Questions re certain drillers reputation, terms etc for leases Bottineau ND

Oil and Gas Leasing Help
1

Hi folks,

My siblings and I own some small mineral rights in Bottineau, North Dakota. These leases were previously held by other producers/drillers but now are held by Corinthian Oil, the U.S. branch of its parent company Legacy Oil out of Canada. Does anyone know of these companies and their reliability, integrity, etc.?

Our leases’ primary term (I assume the first 3 years) just expired and we received a request to renew. They initially said they would let part of the parcels expire. But their letter was quite late and we didn’t respond and then received contact from Diamond Resources of Williston, North Dakota—a broker working for Legacy, I was told. The new leases re-add the originally expired land. Does anyone know anything about this outfit and their reliability and integrity? I spoke to their landman who seemed nice and sincere, and who told me the renewal terms were the same as the original lease (I am just now looking at it) (including pugh clause, and believe shut-in—trying to recall what that is).

The terms seem to be at first glance a three-year primary lease with the right to lease an additional two years. The royalty is one-sixth paid quarterly and the bonus, as I understand, is $75 for the primary term and $50 for the next.

Questions, do these seem like fair terms? The landman said he was surprised they were willing to lease now with prices down. But he acknowledged they expect them to be down for about 3 months. So looking at the long-term picture (what are the price prospects long term? I would think long term with increased industrialization in the world and need for oil, and barring global economic collapse, demand would skyrocket as prices.) The lease also seems to indicate royalties are “free of cost” if I understand.

Thanks, regards!

Van M

2

PS I just noticed the broker (Diamond Resources) has their name on the lease instead of the driller Corinthian. Is this normal or unusual?

3

I think that those terms are below what you might be able to get. My family also owns interest in Bottineau County and negotiated more favorable terms from Legacy. However, with current conditions, I am not surprised that is the offer. I’m not sure of the exact location of your interest, but I would ask for at least a 3/16ths, which is low in some areas. Also, the bonus is low but, personally, I always sacrifice bonus for royalty. And I believe on at least one lease we signed with Legacy, the OGL was executed by Diamond and assigned to Legacy.

4

Thanks so much for your input Brian! FYI our leases are small and are in Township 163N Range 78 and Township 164N Range 78. We are not in the prime Bakken area. So I understand we won’t get as much as that area, so wondering in light of that if these are fair terms? Are yours in Bakken? Also would you know or have a feel if these companies deal upright?

On the other hand, in light of what we have, if it turns out to be low, I’m wondering what our options are? Either negotiate for higher or I guess wait till someone else comes along?

Thanks again,

5

Van,

We have some minerals in the Bakken and have dealt with Diamond on a few of the leases. It is normal to have their name on the lease. I believe that they will then turn and make some money on the backside of the lease with the company. The check you receive will come from Diamond as well and will not come from whoever they are negotiating for. I’m not sure if you are looking for advice on what to do, but the prices will be severely strained for some time on the leasing front. I would be hesitant to lock into a 3-year primary lease with a two-year secondary lease at these prices. You say it is a small amount of acres, so I’m not sure what it is worth or what your current situation is. I have always been advised to look at the percentage they are willing to offer you, rather than the bonus money. In your case, 1/6th seems pretty low since the going rate has been 3/16ths or even 1/5th. You are going to make most of your money on the interest side should you ever get a well.

As for what to do, you can negotiate back with them or you can look for other people who may be leasing in that area. From a brief look at the North Dakota map, the operators in that area are Corinthian, Legacy, Citation, and Murex. There are some active wells close to you and they may be planning on expanding that area. I would see if you can find who leases for the other companies and call them to see what they might offer. Realize that the first offer you are given is usually quite flexible and becomes even more flexible if they really want it. I’m not shocked that the landman said he was surprised at the fact they want to lease. He’s paid by the oil company and leasing company to get you to sign the paperwork. It’s kind of like the car salesman who is shocked at how fast the car you are test driving is. They want you to feel like you are getting a good deal and they want you to sign. I’m not saying everyone is like that. I have had good experiences with Diamond, and I have had some bad experiences with Diamond. I will say that when I brought the bad experiences up to the supervisors, we got a solution to the issue.

