New Resource Site: For Mineral Owners

The biggest shortcoming on my site: links for mineral owners. It seems such sites come and go, are few and far between. The number of those folks receiving royalty income from the Bakken should be increasing exponentially:

• early on: the original landowner, the homesteader, one individual with perhaps four surviving children (first)
• then: the four surviving children, my dad's generation, the greatest generation, gradually passing away (second)
• then, three or four children of those four surviving children, the baby boomers, now sixteen mineral owners from the original homesteader (third)
• next, two or three children from those baby boomers, my children's generation, and we are up to 32 mineral owners from the original owner (fourth)
• and, after that, one or two children from my children's generation; the iGeneration, my grandchildren's generation, and we are to 32 - 64 mineral owners (fifth)

The homesteader probably received little to no royalties, and really didn't follow the oil sector in North Dakota all that much.

The second generation, older, many of them seniors when the Bakken boom hit its stride, were getting huge royalty checks, but didn't understand how it all worked.

One or two members of each extended family in the third generation began to take an interest in the boom; helped the family set up trusts; some may have become active in ND politics shaping the oil sector; probably the most active generation;

Each succeeding generation -- with smaller and smaller royalty checks; simply because the minerals were spread out among so many heirs; most in this generation will have less interest in understanding how it works, simply because the beneficiaries of the original landowner and the one or two members of the extended family in the third generation that "put things on auto-pilot."

Those in the fourth, fifth, and future generations may look for more information regarding mineral rights.

All mineral owners will all of a sudden have to deal with taxes, and perhaps K-1s for the first time.

A reader has sent me a link to a "new" site -- at least "new" to me.

• I have not seen it until now, but it will be linked at the sidebar at the right, as well as at the tab above. at the tab at the top: Minerals
• at the link at the sidebar: near the top, "the top seven" to start your day.

Link here: Mineral Section - Mineral Rights.

Request For Assistance From A Reader -- December 19, 2016

Disclaimer: this is a long note. There are likely to be factual and/or typographical errors. This is my opinion only. It's how I "see" things. I may be completely wrong. If this information is important to you, contact professional assistance.

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Updates

December 20, 2016: see first comment. The reader brings up the issue of communitization. For more on that, one might to start here. But again, if we are getting to this level, one needs professional advice. Again, I would assume a good landman could point folks in the right direction. If not, go to the trust department of one's bank and ask for suggestions. 

Later, 9:30 p.m. Central Time: I think we're working too hard at this. Every well stands on its own. Forget about "overlapping." Forget about other wells, no matter how many wells you have.

Simply take the well you are interested in. Take that well, and take out the lease you signed for that well.

Your royalty for that well = (net mineral acres / spacing unit size) * (bbls of oil produced) * (price per bbl of oil) * (royalty rate).

Your lease will tell

• you how many net mineral acres you have;
• the spacing unit size; and, 
• the royalty rate

The NDIC provides monthly production for every well; and that information is available to everyone free of charge at the NDIC site. The monthly Director's Cut will provide a ballpark figure for the price oil is selling for.

"Mailbox money" for an existing well in a 1280-acre drilling unit will not be affected by a new "overlapping" 2560-acre unit, if that makes sense. Likewise, "mailbox money" for an existing well in one 2560-acre unit will not be affected by a new "overlapping" 2560-acre unit that includes sections in the existing 2560-acre unit. Each well stands on its own; each well is defined by the NDIC permit and by the lease.

Original Post

 

Over at the "Discussion Group" someone asks an interesting question: Can someone point me to some resource that describes how mineral interests are to be handled when two overlapping 2560 acre spacing units are established?

This is an important question because from the graphic below, one can see how the Bakken is covered with 2560-acre spacing units and overlapping 2560-acre units.

I will throw out my two-cents worth to get the discussion going and then open it up to those that have actually had experience.

I don't have any minerals so I am not speaking from experience. But I've followed the Bakken long enough to have a pretty good idea how this works. If I'm wrong, I would definitely appreciate if someone would point out  how I'm wrong.

The most important thing to understand is this: each well stands on its own. It is not affected by neighboring wells or other drilling units from a royalty point of view.

