Replies to This Discussion

Permalink Reply by Two Dogs, Pirate on October 14, 2015 at 2:10

Who is making the offer?

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Permalink Reply by dj V & A1 on October 14, 2015 at 2:20

BHP

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Permalink Reply by Skip Peel - Mineral Consultant on October 14, 2015 at 2:31

The no bonus lease  offer is pretty standard at this time and has been for a number of years for small acreages that fell through the cracks in earlier title due diligence for Haynesville Shale units.  Louisiana mineral law limits recovery of back royalty to three years.  That would  be back to approximately Oct. 2012 in your case.  BHP appears to be offering back royalty going back to first production, Nov. 2011.  If so, that first year of production is by far the best in Haynesville Shale wells and could very well be more than you would receive with a modest bonus.  Remaining un-leased in Haynesville Shale units has turned out to be a poor decision for the majority of Unleased Mineral Interests (UMIs) as it takes even a good Haynesville Shale well quite a while to pay out at today's low NG prices.

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Permalink Reply by dj V & A1 on October 14, 2015 at 3:06

Thanks, will look into details of a lease. 

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Permalink Reply by Skip Peel - Mineral Consultant on October 14, 2015 at 3:23

You're welcome.  The evolution of well designs to longer-lateral, cross unit drilling has caused some Haynesville operators to review and correct mistakes and omissions from earlier title work.  This can sometime offer UMIs the opportunity to consider a lease.  In almost all cases it is better to be leased than un-leased.  I would like the state to make it mandatory for operating companies to identify UMIs and offer them leases with standard clauses and a quarter royalty whenever a Cross Unit Lateral or CULAlternate Unit Well is permitted.

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Permalink Reply by Bobi Carr ("parker") on October 14, 2015 at 6:36

I agree with your intent Skip, but I don't believe any company should be required to make and offer with a minimum 25% or any specific % for that matter.  Just my opinion.

That being said, the additional reason to sign a lease would be to help accommodate additional development.

If a company has two similar units to chose from for development and one is burdened by more UMIs, it won't see additional development.  

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Permalink Reply by Skip Peel - Mineral Consultant on October 14, 2015 at 6:58

Many states force mineral owners to take the highest royalty accepted by other mineral interests in the unit.  Of course because those laws favor the industry most of those royalties are something less than 25%.  In NW LA however the vast majority of the leases are for 25%.  If the leased interests in a unit are 25%, then the UMI should get the same, IMO.  The UMI interests discussed here are so small that they do not matter in development decisions.  The vast majority of Haynesville Shale UMIs own very small acreage interests.

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Permalink Reply by Bobi Carr ("parker") on October 14, 2015 at 8:40

I have heard of as much as 120 Acres in a unit being UMI.

I have 5 acres in one unit that is unleased and several other small tracts that are unleased.

I was never offered a lease on these tracts or they would now be under lease.

Even on small tracts, I don't believe that companies should be forced to offer 25%.  There is already a mechanism in place to compensate owners.

Putting a minimum royalty doesn't seem fair to the business to me.  I believe it would be an onerous requirement.  It would also encourage small landowners to hold out instead of trying to work out a reasonable lease.

This is something we will have to agree to disagree on.

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Permalink Reply by Skip Peel - Mineral Consultant on October 14, 2015 at 9:43

Holding out has already proven to be a really poor strategy.  I'm sure there are other UMIs with good size mineral interests in a unit.  However they are the exception, not the rule.  The majority are very modest.  Yes, we can agree to disagree but how about this.  If a UMI with a small interest was offered a lease and turned down the offer, they can negotiate now the best they can and the operator is under no requirement for a set royalty percentage.  If the operator or the operator's successor passed over the small mineral owner, for whatever reason, and never offered them a lease then the required royalty is 25%.  The level of title due diligence in the early days of the Haynesville Shale was very much lacking.  Those that never got the chance to lease then should get now what they would have gotten then.  Paybacks are sometimes warranted.  And it's the fair thing to do, IMO.

Permalink Reply by Henry on October 15, 2015 at 0:05

I had a couple of acres that did not get leased for reasons that we don't need to go into here.  BHP drilled a well in that section 5 years ago.  About 3 years ago, they were kind enough to offer me a lease with a $500/acre bonus and 25% cost-free royalty retroactive to initial  production.  I leaped to take it.  That well will never reach payout.  If I had remained unleased, I would never have gotten a penny.  Thank you BHP.

My advice:  Take the lease.  Be thankful you have BHP and not CHK.

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Permalink Reply by Dion Warr, CPL on October 17, 2015 at 6:32

No cost leases are prevalent in situations in which E&P and/or land acquisition budgets are short on cash and companies are seeking additional NRI at minimal cost to substantiate and/or facilitate additional development. Back royalty is just a different way of paying bonus to the landowner, except for the advantage of being able to net out against depletion. Neither the wells drilled in your section (draining your unit) nor the wells draining surrounding units appear to have reasonably paid out at this point on a well-to-well basis, so if the lease pays back to first production, it's like a do-over for royalty compensation (just no bonus).

Given all the above at 25% RI, major terms sound good. Devils in the details (read your lease), and you may wish to inquire and/or propose a drilling commitment, but I wouldn't jump up and down and scream about it.

Good luck with your negotiations - I hope they are successful.

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Permalink Reply by HBP on October 19, 2015 at 7:20

Another thing to consider here is that if it is small acreage unleased, it may be residential or commercial, etc... You may benefit from putting it in a lease with a strong no surface provision rather than just being unleased in general.  If I was on the fence about a no-bonus lease, but I did want the back royalties - then ensuring no surface through contract would put me over on the side of leasing (assuming its not a well that did or could payout).

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