The Uncertainty of It All

I think I posted this to the wrong group, so I am reposting it.....

I had an interesting conversation with someone last night about the gas and oil business. I'm just a landowner thrown into this, so much of it went over my head.  But I hung up the phone with these basic concepts: even IF you get into a unit, and IF there is a well drilled, there are a thousand and one ways the gas and oil company can screw you.  You might have a pad and get no royalties. You might be in a unit and get no royalties.  You might not get royalties for all the wells in your unit. Plus, no one REALLY know what they are pumping out because there are no "meters" on the wells. So you are automatically screwed there--yeah, they're going to give you royalties on the whole amount--not.

Honestly, it seems that selling the mineral rights (if the price gets high enough) and just selling the whole mess and getting a new place somewhere is beginning to make more sense.  Can anyone comment on the above?  If it is all true? And how often does it happen? And what is the difference between a drilling unit and a production unit?

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Permalink Reply by Ken Barton on February 27, 2014 at 8:27am

The difference between the lottery analogy and someone buying your minerals is that the lump sum payment vs installment payments are based on a mathematical formula, using interest rates.  The mineral buyers have no such numbers and are simply trying to get minerals for the cheapest price they can, in order to sell them elsewhere, (where they have knowledge of a market, that they average person does not have), or to form an investment, like a unit investment trust, to attract investors.  If you are in an area where an O&G company is interested in drilling, you would be much better off to lease.  If no exploration company has shown interest in your area, chances are that any offer you get for minerals will be miniscule, if you get any at all.  The sharks don't feed unless there's blood in the water.  I question your calculation of how much you will need to live well through retirement.  Unless you have calculated that figure using future dollars, whatever amount you have now is probably inadequate.  Right now, in this economy, inflation is fairly controlled, however, that could change abuptly, (and probably will, given the fact that our President knows less about economics than he does about healthcare). Your mineral interest can provide a hedge against inflation as they, and other commodities, have a tendency to appreciate with the inflation rate.  A cash payment that you take right now, begins to lose value the minute you put it in a bank-their interest rate minus the rate of inflation will give you the true interest rate, which means that it is "0", or less. Nonetheless, whatever decision you make, I wish you the best.

Permalink Reply by Susan A Tippel on February 27, 2014 at 9:18am

I'm already leased.  I get offers for my mineral rights and most if them are not miniscule. Some of them are down right tempting but not enough. And a lot of people live just on their piddly social security checks which I can do if need be when I retire. My boyfriend calls me Cheap Bird (complete with "cheeping" sounds and arm movements). I buy crummy toilet paper, reuse coffee grounds, only drive about 90 miles a week (yes, I have a job), shop at good will, and buying a steak is an occasion. I am also the Utilities Police. I'll probably always live something like this. You make a good point about our economy. I think it is going to get very bad indeed. I won't put much of the money in the bank because your right--you lose money. I wish you the best also.

Permalink Reply by Bill F. on February 27, 2014 at 5:46am

@ Susan ...you are so correct what I have seen and dealt with as far as NG leases and drilling in my area I wish it would just all go away .Of course this is not possible and continues everyday .More and more I deal with PA DEP and Talisman  Energy I realize this has become a bad dream .The money isn't what I expected   and twists happen all the time .Now we have a compressor stations coming close by and drilling units all around (more coming too) pipelines everywhere .This is NE Bradford County ,PA..Once was a quiet agricultural area now it is changing to an industrial energy zone in some places .(around me for sure ) and some say it's temporary .I say HaHA been 5 years and it's just starting .....well just my opinion of course ! I believe a drilling unit is before the gas is produced and production unit is a producing well site .

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