Hi all,
I received a package from Permian Deep Rock offering three options pool about to lease my mineral rights.
I have 0.254 net mineral acres on 1/4 land. The well is called Knight 140NB in Midland, but it hasn’t been drilled. The one next to it is producing I believe.
I heard that I don’t need to reply to them and do nothing, and then I can get the share of revenue on the production later.
Does anyone have the same experience and what is the outcome?
Also, what is the economic model like with the mineral royalty I have? ( Interesting to know)
The operator of the Chaparral 110 Unit is Permian Deep Rock Oil Company, LLC.
The Chaparral 110 Unit shall be effective on the date this Order becomes
administratively final.
The Chaparral 110 Unit is established for and limited to the depth interval
correlative with the Spraberry (Trend Area) Field.
For the purpose of determining the portion of production owned by the persons
owning interests in the Chaparral 110 Unit, the production from any well completed
on the Chaparral 110 Unit shall be allocated to the respective unleased tracts and
voluntary pooled units within the Chaparral 110 Unit in the proportion that the
number of surface acres of each bears to the number of surface acres included in
the entire Chaparral 110 Unit.
6. The interests of lessors in voluntary pooled units within the Chaparral 110 Unit arepooled as royalty interests. The interests of Permian Deep Rock Oil Company, LLCand its affiliate Midland–Petro D.C. Partners, LLC are pooled as working interests.7. The mineral interests of owners of all unleased tracts within the Chaparral 110 Unitare pooled as owners of a 1/4 royalty interest and a 3/4 working interest,proportionately reduced. These owners’ share of expenses, subject to a 100percent charge for risk, is payable only from 3/4 of production and not from theirentire mineral interest.
8.) …
To be more specific, I have 0.2537 net mineral acres on the proposed 100.2 acre unit. I was given 3 options:
Take a bonus payment of $10,000 per net mineral acres (so, my effective bonus would be $10,000 x 0.2537 = $2537), and receive a 25% royalty per net mineral acre (so, my effective royalty rate would be 0.2537 x 0.25 = 0.000634)
I think…correct my calculations if I am mistaken
Participate as a working interest owner, responsible for my proportional share of the costs (0.2537/100.2) and production from the wells (0.2537/100.2)…
Farmout mineral interest where I convey an 80% NRI to Permian Deep Rock Oil and retain an ORRI of 20% until payout. At payout I would have the option to convert my ORRI to 25% working interest.
I was trying to do back of envelop calculations on well production estimates to figure out which option is best for me… I think I am more interested in option 1 and option 3 (avoids having to pay for any costs). But I am not sure which of the two is a better option and need to understand them more… any advice?
Hopefully someone like forum member @NMoilboy will see your latest post and reply.
You may already be under the MIPA order. Assuming the well or wells pay out past the 100 percent charge for risk, would the proportionately reduced working interest be more valuable than the bonus received from option number one? Is the option 1 lease a “no cost” lease free of post-production deductions? I do not have a sufficient level of understanding to even hazard a guess as to which option in the proposal you have received would allow you the most benefit. If you are under a MIPA order, is it concerning that that was not revealed in the proposal? Maybe someone with a deeper understanding of the oil and gas industry will explain the language from the MIPA order below.
The mineral interests of owners of all unleased tracts within the Chaparral 110 Unit are pooled as owners of a 1/4 royalty interest AND a 3/4 working interest, proportionately reduced. These owners’ share of expenses, subject to a 100 percent charge for risk, is payable only from 3/4 of production and not from theirentire mineral interest.
It appears there are a few Knight lease wells that are not MIPA. Please go to the RRC’s permits page for the full list of Knight permits [https://webapps2.rrc.texas.gov/EWA/drillingPermitsQueryAction.do] and also check to make sure that you have not transposed, mistyped, or omitted a letter or number:
32946093 08 KNIGHT 140 MIPA UNIT H140WB PERMIAN DEEP ROCK OIL CO., LLC(655805) MIDLAND Submitted: 01/12/2023 Approved: 01/20/2023 887282 Horizontal New Drill N 9900 875533 APPROVED
What are the drilling costs and what are the new offsetting wells in the area producing? Those 2 questions/anwsers are the most important pieces of the puzzle
The Knight 140 NB Well is a horizontal well and estimate total of the proposed drilling and completion is about $14M. It is approx. measure depth of 24,500’.
