Royalty Payments

We own the mineral rights to a well being drilled in the Bakken Shale. The well shows that is started producing in July 2010. Does anyone know how long it takes to receive your first royalty check? The ND website says as early as one month and some say as long as 5 months after production has started. There are no title issues. I am hoping to hear back from someone who is in the Stanley, Minot area that has received at least their first check.

You might check your lease language as to the payment of royalties. I looked at an expired lease of mine and it had this provision:

“All royalties that may become due hereunder shall commence to be paid on the first well completed on the leased premises within ninety (90) days after the first day of the month following the month during which any well is completed and commences production.”

I believe this means about 4 months after the first well is completed and producing. Additional wells drilled may have a shorter time frame for payment of royalties.

Thank you so much

Mike Igau said:

You might check your lease language as to the payment of royalties. I looked at an expired lease of mine and it had this provision:

“All royalties that may become due hereunder shall commence to be paid on the first well completed on the leased premises within ninety (90) days after the first day of the month following the month during which any well is completed and commences production.”

I believe this means about 4 months after the first well is completed and producing. Additional wells drilled may have a shorter time frame for payment of royalties.

Mike-

Can I also ask you …did you just one day go to the mail box and have a check or did the company drilling the well contact you first?

Thank you- Lou

Lou Wheeler said:

Thank you so much

Mike Igau said:
You might check your lease language as to the payment of royalties. I looked at an expired lease of mine and it had this provision:

“All royalties that may become due hereunder shall commence to be paid on the first well completed on the leased premises within ninety (90) days after the first day of the month following the month during which any well is completed and commences production.”

I believe this means about 4 months after the first well is completed and producing. Additional wells drilled may have a shorter time frame for payment of royalties.

Lou: Did you get a draft with your letter? What needs to happen is that you should be contacted by a landman or the land department of the Oil Company stating explicitly that they would like to lease your mineral property. Often times there will be folks wanting to get a lease from you and peddle it to some oil company and make a nice payday at your expense. Be very careful of letters that state they want to purchase your mineral rights. There are “Countywide” conveyance offers where a mineral owner may confuse a mineral lease offer from an offer to purchase your mineral property that would include all properties in the County that a mineral owner may own. These unsolicited offers are typically presented with a draft. Can you explain what type of offer were you presented?

Lou Wheeler said:

Mike-

Can I also ask you …did you just one day go to the mail box and have a check or did the company drilling the well contact you first?

Thank you-
Lou

Lou Wheeler said:
Thank you so much

Mike Igau said:
You might check your lease language as to the payment of royalties. I looked at an expired lease of mine and it had this provision:

“All royalties that may become due hereunder shall commence to be paid on the first well completed on the leased premises within ninety (90) days after the first day of the month following the month during which any well is completed and commences production.”

I believe this means about 4 months after the first well is completed and producing. Additional wells drilled may have a shorter time frame for payment of royalties.

An oil company has leased our property and the lease won’t be up until 2012. We did receive that check a couple of years ago and it states that we will receive 15% of any royalty off the well. The well started producing in July of this year- so I know that there aren’t any title issues otherwise the lease would’ve had issues and they didn’t. So, my question was once the well starts producing how long does it take to start receiving payments which you said you thought was around 4 mos which sounds right. I was just wondering if in your case did you just one day go to the mailbox after 4 months and have your 1st payment?

Thank you for taking the time to discuss this. Lou

Mike Igau said:

Lou: Did you get a draft with your letter? What needs to happen is that you should be contacted by a landman or the land department of the Oil Company stating explicitly that they would like to lease your mineral property. Often times there will be folks wanting to get a lease from you and peddle it to some oil company and make a nice payday at your expense. Be very careful of letters that state they want to purchase your mineral rights. There are “Countywide” conveyance offers where a mineral owner may confuse a mineral lease offer from an offer to purchase your mineral property that would include all properties in the County that a mineral owner may own. These unsolicited offers are typically presented with a draft. Can you explain what type of offer were you presented?

