I own a few mineral acres in an active area of Reeves County and not surprisingly am being approached by outside parties to lease. I am being told that if I don't lease, the oil company will drill anyway and request a Rule 37 to make me pay their costs to drill. What does that mean? Does it mean that they deduct their drilling costs from their revenues before they pay me for my oil and gas? Or does it mean that I have to come out-of-pocket to pay them for their drilling costs and I get nothing? If oil is found on my few acres, am I better off to have leased or not leased? I am very willing to forego the up-front bonus for the hopes of a strike if I get more by not leasing. Wouldn't I get 100% royalty instead of 25%?
Very generally speaking, I believe you might elect to participate in the well in which case you would pay your fractional share of certain well costs, or you might elect not to participate--no out of pocket expense--and begin to reap 100% of your share instead of a 25% royalty AFTER the well pays out. This* is an example I posted in another thread which has not been corrected by more expert forum members. Perhaps others will disabuse me of any wrong thinking and fill other blanks. Depending on your net minerals and the drilling unit size, participating in a $7 million dollar well could quickly get expensive.
*Let's pretend the drilling unit size is the entire 640 acres. You and your siblings own 40/640 or 1/16th = 6.25% If you sign a lease, your royalty will be 25% and you will get .25 x .0625, or 1.5625% of the hydrocarbons produced. If a horizontal San Andres well is drilled and produces 300,000 barrels of oil, you would receive payments for 4688 barrels of oil. If you choose not to sign the lease, I believe you would receive payments for 6.25% of the oil produced AFTER the well pays out. A horizontal San Andres well might pay out in a year or so, and you might ultimately receive considerably more money, e.g., 6.25% of 100,000 barrels of oil produced is more than 1.5625% of 300,000 barrels of oil.
The "Rule 37" does not apply to having you pay a portion of the costs to develop. It refers to the Railroad Commission rule addressing how close a well can be to a neighbor's property line. The specific details of your minerals are vital to understanding your best path forward. If you own an undivided net mineral interest (e.g. you own an undivided 1/320th of a 640 acre section) in which the operator owns leasehold or mineral rights from some of the other rights owners (you would be considered a co-tenant), they can drill the well and you would be eligible to "back-in" for your proportionate share after the operator has recouped 100% of their costs to drill and produce the well. You could become a party to the joint operating agreement and then pay your part of the bills as they drill; this would be the only way you would be entitled to 100% of the revenue from your property--pay 100% of the costs. If you own a divided interest (e.g. you own 100% of the minerals under a 2 acre parcel) you could be omitted from the development and the operator would file for a Rule 37 exception and request permission from the railroad commission to drill (not on, under, or across your land) close to your property. If you are not interested in the costs (and tax benefits) of being a working interest partner, it is almost always a better idea in Texas to lease the minerals with a strong lease form, for top dollar bonus and a premium royalty rate. I am happy to help you wade through these waters if you are interested. Friend me and I will share my contact info. Best of luck!
Great info! Assuming someone with an undivided interest does not lease to the operator, is the onus on the unleased mineral owner to assert his or her rights, or is the operator required to make contact, provide forms, etc.? Hiring an attorney with knowledge of how to force an operator's hand might be no small challenge or expense.
That is exactly "the rub", as they say. This usually depends on the operator. Most don't like fronting the risk costs to explore without the reward of the production (the ~75% they would make from your land in the partnership). My understanding is that the owner could request payout statements and track costs associated with the development, but don't know if they are obliged to provide this info without demand letters. I do know that payout isn't on a well by well basis; you wouldn't get paid any revenue until the entire RRC lease/unit costs (all wells, facilities, etc) are paid back. This is what makes it generally a better idea to lease at favorable terms--suing an operator to be able to audit their files and determining if payout has occurred may not be worth the cost.
Your input is much appreciated, Jimmy Wright. I have learned new things and hope you continue posting in this forum.
Dear Ms. Parker,
Some valuable information was missing from your post.
Do you own a percentage of minerals in a larger tract?
What percentage in the larger tract do you own?
Your answers to your questions become fact specific very quckly, but it sounds like the landman was in over his pay grade when he told you what your options were. Either that, of he was deliberately trying to mislead you.
Awesome and sound advice. Especially a strong leas form.
Gary L Hutchinson
One thing about participating in the well–by agreeing to be a non operating working interest partner, you are agreeing to pay all costs they bill you for, until the operator plugs the well. You’ll be in for drilling g&a and plugging costs. If you stay unleased, you can collect your ownership percentage after the well pays out, but those revenues will be net of direct and reasonable costs of producing, so as the well ages, your not stuck with a loss. As unleased, you cannot be made to come out of pocket for anything greater than your revenue (i.e., may not get any revenue if costs are high). I would negotiate a lease as best you can, unless you want to fight every time an operator changes about your status. I’ve inherited a few and still waiting after one year to get Encana to straighten this out. I’m not a land man, just freshly dealing with this problem. So far, no one has denied payment under 37, but apparently they can. There are some good articles on the web. Google unleased mineral interests in Texas
Jimmy, overall, very sound advice. However, I'm not 100% sure that this is part is correct:
"I do know that payout isn't on a well by well basis; you wouldn't get paid any revenue until the entire RRC lease/unit costs (all wells, facilities, etc) are paid back."
We've had to carry mineral owners in the past and we had to track payouts on a well-by-well basis. Major pain in the a$$. This was on the advice of a local attorney (that you know, you know me, too. Hi, Jimmy!). But, if you have something else that states that it's on a lease basis, I'd love to see it.
