I have been contacted by an oil company regarding mineral rights I own in Burke County, ND. They are currently drilling on one of my sections and preparing to drill on another section. I have also been told they may drill other wells in the same spacing unit.
I have been given the option to:
1. Participate in the well by sharing in the costs which would be proportionate with my interests.
2. Not participate in well.
3. Elect to lease
4. Sell mineral rights
I believe I understand the royalty calculation should I opt to lease.
My question is regarding the cost participation option. I was told that after I paid my portion of costs I would share in the revenue. What I don't understand is how to calculate this option to compare with the lease option.
Can anyone give me an idea of how I could calculate my participation in revenue under the cost participation option?
I've got a big learning curve here and want to better understand all of the options.
Janis, many of your questions should be answered by receiving the AFE after which you will have 30 days to reply that you are participating, or you forego the opportunity to participate in this well but you will still be able to participate in future wells if you don’t lease. If you decide to lease, you can’t change your mind about that until the lease expires, which could be in about 100 years, or they may never actually drill.
You could be non-consent, receive the weighted average royalty or 16% whichever the operator elects from the very first barrel. I wish I could give you more to go on but it’s hard on my phone. The AFE should give you ownership percentages, a breakdown of what everything costs(estimate) the amount it will cost you to participate. The usually dont like to send the AFE because that is a road they dont want to travel. If you actually can and do participate for your acres, the operator makes next to nothing off your acres instead of potentially tens of thousands per acre. They would much rather tell you horror stories about vertacle gas wells that probably have not a thing to do with your well and say the AFE is coming. Don’t let them bluff, have them send the AFE. I may have said something of use in another thread. I will try to check back later if possible…
Thanks for the info RW.
I was told that my WI is 0.00179682 and the AFE total is $7,996,375 which means my share of the costs would be $14,368.05, if I elect to participate.
If I lease the bonus $ per acre is $1,000 and I have 2.3 acres, not much I know but something. The royalty percent is 20%. I believe the lease royalty would be calculated WI (0.00179682) X Royalty % (.2) X Barrels of oil X Price.
What I don't know is how the cost participation formula differs. They said that I would receive checks for my proportionate share (or my % of working interest) of the revenue from production. So does that mean that it would be:
WI (0.00179682) X Royalty % (.8) X Barrels of oil X Price.
I understand that in both options there will be deductions for certain costs and that if I chose the cost participation option I would also be responsible for some of the closing costs.
Do you know if there is a report that shows the total production of wells from inception. I'm trying to figure out how much an average well produces over time. I've researched a couple of wells and it looks like they start out really good and then taper down.
The other question I have is can I lease the land and then participate in cost? I suspect the answer is no for various reasons. So I imagine if I select the cost option I would need to do the same for any other well that they put in my spacing unit. I was told by the landman that it could be up to 14. I don't have that kind of disposable income.
Janis, here is another thread on the same subject as your first option:
http://www.mineralrightsforum.com/forum/topics/cost-of-participatio...
Thanks for the link. Very interesting information. I'd still like to understand the equation though.
Wilson Inc said:
Janis, another thing is you need to talk to a CPA. You need to know how much of your participation you will deduct in the first year for intangible costs, tangible costs, depreciation of equipment. Added to your 15% federal depletion. If you pay federal taxes in the first year, your well really made money or you have a really horrible CPA.
If you participate in the first well, you do not have to participate in future wells, you could lease that wellbore alone or you could be non-consent or you could lease all except your first well or you could lease all of it and the operator give you your participation cash back, the possibilities are numerous, it all depends on your negotiating skills.
BTW, you would not have to pay for plugging the well, unless you were not paying attention or just felt like throwing money away. There is a provision in law that says you can give your interest in that particular well to the operator, who will have to PAY you for salvage value of your proportionate share of all equipment, and you would not be responsible for any of that particular wells' bills from that point forward. You would of course retain your mineral rights and interest in any other wells, but should the operator not plug the well you gave your portion back in, you would no longer share in the production from that particular well, so make sure it is done before you give it back.
I forgot to mention that if the operator makes about 60% profit after paying all costs.....including the lessee. As was pointed out above, you don't have a lessee to pay so you make 80% or roughly 1/3 more than the operator. I realize the operator has economies of scale but 30% more can go a long way to making up for that.
RW, thank you for the invaluable information. You've given me a lot to think about.
So I was correct that the equation would be WI (0.00179682) X 80% X Barrels of oil X Price.
Can you recommend any other resources such as a book that would help explain mineral rights and how to manage them? I downloaded 'Maximizing Your Mineral, The Insider's Guide' by Kenny DuBose. I did a web search to find something more in depth and see that Amazon has a couple but one is from 2009 and things have changed since then. When we leased our acres in Mountrail county a few years ago there was no 'enhancing or post-production' clause. Now they are trying to slip that in the lease.
Janis,
Depending on what exactly you are looking for, there are also a few good books on NAROs website. http://www.naro-us.org/store
"Look Before You Lease" is decent and free with a NARO membership.
"Oil and Gas Law in a Nutshell" has some great info but could be better as reference material for most. It is a difficult book to read. As are most books concerning law.
"How To Manage Your Oil & Gas Interest For Fun & Profit" has some good info on record keeping.
"Money in the Ground" I hate the title, but one of the best on their site. (and the most expensive) I picked up a copy off the table at the convention this spring and skimmed a few pages and then got out the checkbook.
The pair of Oil and Gas law books here are great https://aapl.ps.membersuite.com/onlinestorefront/BrowseMerchandise.aspx but pricey. The info in each is the same, it is just indexed differently.
Thanks, Rick, for the resources. I'll have to spend more time on their site to see what they are all about.