Lou Wheeler said:
Mike-

Can I also ask you …did you just one day go to the mail box and have a check or did the company drilling the well contact you first?

Thank you-
Lou

Lou Wheeler said:
Thank you so much

Mike Igau said:
You might check your lease language as to the payment of royalties. I looked at an expired lease of mine and it had this provision:

“All royalties that may become due hereunder shall commence to be paid on the first well completed on the leased premises within ninety (90) days after the first day of the month following the month during which any well is completed and commences production.”

I believe this means about 4 months after the first well is completed and producing. Additional wells drilled may have a shorter time frame for payment of royalties.

Lou: You should receive a Division Order. That will determine your net mineral ownership decimal percentage to calculate your royalty percentage for payment. This should precede your receiving a royalty income check. I would contact the Company about the Division Order. Did that letter you received mention anything about a Division Order? I would contact the Company’s land department for clarification.

Lou Wheeler said:

An oil company has leased our property and the lease won’t be up until 2012. We did receive that check a couple of years ago and it states that we will receive 15% of any royalty off the well. The well started producing in July of this year- so I know that there aren’t any title issues otherwise the lease would’ve had issues and they didn’t. So, my question was once the well starts producing how long does it take to start receiving payments which you said you thought was around 4 mos which sounds right. I was just wondering if in your case did you just one day go to the mailbox after 4 months and have your 1st payment?

Thank you for taking the time to discuss this.
Lou

Mike Igau said:
Lou: Did you get a draft with your letter? What needs to happen is that you should be contacted by a landman or the land department of the Oil Company stating explicitly that they would like to lease your mineral property. Often times there will be folks wanting to get a lease from you and peddle it to some oil company and make a nice payday at your expense. Be very careful of letters that state they want to purchase your mineral rights. There are “Countywide” conveyance offers where a mineral owner may confuse a mineral lease offer from an offer to purchase your mineral property that would include all properties in the County that a mineral owner may own. These unsolicited offers are typically presented with a draft. Can you explain what type of offer were you presented?

Lou Wheeler said:
Mike-

Can I also ask you …did you just one day go to the mail box and have a check or did the company drilling the well contact you first?

Thank you-
Lou

Lou Wheeler said:
Thank you so much

Mike Igau said:
You might check your lease language as to the payment of royalties. I looked at an expired lease of mine and it had this provision:

“All royalties that may become due hereunder shall commence to be paid on the first well completed on the leased premises within ninety (90) days after the first day of the month following the month during which any well is completed and commences production.”

I believe this means about 4 months after the first well is completed and producing. Additional wells drilled may have a shorter time frame for payment of royalties.

Mike-

Thank you so much for the info- I appreciate it!

Lou

Hey Mike-

You might not know the answer to this question, but I had one more for you. Do you happen to know how close wells can be drilled? Like is it only 1 every 20 acres?? I did contact the oil company and they said we should be receiving our letter with the division of royalties by the 1st part of November and then still receive our 1st payment some time later that month. Thank you for all of the earlier info I appreciate it. Lou

Lou Wheeler said:

Thank you so much

Mike Igau said:
You might check your lease language as to the payment of royalties. I looked at an expired lease of mine and it had this provision:

"All royalties that may become due hereunder shall commence to be paid on the first well completed on the leased premises within ninety (90) days after the first day of the month following the month during which any well is completed and commences production."

I believe this means about 4 months after the first well is completed and producing. Additional wells drilled may have a shorter time frame for payment of royalties.

Lou: Well spacing is a complicated subject. The TRRC has spacing rules pertaining to characteristics of the formation and depth. There are also lease boundary line rules so the Operator won’t drain the minerals from a neighboring tract. Today much of the drilling is horizontal. Multiple wells can be drilled from the same drilling pad even though the Operator will move the rig about 30’ or so to have a separate well bore. This often happens in the Barnett Shale Play. The penetration point can be several hundred feet away from the first well, for example. I have seen well spacing on these type wells be at 500’ and 1000’ apart. As to lease boundary lines the typical distance from the boundary in the tight shale plays is 330 feet, as determined by the TRRC. Sometimes exceptions to these rules may be permitted by a ruling from the TRRC.

