A land company wants to acquire an oil & gas lease for our property. What's the deal?

In My Humble Opinion
1

I just received a letter in the mail telling me that a land company is acquiring oil & gas leases in our area on behalf of an energy company. They want to offer a signing bonus and royalties on production. They claim no drilling would occur without express written permission. I live in a Fort Worth suburb, on about a half-acre property.

Are there any negatives to this? Has anyone else ever done this? On the surface it just looks like money for using the stuff under my land I’m not using anyway. But if it looks like someone is giving me something for nothing, I like to look closer.

2

My parents sort of inherited an oil and natural gas lease when they bought a farm in Ohio. The prior owner had signed the lease. The property came with a single old oil derrick and a very large collection tank. They did get some minor compensation for the crude oil which was emptied every couple of months but of more value was the natural gas which was also pumped. They had free natural gas for heating, cooking, water heating and clothes drying.

The oil derrick was large, rusty, oily and noisy. The storage tank also very large, rusty and oily. However my parents farm is 79 acres. You couldn’t see any of this from the house. On a 1/2 acre you may be hard pressed to hide the derrick or storage tank. And if you can’t see them I’m sure your neighbors might be no plussed by the change in their view.

3

There was an article about this in the USA today yesterday. I don’t know how they can say they won’t be drilling but still give you a bonus, because drilling is what they need to do to get the NG. And it’s loud. And then coems the fracking. No, that’s not a Battlestar Galactica reference, they have to fracture the shale thousands of feet below your house to get the NG out. And it involves explosives.

4

There was an article about this in the USA today yesterday. I don’t know how they can say they won’t be drilling but still give you a bonus, because drilling is what they need to do to get the NG. And it’s loud. And then coems the fracking. No, that’s not a Battlestar Galactica reference, they have to fracture the shale thousands of feet below your house to get the NG out. And it involves explosives.

5

I just tracked down that USA Today article (here). I don’t think it’s worth it, based on what it said.

The one thing I’m curious about, though, is if every one of my neighbors agrees to it, won’t they essentially be taking my oil and gas anyway?

6

I’d maybe have it looked at by a lawyer or something, but this is one of those things that actually can be virtually money for nothing. I worked at an oil and gas company here in Calgary (the O&G capital of Canada), and we mailed payment paperwork to tons of people every month for their land leases. My husband has a friend whose family is the beneficiary of this kind of land lease, and they make good money off of it, apparently. Don’t write it off without looking into it.

7

DeadlyAccurate, be very careful about what you are signing. You want to make sure you’re not selling your mineral rights, but rather signing a production lease. Some land men are a little less than forthright about that information. When I get home tonight, I’ll try to give you a better answer. Maybe someone with more legal expertise will come along before I get home and give you an even better answer.

8

One of the guys I used to work for had an oil company lease exploration rights. Rather than sign the standard lease they wanted him to, he contacted the state department that leases state land for such things. He got one of their leases and told the company he wanted the same terms they gave to the state. They gave it to him. So don’t just sign what they put in front of you, everything is negotiable. As it turned out, he got a lot of money and they never even exercised their rights under the lease.

9

I’ve got two leases like that, on my family farm in central Texas.

For quite a while, they would renew the leases every few years- the wells weren’t worth digging, but they didn’t want us to allow another company to drill. That was kinda nice- literally, money for nothing.

Eventually, though, they decided that it was worth digging. The great thing is that they’re doing area digging- there aren’t any actual wells on our property, but they’re still tapping into the reserves below our land, through wells on our neighbor’s land. Now I get one or two checks a month for the natural gas they produce. Again- basically money for nothing.

10

If you were in Western Canada, I could answer pretty much any question you could think of.
But you aren’t.
And I know enough about leases in the US to know that they are very different from here.
Definitely get professional advice. There may be associations who specialize in helping educate individuals in your situation - see if you can track one down.
There are just too many ways that this could go - even if the company is 100% on the level, there are still things that may not be in your favour that are perfectly legal to do.
Or, they could be crooks.
Definitely get more info. Start with the company who has sent you the offer - they should have no problems answering questions. Just keep in mind that they are working for the oil company, not you.

11

I did a quick search and these folks might be able to point you in the right direction; Texas Land & Mineral Owners Association

12

Thanks for that link, the Lady, and to everyone else for your advice. I’ll check everything out and try to figure out if it’s worth it or not.

13

With a half acre, you probably won’t get much, but something is better than nothing. They can probably assure you they won’t drill without permission because they won’t have to drill on your land; they could theoretically sink the bore several miles away.

Also, producing in populated areas is pretty different than standard procedure in the country. After the initial drilling (3 weeks maybe) there likely won’t be any rusty equipment littering your yard. It’s in the interest of the oil company to keep things neat. In Oklahoma City, there is oil and gas production in the parking lot of a major shopping mall. One of the Dallas airports has production between runways.

As far as what you will get, there are several components, all negotiable. Remember, in general, if you take the first offer you could have done better. You stand to get, as far as I know:
a) A bonus for signing the initial deal
b) Some kind of yearly payment to keep the lease current
c) Surface damages if they do decide they need to put anything on your surface (sounds like this will be negotiated down the road, and if you’re not interested, they can put the equipment on the neighbor)
d) A royalty depending on eventual production. The going rate is usually around 1/8 of production, and you don’t owe any expenses. This is called an override.
e) Maybe free natural gas for you house. This isn’t a sure thing; obviously gassing one farm house on 40 acres is cheaper for the company than supplying 40 acres of suburbia.

