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Permalink Reply by Skip Peel - Mineral Consultant on July 28, 2014 at 5:22

Since the judgement you have been an Unleased Mineral Interest in the unit well.  UMI's do not receive Division Orders,  Mineral Lessors receive DO's.  You will receive monthly production and operating expense reports from the unit operator.  As a UMI you are due 100% of your proportional share of unit production less monthly Lease Operating Expenses defined by the state.  I'll place a link to UMI Basics by KB at the end of my reply. 

The days of big lease bonuses is long over in the Haynesville Shale.  It's certainly okay to attempt to negotiate higher but even if you get $500, which I think is more common currently, it's not a large dollar difference.  The quarter royalty and basic protective and beneficial lease language should be the focus of your negotiations.  It is good to hear that the operator is willing to discuss a lease.

I advise signing a lease for small tract interests.  It's a pain to try and track LOE's and variations in production.  And every new alternate unit well will have to return it's cost to drill and complete before you begin to receive income. 

http://www.gohaynesvilleshale.com/UMI-Basics

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Permalink Reply by kittycatmama on July 28, 2014 at 5:56

@ Skip, we went as UMI on a tiny piece of property (1 ac) in south Shreveport.  I probably would not have taken the chance on a larger piece of property and also the gas co. trying to lease us refused to sign the offer THEY made to us a day before we were set to sign because they were feuding with a large land owner. In essence we were forced into being UMIs.  It was a good learning experience, but I need to know if they drill alternate wells in that area do I need to start the process of UMI all over for EACH new well or will my status remain as an UMI for all wells drilled in that section. Also what if a different co. like Indigo were to come in to drill a shallower level, then I would assume that would be a whole new ball game?

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Permalink Reply by Skip Peel - Mineral Consultant on July 28, 2014 at 6:04

UMI's must wait until each well drilled has recovered it's cost before receiving payment.  Doesn't matter which company operates or what formation/zone is being produced.  You could lease the CV to Indigo and remain unleased for your Haynesville rights.

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Permalink Reply by Colquit Owner on July 28, 2014 at 6:54

thanks for the info.  But I don't get it.  Assuming an alternate well is NOT drilled in my section, then, since our well HAS paid out already, won't I receive much greater monthly royalty?  And how would I calculate the difference??

And, looking at all this, what does the size of my property have to do with the decision to-or-not-to go UMI?We have 22 acres property  in Sect 27, 16n, 15w

Thanks for the help.

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Permalink Reply by Skip Peel - Mineral Consultant on July 28, 2014 at 7:00

Each well must pay out before a UMI receives any revenue from it.  Small tracts generally do not generate enough income to make it worth paying an O&G accountant or attorney to help monitor the payments and deductions for non-consent production.

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Permalink Reply by Colquit Owner on July 28, 2014 at 7:21

thanks Skip.  If I understand your reply, You're saying I'd have to hire an accountant or attorney to "do my taxes?"  Or to see if I'm being treated fairly?  

Or is this expense involuntarily deducted by the Lessee?

And back to my other question, how would I calculate the difference in monthly royalty payments between UMI and leased, assuming for the moment that all other things remain equal?

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Permalink Reply by Skip Peel - Mineral Consultant on July 28, 2014 at 7:25

Good Haynesville horizontal wells can take a year and a half to pay out at current NG prices.  Even when operators employ a restricted choke production program, ~50% of a well's total production over its economic life is depleted in the first 12 months.  I know some UMI's that have fared well because they were under some of the best wells in the best rock of the play.  I know many more that are not and would prefer it if they had leased in the beginning.

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Permalink Reply by Skip Peel - Mineral Consultant on July 28, 2014 at 7:28

The expense is voluntary.  Ever heard the term, "pencil whipped"?  I do not know of any formula that works without knowing the cost to drill a well and the production of that well over time.  Both of which are difficult to ascertain when the well has not been drilled.  As far as attempting to crunch the numbers for an existing well which has already paid out, you'd have to know the Lease Operating Expenses and the production decline.

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Permalink Reply by Colquit Owner on July 28, 2014 at 7:28

Since I mentioned earlier here that my well paid out earlier this year, and is still producing, what would be the difference in monthly royalty between being unleased vs. leased at 0.25%?

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Permalink Reply by Skip Peel - Mineral Consultant on July 28, 2014 at 7:31

Your non-consent production would be 4 times that of the quarter royalty interest less the lease operating expenses. 

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Permalink Reply by Colquit Owner on July 28, 2014 at 7:45

thanks.  "four times" sounds great!

And, to better understand, it seems you're saying that with a .25 lease, the monthly royalty would not include deductions for expenses?  

Where, with the UMI, the payment in fact would be 4 times the net lease royalty. . . . . .less certain operating expenses???  And, with a paid-out well, still producing, how would you characterize these expenses?  sigmificant? etc?  that is, as you know, I'm simply trying to assess the value and risk between the two options that I am now offered!

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Permalink Reply by Skip Peel - Mineral Consultant on July 28, 2014 at 8:08

You're welcome.  Yes, it does sound great...but is it?  A 25% royalty with no LOE deductions is a sure thing on 100% of production.  100% with LOE deductions on 40 to 50% of production may turn out to be more money.  Then again it may not depending on how much the operator spends on the well over its life.  Whatever they spend, in addition to LOE, your share will be deducted from your proportional production. 

I don't recommend going non-consent for my clients and therefore don't know the pros and cons beyond what I have stated. IMO non-consent is for those who are pros, know the tricks of the trade and have professional help.

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