In a 2560-acre unit (overlapping other drilling units or not overlapping other drilling units -- does not matter).

A 2560-acre drilling unit is a four section unit. It can be of several different configurations:

• a square;
• a stand-up (four sections, all in a line, vertically)
• a lay-down (four sections, all in a line, horizontal)
• L-shaped (various orientations)

For simplicity, let's say the 2560-acre unit is comprised of sections 1, 2, 11, and 12.

Four sections = 2560 acres.

If a mineral owner controls any acreage in any of those four sections, that mineral owner will participate in any royalties generated from any well permitted for that 2560-acre drilling unit. It does not matter where the well is sited inside the drilling unit, or even outside the drilling unit.

What counts is the specific acreage permitted in the permit application, generally identified by sections or part of sections.

So, back to the example: sections 1, 2, 11, and 12 in any given township.

If a mineral owner controls ten acres in section 11, the mineral owner will get royalties based on 12 acres of the 2560 acres.

If a mineral owner controls 60 acres in section 12, the mineral owner will get royalties based on 60 acres of the 2560 acres.

Most horizontals in the Bakken are still about two miles long. Therefore, for illustrative purposes, let's say Whiting has a well sited in section 13 (to the south of section 12) and plans to run the horizontal from section 13 (not part of the 1, 2, 11, 12 - overlapping 2560-acre drilling unit) through sections 12 and and 1 to the north. If the royalty owner has 10 acres in section 2, that royalty owner will participate in the Whiting well.

If the well produces 25,600 barrels in the first month, the royalty owner will get royalties on a ratio based on 10/2560 (ten acres controlled by the mineral owner; the well is on a 2560-driling unit).

(10/2560) * 25,600 = 100 bbls.

Let's say the company clears $35 / bbl. Then those 100 bbls netted $3,500.

Go back to the lease one signed with Whiting. If the royalties were 3/8th, then 3/8ths of $3,500 = $1,312. 50.

Bottom line: one can sort this out without worrying about any other wells, any other drilling units, etc.

To repeat:

• identify the 2560-acre drilling unit 
• a mineral owner controlling any acreage -- no matter how small -- any where in that drilling unit, will participate in a well that is spaced in that drilling unit on a proportional basis, based on the number of acres controlled by the mineral owner

If there is another horizontal running through sections 1 and 12 but on the 1280-acre drilling unit comprised of sections 1 and 12, then to participate in that well, one must control / own acreage in section 1 or 12 or both.

It took me a long time to figure this out but once it's figured out, it's really quite straightforward.

Finally, back to the original question by the reader. What about two overlapping 2560-acre units? Doesn't matter. Same thing applies. Simply forget about other wells and other drilling units. Just identify the 2560-acre unit; determine if you have any acres in that 2560-acre unit; if you do, you will participate in the production of any well placed in that spacing unit.

I think this is where the problem lies: if a mineral owner already "has" a well in a 1280-acre unit, let's say, sections 12 and 1; and, then a 2560-acre well is drilled which includes the existing well in section 12 and 1, does the mineral owner collect royalties from that 2560-acre unit from both wells? My hunch is "No." But someone else will have to answer that. I still think that each well "stands on its own merits, on its own permit. If the mineral owner has ten acres in section 12, the mineral owner will collect royalties from the existing well on a 10/1280-ratio; and will collect royalties from the new well on a 10/2560-ratio. 

If I'm correct, it's easy to visualize; hard to articulate. 

If I'm wrong, someone will have to explain to me the way it works. 

My explanation is in line with what an experienced landman has provided in his book Royalties Within Reach.

Forget about other wells.  Pay attention to one well at a time. It does not matter if you have one well "straddling" two overlapping 2560-acre units. Look at the permit and lease.

Royalty = (net mineral acres / spacing unit size) * (bbls of oil produced) * (price per bbl of oil) * (royalty rate).

The usual disclaimer holds: I don't own any mineral acres. I don't have any experience with minerals. It is very likely I am wrong. I am hoping that folks with experience can tell me if I'm wrong, and I'm wrong, how I'm wrong. 

