Royalty vocabulary

Shales Bakken Shale
1

Hello everyone,

My siblings and I are mineral owners in one producing well and another well that is about to come off the confidential list. We are about to begin receiving royalties, have elected to participate, and have signed division orders.

We do not know how much we will be receiving, but the one well has produced 60,000 barrels since February 2010 with our interest being 0.018% [spacing unit 1280 acres]. The second well was spudded in December 2011 with our interest being 0.0012%, still on confidential list.

Our question is the landsman for the oil company has been emailing us in language we cannot understand. We want to know what JOINT INTEREST BILLING DECKS and CASH CALLS mean. Since we sent in our share of participation, it has taken 5 weeks just to get the landsman to email me back.

Also have question as to our back royalty payment from time of production through the present time; is this usually sent in one lump sum? We know we will be receiving monthly payments from the present onward, but are questioning the back royalties we are entitled to.

Any help in this matter would be appreciated; it is like pulling teeth to get any information from the oil company even when we own the mineral rights.

2

JIB Decks are basically the bill you get for your part of the cost. Cash calls are a payment of your well costs in advance to drilling the well or the costs expected within the next month depending on the operating agreement language. Hope that helps. In terms of entitlement to royalties or payments I would check with a professional in terms of entitlement to those. I would also go through each check stub in detail and make sure that you weren’t already paid for past production. As small as the interest is I would bet the total of the payments on the 60,000 bbls is less than $1,000.

3

And, I would bet your take is MUCH higher than $1,000. It all depends on whether you are receiving .018 percent interest or .018 digital interest. It’s my guess that you are receiving .018 DIGITAL INTEREST!! And, if this be so, for comparison purposes, we have .010788 digital interest in a well…and in April of this year, this well produced 2194.01 units of oil…and our check was for $1,771.07 after taxes, etc…

Hope this helps with your “figuring” and hope your .018 is digital interest and not percent interest…as they are two completely different figures.

And then, in terms of payout, check your division order. It should state the stipulations of the minimum payouts…“if payout is more than $100, then payment will be made monthly and if less than $100, it will wait until the next month”…or something like that!

4

Simple math, if the well produced 60k barrels that is about 46 barrels per acre. Quarterly production costs on my wells are absurdly low. I think you probably will receive an average of $70 to $75 per barrel after production and severance taxes. Then you have state and federal income taxes but also a 15% depletion allowance on federal tax return.

5

Thank you so much. We have approximately 8 mineral acres; if my math is correct at 46 barrels per acre that would be approximately 368 barrels. Then one would multiply that times $70-75 per barrel resulting in $27,600 lump sum from the time the well started producing in 02/11? Since we did not get a chance to participate until one month ago, wouldn’t the oil company owe us some interest as well? We have been told by several people that we should have been notified within 150 days of first production or penalty would be imposed on the oil company. Is that for participating owners or just for individuals who sign leases regarding the 150 days? We have learned more from this blog than anywhere; I actually found out we had a well last October on this blog. Thank you for your expertise and help with my additional questions.

Pat Maloney

r w kennedy said:

Simple math, if the well produced 60k barrels that is about 46 barrels per acre. Quarterly production costs on my wells are absurdly low. I think you probably will receive an average of $70 to $75 per barrel after production and severance taxes. Then you have state and federal income taxes but also a 15% depletion allowance on federal tax return.

6

So if they drill a well on my 160 acres and I own all the minerals how much of a royalty check could one reasonably expect? At 3/16 I believe.

7

Deborah, an amount of money could be considered large or small depending on who you are talking to. I will tell you what I have been able to find out and let you decide. There are a handful of recent wells near you drilled by G3 and Oasis which it seems the great majority produce about 200 barrels a day for the first months tapering down to 60 to 70 barrels a day after a year and a half. You are in a 1280 spacing so you would be paid royalty on 1/8th of the production of 200 barrels, which would be 25 barrels a day initially (heaven willing). 25 barrels at $75 a barrel = $1,875 a day initially on which you get paid 18.75% royalty which would be about $350 a day but then there are taxes of 11.5% severance and production combined, ND state income tax. There can also be charges the operator can make against your royalty for transportation or conditioning the production for sale, also there will be federal income tax. Don’t count the chickens before they are hatched, operators have a habit of stopping production to work on the well or simply can’t get the oil out due to bad roads or snow in season so you may not get full months every month. Decline varies from well to well but from the handful I looked at in your area I would prepare for the well to be producing 60 to 70 barrels a day 18 to 20 months after first production. I think you could gross about $10,000 a month in the early months, how much you net will depend on taxes and how much the operator may charge against your royalty. You may get to net as little as 50% to 60% of the gross. If the price of oil stays up I think you may do better than $75 per barrel which will improve the upside. I wish I could pin it down closer for you than that but there are too many variables. If nothing else I hope this explained the variables and possibly gave you enough understanding (well performance around you) for you to make a fairly accurate estimate yourself.

