I was curious about what happens if an operator drills and starts producing oil and what happens if someone had some mineral rights that were unleased in that spacing unit at that time?
I know once the division order was done, they would find them and try to lease them, but what if the minerals were unable to be leased at that time due to probate or for example, the BLM was unable to auction off any mineral rights leases about 1 1/2 years ago because of the temporary halt on the auctions until a study on the effects of fracking was concluded? In this case, I noticed that the operators were still going ahead with their drilling program as long as they had a >50% oil rights leased without the federal mineral rights leased.
Basically, what happens in the above case to the BLM mineral rights if someone else leases the rights besides the operator after the study was concluded and the ban was lifted and the auction was held? Does the auction winner still have the option to participate in the well even though it may have been drilled and producing for an entire year until the auction was held and the minerals were able to be leased? In the above cases, I am refering to North Dakota, but would the answer to this question vary among states?
I had a hard time forming this question so if you need some clarification to the question, let me know. Thanks
In ND if you can't be found they could set up a trust in your name and lease from it. If you are found and don't lease [ they can lease you even if a probate isn't finished, or even started ] you would automatically be force pooled and a carried interest, if you continue to refuse to lease. If you lease to the operator after the well is drilled, the lease is almost certainly back dated to the time before the well was drilled, so if you sign the lease with the operator after drilling and production/sales start, it makes no difference, unless it is a really great well, pays itself and the 50% actual cost of drilling penalty off in less than a year to two years, in which case you may have tossed away alot of money. Interesting question about state acres, I can honestly say I have no clue about state acres. And if it were your acres that someone leased with someone elses well on it, I think they could participate as long as you could, which would be anytime up to the point you were served with the well proposition AFE [authorization for expenditure] which would give you 30 days to decide to participate or not/ lease to someone else. I don't think a lessee could bounce it out of being carried interest by paying the participation after the AFE had expired, a carried interest owned by right of lease is subject to 200% to 300% penalty compared to the mineral owners penalty of 50%, so pretty unlikely to happen. You could probably sell your carried interest and the new owner would still only owe a 50% of the actual cost of drilling penalty. I would venture an opinion (disclaimer only my opinion) that if the state had a profitable producing well on unleased state acres and the state just leased it away at the normal bonus and royalty, I'd say we have the wrong people working for us, because if it's a poor well nobody would lease those acres and if a good well, the state shouldn't just give the ordinary lease on those acres. Maybe the state could bargain for a 50% to 75% royalty. I hope this answers some of your questions.
Yeah, I was confused about federal acres, because I know there were a few cases where the Federal government owned less than 50% of the acres in a spacing unit and so drilling occurred anyways, but due the moratorium on the auctions for federal land minerals (due to the concerns about fracking), they weren't able to auction the minerals for about a year and so there were wells drilled and producing for 8+ months before the minerals were able to be auctioned. I am really curious what happens with the leasee of the federal land minerals and if they are still able to participate in the well, even though it was 8+ months since the well was drilled and started producing.
Another case would be were the operator didn't discover the state owned the mineral acres until the division order was done and as a result, it could take 3 months before the next state auction where they could auction off the minerals. Likewise, in this case, I am curious what the auction winner's (leasee) rights are and if they are also given the opportunity to participate. I would imagine in this case they would be able to because they were never served with an AFE and therefore were never given the option to elect to participate and I know the state has the power to make the operator retract the AFE until there is a leasee after the auction date.
Sounds reasonable that with no afe you would still be able to participate. Quite an opportunity when you can see how the well is doing before you lease the acres. I've lost track of how many unleased people who come here for advice I've told they already have a well. I think the AFE is frequently a last resort to sticker shock people into leasing, the last thing an operator wants you to do is participate in a good area.