Realistic Oil Royalty Values

Landman Discussion
1

Hello to all Landmen; Based on a 640 acre pool my interest is .003906

Please help me understand... Trying to get a realistic understanding of an oil mineral lease royalty value per barrel,
as an expression of percentage, net profit VS. production costs, storage and transportation.
The landman has been telling me,

Scenerio 1: non-working interest as follows

1 barrel of oil selling for $100 with an average 10% costs for production storage & transportation, leaving 90% net profit;
with 25% of net profit in royalties equals $22.50 to our pool.

Now I have talked to other people, who tell me the norm. hypothetically

1 barrel of oil selling for $100 average 70% costs of production, storage, and transportation leaving 30% net profit at 25% of net profit in royalties equals $7.50 to our pool.

Now, I understand everything in oil exploration is a gamble, I am sure there are no two wells that have the exact same costs involved; but specifically in the Eagle Ford Shale Play in La Salle County, TX abstract A-585, there must be some average window of costs per barrel to calculate net profits per barrel as to get a ballpark value of the royalties assuming
an average well producing 400 barrels per day on a yearly average (I understand the production decline curve).

Bottom line in my personal situation the landman is tapping out numbers of around $5,000.00 per month for my share of the pool.

People I have talked to with my personal situation are estimating $300-400.00 per month in royalties, that is a huge spread? And, I am asking any body with any real experience what tends to be the production, storage, and transportation costs expressed in a percentage. Thank you very much,

p.s. here's the latest deal on my table $750-3 yr/$750-2 yr ext. with 25% royalty. Let's help each other as much as possible.

2

We negotiated with EOG for a Cost Free Royalty Clause.......here's the contract verbiage.....


"The royalties payable under the Lease will be free of all production and post-production costs. However, any such costs that result in enhancing the value of the oil, gas, or other products to receive a better price may be deducted from the lessor’s share of production so long as deductions are based on lessee’s actual costs and the total amount of the costs do not exceed the amount of the enhancement in value."

3

Thank you Eva I will need all the help i can get to undrstand the leases and the potetal values .

was your land near dull tx ?.

again thank you for your help.

Kelly

Eva said:

We negotiated with EOG for a Cost Free Royalty Clause.......here's the contract verbiage.....


"The royalties payable under the Lease will be free of all production and post-production costs. However, any such costs that result in enhancing
the value of the oil, gas, or other products to receive a better price
may be deducted from the lessor’s share of production so long as
deductions are based on lessee’s actual costs and the total amount of
the costs do not exceed the amount of the enhancement in value."

4

No, we are in District 9. I would also advise you to NOT believe what a Landman is telling you - they will tell you what you want to hear; DO NOT sign the contract you are presented by the EOG landman without consulting an oil and gas attorney and negotiating various things. Your royalty percentage is the same as we agreed to. Best of luck.


Kelly Taylor said:

Thank you Eva I will need all the help i can get to undrstand the leases and the potetal values .

was your land near dull tx ?.

again thank you for your help.

Kelly

Eva said:

We negotiated with EOG for a Cost Free Royalty Clause.......here's the contract verbiage.....


"The royalties payable under the Lease will be free of all production and post-production costs. However, any such costs that result in enhancing
the value of the oil, gas, or other products to receive a better price
may be deducted from the lessor’s share of production so long as
deductions are based on lessee’s actual costs and the total amount of
the costs do not exceed the amount of the enhancement in value."

5

If I read the original question correctly,the poster wants to know how much is the net on $100.00 oil.

6

Potentially my bad on interpretation of the question, James. I believe Kelly has not signed a contract yet, which is why I told her about the Cost Free Royalty Clause. That would make all the difference in the world on her net.

7

Dear Eva,

Since Kelly's property is located in Texas, she may or may not end up with free royalty using your language. The language in the lease defining where market price is set is generally a controlling factor.

Refer to Heritage Resources, Inc. v. Nations Bank, 895 S.W.2d 833 and learn that if the market is set at the wellhead, post production costs could NOT be deductible, even though there is clear language to the contrary.

What is the lesson to be learned? First, do not assume that plain language will protect you -- there may be court cases on point that on the surface, do not appear to make sense in their decision. Second, be careful how you draft a lease clause prohibiting deduction of post-production costs.

At one time, I went as far as to conclude my no-deduction clause with the following; "it is the intent of this provision to prohibit deductions from Lessor's royalty notwithstanding the holding in "Heritage Resources v. NationsBank 895 S.W.2d 833" and its progeny and this clause is specifically intented to be given effect and not be treated as mere surplusage."

A cleaner practice is to avoid the term "market value at the well" altogether. Change it to "market value at the point of sale" and expressly prohibit any deduction of post-production costs from that value.

Some companies dealing with Texas properties will seemingly gracefully grant a no - deducts clause added as an addendum to their lease form --- which provides for market value to be set at the wellhead. At that point the clause has all of its teeth removed and the lessor does not find out that checkmate has occurred until it is way, way, too late.


Oil companies will quote the Heritage case with regularity when denying claims for deductions, notwithstanding language in the lease that does not satisfy the Heritage v NationsBank case.

Let the Lessor beware and be not afraid to pay for qualified advice.

Best,

Buddy Cotten

www.cottenoilproperties.com



Eva said:
Potentially my bad on interpretation of the question, James. I believe Kelly has not signed a contract yet, which is why I told her about the Cost Free Royalty Clause. That would make all the difference in the world on her net.
8

Dear Ms. Taylor,

I would freak out if some oil company tried to charge me with 70% of the value of hydrocarbons. In Texas, as memory serves, oil is taxed at 4.5% and gas at 7.5%. The last time that I felt like looking, typical gathering, compression, transportation and dehydration costs tend to run about 5% on gas. That estimation, however, is vagrant because I am expressing it as a percentage when the costs are not based on percentage. My clients do not pay those charges, so I am looking at leases in antiquity.