Dear Lou,

With deference to Mike, you need to check with the regulatory body in ND. Railroad Commission rules are nice, but they only apply to Texas.

When you say the well is in production, are you sure? From what I have heard in the Bakken shale, sometimes the well is shut in for months and months, waiting on a pipeline connection, since there was no underlying pipeline infrastructure.

I think that we need a professed expert in North Dakota rules and regulations - and I am not that person.

Mike Igau said:

Lou: Well spacing is a complicated subject. The TRRC has spacing rules pertaining to characteristics of the formation and depth. There are also lease boundary line rules so the Operator won’t drain the minerals from a neighboring tract. Today much of the drilling is horizontal. Multiple wells can be drilled from the same drilling pad even though the Operator will move the rig about 30’ or so to have a separate well bore. This often happens in the Barnett Shale Play. The penetration point can be several hundred feet away from the first well, for example. I have seen well spacing on these type wells be at 500’ and 1000’ apart. As to lease boundary lines the typical distance from the boundary in the tight shale plays is 330 feet, as determined by the TRRC. Sometimes exceptions to these rules may be permitted by a ruling from the TRRC.

Thank you Mike I appreciate the info.

Lou

Mike Igau said:

Lou: Well spacing is a complicated subject. The TRRC has spacing rules pertaining to characteristics of the formation and depth. There are also lease boundary line rules so the Operator won’t drain the minerals from a neighboring tract. Today much of the drilling is horizontal. Multiple wells can be drilled from the same drilling pad even though the Operator will move the rig about 30’ or so to have a separate well bore. This often happens in the Barnett Shale Play. The penetration point can be several hundred feet away from the first well, for example. I have seen well spacing on these type wells be at 500’ and 1000’ apart. As to lease boundary lines the typical distance from the boundary in the tight shale plays is 330 feet, as determined by the TRRC. Sometimes exceptions to these rules may be permitted by a ruling from the TRRC.

Mike- Since you have already been through this process it sounds like, I was wondering how Royalties are paid. Our well has produced over 2000 BOD. So, for instance our royalties are leased at 15% royalty. So would you just take 2000 x 7 days a week x 4 which = 56,000 BOE/per mos. and x this by the price of crude oil which we could say just for discussion is $70 p/barrell. Which this would = $3,920,000.00 and times this by 15% to get our monthly check total ? or are royalties calculated a little different? This is our first producing well so we are not sure how it works.

BTW… I did contact the Royalty Dept on the oil company doing the drilling and you were right they are saying that we will be receiving our division of royalty letter in November and our 1st payment will be for three mos. and be paid some time therafter once they get everyone’s paperwork back. So, thank you for that earlier info.

Lou

Mike Igau said:

Lou: Well spacing is a complicated subject. The TRRC has spacing rules pertaining to characteristics of the formation and depth. There are also lease boundary line rules so the Operator won’t drain the minerals from a neighboring tract. Today much of the drilling is horizontal. Multiple wells can be drilled from the same drilling pad even though the Operator will move the rig about 30’ or so to have a separate well bore. This often happens in the Barnett Shale Play. The penetration point can be several hundred feet away from the first well, for example. I have seen well spacing on these type wells be at 500’ and 1000’ apart. As to lease boundary lines the typical distance from the boundary in the tight shale plays is 330 feet, as determined by the TRRC. Sometimes exceptions to these rules may be permitted by a ruling from the TRRC.


Lou: Your Division Order will calculate your decimal interest. This decimal interest will be applied to the net proceeds produced in the unit based on your pro rata ownership interest. For example:

Assuming your in a Unit, your net mineral acres will be divided by the total unit acreage and multiply by your royalty interest rate to get your decimal interest. I believe this is correct.

