Section 9 - Canadian County

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.

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!

Thanks M_Barnes. This is a big help.

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:

I am in the same boat as “themeyers”. I received my options letter and it has 5 options available to me. I actually have received a letter from a second company making their office. I spoke with an individual at the Land Records office there in Canadian Co. They advised adding an addendum to include verbiage about Gross Value of Production, Not Deduction Clause, Depth Clause, and Pugh Clause.
Is there a form or form letter I could get access to, to use in my response to the Landman?
M_Barnes and Richard_Winblad, are either of you available for hire to create my response? I apologize for seeming to be so novice, but I am. I certainly don’t want to get hasty in my response.

The first thing you need to do is get a copy of the first company’s lease and a copy of the second company’s lease. Do not agree to any terms. You need to read the leases first and understand what they are saying before you can craft a response letter or and Exhibit A (the addendum) as you need to find out what you need to change. Never do a deal over the phone, only in writing by email or certified mail. And never send a lease without getting paid. More on that later. Get the leases first and then come back with questions.

Will do and thank you so much.

If they have filled a pooling, I would just elect under the pooling. You get the same upfront bonus, buy usually only last 6 months to a year.

In the letter I have that offers my options and where they are asking me to elect, sign and return, there is a paragraph as follows: “Camino anticipates filing an application to force pool this section with the OCC in the very near future. In the event that you elect to participate under this letter, you must also elect in writing to participate pursuant to the terms of the Force Pooling Order to issue.”

They are required to attempt to lease everyone before they can force pool you. I would only lease for a year if you don’t want to wait for the pooling hearing.

My concern with waiting for the pooling is I would receive the less amount of Royalty option.

If they are offering now, it will be offered under pooling. Are you wanting a 1/5 or 1/4?

1/4 is what I would prefer.

what is the section, township and range?

Mount Scott 1207 4-9-1WH Section 9-12N-7W

I just got off the phone with the Landman, he is supposed to be emailing me a copy of the lease.

How many acres do you own?

Their letter doesn’t say so I got a copy of warrant deed showing, lots 20-21-22.

That wont tell you necessarily, but gives you an idea of how large it could be. I would ask that landman you just talked to.

He was not easy to warm up to. LOL I know the area in which I owned the home, I don’t think it’s real big. It’s in a neighborhood.