New lease

Our lease is expiring in sept our old lease was 200/ acre with sundance oil. We have an offer of 600 from a company leasing for continental and 18.75% royality. We own about 80 acres in divide 162/96/13. Does seem fair or should we negotiate for more?

cam:

Looking at the GIS map, Continental has two active wells next to your area, both named Miller. I don't subscribe to the NDIC publication which details the current production of wells but I would research this information first before making a decision as to the bonus amount being offered. Just guessing, I would say that your current bonus offer is low and I would not settle for less than 20% royalty and a maximum of 3 year lease. Mr. RW Kennedy has access to this production information and he may be able to advise you on that matter. Don't get in a hurry to sign as you should be able to negotiate a good lease.

Cam, Your area looks like it will be a solid area if not spectacular. The nearest well to you was drilled in 2005 and wasn't great but that was the stone age for Bakken completion techniques. The fact that that well was steadily producing gas after initial decline tells me that the oil was probably having a hard time getting into the wellbore. The well was so outdated they even put two short legs on it which would seem to be a good technique but has been abandoned in modern practice. The gas is significant because gas makes the oil move, it is the fizz in the soda, that is why professionals are so concerned with GOR gas oil ratio, not enough gas and the oil just lays there and has to be pumped. That well from 2005 next to you at todays gas prices has produced $840,000 or more worth of gas and sadly all of it was flared off. The well has produced 35,918 barrels oil to date but I would expect with modern drilling and completion techniques your well will do that much in the first year. Sometimes it's good not to be first.

When it comes to bonus and royalty, the bonus is a bribe. The bonus is the bribe to make you forget that you are giving up 80% or more of the value of your oil, as such, it should really be substantial, shouldn't it? In most cases it is not, usually it's less than 1% of the value of the oil and almost always less than 3% of what you are giving up. As such, the one time bonus payment, for a single well, future wells will not come with a bonus so royalty is paramount if there is production. Everyone negotiates differently. I personally would be telling them that under no circumstances would I even consider a lease at less than 20% royalty with no deductions for post production costs other than taxes. Post production costs can take a large bite out of your royalty, making 20% royalty with post production costs other than taxes equal to 17.5% royalty. 18.75% after post production costs and taxes is about 15% of what your oil actually sells for. Even $5 per acre extra per month in royalty averaged over 300 months is $1500 more per acre. So negotiate for the royalty, I would start at $1,000 bonus at least for negotiating but never lose sight of the royalty. When you hear professionals say that "the money is in the ground" They mean it. The bonus is the one time payment, if your spacing eventually has 4 or more wells on it, the bonus is going to look pretty paltry in comparison. The only other consideration is if the bonus money is what I call a considerable sum, which is no single dollar value because it's all relative. If you can negotiate a bonus amount that will set you up for life on easy street, I'm nobody to stand in the way of that. I love reading stories about instant millionaires from early in the Bakken play. Sadly, many of them looking back wish they had made a different deal, less up front and more royalty. If the bonus will not put you on easy street, negotiate it up as high as you can but make the royalty your main objective would be my suggestion. I hope this helps.

Cam.

I love Mr. Kennedy's conclusion for you below. I've been preaching this concept for years. See my many posts

"Sadly, many of them looking back wish they had made a different deal, less up front and more royalty. If the bonus will not put you on easy street, negotiate it up as high as you can but make the royalty your main objective would be my suggestion. I hope this helps."

But now you are in a position to really protect your upside and enjoy a fine payday now. Old business leasing practices are no longer applicable in the Bakken Play in my practice. Smart guys like Kennedy are adapting to the NEW oil business where the mineral owner can protect his known assets and enjoy considerably more money up front due to lower drilling and completion risks. By using an old lease doctrine, you are transferring low risk mineral owner profits to the operators for a small amount of money now.

IS it better to negotiate directly with the oil companies or ok to work with the land companies out there?

cam:

I have always leased with a land company and never with the actual oil company. I have been leasing since 2004 on leases located in Montana and North Dakota. In each instance, an oil company had hired a land company to conduct their leasing operations. At times, the land company representative would have to contact the oil company when negotiating bonuses and terms of the leases. I have always insisted on the land company rep divulge the name of the oil company. By doing this, I could do some research on that particular company even though, the lease could easily be flipped during the lease term. The main goal, whether dealing with an oil company direct or via a land company, is to get the best lease terms. This takes time on your part to play the game to your advantage.

cam elmer said:

IS it better to negotiate directly with the oil companies or ok to work with the land companies out there?

Cam, I have found that it is better to negotiate with an operator directly, especially with a smaller interest. The landman may say no to an amount that his employer might say yes to just to have done with it. Landmen do not work for free. If they pay you another $2,000 or they pay the landman another $2,000 for negotiating with you, and possibly not securing your lease at the end of it, did the operator really win anything? I had a potential lessee that tried to lease me for more than 2 years and probably spent 100 hours trying to negotiate with me. Take your time and let your desires be known. If the landman says what you think is reasonable is impossible, I'd quit talking to him and hopefully the next landman to call will have more imagination. The landmans employer tells the landman how much he can offer, which is not the same as telling the landman how much they are willing to pay. When you get the letter saying we would like to pay you xxxx dollars, they are usually [ some would rather pay you nothing ] not telling a lie, they really would LIKE to pay you that much for a lease. What you are looking for is the terms that they would grudgingly accept and not the terms they would LIKE.

cam elmer said:

IS it better to negotiate directly with the oil companies or ok to work with the land companies out there?