Sorry to throw so much information at you, but leasing your minerals should never be taken lightly. You need to look at a lot of different parameters to figure out what is best for your financial situation, etc.

6

Hi Jon,

Thanks so much for your very helpful reply. No it wasn't too much info-the more the merrier! :)

But just to make clear, our parcels are NOT in Bakken but are in Bottineau (sections as mentioned previously). Was that your assumption? We have about 8.6 net acres on a gross of about 805.

You say "I would be hesitant to lock into a 3 year primary lease with a two year secondary lease at these prices." Assuming that we can negotiate 3/16 to 1/5, , would you then say a 3 year + 2 would then be feasible? Or do people ever do just a 3 year primary? Times are so uncertain, and from my view the world economy quite precarious with all the debt. Yet I would sense if things continue as they are eg in China and India etc that demand for oil demand would greatly surge in future. The Diamond guy said he thought prices would only be low for about 3 months.

Re contacting those who lease for other companies in the area, how do I determine that? Also would it be okay to sort of horse trade-ie if one company offers a better price go back and forth with other companies?

Thanks again, Jon so very much for your obviously quite seasoned experience. I and my siblings greatly appreciate that! God bless!

Van S Mabrito



Jon Adams said:

Van,

We have some minerals in the Bakken and have dealt with Diamond on a few of the leases. It is normal to have their name on the lease. I believe that they will then turn and make some money on the backside of the lease with the company. The check you receive will come from Diamond as well and will not come from whoever they are negotiating for. I'm not sure if you are looking for advice on what to do, but the prices will be severely strained for some time on the leasing front. I would be hesitant to lock into a 3 year primary lease with a two year secondary lease at these prices. You say it is a small amount of acres so I'm not sure what it is worth or what your current situation is. I have always been advised to look at the percentage they are willing to offer you, rather than the bonus money. In your case, 1/6th seems pretty low since the going rate has been 3/16ths or even 1/5th. You are going to make most of your money on the interest side should you ever get a well.

As for what to do, you can negotiate back with them or you can look for other people who may be leasing in that area. From a brief look at the North Dakota map, the operators in that area are Corithian, Legacy, Citation, and Murex. There are some active wells close to you and they may be planning on expanding that area. I would see if you can find who leases for the other companies and call them to see what they might offer. Realize that the first offer you are given is usually quite flexible and becomes even more flexible if they really want it. I'm not shocked that the landman said he was surprised at the fact they want to lease. He's paid by the oil company and leasing company to get you to sign the paperwork. It's kind of like the car salesman who is shocked at how fast the car you are test driving is. They want you to feel like you are getting a good deal and they want you to sign. I'm not saying everyone is like that. I have had good experiences with Diamond, and I have had some bad experiences with Diamond. I will say that when I brought the bad experiences up to the supervisors, we got a solution to the issue.

Sorry to throw so much information at you, but leasing your minerals should never be taken lightly. You need to look at a lot of different parameters to figure out what is best for your financial situation, etc.

7

Hey Van,

I looked at your minerals on the North Dakota minerals web page and it looks like they are in the Madison formation. From looking at the production, there is some production in that area although nothing as prolific as the Bakken in McKenzie/Dunn/Mountrail/Williams. With that being said, there are some wells in your general area doing a thousand barrels of oil or more per month. Here is the reasoning why the ownership interest is the key. For ease of math, lets say that oil is selling for $50 a barrel and you have a well doing 1000 barrels a month. With a 3/16th rate you would get around $100/mo., $88 a month with the 1/6th, and $108 with the 1/5th. I know these amounts seem insignificant but you can now see why sacrificing some bonus money for a better ownership interest will benefit you in the long run realizing that these wells can run for quite some time.

