What Happens When Lease Flipped to Non-participating Third Party - North Dakota

Could any mineral owners here comment on the pitfalls of leasing with a non-operating third party who then chooses not to participate in the wells? This would be in North Dakota on a parcel that has existing wells. I am especially interested in learning what happens to the 16% statutory royalty, possible bankruptcy and other potential hazards of leasing with someone other than the well operator.

Thank you

Has the operator ever sent you a lease offer which you have declined and then made a participation offer sending you an AFE after receipt of which 30 days have elapsed without you having made an election?

Hi rwk,

The well operator made a verbal lowball offer (with a take-it-or-leave-it attitude ) that I rejected, right before the first well spudded, . Then they sent the AFE's which I did not return, told them I would go non-consent instead of accepting their lowball offer, which was much less than the average of other leases in the DSU. (I've read most of your non-consent threads on the mineral forum for the past few years, so thank you for all of that info!) I'm very strongly inclined to continue as a non-consent because the acreage is prime and in an area where superfracks are coming in with big results, which would hypothetically pay off the well a lot sooner than older wells. However, landmen are making big lease offers too so I'm wondering, what if I leased and then THEY decide not to participate and be non-consenting, what happens then? Do they get the 16% statutory royalty, what happens if they flip the lease to somebody like Chesapeake Energy who then absconds with the royalty money, or a company that goes bankrupt?



If the operator sent you the participation offer (AFE) and you didn't elect to participate, you can't lease to anyone but the operator in the spacing you received the time elapsed AFE's for.

The operators force pool the spacings as a matter of course these days even when they think they have all the interests accounted for.

Once the operator has force pooled the spacing you can't lease to anyone but the operator, BUT you can still enter into a farmout agreement with someone for future wells. You put up the minerals and your partner in the farmout agreement puts up money for drilling and expertise if you have chosen the correct partner. You still have that option.

I don't know exactly where your minerals are but I believe you are (reasonably) near the river from what you have said elsewhere and that area is generally the low/thick/rich area and your operator wouldn't like it if you participated or entered into a farmout deal with someone. The Operator might dislike the possibility enough to come to the table and negotiate a lease in earnest, should you still wish to lease.

It's a good time to be looking for a partner. Drilling cost is down to 2/3 the cost of what it was previously. My most recent wells are scheduled to have 50% more frack stages for 2/3 the cost of my 2011 wells. Things are definitely looking up.

Thanks for the reply. So, if I can only lease with the well operator within that DSU, what is the game of the land guys who keep offering me leases? If they are an LLC or whatever, do they have other options besides farming out or participating themselves?

We call that evidence of title Dog. It's worth more to them than what they are offering, so hang on - and educate yourself on everything about your minerals.

Dogbert, if someone is making lease offers for an area you are already force pooled in, they have either made a error because they haven't researched, they work for the operator or they are inviting YOU to make a mistake in hopes that they can squeeze something out of you.

The state has already assigned the right to develop your minerals in the Drill/Spacing Unit to the operator through force pooling, how are you going to assign those rights to a lessee? The reason you might still be able to lease to the operator is because they already have the rights to produce your minerals.

If you do not have the right to lease minerals and you lease them to someone else, the new lessee can sue you not just for the return of the bonus but also for all the money they claim they lost not being able to be a working interest. If you need an example send me a friend request, it wasn't me and I don't want to embarrass someone unnecessarily.

LLC is only the form of the entity, doesn't affect the options.