Refusing to sign an oil lease

Texas Mineral Rights Smith County, TX
1

I just recently was contacted by RTW land services about leasing a tract of land in Smith County for Oil & Gas mineral rights. The lease offered $10 with a $20 signing bonus. No mention in the lease of percentage of royalties. I am a 1/6 heir on this property.

The lease concerns 2 parcels each 27.4 acres which is a part of the M.E. Barber Survey, A-82, Smith County, Texas.

This is a 5 year lease. Any information on how to proceed would be helpful. Also, what happens if one of the heirs to this property refuses to sign their lease?

Thank you so much.

2

Typically, development can occur even if there is not consent among all the owners of the minerals. This is known as forced pooling. Texas has its own rules regarding forced pooling. This usually results in an administrative body making a determination of a fair royalty and lease bonus. Sometimes owners are allowed to chose between several options. If an owner does not respond a choice is made for him/her.

So, don’t worry that one of your relatives doesn’t sign or if you don’t want to. It won’t stop development.

3

I cannot comment on the amounts offered other than to say they should be per acre. I would not do a five year lease at all and the going royalty is usually 25% in TX. If you are new to leasing, read the Mineral Help above and ask tons of questions. The generic lease they might offer you is rarely in your favor and you will need help negotiating.

4

This link will open to a vertical well in your abstract in Smith county which has been producing for many years. This link will open to a permit for a horizontal well approved May 2019 which extends into your abstract and is just west of the vertical well. For clarity, please try to rephrase what you have been offered. Are you certain you have been offered a oil and gas lease, or is a company wanting to conduct geophysical surveys? Given the proximity of the newly permitted well, it would seem to be in your interest to get expert advice, i.e., an attorney with oil and gas leasing knowledge. Please consider listening to this interview. You might ought to also read this. Hilltop Royalties is a forum advertiser and a very expert and gentlemanly outfit. LeaseMinerals website claims to beat 95% of offers.

5

The terms reflected in the lease are $0.00 per net mineral acre, a One-Sixth (1/6) royalty, and a 5 year primary term. (This is a sentence in the letter to me concerning signing the lease)

This is from the actual lease: It doesn’t mention anything about “per acre” or what the “royalty percentage” will be.

That Lessor, in consideration of TEN AND NO/100 DOLLARS ($10.00) in hand paid, and in consideration of the covenants set forth in a certain Oil and Gas Lease made and entered, Effective July 22, 2019 , did grant, lease and let exclusively unto Lessee for a primary term of FIVE (5) year(s) for the purpose of investigating, exploring, prospecting, drilling, mining and operating for and producing oil, gas and all other minerals, conducting seismic operations, injecting gas, water, other fluids, and air into subsurface strata, establishing and utilizing surface facilities for disposal of salt water, constructing roads, laying pipe lines, storing oil, building tanks, power stations and lines, telephone lines, and other structures and things thereon to produce, save, take care of, treat, process, store and transport said minerals and other products manufactured therefrom, the following described lands in SMITH County, TEXAS , to-wit:

I have not signed the lease and requested the names an contact information of the other lessee’s but was told they were not allowed to furnish that information.

6

So if I understand your answer, if I didn’t sign the lease, production would still move forward but an administrative body would determine my share of the royalty and lease bonus, correct?

7

Forced pooling is under MIPA and rarely used except under cities with small lots. In Texas, you would be an unleased mineral owner and after pay-out of the well, receive all revenues from the well production less operating and other costs. Pay-out occurs when the total sales from well has equaled 100% of the drilling costs and on-going expenses. Being offered a 5 year lease indicates that it is unlikely that there is any imminent drilling plans. If activity heats up in a few years, some other company will lease from you or the operator will offer better terms. If you own the surface, then you should not agree to free use, but be paid for well location, pipelines etc. HERE IS THE GOOD NEWS - In June 2019, Breightburn Operating permitted the Chapel Hill 3 Allocation 1H (42-423-32431) and the Chapel Hill 4 (Allocation) 1H (42-423-32432) wells in the section just west of you. Breitburn and Maverick have taken 90 leases in your ME Barbee Survey, A-82, since January 2019. Most at 60 months and some at 36. You should get a 25% royalty. Best to sign 36 months. Or if you can agree to an option to extend for an additional 24 months, but only if the lessee pays additional bonus (at least double the up-front payment). Keep in mind that bonus rates are calculated per net mineral acre - If you own 1/6 of 54.8 acres, then you own 9.133 net mineral acres. If you predecessor only owned 1/2 of the 54.8 acres (27.4 NMA) then you own 1/6 X 1/2 X 54.8 acres = 4.57 NMA. Ask the landman for the bonus per net mineral acre and exactly how many net mineral acres you own. Never be in too big a rush to sign. And the bonus is good for right now, but the royalty rate matters for the long run.

