I guess it's true?!! Mountrail county. I saw it last night on the Million Dollar Way website. I've always heard that the mineral owners don't ever see the prices they get on the auctions, but that is impressive figures!! I haven't seen a map of the area yet that involved these prices per acre other than it said it was one of the hot spots.
Mary Beth, a friend of mine was in lease negotiations in Mountrail and the lessee didn't want to pay $2,000 an acre and 20%. After my friend leased the lessee took out a loan against the lease for $54,700 per acre. The lessee would not have been able to get that much if the acres were not worth so much more.
Your reply made me wonder what that was about so here is my best answer from what I can tell, correct me if I am wrong.
OK, adding to my education of the oil business...
Mineral owner leases their minerals for x$, Lessee flips the lease to others in business circle, keeping say 25%, and makes money doing it. Then new part lease owners add the mineral lease- acquired in that deal- to the list of property in their list of mortgaged leased mineral interest property at the bank, and asks the bank for additional money based on new acquisitions, maybe now the loan is already $$$$$millions, and the bank holds the mineral leases and well production as collateral, whereby the loans at the bank are backed by a foreign company, maybe Australia or whoever. Now the lease holders have more money to acquire more new leases, back more drilling here or there, sends money out to all of the investors, pays on the bank’s note, and pockets who knows how much. Only the Lessee’s records will tell, and hopefully the bank has an audit yearly.
So, where does that leave the mineral owners, and how much is a fair price for leases? Knowing that their mineral lease may bring thousands worth of collateral to the Lessee's mortgage at their bank, what do you think our mineral rights leases should be worth, really?
Mary Beth, my opinion is that leasing is not the risk free activity people think it is. The lessee leases the mineral acres in the Bakken for 1% or less of what they think they are capable of producing and a royalty between 12.5% and 20%. A fair number of people at least suspect what the acres are worth but they think, well I give up 80% or more but I have a royalty that will make it all worthwhile. Don't bet the farm that the lessee/operator will not drill a cheapo well with beach sand and one third to one half the frack stages all other operators are using in the same area. Just enough well to hold the acres by production while the oil in place appreciates. The mineral owner, even with very good acres, capable of good production, take a great risk that their royalty will be lunch money and I'm talking McDonalds dollar menue. Too many times I heard that someone thought they would realise alot more, even from very good producing oil wells and some people are in absolute shock at how little they realise from gas wells with certain operators.
In ND how much is the lease really worth? I would say a 16% statutory royalty until the cost of drilling/completing and a 50% of actual cost of drilling and completing risk penalty is paid off. If someone needs the bonus money so badly, sell as many acres as needed to equal the bonus, take the 16% statutory royalty on the rest until payout and there is a very good chance you could be part owner in the well for the acres you kept and collecting 100% less cost of production. If an operator clears $60 a barrel when oil is $100, how much do you think you will make since you don't have to pay yourself a royalty, unless you really want to (75-80%?). Of course your effective percentage on all the oil depends largely on how productive your acres are. A poor well may only leave you an effective 20-30% after paying off the risk penalty, a very good well may leave you with an effective 80% of the value of your oil if you don't lease in ND.
As long as I am babling, lease then sell has to be the visibly worst strategy I've come across. Convey 80% or more of what you have to sell for 1% of it's value then try to sell the rest for possibly 25% of it's value. Why settle for 6% of the total value? Why not sell when you have 100% to sell? If you only realise 10% of the value of 100% unleased in the sale, you can receive 166% of the lease then sell strategy.
Not to be mean but if someone conveyed 80+% of what you had in your first oil and gas deal for 1%, I wouldn't be in a hurry to make another oil and gas deal. If you lease, and they drill, the best you can do is collect royalty to the dregs anything else and you just lose more money. It's their game. Some operators when they drill a good well send out a hail mary buy offer before the average mineral owner ever gets to know exactly what they were selling.
In Wyoming, or Texas (not always), and several other places, there may be no choice but to lease, Oklahoma at least generally lets you pick your poison. In ND, I believe that often, leasing is throwing money out the car window doing 80 miles per hour down the highway.
The value of a lease is however much you can get for it.
1. Thanks for the reply. So how much time does it take for an average 4000 barrels a month well take to pay off a 10 million dollar drilling expense using the 50% risk penalty you mentioned?
2. If I have my proposed lease well written to cover the pugh clause and vertical severance clause and selling at the point of sale for the gas and oil, and to exclude production expenses, and the other things to protect my interests, etc. and you go with the 16% and no lease written, how are you going to ever prove anything in court if problems come up years later? I have been using a checklist for leases from Texas, and it has items in it that I don’t see in the North Dakota leases. Right now I don’t know what your non-consent will cover in your non-consent lease, legally.
Here is the link for that for those that want to see the checklist:
http://www.gdhm.com/images/pdf/jbm-ogleasechecklist.pdf
3. So, say I leased and the lease wound up with a lien at a bank, and the Lessee doesn’t drill, does that cloud the title on my mineral interests for future leases after the 3 years was up and the lease expired? Without the cooperation clause in the lease the Lessor may not know they have their leased property in a bank mortgage, do they?
Are there honest investors and operators in North Dakota, who won’t drill the cheap well and will pay you a FAIR bonus for your mineral interests?
Mary Beth, the calculation to payout has many factors, price actually received for oil not least. It needs to be calculated on a case by case basis. Many people leased for 16.67% and I believe they would be much better off with future ownership than an extra 0.67% royalty.
