It’s the same old same old. The landman says the client really wants the 2-year option to extend. I reply with my reasons for not doing the option. The landman tells me all the other owners from whom they have leased have leased for 3+2 years, and on DrillingInfo I do see leases taken in my area do have the 2-year option. I don’t know why any owner would agree to it, even when the offered price for the option is 120% or even 150% or more of the original bonus. Is there something I am missing here? (My minerals are in NM, so I guess one related question would be whether they can force-pool me because I was willing to lease for only 3 or 5 years, but I refused to lease for 3 yrs plus a 2 year option.)
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@out_of_state, my own experience with lease extensions has been good.
One set of wells took almost 10 years to start, so we collected bonus 4 times.
Life is good when minerals produce income without being depleted.
I suppose the thinking is a re-nogotiated lease will be better, but that seems a
50 - 50 chance… the other side is sharpening their pencils too. The extensions
seem like a win-win to me, but I know it is not conventional thinking.
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Lease extension options are a win for lessees because they can renew in a hot area at a below-market bonus rate or can walk away if they want to abandon the area or bonus rates are down. Landman works for operator and verbal claims are not always accurate. Even if true, you should not be bound by lease terms signed by less knowledgeable mineral owners. However, forced pooling in New Mexico will be enforced against unleased mineral owners, whether or not they have tried to negotiate better or different lease terms. Leasing power often depends on net mineral acres at stake. Perhaps ask for double the bonus rate per acre for option extension. Or see who else is leasing in the area. Or wait until area activity has increased.
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Tell them if they want to lease it for 5 years to pay you for it now!
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With forced pooling in NM, operator can refuse and drill. Mineral owner will get 1/8 royalty and remainder goes to payout of all wells drilled in unit plus state mandated penalty. Different from Texas which has well by well payout and no penalty.
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Wait til the pooling
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it is my understanding that in NM, pooling order is not accompanied by any required leasing option. Unleased mineral owners are left unleased unless operator or another company offers a lease. It is not the same as OK pooling. Hopefully someone with specific knowledge and experience in NM can jump in here.
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Yes, I just meant wait for the pooling in the sense that the “market” for the leasehold will be mature enough that there should be some non-op guys out there wanting in the well/s that will offer substantially better terms than the operator
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There is nothing standard about a 3-year lease, with a 2-yr option.
Just the mere word “option” tells you it is not standard. I have 30 years as a landman to stand behind that statement. Now, taking an option may be the only way to get to the finish line, I will grant you that.
Currently in negotiations for a lease for a mineral owner in Leon County, where we have agreed to all terms except the “2 yr option”, it all comes down to money and time. Who blinks first? My client might just miss the bandwagon and watch all his neighbors get leased? Here is my take: options are a one sided deal- if the price goes up, do you get the higher price? No! If the price goes down- guess what? You got it-- You don’t get leased.
These are the decisions one has to make. - Clint
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@CW_Croley, appreciate your 30 years of perspective, but I don’t find the argument against extensions convincing. If conditions deteriorate so that project won’t go forward, then it doesn’t matter whether you checked the extension or not, the project doesn’t happen either way. If conditions only deteriorate a little, however, then the extended lease wins.
Consider the last 3 years… If I signed up at $90 a barrel prices, if lease renews now I get $90 a barrel bonus again, whereas new leases only get the $60 price. There seems to be a great concern or fear of missing out on a hot market, but how likely is that after a primary term expires? After primary term lease prices are probably pretty well established and way less speculative.
Risking force pooling or going unleased seems completely unreasonable when the lease extension bonus is probably the easiest money a lessor can make. You don’t have to negotiate, take a quiz or attend a presentation. The only finger lifting you have to do is to sign the back of check before you deposit it. Being unleased / force pooled, 300% risk penalized, becoming part of the non-op working interest and condemning your heirs to pay for plugging costs seems a poor alternative to taking the easiest money in the world.
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I have a question. What happens if you don’t lease when they come to you and you just sit and wait for them to bring in oil or gas. At that time don’t they have to make a deal with you to bring the well in? This is what I have heard. So in my mind it makes sense to not take the upfront money and just wait and see if they bring a well in and than possibly you will get more because they can’t drill without you? Is this correct?
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Depends on what you own and state law. Do you own 100% of minerals or only a fraction of minerals? In Texas, if you only own a fraction of minerals and the other co-owners are leased, then you can be carried in well and only come in at well pay-out. If you own 100% then there are restrictions which vary by whether horizontal or vertical well. In OK and NM your minerals can be force-pooled and paid in accordance with state law. Others will know if you can be force-pooled even with 100%. Other states have their own rules. No one rule applies everywhere.
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I had one of my leases about 12 year’s ago on small net. mineral acres with EOG for a 3 year primary term and a 2 year option. When then two year’s was up and time to be paid for the 2 year option EOG wanted to lower the bonus by 1/2 and instead of two year’s they wanted 5 year’s. I had in my lease that when it expired they had to file a release. They reluctant filed the release. It’s always the lessee’s or assigns option to pay the option term. In over 40 plus year’s of leasing I have NEVER been paid an option term.
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My mineral interests are in Reeves County, Texas area - but I would never sign a Lease with a 2 year option. The Landman gets paid when you sign the lease I figure. That’s why he says everyone else is doing it. I didn’t sign a lease 2 years ago because of the Bonus Amount. I got 100% Royalty - NO LEASE
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