I have interests in a well that was drilled and oil was found, but was not a profitable producer. However, it was leased again by a company till June of 2013. A company has since purchased the lease from that company and was planning to drill horizontally. However, they called and will not be able to start by the lease deadline. Therefore, they are offering a new lease.
I own mineral rights to 20 acres. I received a letter with a lease offer of $400.00 per net mineral acre with 3/16 royalty in a 3 year primary lease for 20 acres, and a $400.00 per net mineral acre with 3/16 royalty 2 year extension option.
1st. To deliver in-kind to Lessor, at the well, or to the credit of lessor into the pipeline or storage tank to which the well may be connected, 1/4 part of all oil and other liquid hydrocarbons produced, recovered or separated and saved from the leased premises.
In lieu thereof, lessee shall have the option, at any time, to sell lessor's oil, in which case lessor's royalty shall be based on lessee's net proceeds at the lease or to purchase lessor's oil at the lease.
In any event lessor's interest shall be free of all costs of production, but shall bear its proportionate part of production and similar taxes, and shall share proportionately with lessee in any costs to market, transport, or condition the oil.
Is this normal that the lessor shares in any costs to market, transport, or condition the oil?
G. Win, I won't comment on whether it is reasonable or not because I try to cut back on my swearing. I would say you do not want the lessee to purchase the oil at the well. You want your royalty based on the third party arms length transaction so you can be sure that you receive the same price for your oil that the lessee does for his.
I also notice that the wording does not mention gas, only other liquid hydrocarbons. This could very well mean that the lessee does not have to pay any royalty for gas, which would be a bad thing for you if 75% or more of the proceeds from the well is from dry gas (methane).
Let me explain it another way. Suppose oil and natural gas liquids make up 25% of the proceeds from the well. Dry gas which is not a liquid makes up the other 75% of the proceeds. Your royalty is 25% of 25% or 6.25% of the proceeds attributable to your acres, less post production costs for conditioning and marketing. I can see where your effective royalty from leasing could be 1% or less, not of the well, but from what is attributable to your mineral acres. Which would not be a good deal in my opinion.
I did not have a chance to read the entire lease which must be taken as a whole but from what you posted, it does not look promising. I think you need to become very wary at this point and if you have to spend every bit of the bonus money to have a lawyer hammer out a deal that actually protects you (it shouldn't cost that much) you would be far better off.
G. Win, I would consider one of the pooling options if you don't want to spend your bonus on a lawyer. Maybe I'm just suspicious but they rarely offer a bonus with 25% royalty, rarely offer 25% royalty at all, to me that means there is a catch somewhere. The catch could be exactly as I outlined above or it could differ slightly or there could be multiple gotchas. I think I can safely say there is a gotcha somewhere because if it sounds too good to be true (400 bonus and 25% royalty) it probably is. I wish you the very best of luck.
[edit] I could have made it sound even worse, there are alot of wells where 90% of the proceeds come from dry gas. I recently chatted with a man from Pa. whose lease did not include gas. From 2 wells on 117 net acres his royalty checks were $200 a month because his leases didn't include gas and his wells are oil poor, but he will be held long term by that lease and those wells that are probably profitable from their gas production in which the lessor does not share. So profitable that he was offered $177,000 to sell the whole interest in one well and half interest in the other. That does not come from a $200 per month royalty.
Thank you BIGGGGG!!!! They changed to 3/16 and 400.00/acre bonus. We had them add that we would not pay any costs of production and transport etc. The only part now is they want to pay from the (net proceeds at the lease). What you told me this is not good??
We have 640 acres of land in Reeves county, Texas of which there are wells producing on it. We have been approached by a landman asking for a "Temporary pipeline right of way grant" they have offered us $10.00 per rod. We are wondering what the going rate might be for that area. Also the contract they sent over does not address any of the other concerns. i.e. damage to surface area, environment issues, reclamation, payments, restoration, etc. Please if possible give us some advise. Thanks
You've already been given some great information. The original lease the oil company presented to you should give you an idea as to how they plan to handle their mineral owners or for lack of a better way of saying it, how they plan to take advantage of you. Of course a big part of this depends on where you are located; but, if they have, after the fact, agreed not to charge you, the mineral owner, for transportation, production or other associated costs, then why would the word "net" even be part of the lease word game and no, the oil needs to be sold outside of the company that is producing the oil. Otherwise, they can and will cut themselves a great deal on every cubic foot of gas or drop of oil that comes out of this well. In closing, I believe the eyes of an attorney is in order and for me personally, there is no reason these guys need a 2 year option at all. Three years is enough time to do what ever they need to do. If they are producing oil or gas as was mentioned previously, they will be able to hold the lease by production. No need for the additional option years. Plus, there is a lot of other great protection information that needs to be in a lease that won't be provided to you in any oil company lease without your input.