Oil production does not have many of those costs.

9

Mr. Cotten,

A publicly traded exploration and production company has been wanting to lease my minerals, they offered to lease at a royalty percentage much higher than the 1/8th stated on the lease agreement they sent and instead sent an addendum stating the agreed royalty. The told me they will not file the addendum so others will not know and refuse to change the 1/8th on the lease to state the actual royalty percentage they offered. They also said they would sign the addendum and return to me but only after they receive the signed lease. The also have stated in the lease that they shall deduct lessor's proportionate amount of all post-production costs, including but not limited to and then the normal deducts.

Is the royalty issue just that, an issue that one needs to work out a solution to satisfy one's trust in their commitment they made on royalty or does it sound a little shady to you? Also, does the word "all" in the all post production cost sound like they can include all cost they incur post production like the pumper, future re-working of the well, secretarial work, and on and on?

You probably have heard of them as they were a big player in the Barnett.

10

Dear Joe,

I see that your minerals are located in North Dakota. I am not that familiar with North Dakota oil and gas law, though I do have some production in the Williston basin as a working interest owner. That certainly does not make me an authority.

As to filing the lease sans addendum, that would not be acceptable to me. I would execute a lease and a Memorandum of Lease (which I suppose would be sufficient in North Dakota to impart either constructive or inquiry notice) and have the Memorandum filed.

As to customary deducts, if I were to agree to anything like that (which is not likely without an offsetting concession), the deducts would be spelled out, something like this: "...it being understood that Lessor's interest shall bear its proportionate share of the cost of all compression, treating, dehydrating and transporting costs incurred in marketing the gas so sold at the wells, but no other costs. "

Since I gave some language, let me give the disclaimer. This is not legal advice, but business advice. Take this language to your attorney and allow him to advise you and handle the operational items of drafting a satisfactory oil and gas lease.

Best,

Buddy Cotten

Mineral Joe said:

Mr. Cotten,

A publicly traded exploration and production company has been wanting to lease my minerals, they offered to lease at a royalty percentage much higher than the 1/8th stated on the lease agreement they sent and instead sent an addendum stating the agreed royalty. The told me they will not file the addendum so others will not know and refuse to change the 1/8th on the lease to state the actual royalty percentage they offered. They also said ..

11

Dear Mr. Cotten,

Thank you. I failed to include a couple of bits of information, the minerals are in Colorado and the lease does include the following phrase:

FOR ADDITIONAL TERMS AND CONDITIONS SEE ADDENDUM ATTACHED HERETO AND MADE A PART HEREOF.

Like I stated though, they say they will not be filing the addendum, would you still want a Memorandum? I don't know if they'll go along with the memorandum. I don't know what their reluctance is to change the lease as to the royalty offered before they print it out from their Word doc as they are only matching another lease offer, unless it is to try and keep offers from getting competitively higher.

I'd like to send you the name of the company as it might help in understanding the issue by knowing as they may have a name for themselves but I don't need any repercussions if it gets back to them by having their name thrown out in an open forum.

I did agree to pay post production cost (not all though) as in the lease it speaks of products sold at the well in what looks like an attempt to leave open where and how royalty comes in play probably for those who want a no cost clause written in.


12



Joe,

My name is Don and I hate to break your train of thought here with your dilema but I too have a company offer here in Colo. that insists on NOT changing the lease on face and try to do all additions and/or subtractions on an ADDENDUM or EXHIBIT. The issue of where the royalty is paid is one issue with me, also they don't want to give a "special limited warranty, they will give a 3yr term with 2yr option but DO Not want to pay additional bonus(what good is that?). and they want me to "release and waive any and all rights to homestead, dower, and curtesy". These are all issues I have not found answers to and would like help in, or at least a lead to a knowledgable person to help draft a reply. Sorry if I butted in but some of this is similar and we're probably close in proximity and probably same COMPANY. Thanks any and all especially Mr. Cotton for his continuous support here.

Don

13

Dear Joe,

I can think of quite a few good operational reasons to not change the face of the lease as to royalty, but that is irrelevant. There is not a thing wrong having an addendum to a lease.

Have I changed my mind to prefer filing a Memorandum rather than filing an incomplete document? Nope. I personally like Memorandums of Oil and Gas Lease. I want to keep my business to myself as much as possible.

But then again, if I felt like it, I could do something real simple. I could execute two copies of the lease and addendum. Send one to the oil company and after they record whatever they felt like recording, record the one that I kept -- with the addendum. Checkmate.

Mineral Joe said:

Dear Mr. Cotten,

Thank you. I failed to include a couple of bits of information, the minerals are in Colorado and the lease does include the following phrase:

FOR ADDITIONAL TERMS AND CONDITIONS SEE ADDENDUM ATTACHED HERETO AND MADE A PART HEREOF.

Like I stated though, they say they will not be filing the addendum, would you still want a Memorandum? I don't know if they'll go along with the memorandum. I don't know what their reluctance is to change the lease as to the royalty offered before they print it out from their Word doc as they are only matching another lease offer, unless it is to try and keep offers from getting competitively higher.

I'd like to send you the name of the company as it might help in understanding the issue by knowing as they may have a name for themselves but I don't need any repercussions if it gets back to them by having their name thrown out in an open forum.

I did agree to pay post production cost (not all though) as in the lease it speaks of products sold at the well in what looks like an attempt to leave open where and how royalty comes in play probably for those who want a no cost clause written in.