Daily production varies as does market pricing.
Lou Wheeler said:

Mike-
Since you have already been through this process it sounds like, I was wondering how Royalties are paid. Our well has produced over 2000 BOD. So, for instance our royalties are leased at 15% royalty. So would you just take 2000 x 7 days a week x 4 which =
56,000 BOE/per mos. and x this by the price of crude oil which we could say just for discussion is $70 p/barrell. Which this would = $3,920,000.00 and times this by 15% to get our monthly check total ? or are royalties calculated a little different? This is our first producing well so we are not sure how it works.

BTW… I did contact the Royalty Dept on the oil company doing the drilling and you were right they are saying that we will be receiving our division of royalty letter in November and our 1st payment will be for three mos. and be paid some time therafter once they get everyone’s paperwork back. So, thank you for that earlier info.

Lou


Mike Igau said:
Lou: Well spacing is a complicated subject. The TRRC has spacing rules pertaining to characteristics of the formation and depth. There are also lease boundary line rules so the Operator won’t drain the minerals from a neighboring tract. Today much of the drilling is horizontal. Multiple wells can be drilled from the same drilling pad even though the Operator will move the rig about 30’ or so to have a separate well bore. This often happens in the Barnett Shale Play. The penetration point can be several hundred feet away from the first well, for example. I have seen well spacing on these type wells be at 500’ and 1000’ apart. As to lease boundary lines the typical distance from the boundary in the tight shale plays is 330 feet, as determined by the TRRC. Sometimes exceptions to these rules may be permitted by a ruling from the TRRC.

OK because I am new at this I guess I don’t understand the second part of your answer. “Assuming your in a Unit, your net mineral acres will be divided by the total unit acreage and multiply by your royalty interest rate to get your decimal interest.”

I know my letter will show the decimal interest. what is a unit and how do I know the total unit acreage?? Like are you talking about a unit being like a section of land? and unit acreage how many sections is in the well?

Sorry …I think I am now totally confused. can u give an example? I understand that market value and production will change daily.

Thanks- Lou



Lou: Do you own 100% of the minerals for this well? Are there other mineral owners involved with this mineral property? A drilling permit should indicate if the well location is pooled or not. The State's Oil and Gas Commission has rules for pooling and unitization. In Texas we can go to our Railroad Commission's web site, which is our Oil & Gas Commission, and find the information on pooling, certificate of pooling, etc. You might contact your State's Oil & Gas Commission to get the data you need.

The Formula: The example, I have for calculating your decimal interest is as follows:

Assuming you have 80 net mineral acres out of a 640 acre section of land that is pooled for this well, then:

80/640 X 3/16 = .0234375 RI

It is your net mineral acres divided by the total pooled acreage X your royalty interest rate. That is my understanding.

Lou Wheeler said:

OK because I am new at this I guess I don’t understand the second part of your answer.
“Assuming your in a Unit, your net mineral acres will be divided by the total unit acreage and multiply by your royalty interest rate to get your decimal interest.”

I know my letter will show the decimal interest. what is a unit and how do I know the total unit acreage?? Like are you talking about a unit being like a section of land? and unit acreage how many sections is in the well?

Sorry …I think I am now totally confused. can u give an example? I understand that market value and production will change daily.

Thanks-
Lou

North Dakota has a law that states that royalty payments are due within 150 days of when the oil is produced so by December you should have a royalty payment unless there is a dispute of the title (in this case it can drag on for longer). As for the production, the 2000 boe/d was the initial production (IP). The production falls sharply until it stabilizes. Each well has a unique production curve but your well should stabilize at ~400-500 boe/d. However, some of that production is gas (boe=barrel of oil equivalent) which is burned off for the first couple of months so no royalty is paid for the gas. All said and done, you will probably be getting a royalty payment for your Net revenue interest on about 200-350 barrels of oil a day.

Phil

Phil-

Thank you for the info. As all this is new to me and my family. We own the mineral rights on 50 acres and the well is right on top of our section also I asked the state of ND to send me a print out of the production and it says Pool status: F do you happen to know what that means? Do you think we are in a pool? Or could “F” mean family?