8

Thank you so much! You are so knowledgeable and I sincerely appreciate it! G-3 (HALCON) plans to spud the first wells in 2013. ‘NOT counting ANY chickens’ has been my mindset from the beginning of all this action. I look up 99% of the info on the NDIC site, but you gave me a greater understanding.

I have posted before that my great-grandparents were the original homesteaders from Norway in that part of ND who busted their asses for a tough life… wonder what they’d say about all of this?

Deborah, an amount of money could be considered large or small depending on who you are talking to. I will tell you what I have been able to find out and let you decide. There are a handful of recent wells near you drilled by G3 and Oasis which it seems the great majority produce about 200 barrels a day for the first months tapering down to 60 to 70 barrels a day after a year and a half. You are in a 1280 spacing so you would be paid royalty on 1/8th of the production of 200 barrels, which would be 25 barrels a day initially (heaven willing). 25 barrels at $75 a barrel = $1,875 a day initially on which you get paid 18.75% royalty which would be about $350 a day but then there are taxes of 11.5% severance and production combined, ND state income tax. There can also be charges the operator can make against your royalty for transportation or conditioning the production for sale, also there will be federal income tax. Don’t count the chickens before they are hatched, operators have a habit of stopping production to work on the well or simply can’t get the oil out due to bad roads or snow in season so you may not get full months every month. Decline varies from well to well but from the handful I looked at in your area I would prepare for the well to be producing 60 to 70 barrels a day 18 to 20 months after first production. I think you could gross about $10,000 a month in the early months, how much you net will depend on taxes and how much the operator may charge against your royalty. You may get to net as little as 50% to 60% of the gross. If the price of oil stays up I think you may do better than $75 per barrel which will improve the upside. I wish I could pin it down closer for you than that but there are too many variables. If nothing else I hope this explained the variables and possibly gave you enough understanding (well performance around you) for you to make a fairly accurate estimate yourself.

9

Pat, I wish I would have seen this before you sent in your cash call, as that is total BS! You do not have to pay your share in cash up front, as it is already YOUR OIL and you were probably FORCED POOLED, WHICH IS BS ALSO! Under the NDIC Statutes, you are entitled to your average weighted royalty, if unleased, and the operator normally will carry you, and take your share out of the production. Now, if they properly notified you prior to commencement of drilling to lease or participate, then you would be subject to a RISK PENALTY OF 150-200%, if they PROPERLY notified you… If they did not follow procedures, you are not subject to RISK PENALTY. Wish I would have seen this in August, as they owe you, not you send them money! DIRT BAG LANDMEN WHO LIE FOR THE OIL COMPANIES, CAUSE THEY DO NOT WANT TO BE PARTNERS WITH THE MINERAL OWNERS, SO THEY SCARE THEM AND THEN HOLD YOUR MONEY, AND DO NOT CALL YOU BACK CAUSE THEY ARE SCREWING YOU AND EVERYONE ELSE IN THE COUNTRY! PLEASE PEOPLE UNITE AND PUT A STOP TO THE INSANITY OF THEM DICTATING THE SHOTS!

10

Jody, I am on your side. Just for information the law says the weighted average royalty or 16%, whichever the operator elects. The penalty for those who own the minerals being carried is 50% and if you hold the rights to the minerals through a lease the penalty can be as much as 200%.

11

Jody you are so right on. I wish my neighbors/family would talk! Instead it is hush hush and in our case the landman almost got away with leaving some very important items out of our lease. Much to the dismay of family members we refused to sign till he put in everything! In the end sibs signed individual crappy leases for the money and we basically said to hell with the money we want the right verbiage in our lease so it took another 6 months but we got it all. People need to realize the landmen are not on their side!!!

