My sister and I were recently identified as heirs to mineral rights and royalty payments in Williams County. The well’s been in operation by XTO Energy since May, 2010. We only own 1 net acre :-) , but hey – we've been getting small checks in the mail, and I’m also learning a heck of a lot! The property is 155N –96W-4. Interestingly, now XTO Energy plans to begin drilling two more wells this September and we have just been contacted with a lease (never had been presented one before). Bakken Oil, proposed $1200/acre and 3/16 royalty. I asked the leasing agent about the production output of the present well and was told that it’s not great - in 3 years it has produced 87K BBLS. Given that benchmark and the fact that we own such a tiny amount, do the terms I’ve presented sound OK?
P.S. Thanks so much to all of you for your great questions/answers. I've already learned so much.
Jill:
What area is XTO Energy and Bakken Oil wanting to lease? If you are referring to 155N;96W;4, then the original lease must have contained a pugh clause as it would be HBP with the existing well. There is a monthly subscription available from the NDIC that reflects the production figures for all wells but I don't describe to it so I can't inform you about the past production. This area has numerous wells and it seems that $1200/acre and 3/16 royalty is on the low side in my opinion. The problem that you have in negotiations is the small amount of mineral acreage you hold. Again, I still think that you will be able to negotiate a high amount than what has been offered.
Jill, there is some psychology involved. Think about it, the well isn't doing too great......so they are going to drill two more? Does that sound right to you? Sink another 16 to 20 million in that spacing? Not all wells are created equal, that first well may not have been an all out effort they did not use any ceramic propant. That well is also a Three Forks formation well and they might be drilling the Bakken this time. You could have another 5 to 9 wells coming after this. There is not going to be a huge difference between the statutory 16% royalty and 18.75% on one acre. 87,000 barrels of oil at $80 [conservative] per barrel is 6,960,000. If you have never been made a concrete offer in writing AND an offer to participate by an AFE the operator can not impose the 50% risk penalty, and you have a well that will most likely be paid off in 2 years or less and you would receive 100% less cost of production. The well may not be fantastic, but it's by no means a bad well. Push come to shove, I would come up with the money to participate in that well because I would write them a check and they would write me a slightly smaller check because I would then have a working interest and not be receiving the 16% but 100% less cost of production. You could still be non-consent in the next two wells, but the one you have right now has gone a long way to paying itself off. Just something to think about.
If I did lease, I would want more royalty and I would want it effective to the very first barrel from the first well. If the spacing is good enough to drill 2 more wells, it can't be bad. XTO did not come to lose money.
Thanks for the replies. Yes, the lease is to cover 155N;96W, 5th PM, Section 4: SE1/4,SE1/4SW1/4. I have to look up Charles' terminology (pugh clause and HBP, more googling...). The fees to subscribe to that NDIC site are more than a couple of my royalty checks :-) so I asked the agent to tell me the production output. Also - I've since contacted a few of my other newly discovered relatives (I think we have collectively 6 acres). Most signed a 5 year lease back in May, 2008. I was thinking that since theirs expired in May, 2013 that we could perhaps work together on negotiating the terms of the new leases together (I got this idea from this forum site). But when I then asked the leasing agent if they would be getting new leases soon (and my relatives were wondering this too), I was told that they would not, because their leases ‘are perpetuated by production and payment of royalties’. I see in mine also that it states it is a perpetual lease.
Mr. Kennedy - Yes, interesting psychology. And yes - Just this past Saturday (a week after getting the lease documents) I got a certified document from XTO Energy giving me the option to participate. Having already talked with the lease agent a couple times prior to Saturday, I never even knew I had the option to participate and nothing was mentioned. OR - Is the lease I got last week for the first well and now I've got participation rights/lease options to these other two wells to work separately? I guess I have to clarify that with the agent. It does say that a risk penalty can be imposed if I chose not to participate and I didn't understand that either (more googling to do). Anyway, stated on the participation document is that they will drill sections 4 and 9 - a 1280 acre drilling unit for the horizontal Bakken pool infill wells. You nailed the costs - it says KERBAUGH 31X-4D and KERBAUGH 31X-4C are together $18 million in costs. As my sister and I have the rights to 1 acre, would our participation be equal to 1/1280 of the expenses?, e.g. for a $20million investment to develop 2 wells, our part would be approx. $15.6K? And what risks might there be with participation? Oil spills, environmental issues, etc? Not sure what non-consent means. Arrgh, there's so much I don't understand. I so appreciate both your comments!
