I have a small mineral interest in N/2 OF SE/4 OF SECTION 1, T25S, R35E, NMPM SURVEY. Until recently it was leased to Franklin Mountain Energy (FME) which during the course of the lease FME obtained permits to drill 2 wells but the permits were allowed to expire. FMC would not release under the same terms of the expired lease, offering a lower royalty and inserting terms such as payments from net proceeds rather than the Non-Deduct clause in the expired lease. They also basically said sign up or expect to be pooled, or words to that effect.
I have now received a copy of the pooling application which has wording which I have never seen before in Oklahoma pooling apps, although such verbiage may be common in NM.
The pooling application case numbers are 21803, 21804 and 21805. What really caught my eye was the inclusion of “a 200% charge for risk involved in drilling said well”. I thought FMC’s business was to consider the drilling risk and the potential gain from that risk and when the gain was commensurate with the risk they act accordingly.
My question for the day is how will such wording affect the common mineral interest owner who has no interest in participating as a working interest partner?
Depending upon the state, the payout risk charges can be common. Some states are 300%, some are 200% and OK is 0%. Maybe someone more familiar with NM pooling statues can comment.
A follow-up question is What is included in calculation of payout risk? How is “payout risk” defined. In other words, risk that is included in NM pooling is 200 percent, but how does that effect the individual mineral interest owner? Is there an example on-line of a typical NM pooling order?
What is to be feared in forced pooling in NM. I thought the usual purpose is to (1) allow the drilling even though there may be some who do not wish to accept the driller’s offer to lease, while (2) giving the mineral interest owner some assurance that they will receive “market value” when forced pooled.
Yes, that is the general understanding of force pooling, but every state handles it differently. Some states are more favorable to mineral owners than others. NM is a “risk penalty” state and so the operator can wait until the well construction, drilling and exploration costs are 200% paid off before the compulsory pooled people can get a share of the profit. This can be a long time and often leaves the mineral holder in a poor position.
I think I have a pretty good understanding here, but I’m not a land expert or lawyer, and lots of people think things that turn out to be dumb, so grain of salt.
Yeah, the purpose of forced pooling is to allow the drilling even if there are holdouts or folks who cannot be reached. Then it comes down to the terms in that state. NM forced pooling terms are very pro operator.
All the “payout risk” means is that the operator is judged to be taking the risk to drill the well, thus if they have to pay your share of the well (because you didn’t lease or participate) they get to recoup more than what they invested on your behalf before you get back in the well. 200% penalty means that they get to recoup each $1 they spent on your share plus $2 extra dollars before you get anything.
They spend X to drill a well. Then they keep track of their net cash flow over time. When that net cash flow is 3 times X, then the force pooled owners get paid their % of the well from that time forward, without having to invest in the well. If its a fantastic well, then the math may be more or less fair on an NPV basis. But you can have a good well and it won’t overcome the risk penalty for a long time (like say 20 years), if ever. So you get to get your share of the well when its making 10 bopd. Generally it is good economics for the operator and bad economics for the force pooled mineral owner. If the well sucks, well than owning more of it is obviously not great for the operator, but even in that case not signing a lease means you get a big goose egg.
There is nothing to be feared. But if your acreage gets force pooled in NM, AND you still don’t sign a lease and then elect not to pay your share of the well, well then you should basically consider your milkshake to have been drank by the operator IMO. You pay nothing, you basically have nothing. I would guess after a forced pooling in NM that the amount of energy that an operator puts into getting you leased or participating in the well is pretty low. In states where you get back into the well after the recoup 100% of their costs, the leverage is completely different.
In NM, just sign a lease. It’s far better to get a bonus and 20-25% of your share from day 1 (when the well is at peak rates) versus getting paid tiny amounts starting in year 15 or whatever or maybe getting nothing.
Thanks for your input on NM pooling. I received an offer “to acquire” not lease. The monetary offer would be appropriate for leasing but in no way appropriate for selling. If the operator meant lease when he said acquire then I guess I missed an opportunity to lease.
If NM is anything like OK, NM’s pooling order will spell out several options for leasing in addition to an offer to participate in the well. I was assuming that the pooling would provide an opportunity to lease. Can I expect the NM pooling order to provide an opportunity to lease.?
I don’t think you will get the Oklahoma version of a “pick one of three” letter. FME is going with “we already made an offer to everyone and some folks are not being agreeable”. Sounds like maybe you aren’t sure if they offered you a lease or not. Sign up or get force pooled. That is the deal. They are not lying. If they are particularly ruthless, I don’t think there is much to stop them from pretending that you don’t exist from here on out. Most people in life are not total jerks so I wouldn’t give up.
Sounds like hearing is April 8th. I don’t know how difficult it is to protest, probably not too difficult. But would probably require a trip to Santa Fe and a call to the NMOCD. I doubt protesting is gonna stop anything but it might get them to make you a reasonable offer. FME paid $42k/acre (haha, oh my, 2018 was CRAAAZY) for the BLM leases in these units in Sept 2018, so if they can pay that for a 1/8th roy lease when oil is $70/bbl one could probably make a case that the fair bonus price now for a 1/5th or 1/4 lease is non-zero.
I would just contact FME, tell them you are aware of the forced pooling and don’t believe you received a lease offer and would like an offer prior to the hearing, and tell them otherwise you will have to consider options with the NMOCD.
But yeah, NM forced pooling seems totally bent. Best of luck.
I also had some culture shock when I realized other states rules for compulsory pooling were not as considerate of owners as the Oklahoma rules are. I think NM Oil is correct when he says that you will be ignored unless you take action. It is much better to try and arrange a lease now, than after the trap of force pooling is sprung.