Thanks again-

Lou

Thank you for the info. As all this is new to me and my family. We own the mineral rights on 50 acres and the well is right on top of our section also I asked the state of ND to send me a print out of the production and it says Pool status: F do you happen to know what that means? Do you think we are in a pool? Or could “F” mean family? Are all wells in pools who makes up the pool? Since the well is on top of our section I would ?? who else would be in the pool besides my family.

Thanks again-
Lou







Mike Igau said:



Lou: Do you own 100% of the minerals for this well? Are there other mineral owners involved with this mineral property? A drilling permit should indicate if the well location is pooled or not. The State’s Oil and Gas Commission has rules for pooling and unitization. In Texas we can go to our Railroad Commission’s web site, which is our Oil & Gas Commission, and find the information on pooling, certificate of pooling, etc. You might contact your State’s Oil & Gas Commission to get the data you need.
The Formula: The example, I have for calculating your decimal interest is as follows:

Assuming you have 80 net mineral acres out of a 640 acre section of land that is pooled for this well, then:

80/640 X 3/16 = .0234375 RI

It is your net mineral acres divided by the total pooled acreage X your royalty interest rate. That is my understanding.

Lou Wheeler said:
OK because I am new at this I guess I don’t understand the second part of your answer.
"Assuming your in a Unit, your net mineral acres will be divided by the total unit acreage and multiply by your royalty interest rate to get your decimal interest."

I know my letter will show the decimal interest. what is a unit and how do I know the total unit acreage?? Like are you talking about a unit being like a section of land? and unit acreage how many sections is in the well?

Sorry …I think I am now totally confused. can u give an example? I understand that market value and production will change daily.

Thanks-
Lou


Lou: Is the well a horizontal drill or vertical drill? A horizontal well can have horizontal legs of around a mile. It does not matter if the well is on top of your land in this case. This type of well could consume a few hundred acres and it would have to be pooled. If it is a vertical well then statewide rules on well spacing and depth of formation would come into play so as not to infringe upon your neighbors mineral property. This can get a bit complicated. It sounds like you have an undivided interest to your 50 acres with other Family members. In this case your decimal interest would be prorated according to each Family members share of ownership.
Lou Wheeler said:

Thank you for the info. As all this is new to me and my family. We own the mineral rights on 50 acres and the well is right on top of our section also I asked the state of ND to send me a print out of the production and it says Pool status: F do you happen to know what that means? Do you think we are in a pool? Or could “F” mean family? Are all wells in pools who makes up the pool? Since the well is on top of our section I would ?? who else would be in the pool besides my family.

Thanks again-
Lou







Mike Igau said:


Lou: Do you own 100% of the minerals for this well? Are there other mineral owners involved with this mineral property? A drilling permit should indicate if the well location is pooled or not. The State’s Oil and Gas Commission has rules for pooling and unitization. In Texas we can go to our Railroad Commission’s web site, which is our Oil & Gas Commission, and find the information on pooling, certificate of pooling, etc. You might contact your State’s Oil & Gas Commission to get the data you need.
The Formula: The example, I have for calculating your decimal interest is as follows:

Assuming you have 80 net mineral acres out of a 640 acre section of land that is pooled for this well, then:

80/640 X 3/16 = .0234375 RI

It is your net mineral acres divided by the total pooled acreage X your royalty interest rate. That is my understanding.

Lou Wheeler said:
OK because I am new at this I guess I don’t understand the second part of your answer.
"Assuming your in a Unit, your net mineral acres will be divided by the total unit acreage and multiply by your royalty interest rate to get your decimal interest."

I know my letter will show the decimal interest. what is a unit and how do I know the total unit acreage?? Like are you talking about a unit being like a section of land? and unit acreage how many sections is in the well?

Sorry …I think I am now totally confused. can u give an example? I understand that market value and production will change daily.

Thanks-
Lou