Is the correct or most popular formula for finding the royalty rate on an allocation well in Texas the following formula below? I plan on contacting the operator as well but wanted to see what answers I got on the forum also.
Allocation Factor x Net Mineral Aces x Lease Royalty Percentage / Unit Size x MCF x Gas Price
I am very interested in this issue also, as I am currently negotiating a lease where the lessee says it will likely be drilling an allocation well. A couple of issues/questions.
In your formula, you include the term āallocation factorā. What is that? How is it determined? The other terms seem easy to ascertain, but that term is unclear.
Also, I watched an excellent webinar by NARO recently where the speakers said that an allocation well is often favorable to some of the tracts through which the well is drilled, and less favorable to other tracts, depending on many factors, including length of wellbore, number of take points, and the various sizes of the tracts that are involved. None of that is of course known at the time the lease is negotiated, so is there any lease language that can be included to protect a lessor when you donāt know in advance whether your tract will be one of the advantaged or disadvantaged tracts?
Iām probably in almost the same position as you. We have older vertical wells and now have new horizontal wells that are allocated so thatās what Iām learning at the moment. Pretty fun actually. I didnāt think it would be fun to learn but I enjoy it.
The allocation factor tells you how much of the total measured production is credited to your well. Itās seems like itās the split of production between the units. It also seems that finding this out in the beginning is a little more difficult or just isnāt possible. When a well is completed there is more information that comes with competition that helps figure this out. At least thatās what Iām seeing from our operator.
I would be interested in seeing the NARO video that you mentioned. Sounds cool! Iāve been watching a lot of videos, taking to a lot of people and just doing research like crazy. Not sure of any language that would help in the beginning yet. So much of this business seems to be science but a lot of guess work or gambling to a degree. Like anything, knowledge seems to be the key so far.
Iāve gotten pretty good at navigating the TRRC site, Fracfocus, etc so that helps a ton. I even track numerous wells to compare different aspects to help me learn. The only part that gets difficult is everything posted is always a couple of months behind. Understandable, but difficult. I know some pay for software or even subscribe to web mineral tracking sites but I havenāt gotten into that yet.
Most frequently the formula is based on the percentage of the length of productive horizontal lateral (ie distance from first to last take point) crossing your tract X your fractional mineral interest in the tract (such as you own 1/10 or 1/15 of minerals) X your royalty decimal. Your royalty decimal (DOI) has nothing to do with the production volumes and prices. Those affect your net royalty payment each month. If your minerals are included in a unit, then it would be based on % of productive lateral crossing the unit X your royalty decimal in the unit.
Awesome! That was the other way I figured it up. Thanks for the clarification.
Be sure to make your final calculation on the āas-drilledā plat filed with the completion report and not on the permit plat. The figures are always at least slightly different. The completion report has lots of other good information such as vertical vs measured depth and the producing formation.
Can a mineral owner specify in their lease to have their interest be calculated using the allocation method in Texas?
Kborak - thanks. Thatās what I figured āallocation factorā meant.
But it sounds as if that is something you just donāt know until the well is drilled. Which means during lease negotiation you donāt know yet whether an allocation well will be good or bad for you, and so you donāt know how to ask for terms that might benefit you when negotiating the lease.
Am I missing something? If so, let me know if someone knows some magic language that I can ask for in a lease that gives you a āwin/winā position whether or not the operator drills an allocation well.
Otherwise, I might as well concentrate my negotiation efforts elsewhere on something that really matters.