To Lease or Not to Lease

General Mineral Rights Discussion
#1

Hello All,

Still trying to wrap my brain around all of this. I am trying to determine the pros and cons of signing a lease vs. not. From what I've read, if a rig is coming into your pooling area you have 3 options..

A. Sign a lease. You get a bonus payment up front and some percentage of the royalties i.e. 16%. They get the other 80+% of the royalties for the duration of the lease. For that 80% they take all the risks and pay all the up front costs. I am assuming there are no risks, up front costs, or back-end costs for you.

B. Participate in the drilling operation. Pay, up front, your share of getting the operation up and running. You become a "working interest" owner and once the operation starts producing, you get 100% of your share of the royalties

C. Do neither and basically participate without "consent", in which case you pay 150% (the extra 50% being a "risk penalty") of your share of getting the operation up and running. The 150% comes out of anything the operation returns. You pay all of this before you see any royalties. After that you get 100% of your share of the royalties.

I have a few questions...

Regarding A: Is it true that there is no risk, up front, or backend costs for the mineral owner.

Regarding B: What is a ballpark figure for what it would cost a person to "participate".

Regarding C: What if the well never produces anything?. Are you still liable for the money they put into the rig?.

Thanks.

#2

To start with if you are force pooled/ carried interest you get the weighted average of what everyone else leased for or 16% cost free royalty from the very first barrel. Landmen sure do like to tell you you get nothing until the well and penalty are paid off, but it isn’t true. If the well never produces anything they could put a lien against any future production of your minerals, but if there is no oil or gas, I don’t think it will do them much good. Sadly wells have become so expensive it doesn’t seem practical for the average person to pay up front and participate. I have some authorization for expenditure [ AFE’s ] for wells of mine that estimated cost would be 9.4 million dollars each. My part of that is about $7,400 per acre per well. They are presently drilling the third of the 4 wells they have planned for that spacing. I suggest you read the N.D. Century code pertaining to forced pooling, it’s not a big paragraph.

#3

R W

Thanks for replying. That clears some things up for me and I will read the Century Code for sure. If the mineral owner signs a lease are they off the hook for their share of the up front costs?. Are their no hidden costs or liabilities for them if they sign a lease?.

#4

If you lease your only worries will be whether the well is good [ a lease won’t save you from a dry hole ] and your title is clear so they don’t hold your royalty payments in suspense. Probate/s and title work can be expensive and it’s up to you to prove you are entitled to be paid. It can quickly make a large dent in your signing bonus. You won’t be liable for the cost of the well if you are leased. Short of title work, I’d say there is peace of mind in leasing. The oil co brings a 6 to 10 million dollar well and you put up[ collectively ] say, between 0 and 100 million [ or more ] dollars worth of oil. The oil co’s cry about the risk and use it to justify their taking 4 times or more what you receive. I didn’t chase them down and coerce them into putting in a well. From my point of veiw , I suggest they not drill where there isn’t oil. It’s an oversimplification but, the O&G co has no oil of it’s own, [ I’m sure they buy some mineral acres but the vast majority is leased ] they have to lease yours to make money. If you participate they make nothing. If you are carried interest they make a 50% risk penalty of the cost of the well. They are not drilling 9 million dollar wells to make 4 . 5 million dollars. I’m not advising people to go carried interest. Being carried, which I and my brother are, will involve work. I do recommend that you study up on being force pooled and don’t let them tell you untruths to make you take carried interest off the negotiating table. If the oil co’s in N.D. would negotiate up to 25% royalty [ as we frequently can get them up to in Texas ], I’d be more inclined to look on leasing as a partnership. My brother and I heard alot of $75 per acre and 1/6th [ 16.67% ] offers for our acres in the flaming hot 2008 McKenzie co N.D. With oil higher than it is now and with 3 wells actually drilling at that time on our minerals, they kept telling us it’s a good deal, all it’s worth. Sounds more like someone trying to take advantage of the uninformed than a partnership between oil co and mineral owner.

#5

Wow, thanks for that!

Regarding a clear title. it is my understanding that the O&Gco will do a title search and determine percent ownership. I guess they do this after we sign the lease. Is there typically language that can change the bonus amount if they find a problem?.

#6

I have seen language allowing an adjustment. If it’s just a few acres left out they will probably send you a ratification and a check. If they overpaid you by an acre or two, they may consider it a gift. I don’t know if anyone has mentioned to you but don’t accept drafts they send with the lease as payment. It’s optional if they honor it. I’d demand a check. I’ve had the draft not be honored, and the lease was recorded. I’ve had to engage an attorney to straighten it out. I may recover legal fees in the end but I have to pay my lawyer up front. If they write you a check you have more direct recourse.

#7

I have heard that bank drafts are not a good idea. However don’t you have to sign the lease before they pay you your bonus. In which case it seems there would need to be language in the lease that specifies a live check.

r w kennedy said:

I have seen language allowing an adjustment. If it's just a few acres left out they will probably send you a ratification and a check. If they overpaid you by an acre or two, they may consider it a gift. I don't know if anyone has mentioned to you but don't accept drafts they send with the lease as payment. It's optional if they honor it. I'd demand a check. I've had the draft not be honored, and the lease was recorded. I've had to engage an attorney to straighten it out. I may recover legal fees in the end but I have to pay my lawyer up front. If they write you a check you have more direct recourse.
#8

Yes. You hand over an executed lease in exchange for a check. Whatever they pay you with could be subject only to verification of title, but it needs to be a method that gives you direct recourse if they record the lease and the instrument used to pay is not honored for any reason other than if it turns out you don’t actually own the minerals. You could possibly use a form of escrow in which the executed lease will be released after payment has been verified. Don’t put yourself in a position where you depend on their word. I did and now I’m having to pay a lawyer…and sitting here at 2 am trying to keep others from making the same mistake.

#9