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Oil and Gas Lease questions?


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We have been approached by some oil companies that want to buy an Oil and Gas lease on our property.

I read Merlin's thread from a few years ago. What is going on there now, Merlin?

They are drilling for the Marcellus and Utica shales in the area. Several of the neighbors have already sold so there will be drilling in the area no matter what. We might as well get a little money out of it if we can. ;) We own all mineral rights except #9 coal.

We have an appointment with an oil & gas lawyer. ;) We won't sign anything without advice.

I know some folks here have worked in the oil fields. Any advice?

We want to protect our property for the future.

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I took it as far as I legally could.... To no avail. They put in the well - I sold out and moved. I still own a piece of property next to where I sold out and now they are coming after it.

I can't will not put into words what I think about it.

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Bill a couple of things to keep in mind. I assume they are buying your lease for mineral rights not buying you mineral rights. I would not sell mineral rights. You should find out the spacing on the mineral rights. In a one mile section there are 640 acres and some are divided on a 320 spacing. Two sepearate sections in the 640 mile section. Now if they are to drill a well on your property you are entitled damages. It varies on location 5 to 10 thousand dollars for rights to build a site is common in my area. Others are more some are slightly less. The Corporation Commission "should" be an asset as they are there to ensure one gets a square deal. Along with spacings there are zones underneath your property and when issued a permit to drill they will list the zone also. ONe other thing to consider is their payment for underground lines to transport their gas. If they are to work on your property clearing any vegetation have them burn and bury all the vegetation they cut. Gas and or minerals harvested in your spacing is paid to you as a percentage of what they pullout of the ground. You would get a percentage times the number of acres you have mnineral rights on the spacing they retrive from. Make sure you bring this up to the gas lawyer you will be tallking to to get as much percentage you can get. You may be able to get some of the gas for yur own use, but it ain't easy. Of course if you get your gas form a distributer it may not be beneficial for you. We are on Propane here. Getting legal advice is a good start on this process. My dealings were not fun but was not a bad experience though. I hope this helps. later rdd

Edited by Bubber
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Merlin, sorry it didn't work out better for you. :angry2: Did someone sell the mineral rights before you bought and you couldn't do anything about that?

Bubber, they are building 640 acre "units". Yes, this is a 5 year lease for the different gas, hydrocarbons, etc. as I understand it. It is an advanced delay rental one time payment for the 5 year lease with a royalty payment also. It can be continued after 5 years if both parties agree.

This isn't Beverly Hillbillies money, but nothing to be ignored. ;)

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Bill,

Have any of the wells drilled in the immediate are started producing either oil or gas or both? Is this a proven field? If yes, this is going to help you drive up the price of your lease. Don't be in a hurry-there are probably other oil companies that would be interested in making you a fair offer. Not sure how things work in Ohio. Try to get a minimum of 25% royalty interest on your lease. BTDT in NM

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Wells have been drilled in nearby WV and PA but I don't think any wells are producing in eastern Ohio yet. Brokers are going around the area trying to get leases. There was an article in the paper the other day about standing room only at the courthouse with brokers looking for properties to lease.

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As mentioned earlier, DO NOT SELL your mineral rights.

Many companies still use a standard AAPL lease form (American Assoc of Petroleum Landmen) but some may have their own form. The man you lease you minerals to may work for a company that wants to drill on your land, or may just want to tie up the land should the play move into your area. Or the man you are leasing to may be an independent landman that is trying to get a lease signed up and later flip it to an exploration company.

If they are trying to lease your rights, you might want to do a little digging on what the going rate is. As with many things in life, its all negotiable. Right now you might be on the fringe of the play. The offer might sound good, but if the play moves into your area, the folks that leased later may get much more bonus and better terms. Then again, the play could fizzle out and you get nothing.

The first question I ask is about the Lease Bonus. This is a dollar amount given to the royalty owner (you) for signing the lease. Make them offer it "per mineral acre" rather than just a lump sum. They like to throw out the numbers and hope your greed or fear of missing out will get you to take their offer.

The second concern is the royalty interest. This is the percentage of oil or gas produced that you will still own. Often its 1/8 (12.5%) of every barrel of oil and every MCF of gas produced relative to your mineral interest. When it got really wild in the 80's, I saw many leases offering 1/4 (25%) and a few as high as 3/8th (37.5%).

Third is the term of the lease. Often its a primary term of 5 year with the terms of the lease continuing in force indefinitely provided the well(s) continue producing.

Assuming you also own the surface rights to the property, will the lease limit how much land they can use to build roads, drilling locations, drilling pits and land for producing/treating facilities. Some oil companies like to set damages within the wording of the lease. Consider requiring that damages be determined when they will be incurred. Say they get a whopper of a well. There are wells drilled in Ohio that were drilled over 80 years ago. How much was land worth back then? Its sure worth a lot more now so it would have been foolish to agree to $25 damages for a drilling location when $2500 in today's dollars are reasonable.