Jill, since you are unleased, the only basis they had to pay you anything would have been as a non-consenting mineral owner, meaning you had not volunteered to pay for your part of the existing well, but you still could if they have not offered you participation in the well you are receiving royalty from. I presume that the AFE's you have are for only the new wells. I can save you some searching on the risk penalty and non-consent in general, you want to look up NDCC 38-08-08 it's the law and while there may be some unfamilliar terms, it's written in plain language.
Jill, if they have been paying you 16% for the one well all along and you participated they would have been holding 4 times as much money in addition to the 16% they have been paying you. How many months would it take to make back $1600 to $2,000 if you received 5 times as much each month? Do not forget the tax breaks as a working interest also, there are alot of deductions and depreciation of equipment, depletion alone would be significant, instead of being able to claim 15% depletion on your 16% percent royalty, you would be able to claim 15% depletion of 100% of the oil and gas from your acre, would you like your tax dollars back? Ever hear of someone complain about corporate welfare for oil companies? To a small extent, you could be who they are talking about.
Mr. Kennedy - Thanks again so much for your responses. I need to naively ask how you figure that our well has gone a long way in paying itself off with the present $7M oil production output. How do I find out how much the original drilling etc costs back in 2009-2010 were or what the maintenance costs have been? As your figures for the 2 new well estimates are spot-on, seems to me that you have a good feeling about the present well?
And yes, interestingly, I just spoke with the XTO Energy rep and asked about participating in the already producing well, since I’ve never been approached about it. I was told that legally I could (as you stated and which prompted me to ask – thank you). With our little 1 acre rights, would it be worth pursuing? We’ve gotten $600 in royalties from it thus far, since production started in 2010. (I know this is a sneeze for others reading this, but maybe my experiences/questions/your answers might help others make the right decisions?)
Secondly, I was told that if I participate in the two new wells, that there would be maintenance fees to consider along the way. I asked if I could receive some estimates to give me an idea of the ‘risks’ involved and haven’t heard back yet (it’s just been a day). Would you have ideas/figures regarding this? Thanks again.
Jill
Participation, in my opinion, is for people that have a little bit more experience and overall knowledge of the business in one form or another. With the completion costs of some of these wells in the Bakken, and then multiply it X2, and you are going to be in shock when the JIBs (joint interest billing) invoices start piling up. Keep in mind that you will also be paying for the infrastructure of these wells also, the pipelines, any power equipment, roads, and yes, you will pay the LOE (lease operating expense) monthly. You also take the risk of a crummy well that might not ever pay out, or, in a worse case scenario, XTO screwing something up, and another, larger participating entity, suing all participating parties.
Again, this is my opinion, but with 1 net acre, you are going to be much happier by asking XTO for $1,200 and a 25% royalty, and pray for a good well.
Jill, you could participate and yes there are expenses. I wonder greatly that you received only $600 from 7M of production $875 less taxes, post production costs. Literally 1/3 of your royalty is disappearing into the maw, I think they are overcharging you. Much of what they are charging you for, would be tax deductable if you participated and they would have to account for what they are now deducting for. Literally I would have them pay me 100% less production and severance taxes and bill me for expenses, I am not so tunnel carpaled that I can't write a few checks each month.
Roundly, $7,000,000 production divided by 1280 would be $5,468 per acre, less taxes and expenses and figuring back in your deductions, I would conservatively estimate that the well would have paid back between $4,500 and $5,000 for participation in one acre, because there are alot of deductions and receiving 15% depletion from your federal taxes for 100% of the production attributable to your acre. This is my conservative estimate. The price of oil has been considerably higher than the figure I used for some time. If you participated I would say you need the advice of a good CPA to make the most of your deductions and you would probably have to amend a few tax returns. The CPA will make you more than his fee unless he charges you outrageously. I was figuring oil at $80 per barrel before, it's been in the mid $80's to mid $90's for some time. I would not participate in the two new wells, you could be non-consent in those, but if you participated in the first one you would have the bills, you could keep track of the expenses they take from your royalty on your non-consent wells. I don't see any way they could not be overcharging you, probably even charging the use of the gathering line against your royalty while at the same time taking it out of your 84% that is going to pay off your well cost and risk penalty. Double dipping, Shame, charging you to use your own equipment.
Jill, every well is different as to how much it cost to operate, my wells cost a few dollars per acre per month to operate and pay alot more than that. If you acre produces 3 barrels of oil a month @$80 after taxes, costs $5 per month electricity $25 a month to get rid of your share of the salt water, you are still up over $200 per month and expenses could be alot less. One of my carried interest [non-consent] wells I get a statement for costs less than $1.40 a month per acre, good thing it pays 30 times that much per acre or I might miss my morning cup of coffee once a month.
