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Permalink Reply by Two Dogs, Pirate on February 10, 2009 at 12:26

You could get screwed around for a long time. Just depends on what happens.

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Permalink Reply by 4HTSG on February 10, 2009 at 15:03

Maybe I should ask the question differently. If they make a well, are they SUPPOSED to pay the landowner? The person who asked me this question was told by a landman that they would not get anything unless the larger company bought their lease from the small company.

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Permalink Reply by Snake Stewart on February 10, 2009 at 15:16

If you signed for 25%, that would mean that this smaller company you signed with is entitled to the remaining 75%. This company isnt going to get beat out of theirs.
While I do not know the proper way to say how this transaction would take place, you are leased and entitled to your percentage of royalty.
If what this person was told by the landman were true, you would never have multiple lease owners in the same section. Once a company leased in a section, there wouldnt be any reason for others to follow once the majority stake were made. Majority lease ownership in a section is key in regards to who is granted the permits to drill.
Hope this helps.I am quite sure 2Dogs,the Pirate , or some of the other pro's can answer much more precisely then I.

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Permalink Reply by 4HTSG on February 10, 2009 at 16:00

Thanks so much. That is what I thought, but knew I could get an answer from the knowledgeable folks on this site.

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Permalink Reply by Todd M. Baker on February 10, 2009 at 16:38

KB:

Do you know of any specific cases in LA where this has happened? In OK, there is SB 168, the so-called "sweetheart gas bill" that essentially melds all the mineral owners together. In other words, if mineral owner "A" leases to one OGC that has one gas contract for, say $6.00/mcf and mineral owner "B" leases to another OGC that has a gas contract for, say $7.00/mcf, the mineral owners each are paid $6.50/mcf. This protects the mineral owners correlative rights to production and shared price. All other things being equal.

TMB

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Permalink Reply by Les Bamburg on February 10, 2009 at 19:13

Todd, would ypu please provide the text of SB 168?

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Permalink Reply by Foxiecajun on February 10, 2009 at 17:20

Well I know Chesapeake will be glad of these post and remarks! Will make them be able to lease for what ever they want to if people believe they can only get their royalty payments if they are leased to the operator or majority lease holder. I don't know all of the answers, but I do know the Lessors can make a WI deal and the smaller can take part in the well if they want to put their part of the operating cost up or they can agree for the smaller to assign to the larger.

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Permalink Reply by Dion Warr, CPL on February 10, 2009 at 19:04

4HTSG:

What should happen is this:

Operator and Non-operator WI Owner enter an agreement known as a joint operating agreement (JOA). This type of agreement spells out all kinds of things, including accounting practices, who is responsible for what cost, whether the operator will pay RI owners on behalf of non-operator WI, and many other issues. While the JOA is a contract entered into by these WI parties, it does not constitute (in fact, most JOAs specifically state that the WI parties are not , or have not formed) a (mining) partnership. Rather, it is a regulatory agreement between arms-length third parties which governs the E&P life of the unit.

Whether operator and non-operator WI sign such an agreement, in LA, the Mineral Code does provide some basic rules of conduct between WI owners in a unit. Field orders may designate the operator(s) of (a) certain unit(s) within the text of the order. Absent any other agreement, each lessor must look to his lessee for his royalty (as quoted from the Code by KB); also, should the operator seek to recover any risk penalties available under the Mineral Code, operator must give notice of their operations to commence the drilling of a well, and submit an estimate of well cost (by way of an AFE), as well as their proportionate share of the cost of such activity. Non-operator is usually given thirty days to respond by participating and remitting their estimated cost for the operations, or elect to go non-consent (thus allowing operator to recover a reasonable risk charge of up to an additional 200% of such well cost). Either way, operator may recover up to 100% of a non-operator WI owner's proportionate share of actual direct well costs. It is then up to the non-operator WI to read their statements from operator, ascertain net royalties due to their lessor(s), and remit royalties to each in a timely manner.

It is not required that the 'big company' buy out the smaller company. However, rather than get saddled with all of the non-operator ballyhoo, in many cases the smaller company will assign or farmout their leasehold to the operator for consideration (cash, override, reversionary interest(s) after payout, or a combination of any of these or all three). In this situation, for the operations contemplated, the operator 'owns' the lease rights on point, and then pays the appropriate royalty to each lessor as required under the terms of the lease, as if operator had taken the lease itself. Generally in a farmout situation, though, the farmee (in this case, the operator) does not own the lease in total, but has taken posession of the lease rights required for the operations on point, as well as its burdens, with the remainder of the rights to the lease still owned by the farmor. In many cases, the operator 'earns' the rights by the drilling of a well to the specified depth or zone (known in the industry as 'drill to earn').

Perhaps this is to what your landman friend was referring. To the RI owner, it just appears as if Company X 'took over' your lease, and is now paying your royalties.

Leasing with the non-operator can get ugly for the RI owner when the non-operator not only does not consent or contribute to operations, but also does not pay their RI owner. RI owner must sue their lessee (as the Mineral Code, backed by jurisprudence, precludes the RI owner from recovering from the operator in such cases). If the non-operator is not receiving revenues, it can be very difficult to recover just royalties from the non-operator lessee / WI owner (as there is no money coming in to which to attach one's claim).

KB: Is the above cited case the one where this occurs??

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Permalink Reply by Les Bamburg on February 10, 2009 at 19:24

4HTSG, I think the answer is your lessee is responsible for paying you royalties. He may contract the operator to pay the royalties to you on his behalf.

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Permalink Reply by Snake Stewart on February 11, 2009 at 1:10

Thanks guys and gals, for the properly worded answers. :-)

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Permalink Reply by 4HTSG on February 11, 2009 at 3:21

This has been very interesting and informative. Thanks so much for the great answers.

My understanding now is that they should get royalties, but if they do not get them in a timely manner, they should go to the company they leased with, or, if necessary, get a lawyer to deal with the company. Bottom line is, they should receive royalties.

Thanks again.

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Permalink Reply by Dion Warr, CPL on February 11, 2009 at 4:06

4HTSG:

Correct. Please also be aware that pursuit of payment of royalties or underpayment of royalties is usually limited to a 'lookback' period of three years, so not only would you want to pursue this, but you would want to pursue it in a timely manner. You would need to first make contact with your lessee, or its assigns or successor(s) in title, possibly followed by written demand (this is when you want the lawyer). You must pursue this administratively as provided by the Mineral Code prior to making judicial demand (filing of a lawsuit).

Keep in mind that this is how the process works in LA. Other states may have different procedures to follow, and your status might be changed as far as where the property is located and what other events may have happened.

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