By Ramon De Hoyos
‘Tis the season to ask!
Friends and mineral owners who I have leased from are asking about other tracts of land with mineral interest.
These tracts of land have been leased in past years but they have never been a part of any drilling program. Their mineral interest has been leased multiple times throughout the family lineage and that has always been the extent of it.
There are few questions you want to ask your Landman when you are going to lease out your Mineral Interest:
- Who are you leasing on behalf of?
- Is the company, your Client leasing towards any local drilling programs?
- What surrounding other areas, if any, have they leased?
- Should I hold out and not lease?
You want to know who they are leasing from as it will give you an idea of who might be in your neighborhood actively leasing towards drilling. It is in your best interest to be leased by a company who will come in to explore and produce your mineral interest along with a company who has been actively leasing around you.
There are other companies you can work with that may be in your better interest and not just the “big name oil and gas companies.”
A smaller oil and gas company, will usually have your interest in part of a drilling program and most likely will not want to tie up for your land for a long-term period.
Do homework or hire a Landman to do some research for you.
You want to know:
- What is the closest producing well?
- Where are permits being filled in the county?
- What is the rig count in the county?
- Where are leasing being filed in the county?
- What type of formation is everyone in the area drilling at?
Holding out and not leasing when the opportunity arises can be a challenge.
Two Types of Unleased mineral interest:
1) Unleased mineral owner on a drillsite tract
2) Unleased mineral owner on a non drillsite tract
Here in Texa: , If you are a unleased mineral owner and pooled into a unit well you might not always share in production. If a company has leases around the unleased mineral owner they can still be included in the unit, the oil and gas company does not need a lease to do so. Now, just because the unleased mineral owner is included in the unit this does not mean the unleased mineral owner will share off and production from the unit well. If the unleased mineral interest is part of a drillsite tract then the unleased mineral interest will share in production from the well. A drillsite tract is defined as property that all or a part of the wellbore passes underneath the property. On vertical wells the wellbore is located directly underneath the surface of that single property location. On a horizontal well there would be multiple drillsite tracts that fall along the wellbore path. An unleased mineral owner tract is not a drillsite tract then they do not share in any of the revenue from production.
If the unleased mineral owner is on a drillsite tract, than co-tenancy laws will apply, and the unleased mineral owner will receive his full share of production in proportion to the number of acres owned in the unit, this is only AFTER THE WELL PAYS OUT.
Here is an example: Patrick is an unleased mineral owner who owns 100% of the minerals on a 50.00 acres tract that happens to be a drillsite tract that is included in a 500 acre unit. Patrick will be entitled to 50/500ths of all revenues from production. If Patrick had leased with the Oil and Gas Company for 1/5 royalty his share would be 1/5th of 50/500ths of production. See the difference? It is a huge risk for an unleased mineral owner to hold out and wait for the well to pay out versus receiving money has soon as the well goes into production. To clear the phase “pays out” this means the point at which the oil and gas company who drilled the well and operates the well recoups all of its cost towards drilling and completing the well. Some wells cost several millions of dollars to drill and complete. A lot of times depending on the production of the well it may take years for the well to payout or production might stop and it might not never pay out. Therefore if Patrick were to lease his interest he would receive a royalty share from production.
You will be carried into working interest if your mineral interest is part of a drillsite tract. If you sign a lease, then you will receive upfront bonus consideration along with royalty checks — if your interest is part of a producing unit.
If you hold out and carry working interest, the well could last a few years and never recover cost(s), so you will never receive anything financially.
Keep in mind, as a mineral owner signing an Oil and Gas lease, you give the Company you are working with the right to enter the property, perform the necessary geological measures to determine if there lies a formation for which they can drill and target towards production.
The primary term is the time period that the Oil and Gas Company has to enter and explore the property. If production does not commence before the primary term of the lease expires then all the interest and rights return to the mineral owner. With that said, occasionally mineral owners will be leased. After geology interpretations are conducted by the Oil and Gas Company they can decide not to continue exploration in that area because it did not find sustainable information for them to move towards the drilling phase.