Replies to This Discussion

Permalink Reply by Mac Davis on July 5, 2009 at 21:31

Yes, as long as the well draws gas from your production unit/section. They could put a pad on the edge of a section and drill wells into two different sections. You'd only get royalties off of minerals from the well that drains your production unit.

If you're unleased, there's a larger potential for fraud on the part of the operator. If you're unleased, the cost of each well will be deducted from the revenue for that well before you get royalty payments.

By the way, where does the 240 acre section come from? "Normal" production units are 1 square mile PLSS sections, which are 640 acres. Some very old sections, or those that were partially under water are different.

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Permalink Reply by lanadan Ds3 on July 5, 2009 at 23:55

Mac,

" . . . If you're unleased, there's a larger potential for fraud on the part of the operator . . . "

Why are you saying "larger" potential for fraud ? Is it that you are saying that the operator will assess the UMI a DIFFERENT set of charges than they do would a leased parcel ? If so, then what is the factual basis for your conclusions ?

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Permalink Reply by Mac Davis on July 6, 2009 at 3:43

"Is it that you are saying that the operator will assess the UMI a DIFFERENT set of charges than they do would a leased parcel ?"

Isn't that the standard legal way UMI's and leased parcels are handled?

UMI's have drilling costs, operating costs, and management fees deducted from their payments. Leased parcels don't get these expenses deducted.

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Permalink Reply by The_Baron on July 6, 2009 at 2:55

Mac Davis

I have to take offense to your statement. I work for a comapny that operates a few wells. We do buisness with many other companies that also operate wells in AR, LA, MS, TX, and AL.

While we may not always agree with some of the charges, or need for some expenses, I can not point to any instance where we have been defrauded. I also find your statement "If you're unleased, there's a larger potential for fraud on the part of the operator" to be espessially scandalus. In my experience, many who go UMI are not always aware of what it takes to keep a well running and are not familier whith many terms the industry uses. I believe that many who simply do not understand what is going on (and why should they, they have there own lives and occupations. What I have learned has taken years of hands on experiance and I stil have a lot to learn). These people who do not fully understand what the operator is doing may feel that they are being cheated, when they may not be.

I am sure there are operators out there who are not as on the up and up as the next. Everyone has a story of that guy who ripped them off.

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Permalink Reply by The_Baron on July 6, 2009 at 2:59

By the way there are also many partial sections, especially by the state line that are in production units with adjacent sections.

I also provide the following:from the Arkansas leasing manuel:

Owing to the curvature of the Earth's surface, lines extending
toward the magnetic pole become closer together. All Townships
are narrower at the North side than on the South side, the North
end being approximately three rods or 49.5 feet narrower than the
South end.

In order to keep these lines as near six miles apart as possible,
usually every 24 miles North from the Base line a stop or
correction line is established, known as a Standard Parallel (or
Correction Line). Guide meridians are likewise established at
intervals of usually 24 miles. The survey is again moved over so
that the North and South lines will be six miles apart.
After the establishment of a Meridian and a Base line, and
after Townships have been formed, it is then necessary to survey
and number each Township into 36 Sections, containing
approximately 640 acres each. These Sections are numbered from
1 to 36 commencing with number 1 at the Northeast corner of the
Township and numbered to the West and then back East.
All Sections cannot contain 640 acres because of the Earth's
curvature hereinbefore mentioned, because of the impossibility of
absolute accuracy in surveying, and because the lines surveyed are
not always parallel. Accordingly, a Township of more or less than
36 exact Sections containing 640 acres each is produced. To take
care of this discrepancy, the Sections on the North and West side of
the Township contain an irregular number of acres and are known
as Fractional Sections. Therefore, we usually have a Township
with 25 full sections and 11 Fractional Sections.

The 11 Fractional Sections of a Township, where Fractional
Sections are caused by the curvature of the Earth's surface and
inaccurate surveys, are Sections 1 through 6 along the North side
of the Township, and Sections 7, 18, 19, 30 and 31 along the West
side of the Township. There is never a Fractional Section caused by
the curvature or inaccurate survey any place except along a
Township or Range line. In very few exceptional cases, it may
happen that Fractional Sections will border on the South or East
side of a Township -- this, however, is extremely rare.

As Sections 1 through 6 contain more or less than 640 acres,
they are surveyed to make 320 acres in the South half. The North
half is then divided so that the South half of the Northeast Quarter
and the South half of the Northwest Quarter of those sections will
each contain 80 acres. The remaining strip of land along the North
side of the Section is then divided into four lots, each given a
number; the acreage of each lot always being 40 acres, more or
less, and ascertained by the Land Office. The Northeast lot is
numbered 1 and the remaining lots are numbered 2, 3, and 4,
running to the West.

In Sections 6, 7, 18, 19, 30, and 31, the surplus or deficit
acreage is placed in the West half of the Section along the West
line of the Township, and divided in the same manner as though it
were along the North line of the Township, except the Northwest
lot is numbered 1, and the remaining lots are numbered running to
the South. Section 6, lying in the extreme Northwest corner of the
Township, would, therefore, contain lots both along the North side
and the West side.