12

Hello everyone,

Since I last posted, my siblings and I have received wildly disparate sums from the oil company on our second well; two of us began receiving money 09/27/12 [first check being the largest] and then again this month for the monthly sum. My third sibling got a check this month for 5 times the amount we got; Oasis has sent very short brief messages stating they will look into it, but did not give us any information on this disparity. We are participating owners in this second well and are only getting $100.00 monthly.

Our biggest frustration is our first well; we have legal counsel, but that has not sped up the process with this oil company. We still have to get our first check and it will be two years since first production and over two years since spudded. We sent in our participation moneys in June and they cashed our checks on July 3rd, so have had our money for four months. We called the oil company last week about the second well and mentioned we still have not received moneys from our first well; they told my brother that the first well is not even in our names, is still in our deceased relatives’ names. The oil company had not given our deed information to the revenue portion of the company; we are beyond frustrated.

Insofar as royalties or interest, our legal counsel advised us that because we are considered a “working interest” owner, we do not own a royalty. We own the right to receive our pro rated ownership from oil produced. The well has produced 75,000 barrels of oil and we have yet to receive any money. I cannot believe they would not be giving us back some interest on the moneys they have had from us for four months; I agree we are between a rock and a hard place. They tried and tried to get us to lease; we refused and we only got the participation papers sometime last May, which they received in June. So we wait and wonder if the oil companies sandbag participating owners; just stall and stall, even when legal counsel is involved. We just do not know what to do any more.

13

Pat, you are being so violated just like I am as a “WORKING INTEREST BUT LEFT IN THE GUTTER BY OIL COMPANY MINERAL OWNER”!!! I would suggest calling the North Dakota Industrial Commission and Lynn Helms, but it does not help at all, as they really work for the oil companies, not us tax paying-salary paying mineral/land owners!!!

There is so much corruption and illegal business activity and politics in North Dakota by paid off public officials, that we the people need to hold them accountable immediately!!! Call the Governor, Attorney General, Industrial Commission, Secretary of State, Tax Commissioner, and Sheriff’s Office to report your violation of constitutional/mineral owner rights! Then call the Jerry Spence Law Firm in Jackson to join the class action suits!! Tell others also. Thank you.

14

Welcome to the oil business. I’ve been watching what has been happening in the Bakken for a couple of years, and the one thing I have observed perfectly is by and large the mineral owners signing leases are woefully inexperienced, and they apparently don’t have access to good and seasoned advice. So many leases are vanilla 2-page forms published by the oil companies. The more acreage a mineral owner owns the worse this is for them. I’ve been in upstream E&P for 35 years, worked all over many large producing states, and I can say without a doubt the mineral owners in North Dakota and Montana are not doing themselves any favors by not having really good advice. And the problem I’ve observed for them is the operators in the Bakken are dedicated to holding as much acreage as possible without having to renew their leases, and that they are also succeeding at it very well, at least in North Dakota. This may be a one-chance opportunity for many or most mineral owners, so they don’t want to get a bad lease agreement at the outset. Also, the majors and large foreign oil companies are gradually buying up the Bakken and the large operators drilling in it. That’s a negative for mineral owners and Americans, at least in my view. Large mineral owners need to get very good advice.

Mark

jody kuntz said:

Pat, I wish I would have seen this before you sent in your cash call, as that is total BS!!! You do not have to pay your share in cash up front, as it is already YOUR OIL N you were probably FORCED POOLED, WHICH IS BS ALSO!!! Under the NDIC Statutes, you are entitled to your average weighted royalty, if unleased, and the operator normally will carry you, and take your share out of the production. Now, if they properly notified you prior to commencement of drilling to lease or participate, then you would be subject to a RISK PENALTY OF 150-200%, if they PROPERLY notified you…If they did not follow procedures, you are not subject to RISK PENALTY. Wish I would have seen this in August, as they owe you, not you send them money!!! DIRT BAG LANDMEN WHO LIE FOR THE OIL COMPANIES, CAUSE THEY DO NOT WANT TO BE PARTNERS WITH THE MINERAL OWNERS, SO THEY SCARE THEM AND THEN HOLD YOUR MONEY, AND DO NOT CALL YOU BACK CAUSE THEY ARE SCREWING YOU AND EVERYONE ELSE IN THE COUNTRY!!! PLEASE PEOPLE UNITE AND PUT A STOP TO THE INSANITY OF THEM DICTATING THE SHOTS!!! JODY KUNTZ

15

Mark, I would like to say, “Thank you for stating the truth on the ND situation.” If the people would’ve united or taken the time to educate themselves, this oil-favorable situation would not have happened, but the lure of the carrot (bonus money) blindfolded the mineral owners! It’s sad as they do not realize that forever their minerals are HBP… I’m thankful to have held out, even though the retards are now drilling well #2… The oil companies have a vendetta out for me, as I have been throwing the “bullshit flag.” Just wish more would!