8

I am not an attorney and am not giving you any legal advice or financial advice with the following. Please do more due diligence. A $20 bonus seems outlandishly low, and from what you are saying, that is not even $20/acre. If you own the surface, you should be paid for damages if there is a pad, road, tank battery, etc. on your land. A “no surface” use restriction could be inserted at the end of the lease using 'Notwithstanding anything contained herein to the contrary…" language. A salt water disposal well is not something one would want to just give away in a lease, but that seems to be what the proposed lease would do. The memo(?) refers to a certain Oil and Gas Lease but then mentions oil, gas AND ALL OTHER MINERALS. That’s nice of you to allow that! How about striking the “all other minerals” business and let them come back and offer you individual leases should they decide to mine gold, uranium, etc. Did you listen to the interview? Did you look up HilltopRoyalties and LeaseMinerals websites? Both end with .com and I have no financial interest in either company.

9

Based on these websites, these are companies which claim to contact other companies to arrange a quick lease and may also offer to buy minerals. These are not land companies working Smith County in particular or operators in the area. The best leasing deals come from operators trying to lease up an area in order to drill and protect lease holdings or competitive offers from companies which want to be non-operating working interests.

10

I have communicated with Hilltop Royalties and was very satisfied with the analysis and with the advice offered to me at no cost [free] by an oil and gas attorney. I have not contacted LeaseMinerals, but the company’s site claims to beat most offers. How would the OP [who appears not to have much experience leasing minerals] go about finding an oil company competing for leases? And how would the OP go about determining whether a particular lease is decent unless someone with more expertise is consulted? What course of action would you suggest if only one company is acquiring leases?

11

AJ11, Yes I listened to the interview, went to both websites and also downloaded the short paper from the attorney at Texas A&M.

The paper was very helpful although somewhat confusing. If I understood what was presented a company can drill on land if just one “contenant” signs a lease leaving the others to receive royalties after payout. That leads me to believe that there is a “take it or leave it” attitude from the company. In other words, how can you effectively negotiate a better terms lease when all the company has to do is refuse to negotiate and go ahead and drill whether or not I signed a lease. My offer at the end of the lease states that if it’s not signed and returned within 30 days the lease offer is null and void. So what then? I would love to negotiate the items that have been mentioned in all of the posts but again, after reading the paper from Texas A&M it seems I don’t have a choice.

In regards to LeaseMinerals and other leasing companies, if they offered me a better lease then as described in the Texas A&M paper, you could have a situation where two different companies may or may not drill on the property. If one does drill and the other doesn’t and I’m leased to the one who doesn’t drill then I’m out of luck on royalties from the company that did drill and have some production, correct?

Thank you everyone for your input, this has been an experience for sure.

12

Wisindixie, A company is not wanting to lease your land to drill an uneconomic well which will not pay out. An individual or company which might speculate on your lease and offer you a better deal is not wanting to burn capital. I asked a question on this forum in the “Multiple companies leasing in an undivided section in Texas” thread. If I were you, I would contact one or more of the companies we have discussed and get information from professional, expert sources who likely can assuage/respond to your concerns. Also, I think leasing companies tend to initially send out low ball offers to scoop up low hanging fruit and go back and offer better deals to holdouts. But I have had a land company withdraw its offer during negotiations because the oil company cancelled the project. I could have had several thousand dollars I didn’t get had I just signed the mediocre lease and not pressed for additional protections. In your case, the risk is you would lose out on $20 on a five year lease?

13

I’m a Landman with a lot of experience in Smith County (currently live in Tyler). Is the land companies name RWT or RTW? I’m familiar with RWT but don’t know anyone over there. There are a reputable outfit, as best I know. I think step one is for you to understand exactly what you own so you can better understand what you should negotiate for. I’d ask the person / company who sent it to you the following questions:

  • Gross acres size & legal description (if not described in the letter or lease already;
  • Whether or not you own any of the surface estate, and if so, how much of it do you own (percentage-wise);
  • Specifically what your calculated “decimal interest” is in each tract;
  • Specifically how many “net mineral acres” you own per tract;
  • Whether or not your mineral interest(s) are burdened by any “non-participating royalty interests” that will reduce the amount of the royalties you receive (again, ask for this on a tract basis);

I doubt anyone is trying to take advantage of you, to me, it sounds like that was just a poorly drafted initial offer letter (I’m assuming anyways). To address your other concerns:

  • Leases usually never state the ACTUAL amount of bonus paid to protect their business practices and the privacy of the Lessor (you probably don’t want everyone in the world to know your business / how much you were paid either). The consideration provision in the lease is necessary for it to be a valid contract. The true amount is negotiated outside of the document that gets filed at the courthouse. HOWEVER, the royalty must be stated in the actual lease contract.

