About Bob Von Rhee Expertise How do you know where to drill for oil or gas? How do you accomplish this task? How many people are involved? How much money? What is the chance of success? the economics? Why don`t all oil and gas wells make tons of money? Why do we need oil and gas in our country? How can we tell if a property has any oil or gas potential? Why can`t we believe everything we see on tv or in the newspapers about oil and gas? What rocks contain oil and gas?
Experience 30 years as a petroleum geologist. Began my career with Exxon in West Texas; worked for many smaller independent companies and now own and operate my own production company and geological consultancy.
Organizations American Association of Petroleum Geologists, and Certified Petroleum Geologist. Tulsa Geological Society, Oklahoma City Geological Society Licensed Petroleum Geologist in Texas
Publications American Association of Geologists Web-based "Search and Discovery"
Education/Credentials BA Geology Lafayette College & MS Geology University of Illinois.
Expert: Bob Von Rhee Date: 1/20/2008 Subject: how much for leasing someone's mineral rights
Question Hello Bob, I have a question regarding my mother's mineral rights in North Dakota. She was recently contacted by someone representing an oil company about her mineral rights. They would like to pay her a small sum (less than $1000) to lease her mineral rights for 1-2 years. Sounds like there is some oil activity in this part of the state. My question is; how do I find out if this person is making an offer that is reasonable? My mother is 78 years old is just happy to get anything from this, but I want to make sure she gets a fare market price. Thanks for your time.
Answer Paul. I have been asked this question many times, and in most cases I am unfamiliar with the "going" leasing terms in the questioner's location. I am copying below an explanation I have given to others that may help you understand the process a little. The usual main points of any lease are 1) The offered "bonus" per net mineral acre - paid up front, 2) the offered "royalty" rate to the mineral owner (the "lessor"), and 3) the term of the lease (usually 1 to 3 years in many parts of the US that are not Federal Lands). Anyway, read the explanation below, and follow up if you have additional questions. I'll see what I can do.
Mineral ownership is very similar to real estate ownership. In fact, it is some times referred to as the "mineral estate" to differentiate it from "real
estate". You hold title to minerals just like surface real estate. You may sell real estate and "sever" or retain the mineral estate below the land. If
your father owned 100% of the mineral rights below his 82.525 acres, he would be said to own 82.525 "net mineral acres" or "nma". If he owned only 50% of
the mineral rights, he would own 41.2625 nma. (50% X 82.525nma) Most mineral owners don't have the expertise or financial means to develop their own minerals, so they typically lease them to a company that can do this.
Leasing involves three main points. 1) A "lease bonus" is normallyl paid up front as dollars per nma. If your father owned 82.525nma and leased them for $150/nma his bonus would be $150 X 82.525 = $12,378.75. 2) The mineral owner reserves a "royalty" amount. The royalty rate may run from 1/5th to 1/8th and a common royalty amount in Oklahoma is 3/16th's. 3) The lease will have a "primary term" usually 3 years but could range from as little as 6 months to perhaps 5 years in certain circumstances. The primary term is the length of time the company (lessee) has during which to drill or establish commercial production of oil or natural gas. If this does not happen the lease expires and all the mineral rights are again yours to lease again. If commercial production is established during the primary term then it will perpetuate the lease beyond primary term and be said to be "Held By Production" or "HBP".
The oil and gas lease is a contract with many more terms besides the main ones I mentioned above. As such, it would be appropriate to contact a qualified oil and gas attorney familiar with your area. The attorney could help guide you on the fairness of the newly offered lease terms and also to understand all the covenants of the lease. Keep in mind you do not necessarily have to lease. Take your time and understand everything to your satisfaction.
There is a website for the National Association of Royalty Owners or "NARO" at http://www.naro-us.org/ There is a sub-website only for texas at http://texas.naro-us.org/ I don't know too much about the association except that the website may have links to other resources that could help you out.
The logical path is for the company to submit a "lease form" for your review and consideration along with thier proposed lease bonus. The bonus amount is not normally shown in a lease form, although the royalty rate and term are. It would be best if they would submit a written offer to you - and if they pressure you to reply in too short a time frame, that could be a yellow flag. They ought to be willing to work with you and negotiate in good faith. If you do come to terms, they may offer you a "draft" which is like an unfunded check, held by the bank until a signed lease is received by the lessee who then tells the bank to fund the draft.
Lease terms vary from county to county, prospect to prospect and state to state. If the lessor wants too much, then the economics of the prospect might fail. This has happened to me and I simply had to pursue another idea because the mineral owners terms were so high it made the prospect economics fail. If you lease, there is no guarantee that the lessee will drill a well AND if they do, there is no guarantee that it will be successful. Like many "contracts" the devil is in the details, so make sure you understand the deal before you sign.
Anyway, I hope this helps you understand the process a little. Regards.
Bob VR
