What are the main reasons not to sign a lease? Is there a downside?
The answer depends upon which state and county you are in. Please re-post the question in the correct state and county, then we can answer better.
The downside is that your minerals will be produced but you won’t get paid royalties. If you decide you want to participate later, the oil company will often let you participate but only as a working interest owner, rather than a royalty owner. As a working interest owner, your income will be charged with your proportionate share of exploration and production costs. If you have a modest interest, these costs being netted out of your income may result in your not receiving a payment for many years. I always tell my clients that there is rarely a good reason not to lease.
In Oklahoma, you have the option of forced pooling which can be very advantageous. Other states have different options, some with rather high penalties until the well pays out.
My understanding (which is limited) is that being forced pooled in OK results in a non-negotiable 1/8 royalty and, of course, no bonus payments. I know that many other owners prefer to be force pooled as well but I do not quite understand why and what the advantages are.
Force pooling in OK is much better than you think! The force pooling usually gives 3-4 option/bonus pairs which are “supposed” to be comparable to the best bonus/royalty offers in the last year for that section. Options can range from 1/8th with the lowest royalty but highest bonus up to 1/4th depending upon the area. Sometimes the higher royalty options do not have a bonus with them. Many of us choose the highest royalty option since it usually pays off better in the long run, especially if multiple wells end up being drilled. The bonus amount is insignificant compared to the royalties from the wells (if the wells are good).
The advantages are a short time frame of six months or a year or rarely 18 months. The reservoirs are defined so that acts as a depth clause. And most of my poolings have been gross proceeds. During the COVID time frame, some of the drilling was unable to be accomplished in the pooled time frame, so I received extensions and extra bonus amounts.
Most forced poolings offer a range of royalty rates. By law the smallest that can be offered is 1/8 per 52 OS Sec. 87.1. The 1/8th royalty is imposed upon an owner who does not make a timely election for a different royalty. It would be unusual for a polling order to provide $0 bonus (consideration) except for a higher royalty. As M_Barnes correctly noted there are often several options from which to choose.
This post is not legal, investment or tax advice, it is for discussion purposes only. Reading or responding to this post does not create an attorney-client relationship.
0_The Pooling Process in Oklahoma.pdf (340.4 KB)
This may be helpful. A bit old, but still has the basics.
I had never seen an order that offered higher royalty with no bonus, until this week. 22% and no bonus on Order No, 725324.
25% is higher than 22%. Often there is a bonus with the 1/4.
This particular company wouldn’t go for 1/4 at all, unfortunately.
Received a lease offer in Hughes County, OK. The highest Royalty 1/4 offered has no Bonus. So, was thinking about waiting for forced Pooling, ---- BUT when " forced Pooled" do I get forced to accept DEDUCTIONS to the revenue? And I guess I can not use any of the items in the Exhibit A that I usually attach to a lease, and it would seem if I sign a lease without a bonus I might be letting them flip the lease at no cost to them? I did read in another post that Forced Pooling usually is Gross Revenue (does this mean no deductions and has depth clauses?)
Thanks in advance – I have just never waited for forced Pooling before - so wanted to get a little info - I do understand about the 20 day rule and will copy the OCC if going with the forced.
There is no Exhibit A. The pooling Order will tell you what formations are being pooled and your interest is only tied up for those zones. Why do you care if someone “flips” your lease if you get what you want on the Exhibit A?
Pooling information is included in this booklet from the OCC.
Thanks Barnes and Baker,
Looked in the OCC booklet for information on deductions. Only item found was item 10 Page 12 -Items on PayStub — Other deductions from owner are to be detailed if quested by owner. Not sure but sounds like items like “Processing” , “Transportation” can be deducted from Pooled Owners?
Title 52 of the OK Oil & Gas code is the next place to read.
My mom’s mineral rights are in Pecos County Texas if that makes a difference.
Thanks. My cousin whose mom has the most mineral rights interest (27 percent vs my mom’s 6.25 percent) is concerned about liability since our family also owns the surface rights to the property. She also has environmental concerns. I don’t know how concerned I should be about these issues. In Texas, it seems like mineral rights owners still get royalties regardless of whether they signed the lease, but I don’t know if my understanding is right.
Interesting discussion about pooling. However, I don’t believe pooling is relevant with our particular well in Pecos County.