Serious piece of advice I've heard from many, many folks: if you have questions like this, it suggests that you are participating in more than four wells. If one is participating in more than four wells in the Bakken, one is now an "oilman." One needs professional advice by this time. Any good landman can refer you to lawyers in this field.

Chesapeake Accused Of Underpaying Natual Gas Royalities

Updates

  
March 12, 2014: WallStreetCheatSheet is reporting:

In February, Pennsylvania Gov. Tom Corbett wrote an open letter to Chesapeake Energy Corp. CEO Doug Lawler, questioning and criticizing the firm for its failure to resolve complaints of unfair and possibly illegal deductions of post-production costs from natural gas production royalties owed to private landowners in the state.

“Despite communicating these concerns several times, I remain disappointed that the complaints of my constituents continue to go unheeded,” wrote Corbett. “It defies logic that, in some cases, leaseholders are being advised that they may actually owe money rather than receive the fair and just royalty to which they are entitled.”

Actually, that does not defy logic. Lynn Helms discusses it almost every month in his annual Director's Cut. 
 

Original Post

The Wall Street Journal is reporting:

Pennsylvanians who embraced the natural-gas drilling boom that has swept the state are starting to sour on one of the biggest names in the business: Chesapeake Energy Corp.  

Some property owners are accusing Chesapeake of shortchanging them on royalty payments for pumping oil and gas from their land. The public outcry has grown so loud that Republican Gov. Tom Corbett, a longtime industry supporter who has received campaign contributions from the company, wrote an open letter last month asking the state attorney general to investigate.

Chesapeake declined to comment on the royalty disputes, but said in a recent letter to the governor that it is abiding by the terms of its contracts with landowners. In Bradford County, a rural area in northern Pennsylvania where a lot of the drilling has taken place, anti-Chesapeake sentiment is running high, said Doug McLinko, a county commissioner. "Bradford County is a pro-gas part of the country where we support hydrocarbons 100%," he said, "but we don't support everyone who's doing it."

I remember blogging about Chesapeake natural gas shenanigans when I first started blogging. See link here.

Thursday: Fast-Tracked?

The AP is reporting via Rigzone:

A Canadian company on Wednesday started delivering oil through the Texas portion of a proposed cross-border pipeline that has stirred controversy and tension between the United States and its northern neighbor. TransCanada began delivering oil from a hub in Cushing, Oklahoma, to customers in Nederland, Texas, early Wednesday, Alex Pourbaix, president of energy and oil pipelines, said at a news conference.

The company expects to complete a smaller pipeline that will transport oil from Nederland to refineries near Houston later this year.

The $2.3 billion pipeline from Cushing to Texas is the Gulf Coast — or southern portion — of TransCanada's proposed Keystone XL pipeline. This shorter leg will begin transporting on average about 300,000 barrels of oil daily and should end the year at an average of about 520,000 barrels, Pourbaix said.

The longer Keystone XL, which would transport heavy tar sands crude from Canada and oil from North Dakota's Bakken shale, requires a permit from President Barack Obama because it crosses an international border. That $5.4 billion segment has not yet been approved. Obama fast-tracked the shorter, southern portion of the pipeline with the hope of relieving a bottleneck in Oklahoma.

Active rigs in North Dakota:

	1/23/2014	01/23/2013	01/23/2012	01/23/2011	01/23/2010
Active Rigs	187	190	203	165	87

RBN Energy: first in a series on royalties for mineral owners. 

There has been a great deal of publicity around royalties involved with the shale gas—stories of instant millionaires (or “shaleionaires,” as 60 Minutes called them in 2010), stories of producers reducing or even eliminating some royalty payments as the vast oversupply of natural gas took hold in the last couple of years, stories of long, excruciating negotiations to reach a royalty/lease agreement, only to find out that the seller’s side of the table didn’t actually contain the owner of the rights, and stories of neighbors turning on each other when they got radically different deals based on timing or whom they were dealing with, and so on.  

Unless you have been directly involved in leasing and royalty work, a lot of it can be confusing.  So today we begin a blog series to illuminate the world of mineral rights, oil & gas leases and royalties.

 The Wall Street Journal

Cheating probe roils Philadelphia school system.