If you decide to lease and they do decide to drill, you are not responsible for any expenditures for the drilling of the well. If it hits, you are also not responsible for any expenses to produce the well. However, you will be responsible for the production taxes and possibly some fees for transportation and handling.

Questions to ask? If they say they are offering a $1000 bonus, find out if this is the dollar amount for your entire interest or is it paid per acre. What is the drilling requirements? How close to structures such as homes and barns can they drill. The dollars sound real good until you have a drilling rig running 24 hours a day outside your bedroom window. The rig moves on and in its place is a pumping unit with bad bearings that squeals all night. What holds the lease after the primary term? Typically it requires actual production but the lease may state ongoing operations may hold the lease. That means if they are not producing income but are "working" onsite, the lease can be held indefinitely.

If you are looking at a substantial amount of acreage or it gets really exciting, a good oil/gas attorney can save you much more than he will cost. For many, bringing in an expert eliminates a lot of worrying and leads to a good night's sleep.

Before you sign, it would not hurt to make it known that you are willing to lease your mineral rights. Get a few more landmen interested. A bidding war may break out. In the big picture, the cost of the lease is a minor expense to the exploration company. If its a high reward, low risk play, they may be willing to stretch a little to get your lease.

Until they get you signature on the lease, the landman will be your newest best friend. They are making you an offer that just can't be passed on and make you feel like an idiot for not offering to name your first born after them. But if the area is hot, others will be interested in leasing, possibly on better (for you) terms.

I'm not an expert on this, but I've been on both sides of the fence on this one.

Bill

(retired petroleum engineer and long term royalty owner)

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Hi I signed an oil/gas lease for my property about a year ago. This was for exploration of land. The royalty % on this was 25%. I own half the land and my brother the other half, It has never been surveyed to show what part each of us actually have. Does the 25% royalty afforementioned mean that we each get 12.5% or each get 25%? We signed seperate papers. Today I received a letter from company that appears to be an application to drill sighned by a judge. This shows my land and the well site. 3/4 of my land is in the "circle". ??? All of it is in the plat. The well is very close to my land, almost on it! It seems to be a 640 acre unit and a deep well...I have 27 1/2 acres that is in this. My brother the same so the tract is actually 55 acres. What does alll of this mean??? It is located in N. La. One more thing when I looked up the well site application on the web it said something about pooling, so I think it is a pooled unit...again can you help me better understand what all of this means? Thanks

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Hi I signed an oil/gas lease for my property about a year ago. This was for exploration of land. The royalty % on this was 25%. I own half the land and my brother the other half, It has never been surveyed to show what part each of us actually have. Does the 25% royalty afforementioned mean that we each get 12.5% or each get 25%? We signed seperate papers. Today I received a letter from company that appears to be an application to drill sighned by a judge. This shows my land and the well site. 3/4 of my land is in the "circle". ??? All of it is in the plat. The well is very close to my land, almost on it! It seems to be a 640 acre unit and a deep well...I have 27 1/2 acres that is in this. My brother the same so the tract is actually 55 acres. What does alll of this mean??? It is located in N. La. One more thing when I looked up the well site application on the web it said something about pooling, so I think it is a pooled unit...again can you help me better understand what all of this means? Thanks

Since you and your brother have not "split up" the land, the lease will show you have an undivided 50% on that acreage and your brother the other half. All acreage within the 640 acres has been "pooled" and will share in the production no matter where within the 640 acres the well(s) are drilled. For the math, say the well produces 1000 barrels of oil per month (bopm). You own 27.5 acres out of the 640 acres, or 4.297% of the unit. Your royalty is 25% so of that 1000 barrels, your ownership will be 4.297% X 25% X 1000 bopm for 10.74 bopm net to your interest.

You indicate the well will be drilled near your land. The actual drill site may not be on your land but they may need to run roads, pipelines or elctricity across your property. Any of these will incur damages. Damages for roads, drilling location, pits, producing facilites and such are paid to the surface owner. In this case, the payments for damages on your and your brother's land will be split and paid equally.

The next well might be drilled a half mile away but still within the border of the pooled acreage. Should that well be productive, you will still share in the production but any damages paid will go to the surface owner of that tract.

If the first well is a deep gas play, it may be the only one drilled to that horizon. Follow up wells might be drilled due to shallower pay zones that cannot be produced from the initial wellbore.

Unless there is language in the lease stipulating the dollar amount the oil company must pay for damages, then I suspect someone should have contacted you about payment by now if they will be coming across your land. The oil companies are good about getting all their ducks in a row long before you see a derrick coming down the road.

Bill

Edited by Flatland Shooter
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Emily to my understanding, using the math as Flatland shooter states your 27.5 acres divided by the 640 acre spacing is 4.29% times the 25% of the rights gives you basically 1.0742% of total revenue of all wells on that spacing. The spacing could be different. On of ours it is on a 320 acre spacing which affects the percent you may earn. And as FLS states the company will get in touch with you prior to anything being built on your land or pipes put under it, or should anyway. Just muddying up the waters. :wacko: later rdd

editied cause I don't have my glasses on!!!

Edited by Bubber
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