I have been getting mineral leasing offers over the past several months in Adams County, CO. The first offers were companies that were NOT doing the actual drilling apparently trying to get in before the main oil company. One of my neighbors signed with one of these companies and got a $2000/acre bonus and 20% royalty. I have now been contacted by the actual company doing the drilling and have been offered the exact same amounts. Given that these offers are the same, I am not clear how the driller deals with the middle man in my neighbor's case? It would seem that the driller would have to pay this middle man more than they paid my neighbor to make a profit. In that case, it seems that the driller could offer us more also since there is no middle man.
Brook, that is the case. The middleman may have more leverage if he has enough money to participate in the wells. In ND where my minerals are, one oil company will assign a small interest they have in another operators spacing for a "Customary" 23% royalty and cash. Mineral owners generally lease between 16.67% and 20% royalty and the oil company making the assignment keeps the difference in royalty interest.
Operators aren't generally looking for cheaper wells with partners. Every interest/acre that the operator doesn't lease or own is an acre they make virtually nothing off of. Someone in the business can do a much better job of holding the operators feet to the fire and extracting the greatest bonus and royalty.
Thanks for the reply. I am not completely understanding your comment about the operator making nothing off of leases held by the middleman. When you use the 23% for the middleman royalty, and the middleman is paying the mineral owner 20%, that means that the middleman is making 3%. However, the operator would still be making money wouldn't they?
So, in the end what is the difference if I sign with the middleman or the actual operator if they both pay the same? This is simply a theoretical question as I would most likely sign with the operator to begin with so I can deal with them directly.
If I know that the middleman gets 23%, could I use that to get a greater royalty directly from the operator?
I think the confusion stems because you think the "middleman" must flip the lease to the operator? What do you think happens if they don't?
If the middleman doesn't flip your lease to the operator and participates, the operator makes say, $1 per barrel for administration, the "middleman" makes $40 per barrel less your royalty of $8 per barrel. This is how the Middleman could extract more from the operator than you could as mineral owner, because he may have the money to participate in the well for the acres he leased from you.
The "middleman" might like to get his cash back plus a tidy profit, plus a royalty interest that will pay him something for years, but if the operator will not meet his price? He has the choice of participating in the well and the operator makes almost nothing
There are different types of leverage. Many people with smaller interests can band together. I realize that for you the horse may have already bolted on that one because the organizing needs to happen before the lease offers start coming in because many people will just say OK, execute them and send them back.
If you had the money and a good understanding of what you stood to lose or make? You could say you want to participate for part or all and if the operator thought you were serious might have to step up their offer, because if you participated, the operator doesn't make 80%. I don't think this one fits you.
At the end of the day you might tell the operator that your neighbor got 20% and you want 21% just because and for bragging rights. Or you could tell the operator that you are going to lease to the middleman if the offers are the same, after all, what difference does it make to you? It might make the landmen for the operator steam up a little bit, but that is their problem.
The short answer is that the middleman has leverage that you probably don't have? Or may have no intention of flipping the lease to the operator in the first place.
The "customary" 23% I used is from North Dakota, in your area it could be more like 25%
So how would the middleman participate in the well? The operator is drilling a horizontal well from a single location. It is not like the middleman could drill his own well. BTW, the size of the lots in this development are about 0.9 acre.
Here is the other strange thing. The neighbor who signed with the middleman went through the same oil and gas attorney that the operator said they were using. This attorney intentionally led my neighbor to the middleman instead of the operator.
Dear Mr. Besser,
Are you sure that they are actually a middleman? A middleman implies that the leasing company is acting for their own account with the intention of selling the lease at a profit to another. Perhaps the profit is not just in the bonus. Perhaps the profit is a small overriding royalty. Perhaps they are selling at no profit for the initial well only and will participate fully on additional wells in the same section. There is a lot that can go on.
Perhaps they (the middleman) just want to participate in the well. They can do that.
Perhaps they (the middleman) have a contractual arrangement with the operator to acquire leases.
Maybe I need to understand your definition of a middleman. That would help me understand your question a bit better.
Brook, I recently participated in a well for about that much acreage. The operator sent me an AFE that is authorization for expenditure, which I read, elected to be covered by the operators insurance [in this case], elected to receive reports, and sent them a check for roughly $5,600. Mine is an infill well [8th to be drilled in that spacing] in an extremely good area with a competent operator and I expect to participate in future wells or I wouldn't have bothered with a single net acre.
If you have about 0.9 acre you aren't going to make a killing in any case and I wouldn't spend a great deal of my life on it. If the terms/clauses of the lease were reasonable, I would be amenable to leasing.
Perhaps middleman is not the correct term. I have been contacted by 3 different companies trying to lease or buy my mineral rights. I found out who was actually drilling the well and had contacted them. They told me that the well is about a year away and that they would have somebody contacting me who represents their company. Therefore, what I am calling the middlemen are companies that are not performing the actual drilling. My neighbor calls them "skimmers" as he believes that they are trying to skim a portion of the profits.
As I said in my previous message, a neighbor signed with one of these middleman companies and got the same deal that the actual operator is offering. In addition, both the middleman and the operator seem to be using the same oil and gas attorney. This attorney previously steered my neighbor to sign with the middleman rather than the actual operator, which makes no sense to me. The only explanation I can think of is that the operator is going through a contractor to gain the oil lease and they don't really care if it is the "middleman" or the company that they hired to get the lease signed.
I suppose in the end that all of this is not going to make a great deal of difference, I am just trying to understand what is going on.