Mineral Lease on EN-Hynek-155·93·0 112H-3 Well, Mountrail County, ND

Shales Bakken Shale
1

EN-Hynek-155·93·0 112H-3 Well, Mountrail County, ND

The Hess Corporation has recently offerred us $900 per acre and 3/16 royalty for three years on this well or the option to participate in the cost of the well at a rough cost of $8,000 an acre. They don't specify what our share would be if we do the second option. we understand that we would be at risk if the well is a dud but if the payback is much greater it would make sense to buy in instead of agreeing to the lease. Does anyone have any suggestions for us? we would greatly appreciate it.

2

I will throw my two cents in. 1) The more acres you have, the more risk. 2) If you don’t lease, or take the participation option, they will force pool you. That means you will get a JOA in the mail, “Joint Operator Agreement” (you might want an attorney to look at it, a gas and oil attorney, not a divorce attorney).

You will then be on the hook for 150% of your cost for the well (penalty thing), but it is way better in North Dakota than Montana, for instance.

If you have 10 acres or less, I say go for it, meaning let them force pool you. If they get a dry hole, you owe nothing. If they hit, you probably will get a royalty each month equal to that of the lowest lease deal they made on the well (it will be in your JOA, so check for that), and once they have collected their 150% of your contribution, then you get a 16/16 royalty check, 100% of your percentage of ownership—in other words, full share.

Now, keep in mind, there are flocks of pedifoggers out there looking for a reason to sue. You, as part owner, are on the hook as a defendant along with Hess and the other owners. You would need to hire your own attorney because Hess won’t share theirs with you. For example, recently, a well got sued for killing a couple of birds. Could you imagine if your well fouled up the water or had a spill or some force majeure thing?

My advice here is given in my capacity as a complete noob. Do not under any circumstances rely on anything I have said as being 100% correct. You should, however, consult a gas and oil attorney for certain.

3

I can only offer how I would think about it:

The first offer of lease is virtually no risk, or at least substantially less risk. You do agree to tie up your ability to lease for a higher offer, but you have dollars in hand, plus royalty if the production is successful.

I gather from the description that this uses horizontal well technology. The likelihood of successful production goes up dramatically versus previous drilling technology - in my layman’s view.

I would not be willing to risk investment at any $/acre without getting in writing the pay off. I would have to know that to trade off the ‘no risk’ lease income versus the higher risk royalty pay off if I chose to invest.

For what it is worth.

4

Our lease offer was $1,000 per acre from EOG, and the cost of the well was $5,371 per acre.

What you should also do is find out what the wells are producing in and around that area. Google “ESER.org”

Hess isn’t Carl’s Wells and Bait shop… Hess knows what they are doing. Of course, make sure it is a horizontal well, but I would be shocked if it wasn’t. The total cost of the well should be at least in the ballpark of around $7 million.

Once again, it all comes down to how many acres you have that you will be responsible for.

Let me be a little clearer about something. Here are your choices:

  1. Take lease
  2. Reject lease and participate
  3. Reject lease, reject participation
  4. Do nothing, ignore everything (same result as #3)

Unless you are rich and/or have an extremely high tolerance for risk, I would avoid #2 (dry hole, you pay your share; if you had 10 acres, that would be $80,000 you owe).

Do nothing, you pay nothing out of your pocket, you collect a royalty from the day it produces (meaning that as soon as your royalty equals $100 or more and the payments are always for the previous month(s)) and when you paid off the 150% penalty, you collect your full share. Your taxes will be a bit more complicated to do, and you hope nobody has cause to sue your well for the next 20 to 30 years.

Take the lease and you are off the hook for everything, except taxes of course.

5

'If you don’t lease, or take the participation option, they will force pool you. That means you will get a JOA in the mail, “Joint Operator Agreement” (you might want an attorney to look at it, a gas and oil attorney, not a divorce attorney).

You will then be on the hook for 150% of your cost for the well (penalty thing), but it is way better in North Dakota than Montana for instance.

I was just reading this over and got confused - Does this mean that if you are force-pooled you become a “joint owner” in the well or wells that are being drilled on your property? I had not heard that before. Thanks for any and all info. And thanks to everyone for participating in this blog. Rick Tatum

6

I agree with Andrew and Rick and their assessment. Taking the lease is by far the safest approach to the problem.

7

'If you don’t lease, or take the participation option, they will force pool you. That means you will get a JOA in the mail, “Joint Operator Agreement” (you might want an attorney to look at it, a gas and oil attorney, not a divorce attorney).

You will then be on the hook for 150% of your cost for the well (penalty thing), but it is way better in North Dakota than Montana for instance.

I was just reading this over and got confused - Does this mean that if you are force-pooled you become a “joint owner” in the well or wells that are being drilled on your property? I had not heard that before. Thanks for any and all info. And thanks to everyone for participating in this blog. Rick Tatum

8

As has already been said on here, it is the most conservative and secure approach to take the offer for the lease. That is a good lease offer and presents no financial risk to you. Participating in the cost of a well can be very expensive as you are responsible for a percentage of any and all expenses incurred with the operation of the well. Plus, if the well turns out to be a dry hole, you are responsible for the costs with no return.

