Section 9 - Canadian County

#1

Agent asking us to make an election prior to drilling. In addition to participating in the actual drilling they offer us three Lease / Assignment options which we prefer.

  • Bonus per net acre, 3 years and a royalty (1/8th, 3/16ths, 1/5th) or (deliver x% NRI)

Can you help me understand the offer?

  1. The bonus is a one-time payment for the entire 3 year lease period, correct?
  2. Is the royalty (i.e., 1/8th) paid annually each year (3 royalty payments) or is this a one time payment also?
  3. How is the royalty payment calculated? Is this based upon well production volumes? What does it mean when they say 1/8th royalty “or deliver 87.5% NRI” ?

Thanks in advance to anyone who can help us understand our options.

0 Likes

#2

Welcome to the forum!
Many of us prefer the higher bonus and 1/5th or 1/4th if offered. The bonus is smaller, but it is only paid once. The higher royalty usually outweighs the bonus in return (in good areas). And if they drill more wells, then the higher royalty is an advantage yet again.

  1. Yes, one time payment. That is why is is called a “paid-up” lease.
  2. The royalty is paid according to the terms of the lease. Usually monthly. When the well first produces, you will get a Division Order which is a contract between the operator and you. It may have a minimum payment of $100. I usually change that to $25 in order to have more regular checks if I only have a small acreage amount.
    3a. The payout for royalty is calculated by the following formula: net mineral acres/spacing unit (actual) x royalty x % perforations in your section. Most sections for horizontals are spaced at 640, but the actual section may not be exactly 640 acres. The sections along the northern tier (1-6) and the western tier (7,8,17,18,19,30,31) are often slightly different as they are corrected for the curvature of the earth. The royalty term is the 3/16hs , 1/5th, etc. If a horizontal goes over more than one section, the actual perforations percent will be determined the well survey and an assignment will be made.
    3b. Companies tend to think company-centric, so they keep 87.5% and you get 12.5% of the royalty. For 3/16ths, it is 18.75% to you and they keep 81.25%.

Good questions!

0 Likes

#3

Thanks M_Barnes. This is a big help.

0 Likes

#4

Your lease may last for decades, the lease bonus will soon be gone. I prefer the greatest royalty as it may pay out the best in the long run.

Beware of Delivering Lease Without Payment:

Failure of a company to pay a lease bonus is a theme that has been raised in this forum far to often. Below are a few discussions on the topic. It is always best to exchange a lease for a check at the time of the transaction. This may not always be possible because of distance. In such cases it is probably better to have an escrow company or attorney to hold the lease until the consideration is paid.

Sometimes companies file leases without payment of bonuses.

There have been cases were companies take leases but never file them. They return the leases later stating that they were never funded by the company. In the meantime, the mineral owner cannot sign with another company.

It is much easier to prevent the issue than to remedy it after the fact.

Below is a sample of Nightmares:

0 Likes