Comment

Comment by sldouglass on December 23, 2012 at 11:44am

My main point is that people may not see the flood of potential royalties in their lifetimes and possibly not in grandchildren's lifetimes. Whatever bonus is paid may be the last payment of significance for some time. As you suggest, there may be other ideas but I am exposing my thoughts for slicing and dicing.
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You appear to emphasize delay rental required to be paid until the first well is producing in a 2 square mile unit. My concern comes after that well is drilled and the lease is thereby extended. Some of your thoughts may be directed to that as well. 1280 acre units seem to put everyone on notice that drilling will be spaced out and compensation per acre will be modest from the first 1 or 2 wells that can be anticipated in an area likely to be capable of having 30 wells - someday.
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My reading of comments suggests that people are overexcited about the money they may see some day. If they are able to get payment of a decent bonus, I am guessing it will be a long, long, time before significant royalties are paid. People should not count on them. An advance minimum royalty is a way to assure some money will be paid over time - and it does not cost the producer anything as outlined - except the cost of paying some money sooner rather than later.
Believe me that there are a lot of things about these leases that give brain pain.
Merry Christmas to Christian - Happy Hanuka to Jews - And Happy holidays to others including the Grinches.

Comment by gary smith on December 23, 2012 at 10:26am

our blessings of the size of the utica also has a cost. MERRY CHRISTMAS to men of good will.

Comment by Bob Jenness on December 23, 2012 at 8:03am

Sam,

Part of this discussion is causing me some brain-pain.  We know we have to wait until the "producers" and "market" decide we "have something they want".  When that happens, and they finally decide they "want" it, then we further have to wait 7 years before they drill on a 5-year lease.  Then when they finally get around to actually producing, we have to pay back our royalties they graciously loaned us.

Seems to me that calling it minimum royalties instead of "delay payments, inflation adjusted", or something like that, is just another bit of confusion between leasing and owning.  I agree that it's some added incentive to actually drill and produce, but at the end of the day, I'm not sure it's a stronger incentive than just a well-crafted stream of lease payments at a small premium (or maybe even a robust premium for the secondary term or non-production).  admittedly,  that makes it a good negotiating strategy, but I'll want to know how many dollars of potential bonus and added years of initial and renewal lease term I'll have to trade to get it.  I'd much prefer to find a reliable partner who can be relied on to drill quickly and produce into good infrastructure connections, since I may have to wait a good portion of my remaining life to see the lease anyway.

Note that if Steve Jobs and the digital communications industry had done business this way, we'd still be using "bricks" for cellular and fax machines for web surfing.

Merry Christmas, with profuse apologies for the bah, humbug attitude above:-)

Comment by j. rick on December 22, 2012 at 4:41pm

any comments on cx energys news letter and special members only meeting jan.8th?

Comment by Douglas W on December 22, 2012 at 9:33am

Any comments on the WPGLC newsletter?

Comment by sldouglass on December 22, 2012 at 8:50am

Bob J
I guess I would suggest not worrying about producers might swap properties to straighten lines between units. As you know the unit is likely to be rectangular in shape NNW-SSE. If your surface lease should extend outside the line of units to be developed by your Lessee-producer, It might be useful to a producer trying to set up adjacent unit(s). There may not be an exchange of money-only an even exchange of land between producers to straighten the line. Of course, as you say there are occasions when a producer will simply want to buy a block of acreage to get or add to reserves.
An assembled block of leased land is worth more than the separate lease- if only because the selling producer has taken the time and made the effort to put it together [cost of landmen, title exam etc.]. The question is how much difference.
I try to be simplistic and not worry too much about such things. The landowner has something the producer wants and that is the bargaining chip.

Comment by Samuel J. Orr on December 22, 2012 at 8:48am

I think the idea is excellent.. Getting an O&G company to agree to it is the problem.  iI also think HBP is a problem where because of low demand or for some other reason and O&G company drills a well and then shuts it in, or chokes the flow to avery minimum. In this scenario a large piece of property can be leased for a very long time and the landowner receives very little if any money. On the other hand, one can not expect O&G companies to produce gas and oil that they cannot sell at a profit. 

Comment by sldouglass on December 22, 2012 at 8:32am

When will we get advance minimum royalty? ... It will take someone with guts [or possibly a large group] that has something the producer wants insisting upon it as a condition. The provision is typical in coal leases and certainly has been used in oil and gas leases. The provision is reasonable.
And I would suggest a MAR that starts say 7 years after the date of the lease -2 years after the typical primary term. And it would be possible to offer the lessee-producer a credit of all production royalties against MAR otherwise due. Since half the well production is likely to come the first 2 years, a producer who producer who actually produces is not likely to pay AMR.
Any AMR actually paid by producer is and asset on it books that can be borrowed against etc.
I would suggest gearing the AMR to half of the anticipated production per acre over the life of the well - say 30 years - 1/30th of half the production paid in AMR each year beginning with the 7th. There are other wrinkles, but that is a start.

Comment by Samuel J. Orr on December 22, 2012 at 6:08am

 Ronald: If the drilling unit is 640 acres and you have 64 acres and the royalty is 20% your royalty amount will be 2% of the well's production. The dollar amount will be determined by the prevailing price of gas and upon whether your lease allows for deductions. If the drilling unit is 1280 acres and you have 64 acres your royalty will equal just 1% of the well's production with the dollar amount calculated the same way. The 2% and 1% figures assume a 20% royalty, and gross lease with no deductions. I hope this is helpful.

Comment by Bob Jenness on December 22, 2012 at 4:10am

Sam Douglass,

Perhaps I misunderstood the earlier discussion.  I was referring to the difficulty of putting together enough land to form a unit without having to trade rights with another party who has HBP acreage in the  geologic target area.  I know I read in this forum somewhere that energy companies routinely do such dealings when they actually want to do new exploration/production (as opposed to land speculation).  I also expect that in any such dealing, they negotiate with each other on a much fairer basis than they negotiate with the landowners.

I, too like the minimum royalty proposal, and look forward to seeing a sample of a real lease with such a clause in it.

Ron, what do you mean by "unit share"?  I thought the "15 to 20%" would be the landowner royalty rate.  Does the industry refer to that as "unit share"?

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