I have always been under the premise that a lower time frame on the lease is better and a primary lease is all we have ever done. I don't want to be tied to a company for 5 years no matter who it is when it comes to a lease. If they are serious about drilling, then it won't take them 5 years to do it.

I agree with your assumption about oil prices. It's just my personal opinion but if we are taking about supply and demand then eventually prices will rebound. Low prices are going to cause some companies to either go bankrupt or merge. Thats just a fact. Active rigs in the Bakken are down now to roughly 156 rigs which is about 30 less than were operating just last summer. With less rigs drilling new wells, and the steep decline that these wells typically have, the amount of oil coming out of North Dakota will go down. I also don't believe that Saudi Arabia is going to continue to sell their oil at $50 over a sustained period because they need a certain amount of money to make their social programs whole. I understand they have vast reserves but at some point I think they will slow it down. So the less oil on the market, the higher the price has to be. Now is this two months, three months, two years? Who knows but the price will rebound eventually, and when it does the price of your acres will go up. I guess what I am trying to say is that I would not rush into anything, but I also don't know your financial status and your current needs. I never like it when people say do this or do that without a full understanding of where you are at.

To find out the leasing companies, you can call the actual operators that I listed above and ask them who they lease through. Diamond, Lone Tree Energy, Kasmer and Afhadt are a few that our family has gone through but this is over a long period of time going back to the 80's. Your best bet is to start with the operator and tell them you have some acres and were looking at leasing them. If you get some offers, I would not hesitate to go back and forth between a few. They are your acres and it's your money. You need to get the best out of it for you and your family. Also realize that the offer you just got probably won't change much so there is not a ton of pressure to sign now. We currently have some acres that we are not leasing right now just due to the economic climate. Maybe when prices come up we will get more serious about leasing them but I don't see any rush right now.

Hope this helps.

8

Jon, thanks again for all your efforts to help. Again we greatly appreciate your insightful and very helpful input!

Jon Adams said:

Hey Van,

I looked at your minerals on the North Dakota minerals web page and it looks like they are in the Madison formation. From looking at the production, there is some production in that area although nothing as prolific as the Bakken in McKenzie/Dunn/Mountrail/Williams. With that being said, there are some wells in your general area doing a thousand barrels of oil or more per month. Here is the reasoning why the ownership interest is the key. For ease of math, lets say that oil is selling for $50 a barrel and you have a well doing 1000 barrels a month. With a 3/16th rate you would get around $100/mo., $88 a month with the 1/6th, and $108 with the 1/5th. I know these amounts seem insignificant but you can now see why sacrificing some bonus money for a better ownership interest will benefit you in the long run realizing that these wells can run for quite some time.

I have always been under the premise that a lower time frame on the lease is better and a primary lease is all we have ever done. I don't want to be tied to a company for 5 years no matter who it is when it comes to a lease. If they are serious about drilling, then it won't take them 5 years to do it.

I agree with your assumption about oil prices. It's just my personal opinion but if we are taking about supply and demand then eventually prices will rebound. Low prices are going to cause some companies to either go bankrupt or merge. Thats just a fact. Active rigs in the Bakken are down now to roughly 156 rigs which is about 30 less than were operating just last summer. With less rigs drilling new wells, and the steep decline that these wells typically have, the amount of oil coming out of North Dakota will go down. I also don't believe that Saudi Arabia is going to continue to sell their oil at $50 over a sustained period because they need a certain amount of money to make their social programs whole. I understand they have vast reserves but at some point I think they will slow it down. So the less oil on the market, the higher the price has to be. Now is this two months, three months, two years? Who knows but the price will rebound eventually, and when it does the price of your acres will go up. I guess what I am trying to say is that I would not rush into anything, but I also don't know your financial status and your current needs. I never like it when people say do this or do that without a full understanding of where you are at.

