Oil Lease options between bonus and royalty


#1

I’ve received a proposal from Echo to lease mineral interests in Carter Co., OK, Sections 27-01S-03W & 22 01S-03W. They have asked me to make a selection from several options and I don’t understand what the options mean.
Option 1 - Participate in the drilling of the proposed test well by paying your proportionate share of the estimated completed for production costs for the subject well.
Option 2 - Lease or assign your interest to Echo accepting a bonus consideration of $3000 per net acre and 1/8th royalty, delivering an 87.50% net revenue interest.
Option 3 - Lease or assign you interest to Echo accepting a bonus consideration of $2750 per net acre, delivering an 85% net revenue interest.
Options 4-6 are similar but decrease in the bonus consideration and percentage of net revenue interest.
I don’t understand the choices - HELP!


#2

Unless you have a bunch of money and can risk losing it, Option 1 is not for you.

The other options are simply a trade-off between upfront money (bonus) and your royalty share in the well:

Option 2 gives you the most up-front ($3,000/acre) but the least royalty at 12.5%.
Option 3 is only $2750/acre but gives you a 15% royalty interest in the well.
Sounds like Options 4-6 are similar trade-offs.

The only way to figure which Option will work out the best for you is to have more information. How many acres do you have and what is the well spacing in the area? You also need to have an idea about how much the well will produce and what the price of oil and gas will be over the well life. But look at it this way: Option 2 will give you an extra 2.5% of the well’s production for a difference of $250/acre.

It’s the old bird-in-the-hand vs two-in-the-bush scenario. If you don’t need the money right now, then I would suggest taking the Option that gives you the highest royalty. If you don’t want to take the chance that the well will be any good, then go for the higher bonus.


#3

Just because they have given you options doesn’t mean you have to just ‘accept’ one and move on. There is always room for negotiation.

Courtney
Landman


#4

I actually have no idea of the size of the area for any of the sections we have. I live in New York State and I inherited them from someone who lived in California. I get very, very small royalty checks every once in a while and occasionally I’ll get a lease offer, but nothing has come of them that I know of. Right now Echo is force pooling on two other sections we have and we just received the above offer on two other sections. I would be surprised if we had more than an 1/8 of an acre in any of the sections.

Thanks for the advise!