16

If the average North Dakota mineral owner ever got to read through the basic terms of the average oil & gas lease being executed by mineral owners down in the Eagle Ford Shale in South Texas, they probably wouldn’t understand how much more sophisticated Texas mineral owners are than they are. And, as a course of business, oil companies take the most lessor advantageous terms you can imagine. I use provisions that are routinely accepted by almost all oil company operators that make mineral owners tens and hundreds of thousands of dollars over the lifetime of a producing well. I understand there are some mineral rights rich folks who need the money now, but again, when a mineral owner takes a 2-page lease form prepared for an oil company, they are shooting themselves in the financial foot. I routinely work with oil & gas lease forms that are more than 50 pages long! Anyone can imagine what that means financially.

17

Unfortunately, those with smaller interests need professional help with their lease just as much as some with large interests. It’s just that for the small interests holder it isn’t cost effective. The lessees want you to sign a lease for 1% of what they expect to make off of your oil. The lessee wants you to do this before you find out how much is at stake. The lessee will not put it in the terms of “I will pay you 1% or 2% of the value of your oil up front in exchange for 100% of the oil and 80% or more of the value of that oil.” Yes, I said 100% of the oil. If the operator gets production, they own 100% and all you have is their word that they will pay you your royalty from the production. It is not against the law to owe someone money, so they are not stealing from you and all you can do is sue them. Besides, you are in business with them, you signed a contract, it’s just a business dispute over oil that is no longer yours, so how can the operator lose? They also want you to sign that lease before you understand how little of the royalty you will get to keep after deductions that the operator will make and after taxes. You may get to keep half or possibly a little more if the federal government does not do away with the 15% depletion allowance. If you signed a lease for 20% royalty, ask yourself if you would have signed for 10%? Every day, I hear of more people who the operator is not paying according to the agreement or according to law. THE LEASE IS NO PROTECTION FOR YOU UNLESS YOU CAN AFFORD A $100,000 LAWSUIT TO ENFORCE THE CONTRACT. The lessee knows this. The lessees also get the courts to change the definition of the clauses of the lease. Cost free no longer means that you don’t have to pay post production costs; now it means you don’t have to pay for the well. Why on earth would you have leased if you had to pay for the well out of your royalty anyway? The courts are bought. The formations in North Dakota have been redefined. The upper, middle, and lower Bakken as well as the Three Forks have in cases been redefined as a common source of supply, so your depth severance/Pugh clause could be rendered meaningless if it is by formation and not specifically by a number of feet above or below the depth drilled and from which production is occurring. You don’t want them to hold greater depths just because they drilled deeper and plugged back or get the formations from the surface to the center of the earth defined as a common source of supply. The operator causes the meaning of your lease to change after you are leased and held and you can’t do a thing about it. The operator can at will not pay you royalty and not have to worry about it if you can’t afford the lawsuit. Don’t worry that I am giving the operators ideas, they already know. Once you are leased your options end. You are chained with no freedom of action besides very expensive lawsuits, if you can afford it, if you can find a lawyer who isn’t conflicted and will take your case, and even if you win, the lease will stand and the operator will still profit from your oil. After all, you already gave them 100% of it for 1%-2% up front and a promise of some percentage in the future. You need to do all of your research before you give the lessee the lease because afterwards you likely won’t be able to do anything. Do your research before you sign anything because it will be just as much work afterwards if you try to find out what happened to you and what went wrong and at that point, knowing will not make things any better. The more you know, the more luck you will have. Good luck to you all.

