In December 2013, I declined a 3-yr lease offer from Diamond Resources of bonus $100/acre---($75.00/acre for a 2 year option) and 1/6th royalty---including a depth clause leasing the shallow rights only, on my rental acreage of 160 acres located at T162N, range 91, section 4 (SW). The farm manager indicated that this was possibly a lowball offer aimed at non-local owners. Now, in March, Diamond has, at the request of their client (Continental?), approached me again as a "holdout" (their term, not mine) and said, basically, "OK, tell us what you would accept; we'll take the offer to our client and they'll either accept, reject or counter"---this "prior to withdrawing offers and starting the drilling program". They say they'll entertain any reasonable offer; I'm just not sure I like that particular ball being thrown into my court. My husband and I have visited the NDIC website (very useful!) and also read through many of the comments on this forum (extremely enlightening!), but still feel unable to reach a decision. We are also wondering about the issue of "forced pooling." Is this a real possibility? I'm not sure we understand completely the ramifications of this, how common it is, or whether it can happen only at a certain point. Furthermore, we are also concerned about the potential effect of this on the availability of fresh (clean) water for our rental operation. Anyway---we'd be deeply appreciative of any advice or observations.
I dealt with Diamond Resources who were representing Continental and for the most part, felt OK with conversations despite my total lack of knowledge or understanding. However the thing I would understand about a lease...any lease...is that you now are locked in to one firm for a determined period of time. A lease becomes void if the Oil Company decides to push up a drilling date (if determined there is a high chance of oil/gas being present) so any term you lock in...the 1/6 for example becomes your share down the road if fortunate that the well produces. It is what happened to 2 siblings and myself when in 2012 Continental pushed up a drilling date just weeks before the lease was to be renewed and better terms were offered. In other words the share became less for myself and siblings.
Unaware of what or how much is being produced in T162N Range 91 S4 (SW), the unfortunate thing is that my understanding is that Continental is one of the biggest players and may have locked up or sewn up the majority and you and others are stuck between a rock and a hard place to negotiate much more. If producing in that area I would think HOLDING out may by an ace in the hole to garnish a better royalty. Based on activity I would think you could get better than 1/6.
I.L. Alfors, I too am very interested in what you wrote. I am so leery of dealing with the oil companies and do not appreciate the forced pooling thing. Please if anyone can help us please post something!
Ms. Alfors, you need not worry greatly about forced pooling. You would receive no bonus but you would receive 16% statutory royalty from the first barrel. The other 84% of your oil would go to paying for your portion of the well and paying off a 50% of actual cost of drilling and completing of the well penalty. the cost of the well and penalty couls only be recovered from production, you owe nothing out of pocket until the well and penalty are paid off from production. The applicable law is North Dakota Century Code 38-08-08. Remember that you are the mineral owner and not one who holds the right to produce the minerals because you leased them from someone which carrries a 200% penalty if force pooled. I actually prefer to be force pooled.
Oil companies do not drill wells to recover a 50% of actual cost of drilling and completing penalty. If Continental spent $8k per acre to drill/complete a well, they would recover only their cost plus $4k per acre = $12k if there is $50k worth of oil per acre you would receive the other $38k less taxes and cost of production which can be laughably low. I have one well that costs $1.40 a month per acre to produce 2,000 barrels a month. These costs are for a deep long lateral well, a shallow well should be much, much cheaper.
With $100 oil, an operator can make $60 after cost of production and paying a royalty. You would not have to pay anyone a royalty so you would make more per barrel than the operator could possibly $75 to $80 per barrel after the wellcost and penalty were paid off. You would receive the 16% statutory royalty until that time.
Operators do not want to force pool people, it caps how much they could possibly make from a well. You would not like it if your salary was capped at 10% of the maximum amount you could make either.
If you have 160 NET mineral acres, I have some doubt the well would be drilled without your agreement to lease. The operator would probably walk away and drill somewhere else where he could make his full desired amount. He would be walking away from all the money he paid to lease the others in the 1280 acre spacing and all the money spent on landmen and title searches, millions of dollars.
If you want to lease, you have an excellent bargaining position in my opinion, you can't be shut out because of the statutory royalty from force pooling which is only 0.67% less than they are offering 16% vs 16.67, a pretty small difference. If they force pool you, you could make alot more money a few years down the road when the well and penalty paid off. If the well never pays off and recovers the penalty, you owe nothing out of pocket. In the event of a dud well, the operator could place a lien against {once again} the production of your minerals only. If I wanted to lease at all, knowing what I know, I would give Continental a firm offer of 23% royalty, the same amount customary between oil companies in ND and the bonus amount would depend on the productive capacity of the acres. A shallow well is much cheaper than XXL long lateral horizontal well they normally drill, because they don't need expensive ceramic propant.
