Oil/Gas/Are we being low-balled?
QUESTION: A little over two years ago, my wife was contacted by a genealogist trying to track down the inheritance path of mineral rights originally owned by her grandparents. My wife inherited mineral rights for 4.9 acres of land in Marion County, West Virginia. The genealogist was working for an agent of XTO. She gave this person her contact info and mailing address, and that was the last we heard for a long time.
At the time, I did some googling, and found a story about a subdivision in Texas that was approached by XTO looking to lease gas rights. The first group of people accepted the $1k/acre offered, while neighbors who held out were able to get $10k/acre. My apologies, but I can't find that link at the moment, so this is hearsay anecdotal.
So, two years later, and my wife is contacted again. At this point she is apparently the last signature needed to start working the land. This is through no action of hers, the genealogist had transcribed the address incorrectly, and the offer had been sent to the wrong address.
Now that they are back in touch, they are very eager to close the deal. The offer is $1k/acre for a five year primary term, and 12.50% royalty. There is an option to extend for an additional three years, with a vague phrasing of "Upon extension, the original bonus consideration of $4,909.10 is paid for the optional three year extension." I say this is vague because it doesn't say "an additional bonus", it says "the original bonus". Having read other questions in this forum I wonder if this is a bit of slight of hand.
I was not terribly surprised to see that they were offering us $1k/acre, as this seems to be pretty standard for their initial offer from what I have read here and elsewhere. I am wondering if we should try to negotiate for a higher per acre initial payment.
Also, should I ask them for an assay report? A friend who graduated from the Colorado School of Mines suggested asking for this when we were first contacted two years ago.
I also find it interesting that the cover letter offers $4,909.10 bonus, but the contract only stipulates $1. Is that normal?
Thank you for your consideration.
ANSWER: The "vagueness" you refer to in the extension option is nothing to worry about. They're saying (though perhaps not very eloquently) that they'll pay you the same bonus they did the first time around if they decide to extend your lease for another three years.
I wouldn't worry about the extension language as much as I'd worry about the extension itself. I usually try to negotiate those extension clauses away prior to signing a lease, or at least get them to agree to pay DOUBLE the original bonus instead of just matching it upon extension; and that's doable sometimes, especially in relatively "hot" areas.
I would also read the Oil and Gas Leasing Tips
blog entry on the Mineral Hub before signing, as you'll find additional tips there.
As for the bonus, I would ask if $1000 is the most they've paid anyone in the past year, and if not, I'd ask them what was and agree to that if it's substantially more than you're being offered. If you really are "the last holdout" due to the genealogist's address error, then you probably have some negotiating power. I would also ask for a 3/16 royalty, instead of just 1/8. A 3/16 royalty is 50% more than a 1/8 royalty. Push too hard though, and they may decide not to lease you.
As to the $1 listed on the lease they sent you, yes, it's common not to disclose the actual bonus paid on the lease itself, but you should receive a "cover letter" with it that will.
Hope this helps you out.
Frederick M. "Mick" Scott CMM RPL
The Mineral Hub
---------- FOLLOW-UP ----------
QUESTION: Thank you for your response.
In your experience, do companies respond honestly to the questions about the highest bonuses they have paid?
In our case, we don't own the rights to a specific piece of land. We own a percentage of several large tracts of land. Could they still choose not to lease us, or would they need to force pool us if they thought we were haggling to strongly?
Companies differ, but if you sound "knowledgeable" while questioning them they will be less likely to stretch the truth in my opinion. Most landmen are contracted with land companies or work for oil companies so they are sometimes under pressure from their clients to not reveal more info than they have to. Asking the right questions should yield good results though in most cases.
I believe WV has forced pooling, so yes, they could eventually decide to apply to force pool you if you proved to recalcitrant in your negotiations.