18

Jody,

My sibs and I again are frustrated. We are “working owners” in one well and awaiting participation papers in another. Our Cash Call invoice dated 05/29/12 stated we each had a working interest of 0.01736% and we paid $1,228.86 each, which was cashed on 07/03/12. They failed to get our deeds straightened out until two months ago as the deeds were still in our deceased relatives’ names; therefore we had to sign division papers on this well in November 2012 to place it in our names. There were two papers; one stated unleased mineral decimal interest of 0.00002778 and the other was royalty decimal interest of 0.00007234; we have a total of 8 acres. We got a check one month ago on this well in the amount of $520.00 each; this well began production on 02/11 and has produced 68,000 barrels. Today the division order manager told us that was all we were getting; initially were told we would get one big check dating back to initial production and then monthly. I guess we were under the impression that we would receive approx. 3,000.00 each initially per calculation in back pay from this well.

Can you or anyone else tell us what the proper calculation is to determine our share in this well? I know there is a class action lawsuit going on, but we are reluctant to join as do not know if we are having royalties withheld or not. Thank you so much.

Pat Maloney

Mark Skipper said:

Welcome to the oil business. I’ve been watching what has been happening in the Bakken for a couple of years, and the one thing I have observed perfectly is by and large the mineral owners signing leases are woefully inexperienced, and they apparently don’t have access to good and seasoned advice. So many leases are vanilla 2-page forms published by the oil companies. The more acreage a mineral owners owns the worse this is for them. I’ve been in upstream E&P for 35 years, worked all over many large producing states, and I can say without a doubt the mineral owners in North Dakota and Montana are not doing themselves any favors by not having really good advice. And the problem I’ve observed for them is the operators in the Bakken are dedicated to holding as much acreage as possible without having to renew their leases, and that they are also succeeding at it very well, at least in North Dakota. This may be a one chance opportunity for many or most mineral owners, so they don’t want to get a bad lease agreement at the outset. Also, the majors and large foreign oil companies are gradually buying up the Bakken and the large operators drilling in it. That’s a negative for mineral owners and Americans, at least in my view. Large mineral owners need to get very good advice.

Mark

jody kuntz said:

Pat, I wish I would have seen this before you sent in your cash call, as that is total BS!!! You do not have to pay your share in cash up front, as it is already YOUR OIL N you were probably FORCED POOLED, WHICH IS BS ALSO!!! Under the NDIC Statutues, you are entitled to your average weighted royalty, if unleased, and the operator normally will carry you, and take your share out of the production. Now, if they properly notified you prior to commencement of drilling to lease or participate, then you would be subject to a RISK PENALTY OF 150-200%, if they PROPERLY notified you…If they did not follow procedures, you are not subject to RISK PENALTY. Wish I would have seen this in August, as they owe you, not you send them money!!! DIRT BAG LANDMEN WHO LIE FOR THE OIL COMPANIES, CAUSE THEY DO NOT WANT TO BE PARTNERS WITH THE MINERAL OWNERS, SO THEY SCARE THEM AND THEN HOLD YOUR MONEY, AND DO NOT CALL YOU BACK CAUSE THEY ARE SCREWING YOU AND EVERYONE ELSE IN THE COUNTRY!!! PLEASE PEOPLE UNITE AND PUT A STOP TO THE INSANITY OF THEM DICTATING THE SHOTS!!! JODY KUNTZ

19

This is really an over simplification but a working interest owner is not going to break even until sometime after 100,000 barrels have been sold… I would say closer to 130,000. If you paid $1,200 and they have sold 60,000 then you should be in the neighborhood of $600 since you are almost half way there in production.

This didn’t answer your question specifically since no math is really involved, I’m sure someone will be around soon to provide that math so you can get a much more exact number.

20

Pat, I don’t know how many of you there are participating in the 8 acres, so I don’t know how much you paid in total, but the cost of a well per acre can be 4 to 7 thousand dollars per acre. If you paid what they billed you, it’s probably their fault for not billing you the correct amount, but that wouldn’t stop them from holding your proceeds until your part of the well is paid for, and beyond just for good measure.

I have a friend who elected to participate in a well and they have yet to bill him and have paid him from first production. He’s still waiting on the bill.

Pat, I’m really starting to believe that the oil companies don’t know how to run the office side of their business and they just keep going with the mentality that they will just fix it later.

I took a look at your second well and it seems to be doing well with 69,688 bbl as of November and still producing 192 bbl a day.

All I can recommend is that you be persistent until you get answers.