Fair Or Not Fair
I have kept up (somewhat) with the discussions on this board for a while now. I have seen constant complaints about contracts being unfair to the land owner. So I ask, what is fair?
If you own 100 acres of land and lease it to a farmer, would he be required to pay thousands of dollars per acre for the right to farm.
On that 100 acres of land the farmer is using, will he keep his crops down to only a few acres and allow you to use the rest?
Will the farmer give you one quarter of the value of his crop?
The fact of the matter is, these wells are extremely expensive to drill. Most companies (including HK & CPK) will require investors to get the job completed. In addition, not every well produces. Just because the wells to date have done well, doesn't mean they all will. It only means they drill the best prospects first, when they get down to the less favorable well planned, their success rate will go down.
Everybody is in this to make a profit. Profits on oil and gas (per barrell or per Mcf) are low, even when prices are high. The more you produce, the more you make, as in any industry. Thats the only reason Exxon/Mobil makes billions, not because they are screwing the public, but because they are producing billions.
And yes, I am a landman, I have been one for 15 years. I consider myself ethicle and honest, as do most working in NW Louisiana. You will have the usscrupulous landmen taking advantage of the uninformed land owner, but they are few and they don't usually work long in the industry, most never become seasoned landmen.
The simple fact is, I have seen more unscroupulous land owners and land owner representatives than landmen. I have seen countless contracts prepared by legal representation that are really just filler and no substance and for that the rep charges hundreds or thousands of dollars. Bottom line, you need to pay more attention to who is actually trying to take advantage of the unaware. The o&g companies aren't hiding anything, can you say that about your agent or representative.
My suggestion, if you need legal advice on a legal document, find an attorney that specializes in that area. If you are buying a house, ask an attorney familiar with real estate, if you have questions about an oil & gas lease, ask an oil & gas attorney. He will charge you, but he will not ask for a percentage of what you are making (always a warning sign). If you have dealt with a landman in the past, give him or her a call. Most landmen are happy to answer questions from landonwers. They will always preface their advice with "Now keep in mind that I am not an attorney", but they will probably help when they can.
I have rambled on long enough now, I am sure only the serious readers have actually gotten to this point, so I should probably say so long, not good by, because as a sesaoned landman, I know that I will be dealing with you, the landowner, for many years to come. That is one of the reasons I will try to be as fair and honest as I can be, I will be the one you call to yell at.
So in closing, have a good day, a merry christmas and a wonderful new year. And remember, don't take any wooden nickles from those bad landmen.
lando
P.S. Forgive the spelling, I am a landman, not a writer.
If you own 100 acres of land and lease it to a farmer, would he be required to pay thousands of dollars per acre for the right to farm.
On that 100 acres of land the farmer is using, will he keep his crops down to only a few acres and allow you to use the rest?
Will the farmer give you one quarter of the value of his crop?
The fact of the matter is, these wells are extremely expensive to drill. Most companies (including HK & CPK) will require investors to get the job completed. In addition, not every well produces. Just because the wells to date have done well, doesn't mean they all will. It only means they drill the best prospects first, when they get down to the less favorable well planned, their success rate will go down.
Everybody is in this to make a profit. Profits on oil and gas (per barrell or per Mcf) are low, even when prices are high. The more you produce, the more you make, as in any industry. Thats the only reason Exxon/Mobil makes billions, not because they are screwing the public, but because they are producing billions.
And yes, I am a landman, I have been one for 15 years. I consider myself ethicle and honest, as do most working in NW Louisiana. You will have the usscrupulous landmen taking advantage of the uninformed land owner, but they are few and they don't usually work long in the industry, most never become seasoned landmen.
The simple fact is, I have seen more unscroupulous land owners and land owner representatives than landmen. I have seen countless contracts prepared by legal representation that are really just filler and no substance and for that the rep charges hundreds or thousands of dollars. Bottom line, you need to pay more attention to who is actually trying to take advantage of the unaware. The o&g companies aren't hiding anything, can you say that about your agent or representative.
