Negotiating lease terms on a small property

Oil and Gas Leasing Help
#1

Got a lease offer today on 10 acres I own in Northwestern North Dakota (Bakken Shale). There don't appear to be any active wells nearby (the next closest one is 3 sections to the South), and there is no guarantee that they will even drill one. I am being offered a typical 3 year lease with a per acre bonus and 3/16 royalty. Given that my portion of the overall production unit (and thus my share of the royalties - assuming drilling even takes place) will likely be very small, do you think it would be reasonable to ask for a larger bonus up front? I had planned on negotiating the bonus upward a little anyway, since it looks to be a few hundred less than what others have been getting out there lately.

By the way, what is an average production unit size in NW North Dakota? Also, I think I read somewhere that the average well in the Bakken only produces 50-80 barrels a day. Is this true? If this is the case, like I wrote earlier, I really don't think I can bank on my royalties here...

The company making the offer is doing so on the behalf of the drilling company. I have not researched the title in depth, although I would like to think that THEY have (title research and due diligence is one of the services this company advertises and provides to their clients). Either way, I was hoping to put a clause in the contract absolving me of any liability or having to pay back money if there is ever any problem with the title or mineral rights ownership. Are most companies amenable to that?

Thanks everyone for your help...

#2

I will speak to the 50 to 80 barrels per day and say it's common, thats not to say that the well isn't going to produce over 1,000 barrels a day to start until the natural pressure goes away. The wells can produce a considerable amount of oil in the first two years of production. As for leasing, the first offer usually isn't all they are willing to pay. I would negotiate for more bonus to begin with and if it didn't suit you you could negotiate for more bonus and less royalty, say another thousand per acre and 1/6 instead of 3/16. Be creative and look at the deal from all sides to achive what you want.

#3

Stephen,

The company will probably balk at you requesting that type of clause. However, it is done and it not that uncommon when they're dealing with an experienced mineral owner. They should allow it if you are insistant on its inclusion.

Currently average drilling unit size in ND is 1,280 gross acres. Though some are twice that size, and many are just 640 acres. Any way you slice it your 10 net acres will not be a large percentage of the well's ownership. Nor can you "bank on" future royalties (nor should anyone). Depending on your location, you may be right that the bonus payment is more significant to you than the ultimate royalty payments (if any). By all means go ahead and negotiate for a higher bonus amount. As Mr. Kennedy stated, their first offer almost always leaves room for them to go higher.

The rough rule of thumb when leasing minerals is;

IF YOU DOUBT they'll find any oil (a true wildcat well), accept a lower royalty rate for higher bonus amount today. Though, IF IT'S LIKELY they'll produce oil, push for the highest royalty rate possible even if it means slightly lower bonus amount.

So based on that "rule", in N.D. I'd take 20% royalty over an extra couple hundred in bonus. Though NW North Dakota is not all equal. If "NW" ND means Divide or Williams Co. I'd certainly emphasize the royalty. If you're in northern Burke Co. where production has been lower, and results more sketchy, you might then focus more on that bonus. Though I'd discourage you from ever negotiating your royalty rate below 3/16th in exchange for a higher bonus amount.

Remember ultimately there could be more than one well drilled on your property. Eventually there may also be more than one formation producing oil. So if there is production (more likely than not in NW N.D.), today's lease might last for 40, 50, or 60 years. As a result, an extra 2% royalty over those decades on one or multiple wells may be far more significant than an extra $2,000 today ($200 x 10 net acres). Hope this helps. Good Luck.

#4

Thanks to both of you!

Eastern MT: The property is in Northern Burke County, not far from the Divide county border. Like I said, there are no active wells for miles, so I really don’t know if they think there is something there, taking a shot in the dark, or if they just want to lock down the mineral rights “just in case”. All the landman told me was that they had just “noticed that there were a lot of unleased mineral rights in the area”. This company has a producing well 3 sections to the South, but I dont know anything about it.

RW: thanks for the info on well production. Regardless of bonus amount, I really don’t want to take less than 3/16. I would like to try to get a couple hundred more per acre though. I’m going to have a lot more questions for the landman now; things like how large the production area will encompass should they decide to drill, get some more specifics on their plans for the area, etc.

Thanks again for all the advice!

#5

Mr. Hill, a couple of hundred per acre should be doable without giving up royalty. I said negotiate first and if it didn't suit you, then you might have to give something up to get more bonus. I was thinking if you wanted to really front load and get $1,000 more per acre bonus that you might have to give up some royalty to get that, or possibly negotiate longer lease term for more money up front, that's why I said be creative. I have never been in a hurry to lease, the two leases I signed, they were hounding me for over two years. The offers kept getting larger and larger without me doing a thing. I have also negotiated a lease for alot more bonus and a few percent more royalty in a ten day period. I suggest you join the Burke county forum.

#6