Introduction to Fundamentals of Leasing and Selling Minerals

By Skip Peel, Independent Landman

Generally speaking minerals have value based upon the perceptions of buyers.  Those perceptions can be based on facts available in the public record, production history of wells near the area of the buyer's interest, personal interpretations of geology, respect for a particular Exploration and Production (E&P) company, publicity generated by stock analysts and energy bloggers, or a hunch, to name but a few factors.  In my experience rarely does an offer come from a person or company that has privileged information from inside an energy company though some E&P companies may buy minerals in units they operate.  Proprietary information is tightly held and unavailable to the majority of buyers and brokers.  Buyer perception  of value changes over time based on actual unitization, drilling, completion and production results, variations in the price of the hydrocarbons produced and calculations regarding risk and rate of return comparisons between established and emerging domestic plays.  The fact that an E&P company spends millions or tens of millions of dollars leasing lands, building infrastructure and drilling wells is often interpreted by mineral owners as an indication that a particular geologic target is a guaranteed successful play.  The reality is that the average E&P company is constantly generating new prospects with the knowledge that some will prove economic and some will not.  Even the largest companies with decades of experience, command of the latest technological tools and world class intellectual talent backed by capital budgets in the billions of dollars probably have historic success rates in the 50% range. 

Early in an emerging play there is little definitive information available to the public and the energy company or companies are basing their lease program off of limited data that they have interpreted to indicate potential but that cannot be a definitive indicator of success.   Energy companies will sometimes use the term, well control, when referring to the cores and logs from existing historic wells penetrating their target formation.  Some prospective formations or zones may have extensive well control because many wells have been drilled through the target prospect over time.  The more recent the better owing to the ever advancing nature of technology.  Some prospects will have little well control owing to depth and historic cost to drill deep formations which were not commercial under prior technical limitations.  Although well control is of obvious value only the drill bit can prove a formation commercial and define its areal commercial extent.

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