G. Win said:
Thank you BIGGGGG!!!! They changed to 3/16 and 400.00/acre bonus. We had them add that we would not pay any costs of production and transport etc. The only part now is they want to pay from the (net proceeds at the lease). What you told me this is not good??
In addition to Mr Liles' and Mr. Kennedy's remarks, and under the circumstances you described, I find the payment on net proceeds to be objectionable. Add, " in an arms length transaction but no less than the field market prie" or words to that effect. Salses to an affiliate are ok as long as they are at market price.
Much of all that provision takes undue and objectionable advantage of the lessor (to say the least) and, I believe, is not, typical. If I had more time I would elaborate. Consult Buddy Cotten, an experienced member of this forum, or a lawyer.
I make no comment as to what is "reasonable" or what a lessor should accept. I will say that it is a long-standing tradition in the industry for the lessor and lessee to share in their proportions of post-production expenses from selling the product. You can negotiate for a different arrangement, but the sharing of expenses has been the norm until only the last few years when the shale boom began.
Sorry to disagree with your statement. Sounds suspiciously like an oil company statement; however, I can't speak for everyone; but, I have leases dated back as far as 1980 that veto that statement. Definitely wasn't EF back then.
There are lots of good reasons for the Lessor to get their royalty free of all expenses which include transportation and many other expenses that are very hard if not impossible for the mineral owner to control or for that matter understand. In addition, we have ample proof that many of these guys have sharp pencils and accounting practices that would make the Mafia proud.
What ever the case, we are only asking for an even playing field; but, we still aren't smart enough to outsmart some of these accountants; however, we've learned a lot in the last 30-40 years. One thing we've learned is to make sure we get help from and oil and gas attorney before we sign anything.
Andrew said:
I make no comment as to what is "reasonable" or what a lessor should accept. I will say that it is a long-standing tradition in the industry for the lessor and lessee to share in their proportions of post-production expenses from selling the product. You can negotiate for a different arrangement, but the sharing of expenses has been the norm until only the last few years when the shale boom began.
The statement by Bigfoot is a very good summary of reality. I was a professional for a large oil company for 15 years and have been closely familiar with the oil and gas business for decades. Some operators are fair. Too many are not,
Bigfoot, I think you were reading something into my comment that wasn't there. I made no allusion that there is no good reason for a lessor to ask for a cost-free royalty, or that it hasn't become a common clause in certain areas. In fact, I routinely ask for this clause in my own leases. I was merely addressing the question "is it normal" for these costs to be shared. My opinion is that it is the default arrangement in a typical lease, and a lessor will have to ask for different terms.
The arrangement for sharing of post-production costs comes from the fact that, once brought to the surface and reduced to possession, minerals are owned jointly by the lessor(s) and the working interest owners. If the well operator sells the royalty owner's property for him and incurs costs to do so, the company would be reimbursed for those costs unless the parties explicitly agree ahead of time that the company will pay the royalty owner's share of post-production costs.
So again, I'll reiterate that I was not making a value judgment about what a "fair" arrangement is. Only pointing out that most standard lease forms will provide for sharing of expenses by the parties and that the lessor should add specific language to the contrary if he wants to change that result.
I think people jump to the conclusion that oil and gas, if it exists in a certain spot that it MUST be produced and I don't think that is necessarily so. I think it is rare that a mineral rights owner contacts a producer and tries successfully, to convince them to explore for hydrocarbons on their property. It's usually the other way around, the lessee/producer approaches the mineral owner. The mineral owner, if he should agree to the proposal by the lessee/producer usually gives up 75% to 85% of anything produced and saved FROM OIL HE ALREADY OWNED.