My suggestion, if you need legal advice on a legal document, find an attorney that specializes in that area. If you are buying a house, ask an attorney familiar with real estate, if you have questions about an oil & gas lease, ask an oil & gas attorney. He will charge you, but he will not ask for a percentage of what you are making (always a warning sign). If you have dealt with a landman in the past, give him or her a call. Most landmen are happy to answer questions from landonwers. They will always preface their advice with "Now keep in mind that I am not an attorney", but they will probably help when they can.
I have rambled on long enough now, I am sure only the serious readers have actually gotten to this point, so I should probably say so long, not good by, because as a sesaoned landman, I know that I will be dealing with you, the landowner, for many years to come. That is one of the reasons I will try to be as fair and honest as I can be, I will be the one you call to yell at.
So in closing, have a good day, a merry christmas and a wonderful new year. And remember, don't take any wooden nickles from those bad landmen.
lando
P.S. Forgive the spelling, I am a landman, not a writer.
Views: 138
Replies to This Discussion
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Permalink Reply by Snake Stewart on
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Nope, I usually go with that plumbers look.
You know the one........Just say no to crack! (LOL) -
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Permalink Reply by Dion Warr, CPL on
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KB:
Lease acquisition costs in the HS have become great, especially in comparison to other plays around it. Let's just use a figure of $150 per acre for broker cost, although in more densely populated areas that figure is probably low (by a factor of about 2X-3X, or more in some of the areas in which lease negotiations have become drawn out.) OK, now add the lease bonus: average $10K/ac. (just hypothetical; some folks signed early, some folks signed late). OK, now you need to do the title, at least a patent abstract on the drillsite tract and any tracts you plan to drill 'underneath', limited title (severance materials plus 1920 forward) on everything else: let's say $250,000, with Title Opinions in hand. Before the bit touches the earth, XYZ Oil Company has spent $6,746,000 before the bit has touched the earth on your unit, and your UMI bill clock starts, and that's not counting whether XYZ bought seismic data in the area if it was available (which I understand has gone into six figures per square mile in some of the hot areas up there). Under this scenario, XYZ has spent $9MM plus before a single completed vertical well starts producing, on which they can bill the UMI owners their share of $2-3MM, and that's if the well is successful (as you know, XYZ doesn't get to bill UMI on dry holes). Out of that, the revenue XYZ will see is at most about 0.78 before payout at 100% leased in their unit. Yes, XYZ gets to capture the UMI % BPO, but once the well pays out, the UMI becomes "the rake" to their revenue, and if XYZ had to acquire acreage from farmouts, either the revenue number will go down further (as further payment to the HBP lease owner), or they will get a new partner APO, as many farmouts includes reversionary WI provisions. It also assumes that none of the other WI partners go 'non-consent' on you either.
If the lease bonus were to have averaged $1000 per acre (very much preferred terms for the landowner pre-March), the 'before the bit' cost drops to under a million dollars. Now, that's workable for a lot more companies that CHK, HK, et al.
Not to just pick on CHK, but they do have a reputation for doing this (playing "loose aggressive" on lease plays), but someone up in OKC probably figured this out. There are a number of smaller players in the Arklatex that have the means to be able to ride on the second set of economics I outlined on a well-by-well basis, but not the first set. So let's raise the stakes, run out the bit players, and try to put a stranglehold on this new play prior to anyone else being able to get in the door. I submit that the hyperinflation in lease bonus was because of that line of reasoning, and had little or nothing to do with the value of the minerals beneath your feet. It also just so happened that there were other players willing to enter the game at this higher level, and so companies like CHK were forced to 'raise over the top' of others to keep pace.
Look at it this way. Based upon 52 BCF per section EUR (which currently appears optimistic), at $7/mcf, $25000 per acre bonus places about a 6% premium on your gas across the life of the well, before transportation cost (or translates out to about 3 BCF). On a cost game where profit is based upon pennies per mcf, and the consumer wants to pay the lowest overall cost regardless of where the gas came from, that's saying a lot. You could drill a good number of conventional wells with a lower overall acquisition cost that could make up 3 BCF per section pretty quick. Those are economics that can't be sustained very long, even by bigger companies, and especially not in a deflationary ng price environment (as rig costs have not suddenly been cut in half since July either).
