I received a letter from a land man offering me $450, and 1/4 of the royalties from 9 wells drilled in my area. I own a house in a subdivision in Midland–probably a quarter acre or so. The lease is dated for June 1, 2016, for three years, or 3 years from the date of purchase. I purchased the house in February 2019.
I contacted the land man, and he says the signing bonus is non-negotiable, and if I don’t sign the lease, I would only receive royalties if a well actually passed under my property. I looked it up on the Railroad Commission GIS map, and there appears to be a well going under my property. The land man confirmed that it is one of his company’s wells.
The land man said since one of their wells goes under my property, if I don’t sign the lease, I’d get my share of 100% of the royalties from that single well, rather than a 25% of the 9 wells they’ve drilled. Of course, 25% of 9 ought to be better than 100% of one.
But that raises a question in my mind. Why would they offer a lease that is better than the deal I’d get if I sign nothing? Or am I missing something? Should I sign it?
What you get paid is your royalty x your net mineral acres x tract participation x production. If you sign a lease then you don’t have to pay any expenses of the well. If you don’t sign a lease then you could be responsible for your proportionate share of expense.
The well that goes under your land may cover ~640 acres. A pooled unit with 9 wells may be many times larger. For tract participation you may be entitled to .25/640 in the one well or .25/1000s over a large pooled unit.
You’ll only ever get paid based on your quarter acre. The math to work out is whether the production from the one well on your land is better than the average of the 9 wells in the unit.
I believe if other wells are within a certain distance–and said distance may vary according to each field’s rules but may be several hundred feet laterally and to all depths vertically–of your property, you would be entitled to your share of production after payout, so you might want to check that. How will you know that the proposed lease guarantees that you receive royalties from the other eight wells and inclusion will not be an optional decision by the operator? Sometimes a cigar is just a cigar, so maybe unleased mineral owners present accounting headaches and slight legal risks to operators. Ask the landman if as a signed owner you will have to pay for any ongoing post-production expenses. Look up posts in this forum and elsewhere regarding the difficulties of achieving cost free lease language. Just because the lease may have the words “cost free” or “free of costs” does not mean the operator will not be allowed to deduct post-production costs. Can deducted costs make a 1/4 royalty a de facto 3/16 royalty? And what if the well under/near your minerals is the best one over the sweetest spot in the development and the other eight are more marginal? Lots of variables to consider. It might help if you share the block and section numbers and the name of the oil company/lease. Good luck and I look forward to seeing other responses in this thread.
There are some confusing points in your posting. Is the offer 25% OF the Royalty or 25% Royalty? You want a 25% royalty. There have been some shady companies which got mineral owners to sign leases providing 25% of the royalties which meant that mineral owner received 1/4 of 1/4 = 1/16 and the lessee got all the rest. Who is getting the royalties from 2016 through 2019? Are they being paid to the former owner or is the company keeping those funds? Your deed may entitle you to all the royalties. Are you sure that the house seller did not sign an oil and gas lease? Have you talked with your neighbors about their leases and what they are being paid? Did they ratify the bigger unit? If you post the operator and wells, then you can get some advice.
The letter says the location is “a portion of Section 3, Block X, H.P. Hilliard Survey. Your land is included within the boundary of the Mask Horizontal Unit operated by RSP Permian, LLC, a subsidiary of Choncho Resourses…” My address is 5010 Castleford Rd, Midland, TX.
The royalty is 1/4 (rather than a 1/4 of the royalty).
The RRC API of the well going under my property is 32941808. I bought the house at a foreclosure sale, so I’m surprised I got any mineral rights at all. The previous owners were long gone. The land man said the initial payment from 2016 would be a nice chunk, but that obviously doesn’t concern me. The subsequent payments are less than that first payment. I haven’t discussed it with my neighbors.
Ask the landman if streets and easements have been included in your town lot acreage calculation. If not, then doing so might bump up your ownership by a considerable amount percentage-wise.
There is another well just a few hundred feet to your west. You may have claim to production in that one if you choose to remain unleased. Maybe some forum experts will weigh in on that. Also note the series of multiple wells in a very small footprint to your east. This could a template of things to come under you minerals, in which case it might behoove you to not sign the lease. You may be more in the driver’s seat than you realize. Demand a larger bonus?
I asked about a larger bonus, and he said that is not negotiable, because they’re offering to lease it after the fact. If I had owned the property since 2016, the term of the lease would already be up. But, as I understand, since I purchase in February 2019, the lease would still have about 2.5 years left.
It is negotiable in the sense that you can choose not to lease if your bonus expectation is not met. They want you to sign or they would not be contacting you. I would definitely determine if streets and easements have been included in your ownership calculation and get that corrected if they have not. It might increase your interest by 30% or more. And because of your proximity to the well to the west, you may have a claim on production after payout with that well as well if you do not lease. I won’t repeat this and hope wiser heads will interject and correct if I have made any misstatements/mistakes.
I think we are missing the point here. If you purchased by foreclosure sale there is a possibility you have the company at a disadvantage because a foreclosure wipes out any leases that have not been subordinated. The bank always gets clear title, since their lien is superior. DO NOT SIGN ANYTHING until you determine whether the company obtained a subordination from the previous owner’s lender.
