Just received two participation offers on proposed wells. Dark Frost State Com 110H and Cactus Sour State Com 110H, both Horizontal San Andrus Well. The offer presents three options: 1) Participate in drilling, including costs, 2) Elect not to participate, or 3) Assign option for fee. If you do not elect, they will pool. I have not received such a participation offer in the past and not familiar with them. I do recognize the potential financial risk of participation, has anyone else received such offers or have any advice on next steps?
In NM Operators are obligated to offer mineral owners a royalty interest lease for open mineral acreage. When we get these types of working interest offers, we elect not to participate but then always request that they provide us with initial terms for a royalty interest lease for our mineral acres. By doing this you can negotiate a royalty lease proactively so your minerals won’t be pooled as non-consent and you leave the cost of drilling to the Operator. I’d reach out to the contact on the offer, requesting confirmation of your mineral acres and any available information on the project (this general interest from you usually gets a response so you have someone to deal with) and then you can opt out and request a royalty lease.
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Thanks for the information. What royalty interest and bonus are norm for this area?
For a royalty lease, in Eddy we always request 1/4 royalty. For a bonus, it depends on the area. In recent leases we’ve had a low of $700 and as high as $3,500/NRA. We will typically request some standard terms and ask them to provide their thoughts on a bonus. We then usually counter with a slightly higher bonus and try to meet in the middle.
Some of our standard terms we ask for include: -1/4 royalty (always ask for 1/4- this is more imp than increasing the bonus offer) -A shut-in rate of $100 (this is often reduced but worth asking for) -Royalties paid at the well head with no deductions for anything e.g. marketing, transportation, employee expenses etc -Inclusion of standard Pugh clauses -No lease extension/Or a 2 yr lease extension considered only with a re-negotiated bonus
Curious how much pushback you get on the no deductions clause?
Do you also include this language in your DO’s to try and protect yourself as best as possible?
THX
Please be aware that, at least in Texas, any pricing at the wellhead (whether proceeds or market value) is by definition net of 100% of all post-production costs, eg transportation, processing or gathering, incurred after the gas leaves the well. This has been established under court decisions. Having a no-deductions clause will not prevent cost deductions. The lease needs very specific language tied to standards such as adding back cost charges under the gas contracts. The oil companies are very sophisticated in this area and will easily agree to no-cost clauses where the pricing is set at the wellhead or as Operator’s proceeds (again proceeds is gross sales less all costs charged by the gas purchaser under the gas contract).
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Understood. I wonder if that is the same in other states (I’m in New Mexico).
Also, have you ever looked into the cost accounting allocation of post-production costs? I worked in commercial real estate for years and the rule of thumb was to stuff as many costs as aggressively as possible into the reimburseables bucket. It essentially made it a profit center. Wouldn’t be surprised if it is being done here too. However, I honestly don’t know. Any thoughts out there?
Post production costs are incurred after oil and gas is produced from the well and are pretty well defined in the industry. These costs can really add up for gas and NGL. Here are some links to Holland and Hart site and to John McFarland’s lawyer blog. McFarland’s blog is a great source for all kinds of legal rulings and industry information in Texas. Deducting Post-Production Costs From Fee Royalty | Holland & Hart LLP and Post-Production Costs Category Archives — Oil and Gas Lawyer Blog Published by Oil Gas and Mineral Law Attorney — Oil and Gas Lease Lawyer — John McFarland
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