Larry has a great point but it is also dependent on the productive capability of your acres.
Gail, each lease will expire in it's own time unless all of the leases have the same effective date, reading your lease should tell you whether the lessee was using an effective date or not.
Gail, Larry's acres are in a very productive area. I think in your area it likely is in your best interest to lease due to the longer time to well payout and a 50% risk penalty would just extend that time far into the future, likely more than 10 years.
You have a fairly large block of acres and you might say it was in your best interest to have them leased, especially if they do not drill. Missing a lease cycle with that much acreage hoping that the value will double in the next one just so you can break even is not a good bet. You do have a fairly large block and no operator in his right mind is going to drill without leasing you. Gail, you have to steer a course between your best interest in getting the bonus money with an adequate royalty and your ability to steer things if you all stick together. Remember that there are alot of acres that still need to be drilled that are the equal of yours so they don't absolutely have to have yours, but they won't drill without your group.
If production in the formation depends on the best frack job, can we surmise that all acres can be very productive?Each heir with Gail has a set known percentage as basis for dealing.
Larry, I believe that all of the acres will be much more productive in the future and I think the operators are banking on that also, but sometimes that new production technique can be just around the corner for 20 years, like a cure for whatever ailment.
If you have too many acres and don't lease, the operator won't drill. Suppose that you are in a less productive area and it takes 30% of the production to pay off the well, the operator would only receive back his 30% plus a profit of 15% of the production from the 50% actual cost of drilling and completing the well = 45% the other 55% less the cost of production would go to the mineral owner. If you have more than 1/3 of the spacing the operator simply will not drill. He will drill the spacing next door where he has an 80% + interest through lease so he can get the 50% slice of the pie for himself on all of the production. The mineral owner could be stuck at 16% royalty for a long time on a lower producing well. You have to balance the difference between 18.75% toyalty and cash versus 16% for a decade or more. I still like the 16% until the well is paid off then 100% less cost but i have nowhere near 480 acres. A reasonable bonus on 480 acres and any royalty at all and I would be chiming in from a tropical island with my toes in the sand.
There is always the fact that the operator will not drill and carry all the risk on more than 1/3 of the spacing for a 15% profit when there are so many places he can drill and get more. Gail would never get that option unless they broke up and most leased and she a a couple of others were the only holouts, until the numbers of non-consent carried acres came down to a manageable number for the operator. For Gail and her family, it's lease, or no well for a long time. There are alway options, Gail might possibly not lease all her acres, save a portion out looking for a future upside, but the deal must leave enough palatable to the operator to get him to drill.
The company that we are leased with still has a 2 yr. option, but are offering a new 3yr. + 2 yr. option same dollar amount but raising the royalty to 20%??? Dosen't make sense to us. We have been approached by another company offering a straight 3 yr. 20%, and higher dollar per acre, if we don't accept the new proposed lease. The well location is already built and the pipeline is in and that location is the last in a line of 5 or 6 wells that are producing!
r w kennedy said:
Larry, I believe that all of the acres will be much more productive in the future and I think the operators are banking on that also, but sometimes that new production technique can be just around the corner for 20 years, like a cure for whatever ailment.
If you have too many acres and don't lease, the operator won't drill. Suppose that you are in a less productive area and it takes 30% of the production to pay off the well, the operator would only receive back his 30% plus a profit of 15% of the production from the 50% actual cost of drilling and completing the well = 45% the other 55% less the cost of production would go to the mineral owner. If you have more than 1/3 of the spacing the operator simply will not drill. He will drill the spacing next door where he has an 80% + interest through lease so he can get the 50% slice of the pie for himself on all of the production. The mineral owner could be stuck at 16% royalty for a long time on a lower producing well. You have to balance the difference between 18.75% toyalty and cash versus 16% for a decade or more. I still like the 16% until the well is paid off then 100% less cost but i have nowhere near 480 acres. A reasonable bonus on 480 acres and any royalty at all and I would be chiming in from a tropical island with my toes in the sand.
There is always the fact that the operator will not drill and carry all the risk on more than 1/3 of the spacing for a 15% profit when there are so many places he can drill and get more. Gail would never get that option unless they broke up and most leased and she a a couple of others were the only holouts, until the numbers of non-consent carried acres came down to a manageable number for the operator. For Gail and her family, it's lease, or no well for a long time. There are alway options, Gail might possibly not lease all her acres, save a portion out looking for a future upside, but the deal must leave enough palatable to the operator to get him to drill.
The company that we are leased with still has a 2 yr. option, but are offering a new 3yr. + 2 yr. option same dollar amount but raising the royalty to 20%??? Dosen't make sense to us. We have been approached by another company offering a straight 3 yr. 20%, and higher dollar per acre, if we don't accept the new proposed lease. The well location is already built and the pipeline is in and that location is the last in a line of 5 or 6 wells that are producing!
CAREFULLY read you lease to see what happens if you lease to others before your underlying lease expires. You don't want to buy a lawsuit when you are so close to production. Figure out how the current lease applies to a new lessee that may be different than the lessee of record in the courthouse. You may want to demand some complicated releases.
Remember the advice of others: The lessees want to tie up minerals for as long as they can as cheaply as they can. They have been doing this for as long as there has been an oil business and if they have to do it through the courts, they are very good at that as well. Basically, a deal is a deal that both sides must live with.
Someone should have bargaining power for their shares in this situation!
There is a reason why they are asking to do a new lease, with all the place holder wells already in production.
Try to find a savvy person to advise you in relation to shares held.
Larry
Gail said:
The company that we are leased with still has a 2 yr. option, but are offering a new 3yr. + 2 yr. option same dollar amount but raising the royalty to 20%??? Dosen't make sense to us. We have been approached by another company offering a straight 3 yr. 20%, and higher dollar per acre, if we don't accept the new proposed lease. The well location is already built and the pipeline is in and that location is the last in a line of 5 or 6 wells that are producing!
Thanks to both Gary and Larry for your reply's. We will see what turns out.
Larry Wagenman said:
Gail,
Someone should have bargaining power for their shares in this situation!
There is a reason why they are asking to do a new lease, with all the place holder wells already in production.
Try to find a savvy person to advise you in relation to shares held.
Larry
Gail said:
The company that we are leased with still has a 2 yr. option, but are offering a new 3yr. + 2 yr. option same dollar amount but raising the royalty to 20%??? Dosen't make sense to us. We have been approached by another company offering a straight 3 yr. 20%, and higher dollar per acre, if we don't accept the new proposed lease. The well location is already built and the pipeline is in and that location is the last in a line of 5 or 6 wells that are producing!