Our minerals not leased, three wells drilled

Law & Legal
1

An independent Landman came with offer for our minerals that were missed when they initially leased minerals a couple years ago. The three wells have just finished drilling.

What are my options? Do we have to sign with this Landman (by the way, he is very aggressive and rude, and of course in huge hurry). They are forecasting participation to be a total of $440,000. The AFE’s were at $9.4M.

Operator is Enerplus. Landman is Robert Reeves Dalton with Vintage Oil and Gas.

This is in McKenzie County North Dakota.

Well names are: Tackle 149-95-36C-25H TF Bait 149-95-36C-25H Quillfish 149-95-36C-25H-TF-LLW

2

Hi Tyler, as an unleaded mineral owner in ND, here are your options.

  1. Lease and get the bonus and royalty.
  2. Participate and pay your share of the well costs now and get your full share of the production.
  3. Get a royalty equal to the average of lease royalties in the unit or 16% (operator’s choice) and the rest of your interest is treated as a carried working interest subject to a 50% non-consent penalty. So if the well pays for itself plus 50%, then you get your royalty interest and your working interest share - essentially your full interest. But you don’t get a bonus under option 3.
3

Tyler,

Erick Camp is correct from a legal point of view. (Except you are probably not "unleaded") You may have other options that could suit your needs and cash flow. For example, sell the well bore interests and perhaps the formation or mineral rights. It depends on what you want from the mineral rights owned and leased.

If my assumptions made as a result to your post, you own ~ 10 net mineral acres and involve as much as a quarter of a million dollars of present value profit so, if that in significant to you, take your time on a decision. Remind the land man that they screwed up not you. You have the laws and regulations on your side. Use them to your advantage and do what is right for you.

Whatever you do, get some legal help in the documentation. It is pretty tricky.

Gary L Hutchinson

Minerals Managment

4

Tyler, you have 30 days from receipt of the AFE to decide if you want to participate or not. You should be able to lease to anyone you desire during this time also. When the 30 days expire, your only options will be to lease to the operator or be non-consent. You could also be non-consent and later lease to the operator. The operators of my non-consent wells still ask me if I would consider leasing with each new well they drill. Being non-consent doesn't foreclose all options. You could be non-consent now but participate in later wells when the conditions are better. You could get a farmout deal in place for future wells. The operator would not like you to know you have options.

I tried looking in the well files and something strange is going on. On two wells, Bait and Quillfish, the form for selling oil appears briefly then is gone. There is virtually no other information appearing except on one there is something half way down the file having to do with the path of the well bore, all other mundane information is missing, possibly 30-50 pages.

Tackle has information (I believe complete), that it is selling oil in excess of 5,000 barrels of oil and it hasn't even been completed yet. Supposedly none of the wells have been fractured yet.

I went back and video recorded my computer screen for the Bait well file and captured the Verbal Approval to Purchase and Transport Oil. 5,000 barrels.

As for rude landmen, I would contact Enerplus and inform them that if Robert Reeves Dalton contacts you again, you will not even consider leasing to them.

I happen to own acres in the same general area as you do and I can tell you that 9.4M is a lot to pay for a well in this day and age. I have received 5 AFE in the last few months and the most expensive well, all by top notch operators and a minimum of 32 fracture stages with about 30% of the expensive ceramic propant in the fracture mix, the most expensive well was 7.6M dollars. The cheapest was 6.6 million. This was Whiting and Burlington/Conoco Phillips. Enerplus is a top operator in the Bakken, I can't believe that they can't get the same prices that my operators can. I think they are inflating the AFE, can't prove it at the moment because they haven't even completed the wells and I don't want to take anyone's money but I would bet on it. I think Enerplus would not like you to participate in the wells. In your place, if I couldn't scrape together the money to participate fully in all wells, I might participate in one acre from each well. Yes you are allowed to do that. Participating in an acre for each well means they will have to bill you for operating and work done so you will know without having to ask or having to audit the wells when the risk penalty is retired and your royalty interest becomes a working interest.

I keep coming back in my mind to the strange activity of the well files.

I don't know how much of the 30 days you have left if any, since receiving the AFE, but time would probably be tight for finding someone to partner with for a farmout agreement. It can even be tough to negotiate a lease in less than 30 days.

Out of curiosity only and if you don't mind, may I ask how much Enerplus has offered? I'm not leasing anything in ND any more but I'm sure other people would like to know as information has been slim to none for the last 2 years because so much was leased and drilled in the first 3 waves.

I hope this helps you make an informed decision.

5

Tyler, I forgot to ask. Were these acres leased before then the wells were begun, the time then expired because of an overlong cessation of work? If that is the case, then arguably, Enerplus is merely trespassing and you don't owe them for your portion of the wells. If this is the case you might discuss it with a lawyer.