Greetings!
I could sure use some friendly and knowledgeable help. I recently inherited mineral rights in Divide Cty. Township 163, range 96, sec 25 and Township 163, Range 95, Section 30. How might I find out what the current 3 year lease price is in this area. per acre?
Jane,
May, 2013
Jane, I am going to say $750 and 3/16. I think you can get 20% royalty if you had 50 or more net acres but it would be a protracted battle and you don't have alot on your side from the closer wells as their production is uninspiring. That's not to say that they will not be profitable in the mid to long term but there are many other spacings in the area with acres just as good. Bakken Hunter and Continental are active near you. Bakken Hunter drilled 2 wells near you and one was better than I would have expected and the other looks like they missed it. Continental in my opinion drills cookie cutter wells and they make it up in volume, number of wells. Both operators would not be my first choice but you have to pick from the offers you can get. Never let a landman think he is the only one you get offers from because if he thinks that, you won't really be negotiating because the landman will figure all he has to do is let you wear yourself out and you will take the deal offered, in my opinion.
That leaves participation, don't do it, there are much better things to put your money into, or non-consent.
Non-consent could be a bargaining chip if they will not come off 3/16. These aren't going to be huge producing wells and the difference between 16% as non-consent and 3/16 [18.75%] leased is not going to be a huge amount unless you have alot of acres. Operators hate non-consent, because it limits the amount they can make off your acres to 1/2 the cost of the well for your portion and if the well never paid out, you would own nothing out of pocket. If the well did pay out and retire the penalty in 10 years, yes it might actually take that long, you would then receive your 100% working interest share less the cost of production and in the end, you might average as if you had a 30% to 40% royalty from the beginning. Being non-consent has the benefit of leaving your options open for the future, you could sell your working interest in the well after it pays out and retain your minerals and rights in any other wells. You could sell your proven mineral rights to someone else who could participate in future wells. I'm not recommend you do this, I am saying you can use it as a leverage point but for it to be useful you have to understand how non-consent works and the fact that they can't cut you out altogether if you don't knuckle under. Be of good cheer, if they drill a well, you have money coming, how much will depend alot on you so don't sell yourself short. If you only have 1 acre, it may not be worth your time and the headache to negotiate it at all.
Another tactic that I like is to talk to the landman just enough so he knows what you expect and that you are seeking other offers, looking into a sale to a professional mineral buying company or going non-consent. These are all things calculated to give a landman ulcers because it's his job to lease acres. After that, be too busy to talk to them, tell them to send anything they want and you will look at it if you get time and just never get back to them. It's the least stressful negotiating I've ever done. Personally I'd rather have competing potential lessees with the drillbit in the dirt so my time is not wasted but it takes little time to tell them you are too busy right now and if you are not disabled like me or have kids in the home, it's likely true.
Jane,
Personally, I wouldn't lease at all at this time unless you need the cash then I would only deal with Continental directly. If your acreage is small, you may not get their attention at first but hold back for a while. Continental didn't drill the Bluebird well nearby, Samson did and now Samson has left the building like Elvis. Continental acquired the Bluebird well for a very good reason and I think they know how to make it work and expand in the area on that effort. They have only owned the well for a short time (Apologies to Mr. Kennedy for differing with his opinion)
The value of your newly acquired minerals will only increase over time and what you do with them will depend on your personal needs not that of a landman whose only interest now is getting your name on a lease form with terms bad for your future. Take your time an learn what is gong on in the area. It will pay huge dividends in the long run. On that point Mr. Kennedy and I are in strong agreement.
Gary, no apology necessary, but I was not basing my opinion of Continental solely on the Blue Jay well and I believe that had Continental drilled the Blue Jay, it would have fared no better. Continental is drilling wells fast and to a price point outside of the best areas and inside the best areas where they do put more effort into wells, Continentals performance falls short of the performance on average of say Brigham/Statoil. When Continental does have a great well in a prime area, even a blind hog finds an acorn now and then and performance is more indicative of the area than the effort put into drilling the best well possible. Just my opinion from looking at the performance of thousands of wells.
