What are good reasons other than more income from well would you consider being a non-operating working interest? How do you decide this is the best course if action. Are you released from any commitment after the well produces very little? Can you assign your working interests to someone else and still hold on to your minerals?
As an operator, and an owner of non operated working interest with other operators, I can give you the benefit of 55 years in the oil and gas business and tell you that 99.99% of the people in the world outside the oil industry have no business whatsoever owning working interest. The shale industry, and the internet, have made people believe there are no "risks" in the oil and gas business anymore and I can assure you, the risks are incredible. You stand the risk of a dry hole and losing everything you invested, you stand the risk of having to pay 300% more than you thought you might have to pay if things go wrong, and the best that can happen to you, in the shale business anyway, is that you will squeak along for 20 years hoping, praying, that you can earn about 80% on your original investment. That’s about 4% per year rate of return. Maybe. No, you cannot simply walk away from a bad investment, or a bad well. You are stuck. The operator, rightfully, can make you sell your house if need be to, for instance, plug a well and decommission a lease. Which by the way, in the shale business can be upwards of 200K per well. You can sell your interest, you bet; but with the limit on upside well known, and the reality of the downside, if it is not good for you what makes you think you can sell that interest?
I get a kick out of reading all the expert advise given on this forum about with holding pooling, or allocation, participating in working interest instead, and I can assure you that 99.99% of that free advise is wrong and potentially harmful to anyone who takes that advise. I would say that 99.99% of the people that give that advise learned it on the internet, not from experience...nor concern that they will be held liable for bad advise should you lose your shirt. The days of becoming wealthy in the oil and gas industry, like the movies, or books, are over for individuals. Folks don't hit homeruns in unconventional resource plays; they get on base now and then but get thrown out trying to steal 2nd.
Respectfully, Liz, avoid free advise and working interest at all costs. You may consider this free advise too, but at least it is rooted in many, many years of experience. Good luck with your decision, whatever it is.
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I would agree with Mike except in cases where the geology really favored you. As for losing your house, that can be avoided by doing what oil companies do, use LLC. Chesapeak has LLC that own LLC which own more LLC, most of them don't have a dime. The LLC owns your lease, not your mineral rights. If someone were to sue the LLC they may get your lease but they do not get your mineral rights and as successor to your lease, whoever holds your lease has to pay you according to the lease or you could sue them. If your lawyer wrote the lease it could favor you pretty well, say 90% royalty with no deducts except for taxes. If you want real advise, you need geological advise and if it's favorable and you have the money to invest, you need the advise of a good accountant and attorney. Always remember never to bet more than you can afford to lose, you can get a bad well even in the richest area or lose the wellbore. Nobody can say whether the risk is worth the gain without looking at the proposal on a case by case basis.
The implication from Liz's post is that she is considering WI instead of pooling her minerals. Pooling implies horizontal laterals and laterals imply unconventional tight oil wells. Therefore "geology" is irrelevant. She can research wells around her and she will know what to expect. A good shale well might mean the difference in 125% internal rate of return over 20 years instead of 80% IRR. Whoopty doo.
Bills get paid in the oilfield, that's why wells get drilled. CHK may act as an LLC but it is self insured to the tune of hundreds of millions of dollars. No non-operated working interest owner should not have liability insurance to the tune of several million, minimum. If Liz's mineral interest is converted to a working interest, and she does not pay her bills, intentionally or otherwise, the operator can place a lien on that working interest until such time as her bills are paid. Most Joint Operating Agreements between operator and working interest owners these days insure the working interest owner is joint and severally liable for their proportionate share of costs. Advising someone about LLC's with regard to the possibility of participating in a 10-12 million dollar oil well is...well, Liz, you make up your own mind on that.
This post made me look up an old conversation about forced pooling in North Dakota that led me to some questions which I posted there at the end of that conversation between Buddy Cotton and RW and others. Please take a look and add some responses as to how forced pooling affected people after this considerable amount of time has gone by.
http://www.mineralrightsforum.com/forum/topics/forced-pooling
A question was asked a few months ago about the downside of participating. This was the answer I gave at that time:
several large dangers possibly loom- 1) The well runs into mechanical problem and the costs are 2-10 times of what was estimated; 2) a pollution problem occurs and you get named in a pollution suit; 3) the operator doesn't market your gas and you have to threaten, cajole and deal with the marketing of your gas; 4) After the initial well is drilled, the operator proposes a six well package that you have to consent to or go non-consent. The cost of the six wells is fairly great. If you go non-consent, then you may have relinquished your interest. 5) the well gets shut-in. I.e, you spent your money and continue to pay joint interest billings every month, but no revenue is coming in; 6) the well runs into mechanical problems, there are cost overruns, the well gets shut-in (so no revenue is coming in) and the operator proposed six more wells in which you have to elect to be in or out.
I'm sure there are other issues, but these are the ones I come up with off the top of my head.
Of course, some people inherit working interests, it’s not like they “made that decision”!
Mary Beth, I did reply to the other thread. I did it on the other thread because I believe that Liz's minerals are in Oklahoma and what may work well in North Dakota may not work well in Oklahoma.
Mary Beth said:
This post made me look up an old conversation about forced pooling in North Dakota that led me to some questions which I posted there at the end of that conversation between Buddy Cotton and RW and others. Please take a look and add some responses as to how forced pooling affected people after this considerable amount of time has gone by.
http://www.mineralrightsforum.com/forum/topics/forced-pooling
Thanks RW, maybe some other people will comment -who have minerals in North Dakota- over at the other conversation, too.
Mike,
That is really excellant advice. I think Liz should consult an attorney too, before making a decision. I would definitely forgo working interests. It is just too risky for me…
Mike said:
As an operator, and an owner of non operated working interest with other operators, I can give you the benefit of 55 years in the oil and gas business and tell you that 99.99% of the people in the world outside the oil industry have no business whatsoever owning working interest. The shale industry, and the internet, have made people believe there are no “risks” in the oil and gas business anymore and I can assure you, the risks are incredible. You stand the risk of a dry hole and losing everything you invested, you stand the risk of having to pay 300% more than you thought you might have to pay if things go wrong, and the best that can happen to you, in the shale business anyway, is that you will squeak along for 20 years hoping, praying, that you can earn about 80% on your original investment. That’s about 4% per year rate of return. Maybe. No, you cannot simply walk away from a bad investment, or a bad well. You are stuck. The operator, rightfully, can make you sell your house if need be to, for instance, plug a well and decommission a lease. Which by the way, in the shale business can be upwards of 200K per well. You can sell your interest, you bet; but with the limit on upside well known, and the reality of the downside, if it is not good for you what makes you think you can sell that interest?I get a kick out of reading all the expert advise given on this forum about with holding pooling, or allocation, participating in working interest instead, and I can assure you that 99.99% of that free advise is wrong and potentially harmful to anyone who takes that advise. I would say that 99.99% of the people that give that advise learned it on the internet, not from experience...nor concern that they will be held liable for bad advise should you lose your shirt. The days of becoming wealthy in the oil and gas industry, like the movies, or books, are over for individuals. Folks don't hit homeruns in unconventional resource plays; they get on base now and then but get thrown out trying to steal 2nd.Respectfully, Liz, avoid free advise and working interest at all costs. You may consider this free advise too, but at least it is rooted in many, many years of experience. Good luck with your decision, whatever it is.