Oil and Gas Lease Information (Midland, Spring: mineral rights, leasing, insurance)

[R. Flynn]

My family owns mineral rights on two 160 acre tracts in Glasscock County, Texas (east of Midland and South of Big Springs). My great grandfather traded for the land (sight unseen) in the early 1900s. Times were hard,and the family's circumstances changed. The family never moved to the land. Over time the land was sold; however, the mineral rights were retained. Recently, we received a phone call and follow up correspondance regarding the leasing of our minerals. The initial offering is $100 per net mineral acre and 18.75% Royalty. This land is in the Permian Basin, and there is drilling activity in the area. Does anyone out there know if this is a fair offer? Also, can anyone recommend a reputable attorney to consult in the drawing up of a lease agreement? I appreciate all the help I can get!

[loves2read]

the royalty sounds good--almost TOO much when you have not even started negotiations--are you sure that is correct--and are the minerals undivided in the sense that only 1 family member owns ALL 100%--or are the mineral rights owned by several family members in a variety of interest amounts???
How were the minerals passed along after the original owner died?
Can't recommend an attorney--call the FTW Bar assoc and ask for oil-gas specialist--and I would NOT use the same firm that is working for the city of FTW--they have done a sucky job of getting the city decent rights...

[DFF]

I don't know the production potential of your land but one thing I think lessees should do is get a good estimate of that value before they sign anything. They should know what they are signing over to the operator's agent before they sigh.

For example, in Tarrant county signing bonus offers range from $2000 to $20000 per mineral acre with royalties of 20 to 25%. That sounds terrific by comparison to what you were offered. BUT .....

It is hard to get an estimate of production potential but some estimates for the Barnett shale indicate that the gas under an acre could be worth $2,000,000 or more. Signing away control of $2M for a even $20k bonus and 25% may not be such a good deal. That is like leasing a new $20,000 pickup for $200 plus $500 per year for the next 10 years. I would love to rent a truck from you but I doubt you would lease it to me for that deal. Why then lease $2M of production for $20k and 25% of the value of its production over the next 10 years?

That's what CHP, XTO, DVN, etc. are paying for mineral leases and owners are stampeding to sign the leases. Is that a great deal? I'm not so sure.

A horizontal well only extracts gas from the fracture zone fairly close to the lateral. For a 2000 to 3000 foot lateral, some estimate that about half the gas from about 20 to 30 acres is recovered. If only one well is drilled on 80 acres, only about 12 percent of the gas reserve in the well unit is extracted. Lessees are typically not required to completely develop their leases and they don't have the equipment and resources to complete the effort thoroughly and quickly.

For example, there are about 50 rigs in Tarrant county. They can drill about 15 wells per year each. But to drill a well for every 20 acres in Tarrant would require those 50 rigs to work continuously for about 40 years (assuming they could get permits, well sites, rights of way, access to pipelines, etc.).

Will owners receive much of the potential value of their minerals? I doubt it ... at least not for a long time unless operators increase their effort significantly or unless owners do something besides lease to the current operators. Current leases do not force operators to expedite development beyond an initial drilling of one producing well on 600 or so acres. That essentially ties up the lease indefinitely while the operator is free to lease and tie up other property as fast as possible.

The only way to assure that minerals are extracted is to stay in control. Either join with other owners to "do it yourself" or alternatively make sure your lease contains a termination clause if annual royalties fall below about half the signing bonus. If they intend to drill enough wells in a pooled area to produce $100k per year per acre, the operator will not flinch with such a clause. If they plan to drag out the process, they won't like it and won't lease your land. You will however retain the rights to your minerals until a serious operator comes along. It will be worth the wait unless you MUST have the upfront money. That is your decision and your right. It's your mineral estate ... don't give it away for less than it's worth. Knowledge is power.

[katie31]

Hello,
I just had a offer for my mineral rights that I own on a 5 acres from a gas company. The sign on bonus was 2000.00 which came out to 400.00 a acre and they offered 15 %. Should I go back and neg. more of a percentage and bonus offer ?