The area in question is not a prime area and Continental would not be drilling an 11 million dollar well but a 7-8 million dollar well. Frankly, 7-8 million is too much because a 10,000 foot lateral is a waste because there isn't enough gas, for flush production to pay off the well and once the field pressure drops within a year to 18 months and a pump is installed, the last mile of the 10,000 foot lateral isn't going to do much so the cost of drilling and completing the last mile of the well is going to be mostly wasted and alot of oil is going to be left in the ground unless they drill a well close to the bottom hole position. Simple physics, you can't pull a vacuum on a screen door, every drop of oil and whiff of gas produced near the pump will lessen the pull on the bottom hole, increasing the pull of the pump would have negligible effect at the bottom hole because you would simply produce more closer to the pump. Wells with 2 mile laterals in areas with low field pressure are drilled to hold more unproductive acres.
Thank you RW and Gary for your geenerous knowledge. I will bear it in mind, moving forward.
Jane
Cutting to the chase: Can I really expect to lease this property for a 3-yr. $750 bonus/A and 3/16 royalty or 18.75%? Background info:
I have been following with a great deal of interest Jane Anderson's thread on lease prices. I have 1/2 interest in 560 acres in the same general area. My property lies 1 twp north and 1 R west of Jane's. Our property is right along the Canadian border. Not sure on the lot numbers, believe it's Lot 1 & 2 29-164N-96W and Lots 3 & 4 of 28-164N-96W or are the lots just the opposite. They are contiguous. Probably doesn't matter much in determining a fair lease price. We also own surface rights and mineral rights on the east half of 33-164N-96W which lies just to the south of 28-164N-96W. My deceased brother's wife owns the other half of both surface and mineral right
http://www.eser.org/29-164n-96w-divide-county-north-dakota
I came to the forum looking for current going terms for mineral lease agreements. Our current lease, expiring in Dec. of 2013 is a five-year lease for $75/A with Sundance Oil and Gas of Bismarck.
OneOk recently acquired rights to run a pipeline or three across our property on SE 33-164N-96W on behalf of Williston-Magnum-Hunter. If I read the maps right that I am able to access, it looks like this is in the 100% Magnum-Hunter zone acquired from Samson.
It seems to me this is an indication that the area will be developed soon. I have read Gary Hutchinson's opinion about Magnum-Hunter taking some time to figure out how they want to proceed.
I don't know if you have access to Canadian statistics or not, but there is a pumping well about 1/8 mi. north of 29-164N-96W, so I'm hopeful there is oil stateside as well. And on the Canadian side, half a dozen wells within sight to the west. We just signed a new lease agreement with Standard Land of Calgary for $200 bonus, 2 year lease, 18% royalty. This is on 160 A just west of the pumping well I mentioned above.
This was a 33% increase from 3 years ago, because the terms were $200 for 3 years at the time. I thought that was really good.
Now I'm seeing $750-$2000/A bonus in Divide Co. for a 3-yr. lease.
As you explained to Ms. Anderson, the profits from a potential well in this area are long-term.
So, explain to me what is wrong with this formula: We have 560 acres in an area you say is good for $750/A bonus and 3/16 royalty interest on a 3-yr. lease for a potential well.
Five years ago, that meant we actually received $75/A X 560A = $42,000/2 in 2 installments a year apart.
But something must have changed. There is no way in hell a company is going to write us a check for $420,000.00 ($210,000 ea.) for the privilege of maybe drilling on our property in the next three years.
How am I reading this wrong? What can we realistically expect to lease our mineral rights property for? 560X$750/2 for a 3-yr. lease. = $210,000.00 bonus. Nobody's gonna pay that.
Thanks for any insight anyone can provide.