I think 23% royalty and $2k bonus per acre would be a fair offer in your area. I would tell them it was firm and they can just force pool me if they won't take it, but that is me and I fully understand what I would be giving up in a lease and what Continental would gain. The lease should be a flat 3 years, no extension no option. If you agree on price, then you need to agree on terms in the lease, get professional help for that, because the big print giveth and the small print taketh away and you should not pay marketing, post production costs, transportation. Remember, they want this, they claim they are willing to "force" pool you into it [which I doubt if you have 160 net mineral acres] they should accept responsibility for the costs. They were lowballing you. They want to buy 83+% of your oil for $100 per acre? A lease is a CONVEYANCE for a term of not just years "but for as long as oil or gas are produced" Don't trust any landman not in your employ, they work for their employer, to lease your minerals as cheaply as possible, they are already pulling out the "force pooling" card which sounds scary if you don't understand what it is, despicable. I hope this helps.
RW Kennedy, Thank you!!! This was VERY helpful and much appreciated! I have heard to ask for the bonus up front and not in a draft and not wait for them to do the title search. What do you advise on that? Also, "professional help" would be an attorney? How do you find one that is experienced in this? I am so novice on this! Thank you again!
Incredible and valuable input RW....thanks for providing same for this novice as well.
Hi,
May I suggest that you folks pay to get the NDRIN records for awhile. Looks like your section 4 is mentioned in a lot of salt leases. It costs $25 a month and it has been a good source of what is happening and how leases are being written to hopefully help protect the owner interests- if you want to have a lease at all. It won't tell you how much people are getting in a bonus, but it will tell you the term lengths and royalty to be received. You need to find out about what it is worth for salt water disposal wells! Maybe it is a good deal to be carried (with no lease) but I don't know, I am sure some other folks on this website do- when it comes to that type of well. On the NDRIN site you can find other people who have those wells.
Donna, I absolutely believe that you should ask for the bonus to be paid before you let the lease leave your hands. A company check should be ok, it will have words that is is for a lease and list the legal description of the minerals on the check stub. If you cashed it, the lease would exist in fact and the only thing you would gain from not tendering the lease would be a possible lawsuit that would cost more than you bonus would cover. If they try to cancel payment, you can take a hot check to law enforcement.
A word about bonus. The bonus is usually less than 1% of what the lessee expects to make from your oil, sometimes the bonus is far, far less than 1% in exchange for 80% to 88% of your oil.
The royalty is where they would like you to think your real payment would come from, the thing is, if they don't get your minerals into full production, they are keeping you at minimum wage and violating the unspoken covenant to act as a prudent operator, but all you can do is sue them, even if it is a condition of your lease that they must drill more than one well.
People say leasing is risk free, think about that. If the largest part of your payment is from production, what happens if you get a poor well? You are enduring the same risk as the operator!
There is a 99% success rate for finding oil in the Bakken or so they say, they did not say that all the wells are profitable, think about that. If you get a poor well that pays almost nothing, you don't get your minerals back. If there is a decent amount of oil there, the operator may not feel the need to drill another well to get it since the poor well holds the acreage by production. Leasing is risky, anything that purports to pay you the greater part of what you are to receive in the future, over a time period of decades, and depends on uncertain circumstances is risky, no doubt about it.
Donna Trontvet said:
RW Kennedy, Thank you!!! This was VERY helpful and much appreciated! I have heard to ask for the bonus up front and not in a draft and not wait for them to do the title search. What do you advise on that? Also, "professional help" would be an attorney? How do you find one that is experienced in this? I am so novice on this! Thank you again!
Thank you RW!! Lots to think about! You have been very helpful! Donna
RW Kennedy: Thanks so much for your generous commentary. Let me be clear about some things: (1) Diamond Resources did not bring up the issue of force-pooling; neither they (nor Continental) played that card as part of the "negotiations". I was just curious about the relevance of such a move, if and when it ever could happen. (2) There are 2 very old wells on my property, plugged and abandoned in the mid-80s. Diamond (Continental?) made no claim that they were interested in those specific wells, nor that they wanted to drill on my property. They said they were simply requesting my terms for consideration before "withdrawing offers and starting the drilling program." (3) I voice this as an absolute novice, but I am struck by your saying that a fair offer would be $2k/acre and 23% royalty. In looking through the discussion forum for Burke County, I find reported bonus offers ranging mostly in the $500-$1000 range---nonetheless I acknowledge that your ear may be tuned to other information sources. (4) I am still concerned to learn about about the impact of this activity on ground water availability to farmers for their operations. Thanks in advance for any further clarification.
