Recently inherited mineral rights in McKenzie, need advice please!

Hi all,

I inherited some mineral rights in McKenzie County when my grandmother passed this last september. I have an attorney working on the probate to get my ownership on the official records. I had no previous knowledge on the subject, so sifting through and understanding all the documents has been quite a challenge. I have been able to educate myself a bit trough this site and the site, but I still have a lot of questions on what to do with this.

I have rights in T148R99W, Sections 3,4,10 and 11 and in T149R98W, sections 19 and 20. Total NMA is approximately 15 acres. As far as I can tell, my grandmother has more or less signed the first lease that was presented in both cases. With regards to clauses such as pugh and warranty I can't really tell. The language in these are way above me:) I assume she has contracts that are good for oil companies, bad for her.

The vast majority of theareas in T149, S19 and 20 were leased to Contex back in November '07 and is for 5 years ($100 bonus and 1/6ths royalty). This lease has been acquired by Kodiak a while back and I think they are drilling wells. A tiny fraction of the areas in T149 are not yet leased, Kodiak has offered $1200 bonus and 3/16ths royalty for these.

The areas in T148, S3,4,10 and 11 were leased to Alfson Energy in October 2010 for 3 years ( $1000 bonus and 3/16ths royalty). I don't know who holds the lease today, but from the GIS-map it looks as if there are wells here as well.

I don't think she has received anything but the bonus-payments and I can't find any division orders.

Now, from what I have read here and elsewhere, leasing is not always the best option for non-professional mineral rights owners, so my questions are:

- Am I bound by the leaseses my Grandmother signed or will they have to negotiate a new deal with me?

- Should I lease or participate? If participate, by investing or just by doing nothing? If lease, what kind of terms should i aim for?

- I would like to value or get an idea of what this is likely to generate in terms of royalties. I have been looking at the GIS map and some monthly production reports, but find it really hard to gauge the quality of my area, any advice?

Sorry for the long post, but I would really appreciate it if someone would provide some insight. I'll stick around to share my experiences with others in the same situation if this works out:)

Ketil, If that is 15 net acres between all of your leases, considering the density of the drilling and if all are leased at 3/16, you have some nice checks coming but I don't think you are going to retire. Sadly, you have three operators to contend with, Whiting, Sinclair and Kodiak which could be tiresome in the future if things don't go exactly right.

If Grandmother didn't negotiate leases the operator is probably going to have quite a bit of deductions from your royalty. The state takes 11.5% production and severance taxes combined, plus you will have to file state income tax. Yes, potentially the state can make more off your oil than you do. Then there is federal taxes, but at least I have not heard of the 15% depletion deduction being done away with, so that helps

I think you are in a pretty good area that over the course of 30 years could yield $75k to $100k per acre, possibly double that eventually. The bad news is 81.25% of that money belongs to the operator before he makes any deductions from your royalty.

Good you are getting the probate done. It looks like all your acreage is held by production so there is nothing for you to do but let the operators know when the probate is done if they aren't paying you allready. You should have some nice checks for awhile but remember not to count on oil royalties, the roads are bad, the operator frequently works on wells so they are shut down, they can be shut down because someone is fracking nearby any number of reasons. Plan what you will do with the money but never count on it. Of course the wells production can fall off sharply, as much as 30% a month for the first few months. Enjoy it while it lasts.

Well, that's bittersweet.. Good thing I wasn't planning on retiring regardless:)

So you are saying the leases survive generations, right? There is no way to get out of it? When you say deductions, are you referring to the taxes? I'm in Norway so I would have to pay 28% capital-income tax (less any tax paid to US authorities) here in any case.

I was thinking I should get my attorney to review the leases thoroughly, but I am kind of disappointed he has not told me any of this before. He's asking $2500+ to do the probate. Is that something I could do fine myself?

I have a little less than one acre that is not covered by any lease yet. I received a lease proposal and well election ballot for this (though the interest i am listed with in the ballot is about half of what it should be). Would you just try to get the best terms possible and lease it or would you participate?

Sorry for all the questions, but I feel I have to do my best to get what I can out of this. Thanks a lot for offering your insight, I really appreciate it!

Taxes are deducted but the deductions I am talking about are for transport, marketing, gathering ,separating, dehydrating, compressing and so on.

If all you have left that is unleased is the half acre, I would say it's not worth learning an entirely new trade.

I usually recommend getting an attorney as far from the oil production as possible and still be in the state because you can probate in any county and the lawyers farther away are likely to be less busy and probably charge less, $2,500 would not be a bad price if it's to pass the title through two generations into your name. If it's $2,500 for each generation I would consider it high, but they can charge what they want in the oil producing area because most people don't know you can probate in another county as long as it's within the state. If you can get the minerals in your name for less than $3,000, I'd let the lawyer handle it.

To maximize your return on owning these minerals I would say not to sell them even when production slows to a trickle because the only reason someone would want to buy them from you is to profit from them. I'm sure you already know that. Even though you have two spacings that have 3 wells each in them, that does not mean they are fully developed and the operator probably will be in no hurry to develop them more, but will eventually or sell the right to develop to someone who will.

If you are not committed to the attorney you have spoken to, I would find one in a county bordering Minnesota. Congratulations on your wells and enjoy what you get from them are the best advice I can give now.

Oh ok, I thought the royalty was calculated directly from the revenues without any cost deductions. I guess I'll try to analyse the contracts a bit better..

Thanks again for helping out!

The royalty should be calculated from the sales, hopefully they take the post production costs deductions then production and severance taxes. The post production costs deductions can be significant, transport by truck would be significant by itself even if it was just a short distance to rail or pipeline.

KN said:

Oh ok, I thought the royalty was calculated directly from the revenues without any cost deductions. I guess I'll try to analyse the contracts a bit better..

Thanks again for helping out!