Gary, I recommend you not use Eser unless you are just looking for the history of an area. Bakken hunter drilled a well fairly near you 1-24-2013, not a fantastic well by any means but it did 5,163 bbl oil in 24 days in june. You area looks like fair Bakken potential and possibly some Madison potential. I have a friend who is leasing at $200 per acre on the Madison potential alone, not exactly your area but they both show similar potential.
I am going to tell you something that you may not like, if your attitude is that there is no way in hell that they are going to pay that much, then they aren't. Everybody negotiates differently. They probably also use some judo because you have a fair amount of acreage that it's in your best interest to have leased for the bonus, resulting in lower bonus.
You never know what you can negotiate until you have decided what it's really worth and have a willingness to walk away if they do not meet your terms. You have enough acres that they will not force pool you so you can effectively block drilling. That means that your oil and probably some additional acres are lost to whomever is trying to lease you. You are not in it alone either, one of you could lease and demand payment and the other hold out and if they don't meet your price, they won't carry an interest of over 200 acres so they would have wasted their bonus money leasing your family member if they can't lease you also. You can divvy up the proceeds either way. Not nice but that is the oil business.
Jane is dealing with Continental, who has fairly deep pockets. I think Continental will pay more to cut down on landman services because Continental drills so many wells that they make it up in quantity. Another company might not be so generous in the interest of saving time.
The eventual return of the wells has been revised upward and I believe that is the basis for people getting agreement to terms that they had to fight tooth and nail to get this time last year.
I wonder if you truly understand what you have and what the lessee is after? Oil right? But not just the oil that one well will produce but the oil that all wells in that spacing will produce. Tell me the difference between leasing your acres and putting a well on them to hold them by production for a cost of $4,500 per acre to hold those acres for 20 years so that they can appreciate in value and just buying your acres outright? Because of the production of the well paying itself and the acres off, they get the acres at low cost, basically the acres pay for themselves over time and if those proven acres are worth $20k to $25k per acre 20 years from now, the lessee has profit without production. Oil companies are in the land business now and not just oil production business. Operators used to plug wells and let the lease expire, now they operate wells at a loss because of the potential value of the mineral acres. The difference is that it's cheaper to obtain your acres through leasing than it would be to buy them.
Your next lease is probably going to be your last one. I would bend every effort to make sure it was the best possible. I would not care if the lease was for 5 years because you are going to get drilled. You should be able to negotiate more money for a 5 year lease. I know it's counterintuitive but the fact is that they are not going to keep leasing you forever. If you lease for 3 years and you get drilled in 2.5 years, well and good. If you lease for 5 years and they have to drill you in 2.5 years anyway because the others in your spacing leased for 3 years, fine. If it actually took 5 years to get the well, wouldn't you likely survive that long? Those who are in a hurry usually get less money.
Have you explored or have you been passive? I would take any offer I had and start shopping it to other operators, period. There are dozens of them and if you can just get a movement of $50 or a 0.5% royalty or even some other term here or there, wouldn't it be worth your time? Wouldn't it be great when the landman calls to be able to ask him if he would hold for a moment because you have a call from XYZ oil on the other line? I can tell you from personal experience that it's pretty nice.
If you don't have a firm grasp of what I have just written and more, I would suggest you hire someone to do your negotiating for you because I think they would make you money.
To quote RW, "Your next lease is probably going to be your last one." I believe that is the case in eastern Divide County so make it a good one. The oil is there. If you are unleased you own more than 6 million barrels of oil per 320 acre half section from only two known horizons. There is more than that in place if you believe the USGS figures. Of course, the oil has no value until someone takes the risk and drills, completes, produces it and sells it. Historically, in the USA, we only produce less than 1/3 of the oil in place during the life of a well. That puts you down to 2 million barrels brought to the surface from your 320 acres. If you think you negotiated a smart lease at 3/16 royalty, your share of 2 million barrels is then 375,000 barrels, or $37,500,000. Ah, but take a closer look at the lease and find those deductions that the operator can take without your approval. RW has estimated that to be a 35% loss (I think it can be more) So, now you have dropped $13,125,000 to the state and operator production costs. You can't do anything about the state taxes, which will only grow as taxes always do, but by signing a lease shoved under your nose to get a little bonus money, you failed to understand that you were kicking back $9,000,000 to the operator for taking the risk to drill, etc. And that assumes the operator is perfectly efficient and like us, none of them are.