r w kennedy said:
Ms. Alfors, you need not worry greatly about forced pooling. You would receive no bonus but you would receive 16% statutory royalty from the first barrel. The other 84% of your oil would go to paying for your portion of the well and paying off a 50% of actual cost of drilling and completing of the well penalty. the cost of the well and penalty couls only be recovered from production, you owe nothing out of pocket until the well and penalty are paid off from production. The applicable law is North Dakota Century Code 38-08-08. Remember that you are the mineral owner and not one who holds the right to produce the minerals because you leased them from someone which carrries a 200% penalty if force pooled. I actually prefer to be force pooled.
Oil companies do not drill wells to recover a 50% of actual cost of drilling and completing penalty. If Continental spent $8k per acre to drill/complete a well, they would recover only their cost plus $4k per acre = $12k if there is $50k worth of oil per acre you would receive the other $38k less taxes and cost of production which can be laughably low. I have one well that costs $1.40 a month per acre to produce 2,000 barrels a month. These costs are for a deep long lateral well, a shallow well should be much, much cheaper.
With $100 oil, an operator can make $60 after cost of production and paying a royalty. You would not have to pay anyone a royalty so you would make more per barrel than the operator could possibly $75 to $80 per barrel after the wellcost and penalty were paid off. You would receive the 16% statutory royalty until that time.
Operators do not want to force pool people, it caps how much they could possibly make from a well. You would not like it if your salary was capped at 10% of the maximum amount you could make either.
If you have 160 NET mineral acres, I have some doubt the well would be drilled without your agreement to lease. The operator would probably walk away and drill somewhere else where he could make his full desired amount. He would be walking away from all the money he paid to lease the others in the 1280 acre spacing and all the money spent on landmen and title searches, millions of dollars.
If you want to lease, you have an excellent bargaining position in my opinion, you can't be shut out because of the statutory royalty from force pooling which is only 0.67% less than they are offering 16% vs 16.67, a pretty small difference. If they force pool you, you could make alot more money a few years down the road when the well and penalty paid off. If the well never pays off and recovers the penalty, you owe nothing out of pocket. In the event of a dud well, the operator could place a lien against {once again} the production of your minerals only. If I wanted to lease at all, knowing what I know, I would give Continental a firm offer of 23% royalty, the same amount customary between oil companies in ND and the bonus amount would depend on the productive capacity of the acres. A shallow well is much cheaper than XXL long lateral horizontal well they normally drill, because they don't need expensive ceramic propant.
I think 23% royalty and $2k bonus per acre would be a fair offer in your area. I would tell them it was firm and they can just force pool me if they won't take it, but that is me and I fully understand what I would be giving up in a lease and what Continental would gain. The lease should be a flat 3 years, no extension no option. If you agree on price, then you need to agree on terms in the lease, get professional help for that, because the big print giveth and the small print taketh away and you should not pay marketing, post production costs, transportation. Remember, they want this, they claim they are willing to "force" pool you into it [which I doubt if you have 160 net mineral acres] they should accept responsibility for the costs. They were lowballing you. They want to buy 83+% of your oil for $100 per acre? A lease is a CONVEYANCE for a term of not just years "but for as long as oil or gas are produced" Don't trust any landman not in your employ, they work for their employer, to lease your minerals as cheaply as possible, they are already pulling out the "force pooling" card which sounds scary if you don't understand what it is, despicable. I hope this helps.
Oh well, if you don't lease, give them time, it's early days yet. I have never talked to a landman or VP of land who did not pull out the forced pooling card when they realized that I truly did understand what I would be giving up and would not lease for a pittance.
23% royalty is the customary between oil companies assigning leases from all I can learn in ND. If someone leased you for 18.75% and assigned your lease to the operator for 23%, they would heep the difference, I see no reason you shouldn't have the whole thing exceptiong that your knowledge and negotiating skills may not get it for you. Between oil companies for the assignment of your lease $2k per acre would be extremely reasonable.
The point was, "If it were me". I don't care if I lease or not, I don't care if I am force pooled. I would have a good idea of the value of the mineral acres and be in the strongest position. If they don't want to meet my price, I will just wait and take 75% of the money that well and any other wells make from my minerals before they are plugged and abandoned.
The "withdrawing of offers and starting the drill program" is completely posturing. The last thing the operator wants is for you to go unleased. I have SEVERE doubts that the operator would want to CARRY you if you have 160 net mineral acres, 1/8 of an entire 1280 spacing as a few years down the road you would own 1/8 of the entire well and it's production after having received a 16% royalty up to that time, not just have a royaly interest in the production from 1/6, 3/16, 1/5 or 23% of that 1/8 of the entire well spacing. Saying they are withdrawing offers is like saying that if you do not agree right now, we will stop asking you to give us millions of dollars.
