Hi everyone. I just found out that I inherited a few acres of mineral rights in Williams County. The acreage covers two sections in different townships. One has a producing well that was completed last October and the other section is going to be drilled late summer. I have been offered a lease with a royalty per acre that combines the two sections. My question is what about the oil production prior to my signing of a lease. Do I get 100% of my share or is it held in trust until the well costs are retrieved so in effect I would get nothing? I’ve read about participating/non-consent, pooling, etc. and for a novice it can get a little confusing; especially when it comes to decision making. Also, the bonus is for $1500/acre; does that seem fair? Do I have any leverage? Thanks in advance for your help.
If you sign a lease I’m sure they will want to make it retroactive/effective to/from first production. I think you need to find out if it’s a good well first. You need not hurry. A second existing well won’t make them lose interest in leasing you. In a similar situation I have been offered $3,000 per acre and 20% royalty. I would have accepted it but the operator lied to me alot before finally making that offer. If you have a good well you have great leverage, in my opinion. If you are carried you will receive a 16% cost free royalty or the weighted average of what everyone else leased for, whichever the operator elects, from the first barrel. The other 84% goes to pay for your part of the well, the 50% risk penalty (50% of your proportionate part of the well) and your portion of the operating costs. The landmen I dealt with always tried to tell me I would receive nothing until the well and a 300% penalty was paid out of my production. It was just a scare tactic and untrue, in N.D. In your place I would want to know when the well was drilled, how much it has produced, how much it is producing recently and how much your part of the well cost. If it has been producing for 3 years they could be holding in suspense enough money to pay for your part of the well, but if you sign a lease they will take 80% of that back. In exchange you will get some signing bonus, they will essentially, be paying you with your own money. If you decide to lease after you gather your production information, get competitive offers. If the operator can lease you still, so can anyone else. If all else fails, you could be a carried interest. You would give up a bonus now and some (but not all) royalty for few years, but when the well and penalty are paid off, you reach 100% royalty less cost of production. If it’s a good well, the operator really would not like that. They do not drill wells to recover a 50% risk penalty. They do not want you to lease to someone else who will participate, because the operator would then make nothing. They may not like you getting competitive offers, but this is business. I have never noticed an operator being worried about my goodwill, and I wouldn’t sacrifice 5,000 to 10,000 dollars to have theirs. Good luck, and if you know a landman named Bob Imsland, tell him I said hello.
Thanks for the advice. The well began producing in November of 2010. I have production numbers through February of this year. The IP was about 1100. November- 518 avg. December- 298 avg. January- 368 avg. February - 275/day avg. Are these numbers good? Thanks again.
r w kennedy said:
If you sign a lease I'm sure they will want to make it retroactive/effective to/from first production. I think you need to find out if it's a good well first. You need not hurry. A second existing well won't make them lose interest in leasing you. In a similar situation I have been offered $3,000 per acre and 20% royalty. I would have accepted it but the operator lied to me alot before finally making that offer. If you have a good well you have great leverage, in my opinion. If you are carried you will receive a 16% cost free royalty or the weighted average of what everyone else leased for, whichever the operator elects, from the first barrel. The other 84% goes to pay for your part of the well, the 50% risk penalty (50% of your proportionate part of the well) and your portion of the operating costs. The landmen I dealt with always tried to tell me I would receive nothing until the well and a 300% penalty was paid out of my production. It was just a scare tactic and untrue, in N.D. In your place I would want to know when the well was drilled, how much it has produced, how much it is producing recently and how much your part of the well cost. If it has been producing for 3 years they could be holding in suspense enough money to pay for your part of the well, but if you sign a lease they will take 80% of that back. In exchange you will get some signing bonus, they will essentially, be paying you with your own money. If you decide to lease after you gather your production information, get competitive offers. If the operator can lease you still, so can anyone else. If all else fails, you could be a carried interest. You would give up a bonus now and some (but not all) royalty for few years, but when the well and penalty are paid off, you reach 100% royalty less cost of production. If it's a good well, the operator really would not like that. They do not drill wells to recover a 50% risk penalty. They do not want you to lease to someone else who will participate, because the operator would then make nothing. They may not like you getting competitive offers, but this is business. I have never noticed an operator being worried about my goodwill, and I wouldn't sacrifice 5,000 to 10,000 dollars to have theirs. Good luck, and if you know a landman named Bob Imsland, tell him I said hello.