From the operator's standpoint, carrying a mineral owner is more of a risk, this is true. However, depending on where this tract is in Reeves County, it could actually benefit the operator. Let's say the well is in a good spot to make oil, the only questions are how much and how fast does it come out? (Think: Wolfberry wells) The operator wants to get paid back as soon as possible. Collecting that mineral owner's portion of the revenue during the initial payout period actually helps them recoup their investment faster and improves their ROR. Time value of money...
Remember this, Janet - If drilling doesn't go well, the hole collapses, a rig hand drops a sledgehammer down the hole and it takes a month to fish it out, a downhole tool gets stuck, whatever; that's more time before you see a single cent. That puts the risk back on you for not leasing or signing an Operating Agreement. Just a thought.
Very good points! I guess that's why there are so many lawyers out there--if they all agreed, they wouldn't have any work! :-)
Finally, someone who is willing to present the facts about "Rule 37". For the last two years I have been amused by the so-called WV laws that has been sited by a certain "Resources Corporation" which has been trying to force me to sign a contract covering the handful of WV dirt I did not know I had inherited and have been facing legal hassles because of for the last two years.
In my case the corporation's bad safety record and the way they treat the land owners in Colorado had me questioning signing their WV lease. They have finally cornered me with their quoted laws that simply seem to have, on the surface, no connection to the legal problem to which the corporation responds.
Biggest problem is that lawyers in the sates neighboring WV refuse to get involved with WV laws covering gas/oil. Why? They would have to go back to law school to learn "the law" as it applies to WV. RCR 114/2017
Please forgive me if I sound dumb but I am trying to figure all this leasing mineral rights, etc. out. I have inherited mineral rights in Oklahoma & west Texas.
My question is: Is it better NOT to sign a lease than sign one? In other words, if I sign a lease, I am responsible for the cost of drilling but if I do not lease, I only receive the royalties. If I worded that right, then why would anyone lease their mineral rights at all & just wait for the pay-off if a producing well comes in?
I'd appreciate any explanations as I have a lease offer on my desk now.
A favorable lease would seem to reduce your risk [dry hole;headaches/ulcers(?)] and offer immediate reward [per acre bonus payment] over the participation route.
I’m with AJ, having inherited both one working interest in a well in East Texas and other mineral interests I have leased, I’ll go with the lease. And I even like to gamble! But either way you should know what you’ve got, what it could be worth, and have a good lease agreement, none of which is easy to figure out. Anybody want to buy a working lease in Rusk County, Texas? That offer is half tongue-in-cheek. Just my two cent’s worth… Linton
Actually, that's pretty much backwards. If you sign a lease, you are "lending" your mineral interest to an operator, who assumes all of the risk and expense of drilling the well, in exchange for a negotiated royalty share (as set out in the lease), which is to be paid to you free of drilling, completion and development costs. This is usually the course of action that entails the least financial risk for the average mineral owner.
If you choose not to sign a lease, however, and the operator drills a well nearby close enough where it might be advantageous to pool your mineral interest, they may come back to you with another offer to lease, or they may ask you if you want to participate in drilling and completion costs of the well. Participating in a well would be a relatively high risk course of action for the average mineral owner, and one would only want to do it if they were certain they knew exactly what they were doing.
In your case, you would probably be better off leasing, provided you could come to a satisfactory agreement with the operator on lease provisions. An attorney can help with that.
If you want to participate as a working interest owner, however, you should prepare yourself to write a lot of checks for your share of drilling and completion expenses. There will be operating expenses once the well is placed on line, as well. Most mineral owners are not in a position to do this, although some are.
re: Your stating, "...free of drilling, completion, and development costs..." caught my attention. In the lease which I was presented in regards to property in Doddridge County, WV, royalty is paid AFTER the cost of development is deducted. Which indicates that the lessor is in fact contributing to the cost of developing the well.
I find this amusing. In my case I was approached by the corporation wanting the mineral rights to my holdings. I did NOT solicit that party and have not indicated I WAS WILLING to sell or lease the mineral rights to my holdings to anyone.
The party stated in a cover letter that they were interested in the gas thought to be UNDERNEATH my property. But the terms and conditions of the contract indicate the cost of constructing the well, transportation of the obtained gas, and storage of the gas until sold would be deducted from my royalties.
Did anyone notice they stated interest in the gas UNDER the property but expect me to help cover the cost of obtaining said gas and bringing it to the surface?
What is that saying, "If YOU furnish the ham WE could have ham and eggs IF SOMEONE FURNISHES THE EGGS."
The gas has been under the property for a long time and is harming no one. Let it stay in the ground if those are the terms of the contract. I am not going to pay the cost of bringing the gas to the surface. And yes, I am being taken to court because I do not agree with the terms and conditions of the contract.
Roger, Is the company sueing you because you won’t lease them your mineral rights?
Yep! We are "somewhere" in the court process, don't ask me where as I am being treated like an outsider, not part of the case.
Add to what I stated, when the company began paying people to sign the lease no one knew that I had also inherited part of the land. I was not contacted for another nine months. I have no idea as to which of the 200+ co-owners had signed before me and what discussions, if any, they had withe the lessee.
If the co-signers were represented as ALL the property owners there is a problem. Once I received the contract I found five areas within the contract that were not acceptable on the first read.
So why did the others sign? I have no idea as I know only about ten of the co-owners and for some reason not one of the other co-owners has contacted me in the almost two years that have passed.
What is really getting on my nerves is that I am being notified of scheduled hearings through the lessee's lawyers, NOT THE COURT.
Pardon my ignorance, please. Is it standard for a lease agreement to include not just the annual lease payment but also some royalty percent? Rather than just the lease cost?