Replies to This Discussion

Permalink Reply by Les Bamburg on January 4, 2011 at 18:25

AW, unleased property does not receive a royalty.  Instead it will receive 100% of the allocated revenue less operating expense after the operator recoups the capital cost of drilling the well.  The time required for a well to reach payout status varies significantly based on numerous factors.  An unleased mineral owner should receive regular payout statements from the operator indicating the payout status.

 

Royalties are only associated with lease agreements. 

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Permalink Reply by Mac Davis on January 4, 2011 at 19:49

Les is right.  It's difficult to estimate how long it will take for the well to pay off.  Cost for the well, production rates, gas prices, etc. vary greatly.  I've heard 3 years mentioned as a possible number, but it could vary greatly. 

 

Can any UMO who has gotten paid comment on how long it took them?

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Permalink Reply by Henry on January 5, 2011 at 0:49

AW,

Royalties will be paid long before an unleased mineral owner (UMO) receives payment.  That is because the UMO does not receive any payments until the well reaches "payout" (i.e., when the driller recoups the cost of the well from selling the gas).  And that won't occur until about 3 Bcf of gas has been sold (at today's prices).  The UMO ought to be getting quarterly statements from the driller that detail the costs and production.  From those statements, he can roughly estimate when payout will occur, and payments will begin.  If the UMO is not getting those statements, read the UMO Basics in the Unleased MIneral Owners Group, on this site, and write the appropriate letter to the driller to begin geting statements.

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Permalink Reply by BirdDawg, plain ole' idiot on January 5, 2011 at 14:08

Henry,

I know if somone will correct me if I am wrong, but don't you have to subtract the royalty interest (say 25% in some cases) from the gross revenue? In other words, isn't he royalty interest owners portion taken out in addition to the drilling and operating expense before the non-leased owners get paid?

Makes for a much slower payout if that is the case. In other words, if that is the case, 3 BCF ain't gonna get it.

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Permalink Reply by Henry on January 5, 2011 at 14:33

BirdDawg,

 

I don't think so. I think I was a bit loose with terminology when I said earlier that the operator must reach payout.  Technically, it is not the operator who must reach payout for the entire well, but rather the UMO who must fully pay his share of expenses for the well before he receives production.

 

The UMO will pay off his share of the well, before the operator reaches payout, because the operator is giving up a chunk in royalty, as you noted.  The law is only concerned with balancing the books on the minerals owned by the UMO. 

 

Think of a UMO with only 1 acre.  The fraction of the drilling cost attributable to him is 1/640.  So for a $9M well, this is about $14,000.

 

Now consider the production.  Let's assume the gas price is $3.  For that one acre to cover its well cost, it must produce about 4.7 mmcf. (4.7 mmcf X $3/mcf = $14,000). 

 

And, if one acre produces 4.7 mmcf, then the entire 640-acre section has produced 3 Bcf. 

 

So, for a $9M well, and gas at $3, the UMO should pay off his well costs when production hits $3Bcf.  At that point, the production is all his (minus operating costs).

 

 

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Permalink Reply by BirdDawg, plain ole' idiot on January 5, 2011 at 14:54

Henry,

I fully respect your opinion on this. But think about this, the royalty interest money is not going to pay for the well. It is an expense against the well, prior to any other expenses. I have been in this situation on more than one instance, and the royalty interest has been deducted first. But I will admit, I have been screwed more than once by operators.

I am interested to hear others opinions. I appreciate your input Henry, and I am not trying to disagree.

 

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Permalink Reply by Les Bamburg on January 5, 2011 at 16:12

BD, sorry but Henry is right.  If you think about it the operator is paying 0% royalty on the gross interest associated with the unleased acreage.

 

Example - 90% of unit acreage is leased with a 20% royalty and 10% of acreage is unleased.  So operator is not incurring royalty payment on that 10% of production.  So 10% of revenue less 10% of expenses is used to payout 10% of well cost.  For 90% of the production operator is paying 20% royalty giving him a 90% gross working interest with a 72% net revenue interest (80% times 90%).

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Permalink Reply by FXEF on January 5, 2011 at 17:09

Are Louisiana UMOs subject to any risk penalty. I have heard some states have a 400% risk penalty for UMOs.

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Permalink Reply by Les Bamburg on January 5, 2011 at 18:51

FXEF, no risk penalty is applied to unleased mineral owners for their carried working interest in Louisiana.

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Permalink Reply by Henry on January 6, 2011 at 0:45

BirdDawg,

No problems here.  I'm happy to have people disagree with me, as long as we remain civil.  That's how I learn -- from others.

 

I don't think this is a case of one of us being right and the other being wrong.  I think we are both right.  You are correct in that the operator will reach payout later -- after 3 Bcf have been pumped.  And your reason is exactly correct -- because he had to give away a quarter of the gas in royalties.  So, in my example, let's assume the entire section is leased at 25% royalty.  In that case, the operator won't reach payout until 4 Bcf have been pumped.

 

(Operator pumps 4 Bcf, gives away 1 Bcf in royalties.  That leaves him with 3 Bcf to sell for himself.  And that gives him his $9M to cover the well.)

 

(I can't resist this:  Of course if the operator were Chesapeake, he'd be selling that gas for $4, even though his UMO only got $3 for it.)

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Permalink Reply by The_Baron on January 5, 2011 at 4:47

It should also be added that some wells will never payout.

 

 

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Permalink Reply by Henry on January 5, 2011 at 5:35

Baron,

You are absolutely right.  Going UMO is not for the timid. 

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