I have to make the decision before Monday can someone email me back asap!!!

Thank you,

Sonja Sailor

email address: sailor425@verizon.net

[loves2read]

please don't give out your name and email address on this site
you have a name for the forum to give you some privacy...

take it and be glad you are getting an offer
you MIGHT get more on royalty but I doubt it
haven't you read the paper and seen how drilling rigs are going idle because of the price of oil/ng...

IF THEY ARE GOING TO BE DRILLING OR RUNNING PIPELINE ON YOUR LAND THAT IS SEPARATE PAYMENT FOR DAMAGES--
AND MAKE SURE THEY PUT THE LAND BACK THE WAY IT WAS--NEGOTIATE THAT IN CONTRACT--SPECIFICALLY MAKE SURE THEY PUT THE TOP SOIL BACK ON TOP...OTHERWISE YOU GET NOTHING TO GROW (NOT EVEN NATIVE GRASSES) WHICH MAKES EROSION PROBLEM...
THAT MONEY IS COUNTED AS INSURANCE/DAMAGES--NOT INCOME SO IT WON'T BE TAXED LIKE YOUR ROYALTY LEASE PAYMENT

[dcardin14]

DFF, you are a real idiot. I am a landman and I have bought leases in Glasscock County and in Tarrant county. They are not at all the same. If somebody in Glasscock county tried to put your provisions in a lease, that would be the last time they would hear from me. It doesn't work like you think. I can buy 50,000 acres of leases in Glasscock county in a few months without ever paying anything even close to the going rate in Tarrant County (even in the same universe). Also, that idiotic stuff about termination language if the royalty falls below....whatever. You are dreaming and it is self-procalaimed "oil consultants" like you who cause hard working farmers to lose out on a chance to strike a fair deal with an oil company who could drill a well on their land and make their lives a lot better. But you are not going to have much luck trying to bully an oil company with some farmland in Glasscock County.

[dcardin14]

By the way. The royalty is fine but you might get a little more on the bonus.

[loves2read]

most of the people who post info about o/g royalties or well-drilling at just blowing off steam--no real background beyond maybe a phone call from a lease hound or the fact they want their land leased...

[jimboburnsy]

Originally Posted by dcardin14

DFF, you are a real idiot. I am a landman and I have bought leases in Glasscock County and in Tarrant county. They are not at all the same. If somebody in Glasscock county tried to put your provisions in a lease, that would be the last time they would hear from me. It doesn't work like you think. I can buy 50,000 acres of leases in Glasscock county in a few months without ever paying anything even close to the going rate in Tarrant County (even in the same universe). Also, that idiotic stuff about termination language if the royalty falls below....whatever. You are dreaming and it is self-procalaimed "oil consultants" like you who cause hard working farmers to lose out on a chance to strike a fair deal with an oil company who could drill a well on their land and make their lives a lot better. But you are not going to have much luck trying to bully an oil company with some farmland in Glasscock County.

I may have said this more diplomatically, but the substance of this post is correct. What a lease is worth is very much a regional trend. In retrospect, Tarrant County was probably artificially inflated by some big companies competing with eachother trying to dominate the Barnett; no one is leasing for $20K/net mineral acre there anymore.

Also, the reason a 25% royalty on in situ minerals worth $2 MM (actually, $2 MM worth of oil or natural gas would never get drilled- it wouldn't be economic) is a good deal is that in situ minerals are completely worthless to you if they are stuck in a rock 10,000 feet below the ground. If you can DIY oil & gas, you are a member of a very exclusive club.

To the OP: I don't know very much about your situation or your location so I am hesitant to give a recommendation, but my knee-jerk reaction if I received that lease offer would be to counter with this:

"I'll lease for a fifth royalty and I want horizontal and vertical pugh clauses in an addendum."

I think that bonus is probably fair. We were taking leases for $125/acre in that general area even during the middle of 2008. You make the real money on royalty anyway.

[MacyMoo]

How do you value oil/gas royalties as property value for property tax appraisal purposes? My interest was appraised at about twice as much as I was ever offered for it.