  • The 30 day term in an offer letter is put in there to protect the Lessee from being OBLIGATED to accept/pay for a lease that was sent out to a potential lessor but was never acted upon. Think about the scenario of an offer was sent to a Lessor a year ago but by the time they get to it / find it again, the company has either moved on from the area, sells the asset, runs out of money, etc. If they still are interested in taking your lease, they can do so even after the 30 day expiration. If you are in negotiations with them and don’t feel comfortable with this, then you can always ask the company/landman to send you a recently-dated offer letter with your current terms.

Good luck, hope they drill a barn-burning gusher well for you!

14

Thanks AJ11, my question still is “do the companies actually have to negotiate with a potential lessee”? Per the paper you referred me to it only takes one individual in the proposed lease to accept the terms and the company can move forward to drilling. If I pressed for a better offer seems to me the company can just not negotiate and I can either sign the lease as presented or not and only receive payouts at a later date to be determined by someone else.

15

In Texas, I think that is correct, but your future proceeds would be determined by the well’s performance. And if you remain unsigned, I think receiving royalties after payout would be contingent upon the actual wellbore going through your minerals or being within a certain distance of your minerals, i.e., if your minerals are localized in one corner of a section and the well is drilled on the other side of the section, you might not have any cotenant rights to assert. Of course, the company doesn’t have to offer you a lease at all. It is not offering you a lease to lose money. I haven’t been able to imagine a scenario where signing a lease with the terms you have outlined would be a good thing to do unless there was a very generous bonus. This is where seeking wise counsel from one or more persons with considerable industry experience and current, in-the-field professional connectivity might be beneficial. I know enough to know that I do not know nearly enough to effect a lease which would adequately protect my interests.

16

JPR has given you sound advice. There is no rush here. You need to understand exactly what you own. How many net minerals do your own within what size of tract? Your ability to negotiate will be hampered if you own a very tiny interest. Most companies abhor having unleased mineral owners as they have to provide information on pay-out and it is a nuisance to compensate and bill them after pay-out. A landman representing the oil company will not share information about other mineral owners because it can only make it more difficult for them to have to negotiate with a group rather than separately with small individual owners. This is a learning process and you can research about unleased minerals in Texas looking for articles on the internet. Try John McFarland’s Oil & Gas Lawyer’s Blog for many shorter articles. Contact NARO-Texas about information.

17

Just heard John McFarland speak at the Texas NARO convention this past weekend. Very good. His blogs are quite useful.

18

There is nothing wrong with consulting people. And you can recommend someone whom you have used. Although others should be aware that they may not get perfect advice - especially when free - or maybe even get to talk with the same person or attorney at a company.

It is NOT advisable to recommend any source about which you have no direct knowledge. A nice looking website is not indicative of competence or knowledge.

Owners also need to take a lot of time to read articles and find information. They can go to the General Land Office website and download the Relinquishment Act Lease for a sample of an owner-friendly document. See if there are state-owned minerals in the same county or area and open the scanned GLO lease files which contain the lease (specifying bonus rate per acre and royalty rate), correspondence with the oil company, pooling agreements, etc. Use the RRC GIS viewer to see wells in the area - then look at permits, completion reports and monthly production reports to see if the wells are deep or shallow, production volumes, etc.

Join NARO an NARO-Texas and get information. Attend a convention or smaller local meetings where they can listen to speakers and talk with other mineral owners. John McFarland’s Oil and Gas Lawyers Blog is a great source of information. There is a wealth of information available, some free and some not, but it takes a lot of time and effort to get educated.

First step is always to figure out what is owned - gross acres and net acres. If there is no direct deed, then search the deed records for parents, grandparents, uncles, aunts to find the link. Buy the deeds, print and save on computer. Print the articles, the GLO lease and other forms and put them into files. Save everything!

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19

Thank you for your response. Here is a copy of the reply I received from the RWT land company answering the questions you posted.

Royalty is 1/6 or 16.66 %

No surface, just mineral that I know of.

Decimal interest in each tract is 0.00017361

.004757 net mineral acres in each tract.

.009514 total net mineral acres X $250.00 nma = $2.38

This is why I pay a $20.00 flat rate for the signing bonus.

Not to my knowledge on “non-participation royalty interest”

20

I am in need of help with negotiating a lease offer. I’m in California and the property involved is in Smith County TX. I’m completely new to what looks to be complicated at best. The rights belong to quite a few cousins so I’m not sure if my small ownership portion is worth paying a lawyer. Any advice is sincerely appreciated.