So you worry about how much bonus you get and unknowingly give away $9million of your oil over 40 years. 320 acres at $1000/acre is only 3.5% of the amount they are going to take back from your last lease. I think the average oil price over the next 40 years will be more than $100/barrel used here.
Your decedents will say , "what could he have been thinking?"
Try to understand what you own not what you can fleece from an oil company, as that is a no win proposition.
Select the best operator. It is money in the bank. Would you let an intern operate on your brain without an MRI or CAT scan to work from?
Gary is correct that I do usually tell people that you are going to get effectively 35% less royalty than they may have thought because they have smaller acreage, will not earn as much at one time, and not be as greatly at the mercy of the tax man. If you have larger acreages your royalty could easily be effectively 55% or 60% less than you thought you were getting and the lessee is not going to explain that to you. You won't have the deductions as a lessor that a participant or lessee would.
Thank you RW Kennedy and Gary Hutchinson for your detailed information. Very informative and much to think about. So much has changed in five years. I am so happy to have stumbled upon this forum. I did know that I could negotiate a much higher lease than the $75 we are currently getting. But I was thinking in the $200-$400 range, not $750-$1000. To this point, I have been passive because I didn't realize a mineral rights owner had so much leverage. This land has been under continuous lease since the 1960's and at that time farmers were just thrilled to have some company offer to lease the land.
Thank you, RW for your opinion on Eser. It didn't look like it has been updated in some time. But it was a free source and an easy link to give you to establish the area I am in. I guess for true, up-to-date maps you have to pay money. I should also add that we cash rent the cropland to a neighbor. I live at Bottineau, so I'm not so far away, but not really in the loop, either as far as what is happening. Do either of you think the placement of the pipelines by OneOK is significant regarding a drilling timeline, or do they sometimes put the infrastructure in place and then just let it sit there?
Mr. Wendel, yes the pipeline is important. Nobody wants to be first to drill although everyone wants to be on the ground floor of leasing. Nobody wants to be the first and to pay for the infrastructure. Also if there is an existing pipeline you can tap into when you drill your well, you don't usually have to flare off all your gas. I don't expect gas to be a large part of the production of wells in your area but every little bit helps.
The NDIC O&G DIVISION basic subscription costs $50 a year and is worth it in my opinion.
Gary,
The North Dakota oil industry has changed so much in the last 5 years it shouldn't be compared to the industry that started in 1950's. They are nothing alike in geology, engineering, economic constraints, or legal guidelines. For a mineral owner to conduct business as usual is similar to groping in the dark without a flash light. One will certainly bump into something sooner or later; it may be a wheat field but more often its a cliff.
Gary Wendel said:
Thank you RW Kennedy and Gary Hutchinson for your detailed information. Very informative and much to think about. So much has changed in five years. I am so happy to have stumbled upon this forum. I did know that I could negotiate a much higher lease than the $75 we are currently getting. But I was thinking in the $200-$400 range, not $750-$1000. To this point, I have been passive because I didn't realize a mineral rights owner had so much leverage. This land has been under continuous lease since the 1960's and at that time farmers were just thrilled to have some company offer to lease the land.
Yes, I can see that now.
Gary L. Hutchinson said:
Gary,
The North Dakota oil industry has changed so much in the last 5 years it shouldn't be compared to the industry that started in 1950's. They are nothing alike in geology, engineering, economic constraints, or legal guidelines. For a mineral owner to conduct business as usual is similar to groping in the dark without a flash light. One will certainly bump into something sooner or later; it may be a wheat field but more often its a cliff.