It is in Section 23 and Block 39. TIS T& P Survey. Midland Country.
Does it help?
Thanks
So if you are subject to a MIPA order like the one I shared above, you will receive 1/4 royalty immediately upon oil and gas production, and then after the well pays out, you will also receive whatever your working interest yields minus your share of the expenses payable only from the working interest.
I am surprised legal eagles here have not commented. One would be correct in assuming that the 1/4 royalty is free of post-production deductions given the order’s wording? Would one expect the working interest created by the MIPA order to be more valuable than the bonus you would receive if you accept the lease offer?
Thank you for your response. AJ11.
I am seeking an experienced attorney or mineral rights broker who can help me on this in the area. Any recommendation?
You’re welcome. The two oil and gas attorneys I could have recommended in the Midland area are no longer practicing, and even if they were practicing, I could not share their names due to this forum’s rules.
I have spoken with Wade Caldwell, was impressed, but have not been a client. He is an advertiser on this forum in the Directories>Mineral Services section accessed at the top of the page. I would bet the other two listed Texas O&G attorneys could seamlessly handle your matter, as well. But I understand that it might be easier for you to work with someone in Midland in which case look in the Yellow Pages section of your phonebook and make some inquiries checking for existing conflicts [does the firm represent Deep Rock] and of course pricing. Perhaps first contact the person offering you the lease and ask if you do nothing, are your minerals included in a MIPA order. If they are under a MIPA order, one might wonder why that detail was not shared. You might also upload a copy of the proposed lease with your personal information whited out and see if forum members will offer their opinions.
IMO, all the advice you are getting is good advice, and it’s always great to take the time to understand the process, and what you own, and what the operator is doing. But…its .254 nma. Take option 1. And that’s it. It’s clean and simple.
I see the permit(s). 100.2 gross acres means you are just going to get a single well (350’ wide unit). So your decimal would be 0.254/100.2 x .25 = .0006337. This well will, say, make 175kbo in year one and 525kbo over its life. You assume the well gets drilled in 6 months and is online in probably 18 months. We will neglect natural gas and just say the well makes $70/bo oil after taxes etc.
Bonus = $2540
Year 1 of production = 175000 * $70 net/bo * .0006337 =$7763
Year 2 of production = 75000 * $70 * .0006337 =$3300
Year 3 of production = 48000 * 70 = $2130
Year 4 -10 total = 125000 * $70 = $5600
Year 11-30 total = 100000 x $70 = $4400
Its not nothing, but its basically a $10k jackpot and then it pays your AT&T bill for the next 10 years. Its a good problem to have, but I don’t think its something where you absolutely have to try to maximize the last dollar by spending money on a lawyer or hours and hours of your time.
As an aside, my MIL owned just south of Wadley on 0.3 nma and when she passed my well-meaning goofball BIL basically gave away the minerals despite me telling him they were worth $20k. And my BIL is broke. He and my wife argued over accounts with $100 in them and couldn’t be bothered to sever the minerals when they sold the house (also way under market). Sigh. I’m smart enough to have never said anything about the whole deal. Except here, so feel free to rat me out if you are one of the many strangers who has my wife’s phone number.
LOL. It’s easy to see why poor people stay poor isn’t it?
Anyway, if your wife’s name is “Potential Spam” she calls me about 6 times a week. I haven’t answered her yet. But if I do, I won’t tell her a thing.
Thank you for your response. NMoilboy.
The Option 1 is the way to go!!
Here is a couple questions I would like to know.
Q1: Does the Mineral owner need to pay the Ops cost later if they choose Farmout. See below Farmout Option 3.
Q2: I heard that If I don’t lease it till the well is drilled. I will participate in the well… what does it mean?
Opt 3: Farmout your mineral interest to Permian Deep Rock. You may elect to Farmout your interest to Permian Deep Rock, whereby you will convey to Permian Deep Rock an 80% net revenue interest attributable to your mineral interest, and retain an overriding royalty interest equal to 20% proportionately reduced to the extent that your mineral interest bears to all of the mineral interests in the Unit, until payout of all well costs (i.e., Permian Deep Rock shall have recouped from the revenues attributable to production from the well all costs incurred by Permian Deep Rock to drill, test, fracture stimulate, complete, equip and connect the well for production), with the option, at payout, to convert the retained override to a 25% working interest, proportionately reduced.