To find out the leasing companies, you can call the actual operators that I listed above and ask them who they lease through. Diamond, Lone Tree Energy, Kasmer and Afhadt are a few that our family has gone through but this is over a long period of time going back to the 80's. Your best bet is to start with the operator and tell them you have some acres and were looking at leasing them. If you get some offers, I would not hesitate to go back and forth between a few. They are your acres and it's your money. You need to get the best out of it for you and your family. Also realize that the offer you just got probably won't change much so there is not a ton of pressure to sign now. We currently have some acres that we are not leasing right now just due to the economic climate. Maybe when prices come up we will get more serious about leasing them but I don't see any rush right now.

Hope this helps.

9

Thanks again, Brian. Just to clarify, considering that our parcels are not in the Bakken area but the apparently smaller and less productive Bottineau area I believe that is east of Bakken, would your minimum of 3/16 still hold? Another broker who I believe I know and trust offered 17% acknowledging that it was that low due to the low prices. Thanks again! Van

Brian B. said:

I think that those terms are below what you might be able to get. My family also owns interest in Bottineau County and negotiated more favorable terms from Legacy. However, with current conditions, I am not surprised that is the offer. I’m not sure of the exact location of your interest, but I would ask for at least a 3/16ths, which is low in some areas. Also, the bonus is low but, personally, I always sacrifice Bonus for royalty. And I believe on at least one lease we signed with Legacy, the OGL was executed by Diamond and assigned to Legacy.

10

Again, Jon, thanks so much for your very helpful input.

Just to clarify, considering that our parcels are not in the Bakken area but the apparently smaller and less productive Bottineau area I believe that is east of Bakken, would your minimum of 3/16 still hold? Another broker who I believe I know and trust offered 17% acknowledging that it was that low due to the low prices.

Again, many thanks!

Jon Adams said:

Hey Van,

I looked at your minerals on the North Dakota minerals web page and it looks like they are in the Madison formation. From looking at the production, there is some production in that area although nothing as prolific as the Bakken in McKenzie/Dunn/Mountrail/Williams. With that being said, there are some wells in your general area doing a thousand barrels of oil or more per month. Here is the reasoning why the ownership interest is the key. For ease of math, let’s say that oil is selling for $50 a barrel and you have a well doing 1000 barrels a month. With a 3/16th rate you would get around $100/mo., $88 a month with the 1/6th, and $108 with the 1/5th. I know these amounts seem insignificant but you can now see why sacrificing some bonus money for a better ownership interest will benefit you in the long run realizing that these wells can run for quite some time.

I have always been under the premise that a lower time frame on the lease is better and a primary lease is all we have ever done. I don’t want to be tied to a company for 5 years no matter who it is when it comes to a lease. If they are serious about drilling, then it won’t take them 5 years to do it.

I agree with your assumption about oil prices. It’s just my personal opinion but if we are talking about supply and demand then eventually prices will rebound. Low prices are going to cause some companies to either go bankrupt or merge. That’s just a fact. Active rigs in the Bakken are down now to roughly 156 rigs which is about 30 less than were operating just last summer. With less rigs drilling new wells, and the steep decline that these wells typically have, the amount of oil coming out of North Dakota will go down. I also don’t believe that Saudi Arabia is going to continue to sell their oil at $50 over a sustained period because they need a certain amount of money to make their social programs whole. I understand they have vast reserves but at some point I think they will slow it down. So the less oil on the market, the higher the price has to be. Now is this two months, three months, two years? Who knows but the price will rebound eventually, and when it does the price of your acres will go up. I guess what I am trying to say is that I would not rush into anything, but I also don’t know your financial status and your current needs. I never like it when people say do this or do that without a full understanding of where you are at.

