I have an overriding royalty interest for a well in Texas.
With my latest statement, the operator sent me a note that says, “You didn’t pay the AFE so we are going to change election to ‘Non-Consent’ unless the payment is received.”
Can anyone give advice on how I’d go about calculating whether or not I should pay the AFE or go with Non-Consent?
This is a confusing post. What exactly do you own? An ORRI is an overriding royalty interest in an oil and gas lease and is a royalty similar to a mineral interest. If you are subject to an AFE then that is a working interest. That would mean that you own a percentage of the lease as a lessee and so are a working interest. In that case you receive the revenues (less any royalties owed to the mineral interest lessor) and less your proportionate share of the lease operating expenses. Are you already receiving revenues and so subject to a joint. Operating agreement (JOA) which sets out a penalty for not participating in a new well or is this the first well and you have the right to accept or reject the proposed JOA? You need to fully review your assignment and any other related documents such as the JOA. Then you have to evaluate the proposed well and your costs
Chances are that in the JOA there is a penalty for not participating (going non-consent). In many cases, the penalty is 3x the cost of the well. Depending on the area, it may be worthwhile to participate. There is obviously risk with both choices. In participating, you are sharing the cost/maintenance, but will see cash flow to offset the costs, but in non-consent if the well never pays out (including your penalties for not participating) then you may never see any revenue interest.
Feel free to shoot me a message with any particulars if you’d like!
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