I don't know how I would live with myself if they stopped asking me to lease so THEY could make millions of dollars off of my minerals.
I have at least 3 operators producing my oil right now, 14 wells plus 2 awaiting completion, not a single Christmas card from any of them. As my brother says "it's not oil friends, it's oil business". The landman, operator, title lawyers, pipeline companies, refiners or distributors are not my brother in law, they and my sister will not have to move in with me if they don't make a KILLING. A lease is the absolute cheapest way to gain the right to and posession of your minerals or they would do something else, whatever was cheapest. If a well is decent at all, they would do fine off your acres at $2k and 23%. If they drill 6 wells, the bonus per well even at $2k would begin to look pitiful, wouldn't it? I wish you good luck with your negotiations. The farm manager was right but even he may not have the experience you need in this matter.
I have read all the advice that you have gotten and I think some of it is not quite right. I am a land owner in Burke County. Our family currently has wells and has had since 1996. We have been recently contacted to release SOME of our land and did so with Diamond Resources. I have been the one to lease and negotiate those leases for almost 20 years. In Burke County, depending on your location, the lease rates vary dramatically. If they can drill directly into the Bakken you may get the big money for your lease. On the other hand if you have land in the Madison Pool, you may get substantially less. I have to be careful about what I say, however a new company is coming in and is going to drill just a few and by few I mean less than five "test" wells into the Madison pool which is no where near as deep as the Bakken wells that are drilled. These leases are being purchased for significantly less than Bakken wells. You may want to find out what kind of well is being drilled before you start negotiating that lease. Here is how I think of it. When we got our first well, we were none too happy that others got more than we did for the lease. However, our well was drilled first and it has been producing for many many years. Many of the people who leased for more than us never got a well. So, you have to decide do you hold out for bigger money at the front-end or look at the big picture. That is what I had to do this time around as well. I don't have to worry about anyone with small parts of mineral ownership because my family owns the mineral rights in totality. I wish you the very best luck, but I hope you will consider where the well is being drilled and the big picture. I would also like to give you a different picture about the so called forced pooling. When companies drill, they now drill one well and see what the production is. Then they may use the same well pad (now my terminology may be wrong) to drill multiple wells, up to 20 wells. This is why there are the bigger spacing units. So again, you have to look at the big picture. Multiple wells vs. one well. The research I have done suggests you will get a larger royalty income for the multiple wells on bigger spacing than one well on the 640 spacing. You rarely, in fact I can't think of one place have seen horizontal wells drilled on 160 acre spacing. Again I hope this helps you think in a different way. My final recommendation is have an attorney look at your contract. We use Peter Furuseth in Williston who actually has experience in Burke County. Have fun with it. It is simply a gift you would never expect to get.
My family was leasing the Madison zone since the 60's at 20% royalty and got wells that produced for decades. That the Madison just naturally leases for less is a myth. Many Madison wells are short horizontals, more efficient that way. Bakken wells on 160 acre spacing are more rare but SM Energy has drilled some and their production was almost as much as the 1 mile and 10,000 foot laterals in the same area and if someone has not seen them, it may be that they are not looking beyond their property line or their neighbors. Not everyone looks at thousands of wells all over the west half of the state and may not be informed, may not know well costs, may not know what oil companies get in trade between themselves and it colors their veiwpoint in a different way.
Forced pooling is more a matter of whether they can drill without you or not. If your interest is too large and you don't lease, they will not drill. If you don't absolutely have to have the lease bonus money, this is called leverage. If there is known to be oil there which can be economically produced, someone will always want to make money off of your oil. If you do want to have your minerals produced, you could contact companies offering a farm out agreement, you don't have to stick with the traditional lease framework that pays less. Some people never think beyond a lease because it's all they have ever known or thought of.
Ok, I have the leases from the 60's that my family signed at 20% for the Madison wells, but if you say it can't be then it can't be.
I think you may want to rephrase your multi-stage fracks comment. I will guarantee you that both the Bakken short laterals and XXL long laterals had multistage fracks since the wells were all drilled in the last 4 years.
Luke Aafedt said:
I would argue that inconsistency in Madison production will always draw lower lease prices.
As to your short horizontal point, multi-stage fracs were probably not used in the wells with comparable production.
-luke
Remeber what you said about Madison wells "always draw lower lease prices". Not necessarily, unless you believe it to be true and quit negotiating before you reach that point, it then becomes a self fulfilling prophecy.