My advice: take the lease offer.

9

Well, until you get to participate as a non-operated working interest owner with such a large company, you won’t be able to learn how risky and expensive that can get. It will likely require you to have a lawyer who is experienced in oil & gas participation. The expenses can get out of hand very quickly for small investors. If you are worth $50 million, you can afford the risk probably. Participating as a non-operator can be full of headaches and frustration, and as you pointed out, you could lose it all.

You are also correct in stating “the payback is much greater,” but then, the costs of a horizontal Bakken well, fracs, etc., can be really huge. You also need to know how big the unit will be and how much of your gross and net mineral acreage interest will be in the unit, to determine your working interest. You will also probably have to get up to speed on AFE’s, maybe an operating agreement and more, as well as your rights under the agreements that will control between you and Hess.

This is not a simple thing either, not as simple as folks would like to think. You can probably also get some idea of the potential of the well by evaluating the current production of offset wells, and if you can find the data, pressure over time and production, you can probably determine the ultimate recovery of wells in your area. This is pretty vital information, since if this is a big well area, the rewards can be “much greater.” I would also think this sort of information can be acquired, maybe not the pressure data, but the total production data can certainly be obtained.

I would personally think Hess would rather pay more money and higher royalty than to be in the practice of taking on a lot of small non-operators who are mineral owners in the units it gets formed (that is not the game they play, allowing private individuals to participate on the ground floor getting the benefit of Hess’s expertise; it’s not their business model at all). Very interesting to hear that Hess is even considering this. It might be a bluff by Hess. At 3/16ths royalty, I would almost think it has to be bluff. But I could certainly be wrong.

Alternatively, Hess may just be considering the state penalty it can recover where it cannot get a mineral owner to agree. I don’t know what the forced pooling statutes or rules in North Dakota are, but I’m sure they exist. Hess has operated in Louisiana off and on for many years, and they face a pretty strict forced pooling set of rules in Louisiana.

North Dakota mineral owners, especially wealthy ones, probably have a real opportunity since ND units seem to be geographic. The key is in knowing what the production of a proposed well will be, and that is something that can be quantified. And also whether they have the right to participate as a non-operator on a heads-up basis with an operator like Hess, which is very, very big and very knowledgeable.

10

In the states I’m familiar with, the State governments do not require a mineral owner to pony up any money where they don’t agree to lease. It is more common that a penalty is assessed. I think in Louisiana an operator only gets to recoup 100% of his costs attributable to the mineral owner’s interest, which is very advantageous for a mineral owner. I read somewhere that made me think in North Dakota the penalty is 150% of actual costs before a mineral owner starts receiving royalty run payments.

Rick Tatum said:

'if you don’t lease, or take the participation option, they will force pool you. That means you will get a JOA in the mail, “Joint Operator Agreement” (you might want an attorney to look at it, a gas and oil attorney, not a divorce attorney)

you will then be on the hook for 150% of your cost for the well. (penalty thing) but it is way better in ND than Montana for instance.’

I was just reading this over and got confused - Does this mean that if you are force-pooled you become a “joint owner” in the well or wells that are being drilled on your property? I had not heard that before. Thanks for any and all info. And thanks to everyone for participating in this blog. Rick Tatum

11

I think bonus rates in the area are much higher than 900/acre now.

12

In ND the carried (force pooled) mineral owner will receive the weighted average royalty of what everyone else in the spacing leased for or 16% whichever the operator elects from the very first barrel!

In the states I’m familiar with, the State governments do not require a mineral owner to pony up any money where they don’t agree to lease. It is more common that a penalty is assessed. I think in Louisiana an operator only gets to recoup 100% of his costs attributable to the mineral owner’s interest, which is very advantageous for a mineral owner. I read somewhere that made me think in ND the penalty is 150% of actual costs before a mineral owner starts receiving royalty run payments.

'if you don’t lease, or take the participation option, they will force pool you. That means you will get a JOA in the mail, “Joint Operator Agreement” (you might want an attorney to look at it, a gas and oil attorney, not a divorce attorney)

you will then be on the hook for 150% of your cost for the well. (penalty thing) but it is way better in ND than Montana for instance.’

I was just reading this over and got confused - Does this mean that if you are force-pooled you become a "joint owner’ in the well or wells that are being drilled on your property? I had not heard that before. Thanks for any and all info. And thanks to everyone for participating in this blog. Rick Tatum

13

Yes, what do they get after that? I can’t imagine a mineral owner wanting that deal. They get that until the penalty is recouped? And what is the penalty? Thanks for your reply.

In ND the carried mineral owner will receive the weighted average royalty of what everyone else in the spacing leased for or 16% whichever the operator elects from the very first barrel !!

In the states I’m familiar with, the State governments do not require a mineral owner to pony up any money where they don’t agree to lease. It is more common that a penalty is assessed. I think in Louisiana an operator only gets to recoup 100% of his costs attributable to the mineral owner’s interest, which is very advantageous for a mineral owner. I read somewhere that made me think in ND the penalty is 150% of actual costs before a mineral owner starts receiving royalty run payments.