The mineral owner is potentially bringing alot more to the deal than the operator which is easy to see because the operator is not going to put in a well that he thinks is going to simply return his money or show a 20% profit. We are not talking about 100 years ago when the producer might have been drilling almost blind. People talk about the risk to the operator, well the operator VOLUNTEERED to take that risk, no mineral owner put a gun to the producers head. The operator, if he is worth his working interest in the well should be taking care of absolutely everything including post production costs, all paperwork and withholding taxes for the mineral owners convenience in exchange for 75% to 85% of the mineral owners property.
If the operator wants the mineral owner to join in in the drilling ,operating, post production, marketing, then the lessee/producers working interest should be GREATLY reduced. Think about that term WORKING INTEREST. When the lessee/producer wants the mineral owner to engage and participate in anything other than receiving his royalty check, they are expecting the royalty owner to work, work being defined as spending money, which is what a working interest does. A ROYALTY owner should not have his royalty reduced in any way besides taxes or he is being treated a working interest and he is certainly not being paid as a working interest. The mineral owner should bargain for a percentage of gross proceeds with nothing deducted except for taxes. For the massive imbalance in the size of the paychecks, the mineral owner should expect a turn key operation and should not be expected to spend money which is the definition of working interests job. If the working interest can't handle post production costs or anything else for that matter, they should have thought of that before drilling a well. If 75% to 85% of the gross proceeds is not enough, don't drill the well, don't take the risk, what is there does not have to be produced, nobody has a gun to the lessee/producers head.
Thank you, Go Fast. I am amazed that anyone understood me since I wrote the post before my morning coffee. I like the subject though and maybe I can start a thread and boil it down a little better.
Right you are Bigfoot, I have been granting, writing, and taking leases since 1980 and confirm that the cost sharing aspect is a new wrinkle dreamt up by land agent attorneys. So be careful to use an oil and gas attorney that has written not just word smithed a newer lease.
Bigfoot said:
Andrew:
Sorry to disagree with your statement. Sounds suspiciously like an oil company statement; however, I can't speak for everyone; but, I have leases dated back as far as 1980 that veto that statement. Definitely wasn't EF back then.
There are lots of good reasons for the Lessor to get their royalty free of all expenses which include transportation and many other expenses that are very hard if not impossible for the mineral owner to control or for that matter understand. In addition, we have ample proof that many of these guys have sharp pencils and accounting practices that would make the Mafia proud.
What ever the case, we are only asking for an even playing field; but, we still aren't smart enough to outsmart some of these accountants; however, we've learned a lot in the last 30-40 years. One thing we've learned is to make sure we get help from and oil and gas attorney before we sign anything.
Andrew said:
I make no comment as to what is "reasonable" or what a lessor should accept. I will say that it is a long-standing tradition in the industry for the lessor and lessee to share in their proportions of post-production expenses from selling the product. You can negotiate for a different arrangement, but the sharing of expenses has been the norm until only the last few years when the shale boom began.
I'm a little late answering this one; but, I've been on the road all day. I believe your latest answer is a fair answer and gets to the heart of the overall "additional costs" issue. I just wanted everyone to see that cost free royalty is not new and that it should be the norm rather than the opposite. I agree that standard oil leases, "Producers 88" or for that matter any other oil company lease should either be handed back to the Lessee or at a minimum thoroughly revised through a very knowledgeable individual or a "good" oil and gas attorney before even thinking about signing no matter how much expert salesmanship is applied.
RWK did a much better job of covering this issue than I ever could! Andrew said:
Bigfoot, I think you were reading something into my comment that wasn't there. I made no allusion that there is no good reason for a lessor to ask for a cost-free royalty, or that it hasn't become a common clause in certain areas. In fact, I routinely ask for this clause in my own leases. I was merely addressing the question "is it normal" for these costs to be shared. My opinion is that it is the default arrangement in a typical lease, and a lessor will have to ask for different terms.
The arrangement for sharing of post-production costs comes from the fact that, once brought to the surface and reduced to possession, minerals are owned jointly by the lessor(s) and the working interest owners. If the well operator sells the royalty owner's property for him and incurs costs to do so, the company would be reimbursed for those costs unless the parties explicitly agree ahead of time that the company will pay the royalty owner's share of post-production costs.
So again, I'll reiterate that I was not making a value judgment about what a "fair" arrangement is. Only pointing out that most standard lease forms will provide for sharing of expenses by the parties and that the lessor should add specific language to the contrary if he wants to change that result.