To find out the leasing companies, you can call the actual operators that I listed above and ask them who they lease through. Diamond, Lone Tree Energy, Kasmer and Afhadt are a few that our family has gone through but this is over a long period of time going back to the 80’s. Your best bet is to start with the operator and tell them you have some acres and were looking at leasing them. If you get some offers, I would not hesitate to go back and forth between a few. They are your acres and it’s your money. You need to get the best out of it for you and your family. Also realize that the offer you just got probably won’t change much so there is not a ton of pressure to sign now. We currently have some acres that we are not leasing right now just due to the economic climate. Maybe when prices come up we will get more serious about leasing them but I don’t see any rush right now.

Hope this helps.

11

Hey Van,

17% would be good but I would be inclined to look for 3/16th. However, at the end of the day, it is all up to you based off of your current financial status, etc. I don’t think you need to rush any because I don’t see a ton of movement in that area until the price of oil comes up. The other thought is that if you can get them on a 3 year lease with a bonus, maybe they don’t drill during that time and you get more bonus money. 17% might not be so bad if they are offering you a good bonus…

Van S Mabrito said:

Again, Jon, thanks so much for your very helpful input.

Just to clarify, considering that our parcels are not in the Bakken area but the apparently smaller and less productive Botteneau area I believe that is east of Bakken, would your minimum of 3/16 still hold? Another broker who I believe I know and trust offered 17% acknowledging that it was that low due to the low prices.

Again, many thanks!

Jon Adams said:

Hey Van,

I looked at your minerals on the North Dakota minerals web page and it looks like they are in the Madison formation. From looking at the production, there is some production in that area although nothing as prolific as the Bakken in McKenzie/Dunn/Mountrail/Williams. With that being said, there are some wells in your general area doing a thousand barrels of oil or more per month. Here is the reasoning why the ownership interest is the key. For ease of math, let’s say that oil is selling for $50 a barrel and you have a well doing 1000 barrels a month. With a 3/16th rate you would get around $100/mo., $88 a month with the 1/6th, and $108 with the 1/5th. I know these amounts seem insignificant but you can now see why sacrificing some bonus money for a better ownership interest will benefit you in the long run realizing that these wells can run for quite some time.

I have always been under the premise that a lower time frame on the lease is better and a primary lease is all we have ever done. I don’t want to be tied to a company for 5 years no matter who it is when it comes to a lease. If they are serious about drilling, then it won’t take them 5 years to do it.

I agree with your assumption about oil prices. It’s just my personal opinion but if we are talking about supply and demand then eventually prices will rebound. Low prices are going to cause some companies to either go bankrupt or merge. That’s just a fact. Active rigs in the Bakken are down now to roughly 156 rigs which is about 30 less than were operating just last summer. With less rigs drilling new wells, and the steep decline that these wells typically have, the amount of oil coming out of North Dakota will go down. I also don’t believe that Saudi Arabia is going to continue to sell their oil at $50 over a sustained period because they need a certain amount of money to make their social programs whole. I understand they have vast reserves but at some point I think they will slow it down. So the less oil on the market, the higher the price has to be. Now is this two months, three months, two years? Who knows but the price will rebound eventually, and when it does the price of your acres will go up. I guess what I am trying to say is that I would not rush into anything, but I also don’t know your financial status and your current needs. I never like it when people say do this or do that without a full understanding of where you are at.

To find out the leasing companies, you can call the actual operators that I listed above and ask them who they lease through. Diamond, Lone Tree Energy, Kasmer and Afhadt are a few that our family has gone through but this is over a long period of time going back to the 80’s. Your best bet is to start with the operator and tell them you have some acres and were looking at leasing them. If you get some offers, I would not hesitate to go back and forth between a few. They are your acres and it’s your money. You need to get the best out of it for you and your family. Also realize that the offer you just got probably won’t change much so there is not a ton of pressure to sign now. We currently have some acres that we are not leasing right now just due to the economic climate. Maybe when prices come up we will get more serious about leasing them but I don’t see any rush right now.

Hope this helps.