'if you don’t lease, or take the participation option, they will force pool you. That means you will get a JOA in the mail, “Joint Operator Agreement” (you might want an attorney to look at it, a gas and oil attorney, not a divorce attorney)

you will then be on the hook for 150% of your cost for the well. (penalty thing) but it is way better in ND than Montana for instance.’

I was just reading this over and got confused - Does this mean that if you are force-pooled you become a "joint owner’ in the well or wells that are being drilled on your property? I had not heard that before. Thanks for any and all info. And thanks to everyone for participating in this blog. Rick Tatum

14

Its sounding like the mineral owner gets the average unit royalty, then when the 150% penalty is recouped, they assume a working interest in the well with the operator probably deducting operating expenses before royalty distributions?

Mark

In ND the carried mineral owner will receive the weighted average royalty of what everyone else in the spacing leased for or 16% whichever the operator elects from the very first barrel !!

In the states I’m familiar with, the State governments do not require a mineral owner to pony up any money where they don’t agree to lease. It is more common that a penalty is assessed. I think in Louisiana an operator only gets to recoup 100% of his costs attributable to the mineral owner’s interest, which is very advantageous for a mineral owner. I read somewhere that made me think in ND the penalty is 150% of actual costs before a mineral owner starts receiving royalty run payments.

'if you don’t lease, or take the participation option, they will force pool you. That means you will get a JOA in the mail, “Joint Operator Agreement” (you might want an attorney to look at it, a gas and oil attorney, not a divorce attorney)

you will then be on the hook for 150% of your cost for the well. (penalty thing) but it is way better in ND than Montana for instance.’

I was just reading this over and got confused - Does this mean that if you are force-pooled you become a "joint owner’ in the well or wells that are being drilled on your property? I had not heard that before. Thanks for any and all info. And thanks to everyone for participating in this blog. Rick Tatum

15

After the drilling cost and penalty are retired the mineral owner gets 100% royalty on the production attributed to their interest in the well, less the cost of production.

16

Mr. Skipper, I have a well that has paid off 1/3 of well cost and penalty in 71 days production. I consider being carried a fairly good deal. I’ll collect my 16% royalty until I get to my 100% royalty and I think it won’t take long to catch up and pass those who leased for 18% or 20%. I also received my royalty check really quick.

17

I believe Mr. Kennedy does a great job explaining how “being carried” works. In North Dakota it can be a fairly good deal for the mineral owner (M.O.). However, it depends upon the specifics of the situation. So carefully consider all options before making a decision.

As an example, in other states there are much more restrictive rules and higher penalties for being force pooled. It also requires more effort by the M.O. to track well production and expenses to ensure they’re ultimately paid the correct amounts versus receiving royalty payments. Are you willing to make the effort? Further, being carried is more, or less, attractive depending upon how productive your wells turn out to be.

Mr. Kennedy’s minerals are in a highly productive area so he is experiencing very rapid recovery on the well cost and penalty. Look to see what production is near your minerals. If there are established wells producing 400 bbls per day then being carried should be fine. Though if there are relatively new wells only producing 100 bbls per day you might be waiting a decade, or more, to see well costs and penalty recovered. So before making a decision, research your area to try to estimate how fast or slow it might be on your future wells. Good Luck.

18

That’s what I was wondering, what the penalty is and it sounds like it’s 100%, plus you get the royalty while the penalty is being recouped. I agree totally, it is an extremely good deal. Not something the ND operators probably like very much.

r w kennedy said:

Mr. Skipper, I have a well that has paid off 1/3 of well cost and penalty in 71 days production. I consider being carried a fairly good deal. I’ll collect my 16% royalty until I get to my 100% royalty and I think it won’t take long to catch up and pass those who leased for 18% or 20%. I also received my royalty check really quick.

19

Of course the operator is entitled to recover his drilling/operating cost (100%). The penalty is 50% of the actual cost of drilling. Also what comes around, goes around. Since you aren’t paying a royalty to anyone but yourself, you are making more money per acre than the operator, who is paying 16.67% to 20% to his lessors.

Mark Skipper said:

That’s what I was wondering, what the penalty is and it sounds like it’s 100%, plus you get the royalty while the penalty is being recouped. I agree totally, it is an extremely good deal. Not something the ND operators probably like very much.

r w kennedy said:

Mr. Skipper, I have a well that has paid off 1/3 of well cost and penalty in 71 days production. I consider being carried a fairly good deal. I’ll collect my 16% royalty until I get to my 100% royalty and I think it won’t take long to catch up and pass those who leased for 18% or 20%. I also received my royalty check really quick.

20

That’s what I’ve been trying to learn, what is the total percentage the operator gets to recoup, 100% or 150%? Looks like 150%. Thanks for straightening me out. Gotta know the basics to evaluate something like this. Makes quantifying decisions in localized areas much simpler. Now, the next biggest unknown I would think is the cost to drill, complete and operate a well, along with what LO&E costs the operator is allowed to charge, along with overhead, etc. Those can be estimated, and I guess I have more work to do now! Thank you.