If you elect to Farmout your mineral interest to Permian Deep Rock, Permian Deep Rock will provide for your review and execution a proposed Farmout Agreement containing the terms set forth above.
Q1: In the Farmout agreement, after the well pays out, you can either just keep getting 20% of the revenues (for your share) with no costs OR you can get 25% of the revenues (for your share) and pay your share of the operating costs.
I’m struggling to see how that is an option compared to just getting 25% of the revenues and bonus by leasing.
Q2: If you don’t lease in Texas, traditionally you either participate in the well or don’t. Participate meaning pay all of your share of the costs (capital and operations) and get that same share of the revenue from Day 1. If you don’t participate, you pay nothing and you will get zero until the well pays out, and then you will get your proportional share of the revenue after opex. Which isn’t a terrible deal, though there is some risk.
BUT…this is a MIPA well (which is generally what happens when a well covers lots and lots of tiny residential tracts), so unleased folks are going to be pooled (Mineral Interest Pooling Act) as per AJ11 description of the Chaparral 110 Unit.
That’s what I think, I’m not a lawyer and I don’t like reading anything longer than like a two-pane comic strip. So that’s from skimming.
Your reply got me chuckling, and I think you might have a sideline opportunity in writing comedy. Using the MIPA language and your projections for the single well, would you mind giving your estimate of what the working interest would be worth to a mineral owner of a 0.254 parcel? " 7. The mineral interests of owners of all unleased tracts within the [___] Unit are pooled as owners of a 1/4 royalty interest AND a 3/4 working interest, proportionately reduced. These owners’ share of expenses, subject to a 100 percent charge for risk, is payable only from 3/4 of production and not from theirentire mineral interest.
I guess that’s a good question, as if I am reading it right you would be comparing the WI value to the lease bonus value (along with some risked calcs and a requirement for your share of well capex up front) to determine optimum course of action. As you get a 25% royalty in both cases? Right?
Like I said, my interest level in reading rules or anything above a certain length (hello ADHD and a shortage of Adderall) is very very low. And I know that is ironic, as my interest is creating posts beyond the length that I would read is apparently very high. But in short, I may not actually know the MIPA rules at all.
Without doing any actual details… I would guess on an average case the WI value is like much much higher than the bonus, otherwise why would anyone lease your acreage at the bonus, but its the upfront cost that gets you and IMO is better left for an oil company
soooo .254/100.2 * 75% * $14M well = $27k. Thats your share of the well. Then your cash flow if the well works out is probably $50k over 10 years above and beyond the royalty share. So in that case you would forego the risk free bonus of $2500…instead pay $27k, then get an additional $50k over the 10 years. Shrug. May not be awful.
I just would not under any circumstances want to be in the Working Interest business (again in my life). Take the zero risk path IMO. Especially at 0.254 nma.
Thanks, NMoilboy! I think if there is a MIPA order in place and it is not
disadvantageous/unprofitable to use it, why would an oil company bother to lease? Although the working interest being a headache for the company’s accounting department might ought to be factored.
My layman interpretation of the order is that the $14 million dollar well cost has to pay out before the unleased mineral owner’s working interest activates. So maybe after 250,000 bo production, the well would pay out? I have no idea. Then that would leave remaining EUR x avg sales price of gas and liquids minus the operation costs x the owner’s fraction. From the MIPA order wording, the owner’s share of expenses is ONLY payable from 3/4 production. If the well has a hydrogen sulfide blowout or something, it seems as if it would be very difficult for the mineral owner to be held liable for the condition forced by the MIPA order. I was hoping some of our resident legal eagles would weigh in here.
Any mineral owner who is not sophisticated enough in oil and gas to understand the ramifications of being a working interest owner should lease the minerals and receive the royalty income. The RRC MIPA orders require that the operator offer mineral owners the option to lease or to remain an unleased mineral owner (working interest owner). Frequently the MIPA order has options for the mineral owner to lease for a smaller acreage unit with only one well (higher DOI) or opt to be in a larger acreage unit with multiple wells and a lower DOI. Having multiple wells spreads out the risk of a single well not being as good so that would be my preference. But some prefer to get as much money up-front as possible and to forego royalties in additional wells. Once you make a selection, it is final.
A-206 T&P RR CO 39 T3S 23
