I’m praying someone could share a little insight and answer a few questions–
A major operator would like us to ratify a lease because due to an error on their behalf, our property was booked as leased but is actually unleased. Production started in 2020 and total BBL is over 1 million. If we choose to remain unleased, I understand that our mineral interest would be reduced by the well costs - operating costs, workover costs, ad valorem taxes paid by the operator, operator overhead, etc and we would only receives this net income APO. Operator will not release BPO/APO status but assuming that the well has paid out, would an unleased mineral owner have any legal rights regarding transparency of the costs that we would be charged and if so, what specifically would I need to request?
Furthermore, would the operator be obligated to “settle up” any payments that should have been paid since reaching APO status? The operator stated that if the ratifications are not signed, they would recoup any royalties that were erroneously paid and we would be responsible to pay the operator our share of well expenses APO (which I can understand but would like to know if they in turn would have to repay our portion of the interest). And is there a limit to what we could be charged regarding APO expenses?
It sounds like this is a highly profitable well so I think you’re likely far better off as an unleased co-tenant than ratifying the lease and being a lessor. As an unleased cotenant you basically get 100% of your interest after payment - minus the operating expenses (which are likely minimal compared to the revenues). As a lessor, assuming a 25% royalty, you get 25% of production from Day 1, undiluted by any operating costs. On unprofitable wells or marginal wells, you’re probably better off as a lessor. But on a very profitable well, being an unleased co-tenant is likely a much matter deal.
As for information they owe you, yes, there is a common law duty to account to unleased co-tenants. They know that but don’t want to do it - so it sounds like they’re bullying you around by not giving you that info. You’re entitled to it, but you may have to hire a lawyer to help you get it.
As for “settling up” payments out of the after payout revenues, such as royalties paid and operating expenses, yes, the operator is likely entitled to do that but it would come out of the future production - so it might impact cash flow for awhile from this interest. I don’t see an operator wanting to demand the immediate repayment of these expenses and don’t know that one could even try to do that.
As a leased party you should get (most likely) 25% of the revenues due your portion of the acreage. Plus in theory some lease bonus. I assume they already paid you the bonus and have also erroneously paid you royalties. If they did, you probably have to pay them back all of that (or at least deduct it from anything going forward) before you will get anything IF you decide that your status is unleased.
If you are unleased you get nothing and pay nothing until the well(s) have reached payout status, at which point you will get 100% of the revenues due your portion of the acreage after expenses.
Basically…what are these specific wells? That (how they have produced to date) will determine what it is that you will want to do. If the wells are GREAT, then its always better to not be leased and get 100% after expenses. If the wells are not that great, then its better to be leased. 1 million barrels for 2 wells in 3+ years is great and those wells have long paid out, 1 million barrels for 8 wells is very very not great and they may never pay out. So would need more details.
That is exactly what I was searching for-- whether or not the operator SHOULD release accounting details and if so, what type of document I may need to request or specific terminology to use in a demand letter.
I was suspicious if “immediate repayment” was more negotiation/intimidation tactic or actually backed by legality.
The 1million + is for a stacked lateral consisting of 3 wells.
My current goal is to ascertain as much info as possible about what accounting info regarding well cost the operator would need to share with us before we make the final decision. Would you be able to speak whether or not there are any costs that could be charged to an unleased mineral owner after a well has met that APO status? You had mentioned we would get 100% of revenue after expenses in which case, I would assume they would then need to divulge these “expenses” but am not sure how to go about requesting them.
They would send you a JIB every month detailing the expenses. And a revenue statement.
Typically a well with no problems will need:
Electricity
Labor
Water Hauling/Disposal
Chemicals
General GA overhead
Etc
This will be the case both before and after payout. Its typically going to run between $10k and $30k a
month (on a 100% basis). If there are big workovers (pull pump, hole in tubing, etc) then there will be more expenses. You would be in more or less the same boat as the operator, you get revenue and you pay expenses. But they will also be paying 25% royalties and you will not. These are all 3 probably 50-75 bopd wells (200 bopd x 30 days = 6000 barrels x $70 = $420k on 100% basis, much higher than expenses), you will all be making money.
It’s pretty much zero sum, if you make a better decision for you, you make a worse decision for them. So yeah I would guess they won’t volunteer to tell you anything about costs or economics of the well. Good luck lawyering that out of them.
A 333,000 barrel well will have paid out. Probably at around the 200,000 barrel mark.
I would guess the better decision for you will be to stay unleased based on the wells being pretty solid. And then I’d guess you get to sit there for 3 plus years before you get anymore money as they already paid you for 250,000 barrels of gross production. So these 3 wells will have to make 250,000 more barrels for you to “work off” the royalties they mis-paid you. That’s still probably better than what you will get in royalties from 1/4 of the interest from here on out.
You probably don’t have any bad choices. As with almost all these questions on this site, it all comes down to the size of the interest. If this is 2 acres, then just sign a lease and move on. If this is 200 acres then by God get a lawyer. If its 10 or so then just flip a coin.