Jill, If Jordan thinks he could get you 25% royalty in North Dakota, I would say definitely go for it. Sad to say, I don't think Jordan has a great deal of experience with ND. I did not recommend you participate in the two new wells but in the one that is in large part already paid off. I doubt that Jordan knows that if you are non-consent and the well never pays out that you owe nothing out of pocket. The rules differ a good bit between ND and other states.
Jordan Murray said:
Jill
Participation, in my opinion, is for people that have a little bit more experience and overall knowledge of the business in one form or another. With the completion costs of some of these wells in the Bakken, and then multiply it X2, and you are going to be in shock when the JIBs (joint interest billing) invoices start piling up. Keep in mind that you will also be paying for the infrastructure of these wells also, the pipelines, any power equipment, roads, and yes, you will pay the LOE (lease operating expense) monthly. You also take the risk of a crummy well that might not ever pay out, or, in a worse case scenario, XTO screwing something up, and another, larger participating entity, suing all participating parties.
Again, this is my opinion, but with 1 net acre, you are going to be much happier by asking XTO for $1,200 and a 25% royalty, and pray for a good well.
You doubt that I know that a non-consent mineral owner owes nothing if a well never pays out?
Hmmm
Yes I do. Care to discuss it or would you like to read the ND law first? The direct quote would be "the well never pays out you owe nothing out of pocket".
Jordan Murray said:
You doubt that I know that a non-consent mineral owner owes nothing if a well never pays out?
Hmmm
Care to discuss what? Tell me the state where a non-consent mineral owner owes the operator for a well that doesn't pay out.
Sorry to have offended you, however that might have happened. I was under the impression this discussion board was for discussion, and I was simply offering, as I stated, my opinions.
Sorry if I offended you, I would be fascinated by how one would get to 25% royalty from an offer of 3/16 when you only have one acre, in ND?
I recommended that Jill be non-consent in the new wells and you are talking about crummy wells and JIB statements, for what? I think you are mixing metaphors. If it's a crummy well, it probably doesn't pay out and retire the penalty, if it does pay out and costs more than it brings in, by law you can assign your interest to the operator, be paid for the salvage value of the equipment and no longer be responsible for the wells bills from that point on. I believe that you are trying to describe being caught behind the eight ball and the fact is, that if you remain behind the eight ball, you are there by choice, since you have the option to walk away.
I actually said and I also quoted it that, "the well never pays out you owe nothing out of pocket", the operator can in fact place a lien against the production of your minerals, so yes, in ND at least, you do owe the operator, it's just that the only way he can collect, is through the production of your minerals. If the non-consenting mineral owner did not owe, there would be no basis for the lien against production. I'm so glad I was able to help you with that, you really can learn something new everyday. It may be the same in other states, but since we are talking about ND, I will confine my answer to ND.
Jordan Murray said:
Care to discuss what? Tell me the state where a non-consent mineral owner owes the operator for a well that doesn't pay out.
Sorry to have offended you, however that might have happened. I was under the impression this discussion board was for discussion, and I was simply offering, as I stated, my opinions.
I'll tell you how you get from any offer to a better offer, you ask. Your assumption of my knowledge of royalty amount in ND is factual, but it never hurts to ask.
While I have you, can you explain to me how one would go back and opt to participate in a well in which they've already been paid royalties?
In ND you have the right to participate and that right does not end until you have been made a good faith lease offer which you decline AND an offer to participate in the well, both of which should have been made to Jill, but evidently weren't. How on earth could anyone decide to participate or not if they were never given a proposal? If the operator has Jills address to send checks, they certainly had it to send a lease offer or AFE but they have failed to do so.
The operator can not impose the risk penalty if Jill has not received the good faith lease offer or offer of participation. The operator had to pay Jill somehow or be in violation of the 150 days after first sales statute and owe interest, if Jill had good title which I assume she does or they would not be paying her anything. With no lease, what are they going to pay her? Jill has not signed a lease or agreed to participate, since they do not have her consent and by law need to pay her the average weighted royalty in the spacing or 16%, whichever the operator elects, they pay her 16%. I've seen several other cases just like this. It's not Jill's fault the operator does not have his ducks in a row. Jill has a right to receive payment for her property being sold. What do you call it when someone takes your property and sells it without your consent and does not pay for it?
Please allow me to turn your question on it's head, what would be the basis in law for the expiration of Jill's right to participate? We know the law says she has a right to elect that she will participate for 30 days after receiving the AFE, no AFE so the time has not expired.
You've got an anger issue today.
I was asking a genuine questions.
No one is out to get you, I promise.
Back to the topic at hand gentlemen,
Debate is fine, but no one benefits from arguing over who meant what.
Have a nice afternoon,