eager to renew lease and in constant contact until this happened and now you can not even get a response from at all. Good luck
Janine, What section, township, and range did they spud that well? (Well name?)
Rodney, it has been 4 months since your posting and three months since lease expiration. What is happening with your acreage? Has there been any other offers from any other sources?
Janine, I believe that the lease renewal offer was a sort of insurance policy. If they spud in time, you would not be paid even had you returned the lease immediately.
township 141, range 99, section 19. what does spud mean anyway?
Richard Basaraba said:
Janine, What section, township, and range did they spud that well? (Well name?)
Rodney, it has been 4 months since your posting and three months since lease expiration. What is happening with your acreage? Has there been any other offers from any other sources?
Janine, To spud a well is to start drilling. First, a bigger drill bit is used. Then the hole is lined with a steel casing and concreted in place. This is done to prevent groundwater from infiltrating into the well. (You can google it too.)
Your well name is Dunkirk 1-18AH1. It is well number 27583. It is now on the confidential well list. And according to the NDIC web site, that well is scheduled to come off from it's confidential status on 9/17/2014. The drilling unit is 1280 acres and includes section 18 and 19.
Thank you for the explanation. Next question, what is the confidential list and what does that all mean. Why is on the list and what happens when it comes off the list. So how can they get away with not paying the bonus because they started drilling before the lease was renewed, yet they did not even send the papers to me until after they started drilling.
Richard Basaraba said:
Janine, To spud a well is to start drilling. First, a bigger drill bit is used. Then the hole is lined with a steel casing and concreted in place. This is done to prevent groundwater from infiltrating into the well. (You can google it too.)
Your well name is Dunkirk 1-18AH1. It is well number 27583. It is now on the confidential well list. And according to the NDIC web site, that well is scheduled to come off from it's confidential status on 9/17/2014. The drilling unit is 1280 acres and includes section 18 and 19.
Janine, Go to the NDIC web site (just google "NDIC").......
Go to Frequently asked questions. It will explain what ND law says about confidential. When the well come off of the confidential status, the well production figures and the well information becomes public knowledge for any one to see.
I am assuming that your mother received bonus money years ago on the lease that you thought would expire 4/2/14 back when the lease was made up? When your well operator start drilling activities before your lease expired, your lease did NOT expire. Instead it goes into a new temporary status, (there may be a time limit during drilling of the well), and once they hit oil and start producing, your lease IS NOW HELD "BY PRODUCTION". And you will be entitled to your agreed upon royalty payments.
Janine, the decision to send you the papers came months before they were actually sent to you when the operator did not know if they would get the well started in time or not. Oil companies are like dinosaurs, they stub their toe and five minutes later they say ouch!
Most leases have a continuing operations clause, read your lease, it should say somewhere that if the operator is actually involved in "work" to gain production, the lease does not end. The lease will not end until the operator fails to gain production or quits work to gain production for a specified consecutive number of days such as 180 days, which is common. If the operator was building a pad, road, drilling a water well, digging a pit on the last day of your lease, the operator could stop work for almost 6 months and your lease would not expire if they came back and continued before the lapse of the 180 days grace period. I have seen continuing operations grace periods of up to 1 year which saved a lease for the operator. I told that person they were lucky, the operator could have made it 10 years with just adding a 0. You always want to keep the continuing operations grace period short but reasonable 60 to 90 days is reasonable, 180 days to 1 year or more is a free lease.
Really, if I were to negotiate another lease, I would want nothing to save the lease for the operator except production. If the operator thinks they need more than 3 years to gain production, they should pay for more time up front with 1/3 more bonus for a 4 year lease instead of a 3 year lease. Options to renew are not in the mineral owners favor. The lessee has the option to negotiate a new lease if the present one ends, there is no reason to give them an option at a set price. If the operator no longer wants your lease, they will not exercise the option. If the operator still wants your lease but they believe the can get it cheaper than the option price they may try to negotiate a new lease with you before the present lease expires for a lower amount and if all else fails, they may decide to pay the option price rather than lose the acreage.
they did use that phrase " entitled to current lease royalty payments'. Thank you so much for the many answers to my many questions. have a great day
Richard Basaraba said:
Janine, Go to the NDIC web site (just google "NDIC").......
Go to Frequently asked questions. It will explain what ND law says about confidential. When the well come off of the confidential status, the well production figures and the well information becomes public knowledge for any one to see.
I am assuming that your mother received bonus money years ago on the lease that you thought would expire 4/2/14 back when the lease was made up? When your well operator start drilling activities before your lease expired, your lease did NOT expire. Instead it goes into a new temporary status, (there may be a time limit during drilling of the well), and once they hit oil and start producing, your lease IS NOW HELD "BY PRODUCTION". And you will be entitled to your agreed upon royalty payments.
Richard
Sorry so slow in responding. We have contacted numerous companies that operate in and around Billings County. We have seen no interest at all in leasing. Even companies who bid at last State lease auction showed no interest in leasing?
Only one commented saying interest should be back in about two years in your area.
Janine Perry said:
township 141, range 99, section 19. what does spud mean anyway?
Richard Basaraba said:Janine, What section, township, and range did they spud that well? (Well name?)
Rodney, it has been 4 months since your posting and three months since lease expiration. What is happening with your acreage? Has there been any other offers from any other sources?