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Permalink Reply by HBP on April 20, 2012 at 9:11

Ask the landman to read from the same citation but at La. R.S. 30:10 A(2)(e) , in part: The provisions of Paragraph 2(b) above with respect to the risk charge shall not apply to any unleased interest not subject to an oil, gas, and mineral lease.

Also, your calculations should be if owner owns 5% of the unit, then they own 5% of revenue attributable to production after payout (100% payout not double).  This is still subject to certain costs and deductions, but very simply put, you receive 100% of your proportionate revenue from gas produced after payout, subject to certain further costs and deductions.  Doesn't mean its better to be unleased, every situation is different - See unleased owner outline on this site by K. Bloomfield from a couple of years ago - great starter overview.

 It seems you are doing better research on GHS than your landman did before contacting you.

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Permalink Reply by swoop on April 21, 2012 at 4:18

Thank you, HBP!

It took awhile for me to find the document that you referenced. It's located at http://www.gohaynesvilleshale.com/group/unleasedmineralinterests/fo... and I'm still reading it.

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Permalink Reply by Dion Warr, CPL on April 23, 2012 at 6:16

Swoop:

 

Having a little problem following your math here, so I will try to answer using your hypothetical:

 

Mr. Unsigned owns 5% of the land in the unit.  The well "costs" $10MM.  Upon the well producing $10,000,000.01 and thereafter, barring in any additional well costs, Mr. Unsigned receives ALL of his proportionate interest in the unit, being 100% of his 5% of the unit (or 5% of the production from the well).  What Mr. Unsigned's neighbors did, or leased for, has no consequence on Mr. Unsigned's revenue stream.

 

The calculation is actually a little harder to follow, as well costs accrue over time (as costs accrue continuously for a well.  But for a well which is generally producing in paying quantities, once payout is reached, Mr. Unsigned should continue to receive revenue in the proportion stated.  The hitch comes when additional work is performed on a well; at that point, the operator has the right to recoup from the revenue until the costst for the additional work has been repaid - after that, you're back at payout again.

 

As to his neighbors: Those neighbors signing leases reserving a 20% royalty will receive 20% of their proportionate share from the revenue generated from the well, from the date of first production.  His neighbors do not have to wait for any "payout".  It is this disparity between the way leased owners and unleased owners are paid that creates situations and "the question" as to whether it is better to go leased or unleased.

 

The first risk (not risk charge, mind you) is whether the operator will elect to drill the well at all, which is in large part determined by how much of the unit is under lease and whether they can make enough profit from drilling the well.  If they elect not to drill the well, Mr. Unsigned's revenue is equal to 100% of nothing.  Of course, the best way to encourage drilling and development is to afford the operator as much leasehold as possible by leasing, but by definition, Mr. Unsigned has resolved not to sign a lease.

 

But back to the discussion - what is proportionate share?  To fill out the hypothetical, let's say that the $10MM well has produced $6.4MM worth of gas, and is the well for a 640-acre unit.  Thus for each acre in the unit, the revenue emanating from the well amounts to $10,000 per acre ($6,400,000/640 acres).  For each acre that a neighbor may own, that neighbor (if leased) is entitled to 20% of $10,000, or $2,000.  The operator may be able deduct certain expenses from that gross, depending upon the terms of the lease that creates the royalty or what is reasonable and customary if the lease doesn't spell that out.

 

In this scenario, Mr. Unsigned is not due anything, as the well has not paid out.  The operator has the right to recoup Mr. Unsigned's share of revenue to pay for the well until payout.

 

As far as what is considered allowable expenses for the well in calculating payout, and upon what basis that the operator may recoup a "risk charge" (which is now 200% of the well costs - that is in addition to the actual well costs themselves) - become familiar with La. R. S. 30:10, and all of its articles and subparagraphs.  This statute specifically excludes the collection of a risk charge from "Mr. Unsigned" (unleased mineral owner) - see R. S. 30:10 A, paragraph (2), subpart (e.) as HBP states.

 

Read and reread KB's articles on UMO - they provide as rich a resource on this subject as one could hope for without being a legal treatise (although she is a lawyer) that you can rely on as specific legal advice.

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