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Oil/Gas/mineral share of production

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Question
Marsha, I have 80 acres of undivided minerals in Creek Co. Okla.  Sec.8, twp 19 range 7e,.  I have been offered 25.00 per acre, lease, and 1/8 of production.  This is for all of the 80 but they will gurantee drilling out and trying to produce an old well that was drilled in the 40's. Is this offer valid or should I hold for 3/16th of the production?. They want the lease for 3 yrs.  Thank you for your expert advise once again.  Harold E. Driskel, Ph.D.

Answer
For a number of years now, the Oklahoma Corporation Commission has awarded a customary 3/16ths royalty in its forced pooling orders, for the forced leasing of mineral interests where the owners cannot be located, or refuse to negotiate.  It would seem that if the OCC routinely awards 3/16ths as the "customary" modern royalty rate, accepting anything less for a negotiated lease would be giving away future money.  As for the $25 bonus rate, the last time I heard of any lease being taken for only $25/net acre was about 1982. Your "80 acres of undivided minerals" means you own either 100% of the mineral rights in a specific 80 acres, or you own a 1/8th (12.5%) mineral rights interest in the entire 640 acres in the section. Either way, that is a significant amount of mineral rights, meaning less work for the landman to get 100% of the mineral rights leased that he needs before he can do anything.  It makes your lease more valuable.

About the "guarantee drilling" on that old well.  There is no such thing as a verbal guarantee that is legally enforceable when it involves real property rights like oil and gas leasing.  The landman is saying what he thinks you need to hear to entice you to sign the lease. I took a look at the OCC website using your legal description, 8-19N-7E, Creek County, and found 4 wells have surface locations in that section.  None of them are producing, and only one has been plugged and abandoned.  That means the other 3 wells could be "orphans", meaning the operator went out of business before plugging the well.  Each of them have "OTC/OCC" as the operator, so it looks like this is what happened.

If this was my personal situation, I would look at several things before making a decision.  First, I would ask who the oil company is that has hired the landman to come take your lease.  If they are a major oil company, then chances are good that they intend to re-enter and rework the well as a "pilot" to see if a horizontal well will capture production left behind by the old vertical wellbore.  If it's a "5-man shop" oil company, they probably are hoping to take a cheap lease that they may, or may not, be able to sell to a larger company and the bonus money may be all you will ever see from it.  The other thing to look at is the wells immediately adjacent to your Section 8. I went into the OCC website and looked at the wells in sections 4, 5, 6, 7, 9, 16, 17 and 18, each of them touching a side or corner of Section 8.  Most of the wells were drilled before 1940, and most of them are abandoned, never having been plugged. None of them have had production in the last several years. But, in Section 9, AOG Operating Inc. out of Tulsa has been granted a permit on 2/17/14 to re-enter a well there.  There is nothing in the OCC site indicating they have done the re-entry yet, so it's impossible to know if it was/will be successful, BUT you can go to the courthouse and look at the leases that have been filed in the past 6 months for lands in Section 9, and see what royalty rate they negotiated for the re-entry.

At least you now have some additional information to make your decision whether or not to grant a 1/8th royalty lease for $25/net mineral acre.

Good luck.

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Marsha Breazeale, M.Ed., CDOA, CPLTA

Expertise

All questions regarding division orders; ownership decimal calculations; title ownership and payer record changes (testate/intestate inheritance; deed; assignment; court order); oil and gas lease analysis for record-keeping and purposes of payment by operator or payer; pooling, horizontal wells, horizontal well allocation units; unclaimed property reporting; royalty owner relations questions. All questions concerning administration of surface land contracts and payment questions, such as for Surface Right-of-Way, Sub-Surface Right-of-Way, Easement, Surface Use Agreement. All questions regarding industry-standard and company-specific policies that affect land owners.

Experience

Sr. Staff Division Order Analyst. Certified Division Order Analyst (CDOA, National Association of Division Order Analysts) and Certified Lease Analyst (CPLTA, National Association of Professional Lease and Title Analysts) with 35 years of experience as a combination division order analyst and lease analyst in exploration and production in the oil and gas industry.

Organizations
National Assoc. of Division Order Analysts (NADOA), National Association of Division Order Analysts (NALTA), American Association of Professional Landmen (AAPL), American Society of Trainers and Developers (ASTD)

Publications
"How an Oil & Gas Exploration & Production Company Operates" and "Principles of Oil & Gas Lease Analysis: Standard Clauses", Oil Patch Press; Articles in NADOA Magazine; LandFocus EDU Professional Training Manuals

Education/Credentials
B.A.in Management from Our Lady of the Lake University in San Antonio; M.Ed. in Instructional Design from WGU Texas.

Past/Present Clients
Past 15 years: GeoSouthern Energy Corporation; Contango Oil Co./Crimson Exploration & Operating Inc.; Apache Corporation; BP America; Marathon Oil; Newfield Exploration

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