If you ever get to the production stage, remember you will spit your royalty with everyone in proportion to lease size above the reservoir. If you have a 1/8th royalty, and the reservoir turns out to be, say 20 acres, you will get 1/8th of 1/40th (per your half acre) of the revenue, which could still be a nice check.

As to what happens if you don’t sign away your rights, and there is indeed a reservoir discovered that lies beneath some of your land, you will be “pooled”. First the state will encourage voluntary negotiation, and if that fails, they will force pool you. This is usually not necessary, but you will get a fair deal based on what the average other land owners are getting. They cannot force you to accept any surface facilities, to the best of my knowledge.

This provision exists, because back in the day, the mineral rights were split up into tiny squares and derricks would pop up everywhere, with everyman for himself, producing out of a common reservoir. This is sub-optimal production, so state agencies stepped in. I have a photo from the good old days taken from the capitol steps in Oklahoma City of hundreds and hundreds of derricks as far as the eye can see.

Hope this helps, and good luck.

14

Okay, I can finally finish answering this. I am not a lawyer and I only know some of this from word-of-mouth, but from a reliable source.

T_SQUARE hit most of the high points.

Assuming the offer is an offer to lease your mineral rights, there should be two components to it. There should be a one-time signing bonus and there should be a percentage of the sales of an production (royality) if any. I’ve heard royalty offers of 3/16 a couple of times recently.

The land company will contact all of your neighbors that are not currently under lease. When they have enough acreage, they will pool into a unit and I think they register it with the Texas Railroad Commision. As long as that unit is under lease, no other company is allow to drill on it. You will receive prorated royalities from any producing well in your unit. For example, if there are 100 acres in the unit, and you own 10 acres, you will receive 1/10 of 3/16 of the sales of any gas from the well.

The laws in Texas hace recently changes regarding the size of units and the proximity of wells. It used to be more strictly controlled.

The lease should have an expiration date. However, the lease will not expire as long as there is a producing well within the unit. The operating company also has the option of paying you “shut-in” royalties to keep the lease from expiring in the absence of a producing well.

The OP asked about not signing the lease if all of the neighbors sign. In that case, you will not be part of the unit and will receive nothing. But, you have the opportunity to lease your acreage to someone else at a later time, possibly for more money, if they wish to drill on it bad enough. It’s a gamble.

If you sign the lease, you have no legal means of preventing them from drilling on your property. Surface rights and mineral rights are two totally different entities, but the mineral rights trump. They will have to pay you for surface damage, loss of production, and easements. There are some restrictions, such as they can’t drill within so many feet of your house, etc. However, you cannot deny them access to the minerals which they have leased. That is true even if you the mineral rights to your acreage belong to a former owner. The owner of the mineral rights gets the lease payment and the royalties. The owner of the surface rights gets the one-time payment for surface damages. That is happening to some relatives of mine right now.

Don’t be so quick to think it’s money for nothing. Take, for example, surface damages. Here is a before picture and an after picture of what used to be one of my favorite places. The three stakes mark three proposed wells; one verticle and two horizontal. It will never be the same again.

If you sign a lease and a producing well is drilled, the lease becomes a taxable property. Tarrant County will be quick to send you a property tax bill based on the sales of the gas. The royalties are also taxable by the IRS.

Here’s another twist I just recently learned. A lease can specify depths. The person who told be about this suggested that a lease should have a clause that, if a producing well is drill to certain depth, that the lease to the minerals from 200 feet lower and down will expire in two years if no wells are drilled deeper. This lets the mineral rights owner release the deeper rights if a driller wants to go deeper. It also prevents the current lease holder from locking out other companies at the lower deeps.

The drilling activity around Fort Worth and in East Texas has been phenomonal for the several years now. I can’t help but wonder how much longer it will last, but it shows no sign of slowing down.

DeadlyAccurate, if what you have is an offer to purchase outright your mineral rights, think very, very carefully about selling. Personally, I would drop that one right in the shredder. If someone thinks your mineral rights are worth that much money, they probably know something you don’t know.

15

Just a minor correction , fracing does not involve explosives. Fracing , the real term is fracturing, uses a lot of pump units and a lot of liquid tanks and basically one pumps fluid down the hole under pressure, this pressure fractures the rock and improves the permeability. The noise is from the pumps and it can be quite noisy.

Perforating involves explosive, but this does not produce any noise at surface.

Drilling ops are noisy, you can expect 10 - 15 days a well plus a chunk of road traffic. Holland has good noise control over land drilling ops, these regulations are not in force in the Texas land ops.

Now they may not drill directly on your property, a vertical well can drain a large area, dependent on oil viscosity and formation permeability. Directional drilling is used extensively, where from a single location, well are steered out to drain further areas. An extreme example of this is a BP operation where the actual reservoir section drained was 11km lateral displacement from the well head.

Anyway that is to say, they may be draining the oil or gas under you land, but from a location several hundred meters away.

cheers
NBC

16

Great information, everyone. Thank you.