Nearly 140 teachers and administrators in Philadelphia public schools have been implicated in one of the nation's largest cheating scandals, according to district officials, who also said Wednesday that they will spend the next few weeks disciplining or firing dozens of employees.

The Pennsylvania attorney general's office also is conducting a criminal investigation into the allegations, according to a person familiar with the matter. Three principals were fired late last week as part of the probe, which grew out of a 2009 state analysis of questionable erasure patterns on test booklets on the Pennsylvania System of School Assessment math and reading exams. 

Shock! Shock! I'm shocked to learn there is cheating in Philadelphia! Shocked! Round up the usual suspects. It's gonna be a slow news day if that was in the front section of The WSJ.

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If the jury doesn't like a law, they can acquit an otherwise-guilty individual through a process known as "nullification" in New Hampshire. Live free or die. There's something inherently wrong with that but it is not surprising. The judge who ruled that probably went to same law school as the president.

The debt-ceiling deadline is now "put" at late February. With some smoke and mirrors, "we" can easily get this deadline out to April, and then the income tax revenue starts rolling in .

The EU's suicide plan: it forges ahead with climate plan. Neither side likes the plan, so it must be perfect.

Boeing adds workers at South Carolina plant to address Dreamline "hiccups."

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Elsewhere

MarketWatch is reporting that California is close to meeting ObamaCare's enrollment targets.

Halfway through the process, officials running the Obamacare program in California said Tuesday they are close to reaching the minimum expected enrollment for subsidy-eligible consumers and have surpassed the half-million mark in overall signups.

That should end the discussion on success/failure of ObamaCare.

Royalty Checks: "O" "G" "P"

Just for the fun of it: does anyone know what the letters "O" "G" and "P" represent on royalty checks?

O: proceeds from oil sales

G: proceeds from natural gas sales

P: proceeds from sales of plant products

Plant products: As the gas is processed and purified for transportation, by-products like natural gas condensate, sulfur, ethane, and natural gas liquids like butane, propane, isobutane, and pentanes are produced and sold. Source.

[Hopefully we'll never see "E" "D" or "M" on royalty checks: Excise tax; Distribution tax; or Medical (healthcare funding) tax.]

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By the way, question/answer on my FAQs page:

Can you give me an example of how big a royalty check should be by owning "fill in the blank with the amount of mineral acres you own."

A mineral rights owner in North Dakota might mention over a cup of coffee that she gets "a 1/8 royalty" on her mineral rights That individual might have no idea what that means; I certainly did not know what it meant years ago when my dad would tell me that he would get 1/8th royalty if they struck oil where he owned mineral rights.

Here's not an uncommon example. Someone inherits or buys or is given 10 mineral acres. Let's say her well is spaced at 640 acres. Therefore, the mineral owner with 10 mineral acres has 1.56% of the 640 acres. Of that percent, the mineral rights owner will get 1/8th royalty (or 12.5%) of the oil. If one multiplies those two numbers (1.56% x 12.5%) one owns 0.20 percent of the oil that comes out of that well. It is not unusual for a Bakken well in North Dakota to produce about 300 barrels/day for the first month, but declines quickly after that. Multiplying the 300 barrels by the 0.20 percent (300 * 0.002) one gets 0.6 barrel/day. At $60/barrel, that would work out to about $36/day, or about $1,080/month. I don't know the tax penalty, but a 12% extraction/production tax would not be unreasonable so, at least $135 would be taken out by the state before you got your royalty check. There may be other taxes/fees I am not aware of, but at least that's a start. How much would it have cost you to buy those 10 mineral acres in the first place? At $2,000/acre it could have cost you $20,000 and there is every possibility that the land would never be drilled on. [Since the original posting, the wells have become significantly better. It is not unusual for a good well to produce 100,000 barrels in the first six months. If you have such a well, 0.002 x 100,000 bbls = 200 barrels. At $70/bbl, that could be as much as $14,000 for the first six months of production. Update, February 8, 2011.]

I am no authority or expert on this, so I could be wrong, but this is my limited understanding.  It will be tedious, but there is a long discussion regarding royalty checks, the time line for receiving a royalty check, and other information at this site. When you get there, scroll down to the comments. Lots of interesting information.