Your Pugh clause may help if you have acres in more than one legal drilling spacing but if they are all in the same 1,280, 2,560 or larger spacing it is null, unless we are talking a vertical well but you said $10 million and vertical wells don't cost that much.
Your vertical severance clause may not be of much use either. The NDIC has declared the Bakken and Three forks as a common source of supply, that means that the upper, middle, and lower Bakken and the Three Forks and all of it's benches are combined and there is nothing to stop the Lodgepole from being included and to drill a single well that produces from the middle Bakken is to produce all of those formations and benches from a single well. This has negated practically all vertical severances clause in leases recorded before the NDIC declared this position. You had better get a lawyer to punch up those clauses to specifically deal with this situation in ND.
Non-consent, is not a lease, you still own 100% of the oil. The state allows the operator to produce your oil to protect your neighbors correlative rights but requires them to pay you a royalty until the well is paid for plus a 50% actual cost of drilling and completing the well penalty, then you have full ownership in the well proportionate to your interest, you can't possibly have more rights in a lease than you do with ownership, period.
The greatest part of a lease is the description of what rights you give up. You can put in all the clauses you think the lessee might agree to but you may be surprised that they will agree to them because the language is pure surplusage and has no effect whatsoever, like that vertical severance clause.
Frankly, I don't know what would happen if an operator used your lease as collateral and did not drill in ND. In other states it follows the property, in some states it does not encumber the minerals at the lease end. I do know that if you were non-consent, they can't get a loan against your minerals.
The better the area you are in, generally the better the well you will get. It doesn't make sense for the operator to cut their own profits by drilling a cheap, low producing well in a good area. In a poor to mediocre area, the operator may drill a well to a price point knowing that oil will be left in the ground. There is profit to be had in long term holding of these low producing acres or they would not keep drilling the cheap wells on them.
Mary Beth, I don't think you need worry greatly about the cheap well syndrome if EOG drills a well for you. The well just south of you drilled by EOG with 110,000 barrels in under 2 years and it looks like fairly steady production around 4,000 barrels a month is not a barn burner but a good well in my opinion, and I think in EOG's opinion because they have a location for a second well in that spacing.
You can lease to whomever you can work a deal with but who drills a well will likely be decided by who has the greatest leasehold in the spacing and your lessee if they do not have the greatest leasehold does not get to say how many frack stages or whether they use more expensive ceramic propant in the completion to get better production, it's just the way it is.
If they lease and drill a producing well in your spacing, I believe that these wells are going to have very long lives, including the period late in their life where they may be produced only one day or two days a month to produce whatever has migrated into the wellbore. Before the last needed well is drilled produced and plugged, those acres could be in production for 100 years. That is not something to fear but it is something to respect. I don't believe that anyone could craft a lease that will stand the test of protecting themselves and their heirs fully for 100 years, with all the orders from the NDIC and what the courts may do to change your rights under the lease. Remember cost free or free of cost in the pipeline used to mean you did not pay enhancement and transportation costs. The courts have now decided that it means you don't have to pay for the drilling of the well [(why would anyone give up the lions share of their produce if the still had to pay for their part of the well? We have the best judges that money can buy)] and you would have to pay transportation and post production costs. Be careful when writing the lease. Some people have leases more than 50 pages long, they are trying to anticipate the future.
Excellent perspective on North Dakota and serious issues to consider whether to lease or not in that state. R W you have provided some very convincing facts and arguments against leasing. Every scenario is different, but this logic seems very appropriate with large tracts of open land in North Dakota. I agree with you about the test of time. Leases are like a marriage you cannot divorce out of. Ownership provides many more rights and control in the process. Unfortunately, I think many people are unwilling to take on the responsibility of being an informed owner and leasing is just easy and requires a pen and notary to get a check.
It depends upon what percentage you are invested, according to your ownership of minerals, and you are not singly paying for the entire 50% drilling cost risk penalty. I have read where some mineral owners were told they had to pay upfront, but the costs come out of the well [s] and besides, you are getting the royalty paid everyone else in the spacing unit. Next stop may be this massive find in the Appalachians- http://www2.untappedwealthonline.com/brpc/index.html
Mary Beth said:
1. Thanks for the reply. So how much time does it take for an average 4000 barrels a month well take to pay off a 10 million dollar drilling expense using the 50% risk penalty you mentioned?
2. If I have my proposed lease well written to cover the pugh clause and vertical severance clause and selling at the point of sale for the gas and oil, and to exclude production expenses, and the other things to protect my interests, etc. and you go with the 16% and no lease written, how are you going to ever prove anything in court if problems come up years later? I have been using a checklist for leases from Texas, and it has items in it that I don’t see in the North Dakota leases. Right now I don’t know what your non-consent will cover in your non-consent lease, legally.
Here is the link for that for those that want to see the checklist:
http://www.gdhm.com/images/pdf/jbm-ogleasechecklist.pdf
3. So, say I leased and the lease wound up with a lien at a bank, and the Lessee doesn’t drill, does that cloud the title on my mineral interests for future leases after the 3 years was up and the lease expired? Without the cooperation clause in the lease the Lessor may not know they have their leased property in a bank mortgage, do they?
Are there honest investors and operators in North Dakota, who won’t drill the cheap well and will pay you a FAIR bonus for your mineral interests?