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Question
We have interest in 2.2223 net mineral acres. Cinco Energy Land Services Llc has offered a contract offering us $50.00 bonus per acre & 3/16 royalty LESS a proportionate part of just about everything.  We have had these mineral rights for about 100 years and feel we are just giving them away. The family part is 20 acres and all but 3 have signed. The property is section 34,township 10N, range12Ein theCounty of Okfuskee. From speaking with Cinco rep. He says they are a small Company and cannot get rid of the proportionate costs. Is this a fair deal? We live in Virginia and don't know. The rep. Says they will drill even if we don't sign the contract.

Answer
You could certainly insert a "no-deductions" clause into the lease to offset their deductions of the "proportionate part of just about everything" you mentioned. I'm sure they have a version of such a clause, though best to draft your own or have an Oklahoma oil and gas attorney draft one for you if you're not familiar with such a clause, as the company's version may be written more in their favor than yours. The NARO (National Association of Royalty Owners) office in Tulsa, OK can likely recommend a suitable Oklahoma attorney if needed.

I would also, at a minimum, include a "depth clause" (they will have their own version of that one as well I'm sure) and a "shut in limitation" clause of 2 years if they will accept one (many companies will.) Again, best to have a knowledgeable oil and gas attorney draft them for you if you're not familiar with them.

Since it's only a few acres, you might also consider asking for a 1/4 royalty and NO bonus in lieu of their offer of 3/16 and a small bonus. It doesn't sound like you'll be making much in bonus anyway, and it's unlikely they'll agree to a 1/4 royalty AND a bonus; though with only a few acres I'd rather have a 1/4 royalty and no bonus than a 3/16 royalty and a small bonus if a good well comes in.

I don't buy that they "cannot get rid of the proportionate costs" actually. They may be a small company, but there is no reason you should have to pay (in the form of deductions related to their costs of doing so) for them to market or market your gas, or pay them to improve or transport it to a higher-paying marketplace UNLESS doing so results in a higher net price (price after deductions) for both of you than would have been possible otherwise.

In other words, even though they have an implied duty to market your gas for you, if you're willing to share in the costs of them marketing your gas along with their own (which is what those deductions represent), then you should receive a higher price even after the deductions are taken out than you would have otherwise, since of course you have no control of how they market the gas or to whom they decide to sell it to.

You'll also be hoping that they will be honest about the costs incurred and the deductions taken and that they were necessary in order to obtain a higher net price than would have been possible had they not "improved" the gas, or had not paid to move it upstream to a buyer who would pay more than was available at or near the wellhead.

In most cases, especially with an interest as small as yours, it really wouldn't cost an operator much to market your gas along with their own anyway, but I think it's okay to share in those costs as long as it results in a higher net price for everyone in the end. Others would disagree with me on that I suppose, but as long as I feel the operator is being honest with me I have no problem sharing proportionately in the costs of getting my gas to a better market, or putting it in better condition, so that it can be sold for a higher net price.

An example of a no-deductions clause follows. Note that I've included the words "off the lease" in the below example. This is because it is my opinion as a mineral rights owner that any such costs incurred in Oklahoma ON the leased premises should be borne by the operator alone. The "implied covenant to market" inherent in all oil and gas leases, is my reasoning for that, along with certain court cases relevant to post-production expenses in Oklahoma.

I've also included an example of a depth and shut-in clause below.They are just examples however, and should therefore of course not be taken as "gospel." Again, please consult an attorney if in doubt as to what these clauses mean as they can affect your rights for (literally) decades if a well is eventually drilled. Important stuff.

DEDUCTIONS: Royalties payable under this lease shall not be charged either directly or indirectly for the cost of producing, marketing, gathering, storing, separating, treating, dehydrating, compressing, transporting, and otherwise transforming the oil, gas and other products produced hereunder into marketable condition; however, any such costs incurred off the lease which result in enhancing the value of the marketable oil, gas or other products to receive higher net proceeds may be deducted from Lessorís share of production so long as they are reasonable, and actual royalty revenues increase in proportion to the costs accessed. However, in no event shall Lessor receive a price that is less than the price received by Lessee or, in the event the production is sold to an affiliate of the lessee, less than the price received by the affiliate.

DEPTH CLAUSE: In the event this lease is extended by commercial production beyond its primary term, then on such date this lease shall terminate as to all rights one hundred feet and more below the deepest producing perforations in any such well or wells located on the leased premised, or land unitized therewith. If the lessee is in the process of drilling or completing a well at the end of the primary term of this lease, this clause shall become effective upon conclusion of such operations.

SHUT-IN ROYALTY: After the end of the primary term, this lease may not be maintained in force solely by reason of the shut-in royalty payments, as provided for in this lease, for any one shut-in period of more than two (2) years or for shorter periods which exceed two (2) cumulative years.

As to them "drilling even if you don't sign" well yes, they could do that, but they'd rather reach an agreement with you to lease I would think. In the event you don't come to an agreement though, you may (if they actually decide to drill) be "force-pooled" into the unit along with other "recalcitrant" or unlocatable owners, at terms dictated by the state and decided at a hearing in front of an administrative law judge at the Oklahoma Corporation Commission (OCC.) You could attend the hearing and be heard if you wished, assuming you were mailed notice of it by your lessee in time, but your attendance would not be required.

An Oklahoma forced-pooling order, if approved by the OCC and actually issued, will include a default bonus and royalty (based on those found in the leases they'd taken from others) for those mineral owners listed as respondents. You would be paid according to those default values assuming you didn't choose one of the other options available on the order (there is often at least one other choice in addition to the "default") but it's usually better to sign a lease than be force-pooled in my opinion, as you have a bit more control over the terms you'll be bound by in the event a producing well is drilled.

As to the $50/acre offer, I think it's probably in the ballpark currently. Oil prices are way down as I'm sure you've heard, and there hasn't been much new activity in this area recently.

Hope this helps you out.
Frederick M. "Mick" Scott CMM, RPL
The Mineral Hub
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Frederick M. Scott

Expertise

Oil and gas leasing, lease negotiations, how to best deal with the oil and gas companies or their representatives, buying/selling mineral rights, forced-pooling, correlative rights, deeds and conveyances, and "post-production" costs. I am most experienced with Oklahoma properties and laws, but am able to answer questions concerning other oil and gas producing states in many cases.

Experience

I am a Certified Professional Mineral Manager (CMM) certified by the National Association of Royalty Owners (NARO) in Tulsa, OK. I am also a Registered Professional Landman (RPL) with the American Association of Professional Landmen (AAPL). I have managed my family's oil and gas properties in Oklahoma for over 10 years and have dealt with many landmen, title analysts, attorneys and other oil and gas professionals in the process. I have written several articles which have appeared in various oil and gas industry magazines and newsletters. I have negotiated and drafted leases, prepared deeds, affidavits, and other legal instruments relating to my own minerals, as well as performed title, legal research, and curative work for same. I have acquired a good deal of knowledge on the subjects of oil and gas law, mineral appraisal, and landwork over the past ten years, and also worked as a professional landman and lease buyer for a time. I've seen the business from "both sides" and therefore feel confident I can help out most of the folks who ask questions in this forum.

Organizations
National Association of Royalty Owners (NARO); American Association of Professional Landmen (AAPL)

Publications
National Association of Royalty Owners "Action Report" (ROAR); NADOA Magazine, The Mineral Hub, Landman Magazine, and several royalty owner association group's newsletters.

Education/Credentials
Certified Mineral Manager (CMM), Registered Professional Landman (RPL)

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