It has always been the rule of the surveyor to survey and
establish as many 80 acre tracts as possible or practical in each
Section. Generally, a section is the smallest subdivision actually
surveyed by the government surveyors, and at each Section
corner is a marker known as a Monument of Survey. Sections,
however, are divided into Quarter Sections containing 160
acres, etc., which will be discussed later under Descriptions.
Fractional Sections cannot be described in the same manner
as a Full Section. Townships bordering on or containing Indian
or Timber Reservations, National Parks, Townships, Lakes, or
Rivers, may contain Fractional Sections caused by such
reservation, lake or river taking out of the Public Lands
irregular tracts and uneven acreage.

Perhaps the most pronounced or noticeable number of
Government Lots occur along a river -- many times a quarter
section will contain as many as 12 or 18 lots -- varying in size
from a fraction of an acre to 40 acres, more or less.
Where lots occur along a river, occasionally such lots have
been surveyed and designated as Lot No. __ on the North Bank,
the South Bank, the East Bank, or the West Bank of such river.
This is caused by two different groups of surveyors working on
the Survey -- one group at one time on one side of the river, and
the other group later on the other side of the river.

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Permalink Reply by Mac Davis on July 6, 2009 at 5:18

Thanks Baron, very interesting details.

I think of much of this as "you can't cover a sphere with squares." I would think that the variation from the standard 640 acres due to the curve of the earth and accumulated errors would be small (<10%?). Boundaries such as water, non-PLSS regions, different PLSS principal meridian/baseline regions, arpents, historical non-standard sections, land grants, etc. are special cases, of course.

I was mostly wondering if Wanda had an unusual section, or was just saying "240 acres" instead of "640 acres" by accident.

In your experience, Baron, is there any "common" section or production unit smaller than a square mile section? 240 acres is 3/8 of a standard 640 acre section. e.g. do they do 1/4 section production in the Gahagan basalt 8-) formation instead of the 640 standard for the Haynesville shale?

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Permalink Reply by Digger1 on July 6, 2009 at 17:45

That is a very good explanation. Thank you for posting it. Now the next question, where do the acreage amounts come from for a one section unit?, the acreage amount used on the division order? If the unit is a small unit, does a landowner with 80 surveyed acres get more than the usual 80/640 times the royalty percentage?

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Permalink Reply by Mac Davis on July 6, 2009 at 23:37

Yes, on a small unit, you will get a larger share of the production, but there's less potential for production. You can't pull as much gas out of a 320 acre unit as you can from a 640 acre unit.

The unit creation order will specify the land included in the unit. I don't know if the order specifies the acreage, or if it leaves the calculation of total acreage to someone else.

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Permalink Reply by Mac Davis on July 6, 2009 at 4:18

Whoa, guys!

I said "potential," not "propensity."

There are a larger number of factors that figure into UMI payment calculations than to Leased owners. Correct?

Well costs, and operating expenses will be deducted from a UMI, but not from leased royalties. Does anyone disagree there is potential for fraud in these calculations?

Does anyone disagree that a dishonest operator has more "potential" opportunities to defraud a UMI than a Leased property owner?

Would anyone suggest that a UMI NOT be on the lookout for fraud in the well costs and operating expenses?

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Permalink Reply by Mac Davis on July 6, 2009 at 5:31

"from possible to propensity."

Actually, from "potential" to "propensity."

I think there's a potential partially pending personal possible propensity problem involved here somewhere.

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Permalink Reply by Mac Davis on July 6, 2009 at 5:57

Second point. With a multi-well pad, there are more separate expense items to account for. Plus the "potential" for double counting items between multiple wells.

Third point, what if one pad has wells in more than one production unit? There's "potential" for fraud, double billing, or "creative accounting" in assigning well costs to one production unit vs. another.

Suppose one unit is entirely leased, and another unit has a significant percent of UMI acreage. Build the pad for the "UMI" section, charge all pad preparation, road building, pipeline, etc. costs to the UMI section. Then drill a well for the leased section, using the same road, pad facilities, pipelines, etc. The leased section gets use of the common facilities for free. Heck, that's probably even legal.

Fourth Point. Could there be one condensate removal system for wells in two different units. Isn't there "potential" for fraud in which unit gets credited for the condensate?

Fifth Point. If the operator is dishonest, is there more "potential" for fraudulently crediting gas to the wrong unit for a multi-unit pad? (I'm asking. I don't know how secure or well audited any logging facilities at well sites are.)

Sixth Point. If the term "fraud" bothers you, substitute "accidentally inaccurate accounting or accidentally improper processes that deprive someone of proper payments."

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Permalink Reply by The_Baron on July 6, 2009 at 7:42

Fourth Point. Could there be one condensate removal system for wells in two different units. Isn't there "potential" for fraud in which unit gets credited for the condensate?

"Fifth Point. If the operator is dishonest, is there more "potential" for fraudulently crediting gas to the wrong unit for a multi-unit pad? (I'm asking. I don't know how secure or well audited any logging facilities at well sites are.)"

Only a fool would falsify production data to the state. The ramifications with Dept. of Revenue would be bad enough. Condensate and gas production must be reported for each well. There may be a common tank/pipeline, but at some point the amounts of each have to be accounted for prior to being comingled.

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