What's the downside for not signing a lease?

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.

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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.

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Thanks @M_Barnes and @Richard_Winblad

That is really helpful information

0_The Pooling Process in Oklahoma.pdf (340.4 KB)

This may be helpful. A bit old, but still has the basics.

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