Oil/Gas/Lease Question- Surface Lease
We have an old vertical well operating in Kay County Oklahoma on a 40 acre tract. Another company sent us division orders to drill on the same piece of land and go over to the 40 acre tract adjoining ours owned by another party. In the Release And Settlement Of Surface Damages Agreement, it states "Should the wells drilled on these surface location sites for Section 17 from this location site continue to produce after Section 8 wells cease to produce, the Operator agrees to pay landowner $15,000 as full compensation for the continued use of this surface location site for Section 17 wells. Our unit is Section 8.
This raises 3 questions for me:
1. Is $15,000 a fair compensation for damages?
2. Is there any dispute since there is another well there with a different Oil Company? We raised this to the Landman and he said they have an agreement with them. (Do I need it in writing?)
3. If they do drill there is it not fair that I receive compensation from Section 17 production if Section 8 goes dry since the well is drilled from my land? I thought it was hard to determine where the oil is coming from?
4. What is the usual rate to negotiate? I do not yet have a contract.
Answers to your questions:
1. This is a fair amount if you feel it will adequately compensate you for the inconvenience (if any) of having oil field machinery and equipment using the surface of your tract for several weeks at time, possibly more than once during the term of the surface lease. I do recommend, however, that you put a time limit on how long after the $15,000 is paid that they will continue to have permission to use the surface for their purposes. This will be a negotiating point, but I would start with offering 5 years for the extended term, and if they want more you can get the $15,000 raised based on the number of additional years they want in the term. It's all a matter of negotiations, but if you want the income you need to be careful not to shoo them away to start dealing with another tract owner adjacent to yours.
2. There is no dispute. What the landman told you no doubt is true, and you don't need it in writing because your surface lease should have a clause in it to "hold you harmless" from any liability to third parties because of the actions of the Lessee (company taking the surface lease from you.) Make sure it has that clause in it.
3. No, you are not entitled automatically to any part of the revenue from production from the well drilled from your surface location, however, there is a way you might be able to wrangle a small amount of income from the wells. Instead of taking the $15,000 payment, tell them you want a smaller amount plus a small override instead, on every well drilled from your surface location. If you make it something easily agreeable by the oil company, you could end up receiving far more than $15,000 over the life of the wells, AND you will know when they stop producing because your revenue payments will start. I recommend a 1/8 of 1% of 8/8 overriding royalty. That is a 0.00125000 part of everything sold from the well. To translate its value to money, move the decimal from where it is, to the right and put it before the last two digits. It now reads 0001250.00. Now drop the lead zeros and add a dollar sign: $1,250.00. For every $1 million sold from the wells, you would receive $1,250.00. Then if you drop the one-time payment to $5,000, you stand to make possibly as much as $25,000 or $30,000 over the life of the wells. This is only a suggestion, and you will want to visit with an attorney to help you draw up the provisions for the oil company to add to the surface agreement. They will owe you an assignment of wellbore overriding royalty for each well drilled into Section 17, so you will want legal help with that.
4. There is no "usual rate" to negotiate. As I showed you with my answer to #3 above, just about anything is possible in the negotiation process. But like I said, if the company decides you are being too demanding or your overall price is too high for the economics they have already calculated for this venture, they will drop their negotiations with you and go visit with a neighbor. Reasonableness and compromise are the name of the game in negotiating any land contract.
Good luck, and Happy Holidays.