As far as Snake: let me say this. I've been doing landwork full time for 12 years. I'd rather deal with an educated mineral owner (or their attorney) than an uneducated one. Educated mineral owners understand that leasing at fair terms to all is the way they get 'mailbox money', since it provides adequate incentive (and economics) for the company to drill, and provides a fair bonus and royalty to the owner. The royalty 'mailbox money' potential in this play is big enough to quash most concerns about lease bonus. And you only get that if someone drills. The educated owner understands that 25% of something with good comprehensive lease terms is worth more than 100% of nothing. Uneducated owners get hung up on ideas like "in 19XX (or 20XX) I got paid $Y thousand dollars per acre, and I'm not gonna lease at less than that" or "why should your company get 75% just for drilling an $Z milllion dollar well?" With an educated landowner, it's all about the trade at fair terms. But it's just that, a trade. Let me rephrase that: it's a trade, and a trust. I know, a good number of l/o's feel screwed by this whole year-long rollercoaster, so trust is difficult. But the first areas to get to drilling again after all this clears are the areas that begin to trade and trust again.
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Permalink Reply by Grice on -
Dion, how can the UMI be billed for lease acquisition cost, when no lease (between the UMI and XYZ) has was ever created?
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Permalink Reply by Dion Warr, CPL on
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Grice:
UMI (under LA law, speaking as a non-lawyer) can be billed direct well costs only(basically, the AFE for the well, checked against the invoices and receipts as actually billed, any cost for workovers and well maintenance, and any continuing, reasonable, actual cost for supervision. That's it. All the 'before the bit' costs (including lease acquisition) is borne solely by XYZ, or the other WI parties taking leases. It's part of their cost of doing business, not yours (as UMI).
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Permalink Reply by Grice on
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"Under this scenario, XYZ has spent $9MM plus before a single completed vertical well starts producing, on which they can bill the UMI owners their share of $2-3MM, and that's if the well is successful (as you know, XYZ doesn't get to bill UMI on dry holes)."
That is the part of your previous post that raised question. Maybe I misread your earlier comments, as I thought you were claiming the UMI would be billed for title search and seismic testing.
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Permalink Reply by Dion Warr, CPL on
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KB:
"At $200/acre, what l/o could truly afford it?"
Plenty. All over South LA. Then again, plenty of folks in south LA still lease at that level (at least on a rental lease, but then again the rentals are only 50% - 100% of the bonus payment, and even if O&G has to pay all of those prior to making a well, you're still in the realm of hundreds of dollars per acre).
Just to make it fair:
SW LA: similar bonus and rentals, 1/5 RI in "non-producing" areas, up to 1/4 RI in producing areas.
Western LA: $150 bonus/similar % ratio on rental, 3/16 to 1/5; up to 1/4 for large landowners at their option.
N and NE LA, before or excluding HS: Anadarko paid up to $500/ac. 3 yr. paid up on infill CV/LCV acreage. I didn't work for them, that was confirmed by l/o's that I spoke with. Generally: $200 - $300 per acre, paid up. 1/5 to 1/4 on RI.
The concept that a mineral owner is being 'robbed' at multiple thousands of dollars per acre lease bonus is just baffling to me. Heck, if O&G would have really wanted to rob l/o's and they could have surmised what would have happened post 3/2008, they could have bought out 1/2 of the pvt l/o's in rural NW LA from 2006-07 for $2000 per acre, lock, stock and barrel. Then you would be dealing with large % of fee lands in every unit, they could have made trades with each other, HBP lease owners, and big timber, and wouldn't have needed to talk to hardly any private UMI. Holdouts would have just been bypassed.
Until the G&G at Mitchell Energy and others showed that this could be done, what was the marketable value of the HS? Zero. Not marketably recoverable. The shale was good for chewing up drillbits on your way to the Smackover. Such is no longer the case, but it still takes a significant upfront investment to produce significantly from the HS.
Lease bonus offers have corrected, and will continue to correct, based on market forces. Lease offers in many areas have already dried up, or gone down 70 - 90%. Where near-critical WI percentages are present, some folks may be wooed with nearly the same terms, since O&G companies are already 'pot committed' in some units, but the days of paying what was paid spring/summer of 2008 to assemble a unit from scratch are far behind us, IMO.
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Permalink Reply by The_Baron on
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Maybe they could if lawyers weren't robbing their clients with such high fees.
