Can somebody help me understand the difference between a Working Interest Lease and Mineral Lease and what the going rate is for overriding royalty on a Working Interest Lease? Cheers.
Once again a glossary of terms and their definitions would be helpful. Lease can have different meanings.
An operator may call it's entire drill spacing a lease although it's made of of many leases of mineral acres some of which may be the "lease" of a working interest who has paid the proportionate drilling cost for the acres they leased in the spacing.
Working interest is someone who has paid to participate in a well for acres they own or have the right to produce because they leased them from someone else.
I would say the mineral owner has mineral acres and not a lease until their acres actually are leased.
Landmen may speak of your "lease" because to them it's a forgone conclusion that you are going to lease, although that is not necessarily so, I will admit that a great majority do lease, probably because they have never heard of any alternatives besides selling out.
I hope this helps.
Dear David,
There is no such animal as a working interest lease.
An oil and gas lease is granted from the Lessor (mineral owner) to to the Lessee (oil company). The term "lease" is actually a misnomer. It is not a lease at all. It is a conveyance of property and a contract rolled into one. We will call that a determinable fee, which means that the oil and gas lease can be terminated upon the occurrence or non-occurrence of certain events.
In the oil and gas lease, the minerals are actually conveyed to the oil company with the Lessor reserving a royalty and having the possibility of reverter ( the lease expires and the minerals come back to him).
The owners of the lease, the lessee and their partners own the cost bearing burden of the lease. This is referred to as a "working interest." Therefore the total of all the working interest totals 100%.
An overriding royalty is a cost free share of production created from the working interest ownership. No lease, no overriding royalty.
The lease royalty is sometimes referred to as the landowner's royalty.
To put things in numbers, let's say that you, David, lease your property and the royalty rate is 20%. That is the landowner's royalty share of production from that lease.
The oil company, the Lessee, let's call them Big Oil, has an incentive program for its upstream professionals. We will call that Big Oil Employees's Royalty Trust. As part of the incentive program, 2.5% of the revenue is sent to the Trust in the form of an Overriding Royalty.
Now, the breakdown.
Costs to be borne:
Big Oil Company --- 100% working interest -- 100% of the costs
Revenue to be shared
David --- Landowner's Royalty -- 20%
Big Oil Employees's Royalty Trust -- Overriding Royalty --- 2.5%
Big Oil Net Revenue Interest -- 100%-20%-2.5% =77.5% NRI
Big Oil pays 100% of the costs for a net revenue interest of 77.5%
There are a ton of different options that can be made on each and every one of these terms, but this is the simplistic, general idea.
I know that this did not answer your question on the "going rate is for overriding royalty on a Working Interest Lease" but perhaps now that you know some terms you can re-phrase your question and I will try to answer.
Best
Buddy CottenBuddy and R W,
Thank you for both for your responses, they are very helpful. I am new to this game and trying to education myself and family. I inherited a Working Interest in mineral and gas leases and have been contacted by an energy company who wants to acquire (what the term of art is) the Working Interest. I am trying to understand the rights and obligation of the Working Interest, as well as a fair override royalty % for consideration to transfer, lease (again whatever the term of art is) the Working Interest the to energy company.
A Mineral Interest and corresponding lease royalties seem pretty straight forward to me; a Working Interest.
Cheers, david
Dear David,
If you inherited a working interest position in leases, is there a Joint operating agreement in place? The first item is to determine their value. That is not always the easiest thing in the world to do.
If there is a joint operating agreement in place, the partners might have a first right of refusal on a sale. As to exchanging a working interest for an overriding royalty interest, many companies will not have a problem with you retaining the difference in current lease burdens and 25% as your override. So, if the leases were for 1/5th royalty, you assign the leases and keep 5% for you. HOWEVER, there are lots and lots of traps in these transactions. Get some business, accounting and legal advice before you go too far.
You will do fine. You are educating yourself and that is a great idea. Learning the words of art is a good idea also. You can get slaughtered if you are not familiar with the jargon.
Best
Buddy Cotten
Buddy,
Thank you again. Lots of good things to think about.
One more item. The company has established a closing date by which time we are told to decide how we'd like to proceed or we'll be receiving a demand letter from their attorney for our share of costs for the new wells. My sense from reading other posts establishing an artificial deadline this is a common bluff tactic when companies negotiate with mineral owners; however I'd like to know if having a working interest creates some obligation to perform or be responsive. An operating agreement may speak to some of this.
Your thoughts are appreciated.
Cheers, David.
Dear David,
Things are becoming more clear. I wager that you have interests in a forced pooling state. It may not be a bluff tactic at all. They are likely following state statutes.
You might have an unleased mineral interest rather than a working interest. Dunno. If you like, friend me and send me an internal mail and I will send you my e-mail for you to send me what you have. I will give it a quick look, if you wish.
It just may be that you need some legal advice. If so, whatever state your property is located, a GP attorney just will not cut it. You will one board certified in oil and gas law at a minimum. If that is the case, I will try to point you in the right direction.
Buddy
Deadlines to sign a lease are frequent and often have no meaning. If an operator is asking you for your share of the cost of drilling a well/s there may be a specific deadline or language in a joint operating agreement mat take over and money advanced on your behalf by the operator may be collected by the operator from production with a huge penalty, possibly 300%.
David, I think you need some help right now and you need to have all documents you can find in front of that person and they may have to obtain more documents. At this distance, I can't tell how urgent your situation is, but better safe than sorry.
If you don't have the participation money, you may find it desirable to take on an experienced partner in a farm out agreement, who will pay the cost of drilling, and watch the operator on both your behalf. I think you need more information, more quickly that you will get here. If there is a default in the near future, you want to avoid that.
Hmm. So much for a relaxing weekend of basketball.
Again, I appreciate the feedback. The interest is in Doddridge Co., WV and the company is Antero. I have copies of the original leases and assignments. Don't have a JOA, not sure if there is/was one.
I have seen the names of a couple attorneys on other discussions who work in WV. I'd be glad for a referral to a fair trader.
Cheers, David