SM Energy drilled 4 wells on 160 acre spacing in the same section. An offset 5,000 ft well was in an adjoining section and a 10,000 foot lateral no more than 1 section away. Long laterals are better at holding land, not necessarily more efficient at producing oil.
Having 16 wells of my own and having looked at a few thousand others also, I am slightly familliar or a little more with completion techniques. I also dig into the wellfiles to see if I can determine why a well did well or poorly paying particular attention to the completion, fractures and stimulation, types of propant and so on.
I suppose we will just have to disagree, let me leave you with a thought though. You are thinking about historic Madison production and the old Madison wells that produced little or turned out to be dry holes. Old Madison wells may look like a map shot with birdshot in the western half of ND but the search methods have improved dramatically over those old test wells of 40 or 50 years ago, you don't hear of that many dry wells anymore. You might ask yourself if the same inconsistency exists today?
Luke Aafedt said:
I would argue that inconsistency in Madison production will always draw lower lease prices.
As to your short horizontal point, multi-stage fracs were probably not used in the wells with comparable production.
-luke
Luke, you might look into what happens to a 10,000 foot lateral after the natural field pressure diminishes. You install a pump and for every drop of oil, water or whiff of gas you produce close to the pump, it reduces the pull exerted farther down the wellbore. From what I am reading, 70% of the oil comes from the first 3/4 mile. Except in areas with huge gas production, I'm not going to call a 10,000 lateral efficient because after the field pressure is diminished, the last mile is just there to hold acreage, although it cost as much or more than the part of the wellbore that is productive. The vertical part of the well is the relatively cheap part compared to the horizontal part with it's completion. There was a well drilled not to long ago that didn't reach total depth, stopped about 3,000 ft short and the operator told the NDIC that it didn't matter and I believe them. That part of the well wasn't going to do much in any case after the flush production was over.
XXL Long lateral wells are infinitely superior to shorter wells in one thing, holding acreage.
Lynne, did you ever find the NDIC O&G site and the GIS map?
Lynne Smith said:
I have read all the advice that you have gotten and I think some of it is not quite right. I am a land owner in Burke County. Our family currently has wells and has had since 1996. We have been recently contacted to release SOME of our land and did so with Diamond Resources. I have been the one to lease and negotiate those leases for almost 20 years. In Burke County, depending on your location, the lease rates vary dramatically. If they can drill directly into the Bakken you may get the big money for your lease. On the other hand if you have land in the Madison Pool, you may get substantially less. I have to be careful about what I say, however a new company is coming in and is going to drill just a few and by few I mean less than five "test" wells into the Madison pool which is no where near as deep as the Bakken wells that are drilled. These leases are being purchased for significantly less than Bakken wells. You may want to find out what kind of well is being drilled before you start negotiating that lease. Here is how I think of it. When we got our first well, we were none too happy that others got more than we did for the lease. However, our well was drilled first and it has been producing for many many years. Many of the people who leased for more than us never got a well. So, you have to decide do you hold out for bigger money at the front-end or look at the big picture. That is what I had to do this time around as well. I don't have to worry about anyone with small parts of mineral ownership because my family owns the mineral rights in totality. I wish you the very best luck, but I hope you will consider where the well is being drilled and the big picture. I would also like to give you a different picture about the so called forced pooling. When companies drill, they now drill one well and see what the production is. Then they may use the same well pad (now my terminology may be wrong) to drill multiple wells, up to 20 wells. This is why there are the bigger spacing units. So again, you have to look at the big picture. Multiple wells vs. one well. The research I have done suggests you will get a larger royalty income for the multiple wells on bigger spacing than one well on the 640 spacing. You rarely, in fact I can't think of one place have seen horizontal wells drilled on 160 acre spacing. Again I hope this helps you think in a different way. My final recommendation is have an attorney look at your contract. We use Peter Furuseth in Williston who actually has experience in Burke County. Have fun with it. It is simply a gift you would never expect to get.
I could be wrong...but I did a lot of research over the past few months to make this determination. I just know that we had a well drilled in Burke County a couple years ago and compared to our other wells it was awful. I also learned it was supposed to be a multi well pad but that that was terminated because none of the wells in that area delivered as they thought. It produces, but less than wells from almost 20 years ago. Most of the leases in that area were dropped and then not picked up by any other company. I know there are people who want to lease, but there was no interest until this company came in and may be drilling a couple test sites. There is not a lot of leasing going on now at least in my area. I could be wrong. I hope I am because maybe that means it will be a really good well. I'll let you know as one of the test wells is being drilled on our land...lol.