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Permalink Reply by Dion Warr, CPL on
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KB:
With the surge in new clients and requests hitting the law firms, I just don't know. I would think that a relatively small number of specialists could put together some standard provisions in an exhibit for general use at a standard price, but that certainly doesn't help you with your specific issues, which could vary from l/o to l/o, or parcel to parcel. The negotiation time specific to you and your property is generally what you would pay for on an hourly basis, or some sort of contingent percentage of bonus, royalty, or both.
As far as seasoned landmen: we deal with this stuff all day long, which is something I can safely say many lawyers don't do. Many of us are working full-time (or pretty close to it), or at least many of us were prior to the HS implosion and retreat of oil and gas prices.
I think between the overnight surge in demand for advice and the fact that everyone smelled money drove the cost of advice up past the point of reality. There are some good people willing to do it for a reasonable price; I'd hold myself out there, but I'm not a sponsor of the site, thus I'm not going to solicit. Skip is a sponsor of the site, and posts good, knowledgeable advice all over this forum. (Shameless plug for Skip here.) If you've got any type of title problem except for relatively minor defects that landmen cure most every day for their industry clients, I (and Skip too) would urge that you seek legal counsel. Landmen can not file a succession for you, file suit for you, or in any way practice law (unless they are a licensed attorney and a landman, of which there are a few).
There is a lot of good (free!) advice on this site; but much like they do at international competitions, I would recommend you throw out the fringe opinions ('$30K bonus or bust', or 'kiss my @$$ you greedy l/o'), kind of like you rule out the French judge and the East German judge, and go with the range in between.
(Coincidentally, such language is just rude, and inappropriate. At least be contextual: given the subject matter on the site, 'Kiss my Smackover' would be much more appropriate. (:-D) )
Sorry if that hits a little close, Graysands. (Gray Sand of the Smackover... I kill me. lol)
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Permalink Reply by Skip Peel - Mineral Consultant on
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KB. I agree. The value of an experienced local O&G attorney is considerable and the cost reasonable. I would suggest that those who consider the expense too great, do two things. Consider the long term potential income benefits and protect the future value of their mineral estate for the generations to come.
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Permalink Reply by Dion Warr, CPL on
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KB:
Have you looked at NARO (National Association of Royalty Owners)? I don't know if they have a LA chapter, but they might be helpful, and would provide another pro-l/o viewpoint. -
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We wouldnt even need this thread if not for the early approach by O&G's. Now everybody needs to play fair and worry about how Uncle Mac is going to pay his bills ?
If you had gone back several hundred pages of dialogue, you would see the 17 - 20 times that I have said that I do not want to go unsigned. You would also see where I have even said that I would forego a signing bonus altogether for the right lease terms. But I will not give it away.
There is a huge difference in someone being educated and someone thats smart enough to know whats going on. Educated people may be swayed by the beautiful rendition of how this play works from your viewpoint. The uneducated and the ones that are smart enough to know whats going on arent phased. Those are the hard ones to work the magic on. I fall somewhere in between the two, depending on who is doing the judging at the time.
Unfortunately for the O&G's, there are many more of me out here now , then the easily beguiled. IMO. Hopefully a few are added to the ranks every day. The O&G's created this monster trying to scare all of "THEIR" competition away. This would still be going your way if not for the outing by PHK and Cubic Energy back in March. Their games have changed the face of leasing forever.Doesnt matter where these landowners are located. They dont trust the O&G's and that will probably never change. And why should it ? If your guy's cant work under those terms then they will have to just take their ball and go home.Just because a few well meaning O&G types are on this site trying to help enlighten us, it doesnt overshadow the pillaging that you, and so many of your cohorts, want to conveniently wish away and just act like it hasnt been like this forever.
I have said on numerous occassions how I enjoy reading your posts. As well as most all of the other pro's on this site. Many of which, I even call my friends.But it wont be with trust if and when our lease gets done. If it was , we wouldnt need that attorney you keep telling us we need.
P.S. If everything is etched in stone lease wise, with the conditions and economics available to us for future lease, what are some of these guy's on here fussing about ? You'll need to have a team meeting and let everybody know that you guy's won.(LOL) Have a good one.
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