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Permalink Reply by Jesse Joyner on February 4, 2020 at 8:57

If it was me, GR, I'd do the best I could to get decent terms on a lease per knowing what I know. And my thinking in this regard is pretty much based upon the years of horror stories that have been posted on GHS by drilled mineral owners who did not sign leases. A huge mess. Yet maybe we don't hear the upside stories of the UMI/UMO folks. If so, it would be nice to learn some of the positive outcomes if such people would actually post their thoughts. Finally, I think the specifics of a well having to go into the black via the profitability of covering all of its costs and the associated paperwork documentation from an operator which, in fact, would support/prove that this threshold has occurred, if it ever occurs -- is a high-risk factor, if you ask me. Conversely, there would seem to be some logic to reaping the high-dollar rewards of a 100% share of a well, similar to a WI or sort of halfway mimicking the cash flow to an operator, yet for some reason, it seems way hard for the little-guy mineral owner to actually cash in vis-a-vis such accounting mechanisms. Yet, of course, I could be wrong. Me, I prefer sure things. Getting into a dustup with an operator takes time and can delay mailbox money for lengthy periods. 

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Permalink Reply by David on February 4, 2020 at 11:54

Also, consider a Pugh clause. Skip can fill you in better, but it gives them rights, but only to an agreed-upon depth. So, for a shallow well, you could give them rights down to 8000' but anything deeper could still be leased to someone else.

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Permalink Reply by Skip Peel - Mineral Consultant on February 4, 2020 at 16:50

If you go un-leased, you are a UMI.  Unleased mineral interest.  And your rights are governed by the the Louisiana Mineral Code and Civil Code.  You don't "pay" anything.  Your proportional share of the well's production is retained by the operator until full recovery of your proportionate share of the cost to drill and complete the well.  After well payout, you would receive 100% of your share of monthly production, as opposed to a fraction based on a royalty in a lease, 25% for example, but are still subject to some deductions for Lease Operating Expenses (LOE) as defined in the mineral code.  That is a fairly short description of what can be a very complicated business transaction and may pay you nothing if the well does not "payout".  If you are under a lease, you get royalty from first production regardless of whether the well ever reaches "payout" or not.  Going UMI, also called non-consent, is more often than not an invitation to get pencil whipped on deductions by the well operator.

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Permalink Reply by William W. Waring III on February 7, 2020 at 6:12

Skip, what if the well never reaches payout? Is the UMI owner obligated to pay his tract's share (participation factor) of the P&A costs, and all other costs that accrued, but not covered by the revenue generated from the hydrocarbons that were produced, or only the LOEs as defined in the LA MINERAL CODE?

In other words, or really another, simpler scenario: if GORICKY elects to go not consent and is, in effect, a UMI and the operator drills a dry hole; is GORICKY obligated to pay his share of the DRILLING, LOE and P&A costs out of his own pocket as there was no production revenue to net out against the costs - or does GORICKY pay nothing in this scenario as there were no LOE costs. 

The nuanced differences between the treatment of  a UMI and a Working Interest Owner (a lessee who has taken a lease in the unit/tract, but perhaps not the operator) have always been tricky and I think they are predominantly based on the type of costs that can be charged against the UMI vs the WIO - is this in the ballpark? This is where you will likely tell us to consult a good O&G attorney. But for the sake of general knowledge & banter, which shall not be relied upon for contractual decisions, tell us the effect of, or reality of ... maybe GORICKY, mineral owner, declines the operator's lease, and alternatively, leases to GORACHEL, LLC and GORACHEL, LLC grants GORICKY a 50% RI under the terms of the lease. Practical? Reasonable? Good on paper but dreamland? 

Thanks, I'll hang up and listen. 

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Permalink Reply by Skip Peel - Mineral Consultant on February 7, 2020 at 6:26

A UMI is not liable to pay out of pocket for any drilling, completing or abandoning costs.  A dry hole would not generate any LOE.

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Permalink Reply by GoRicky on February 7, 2020 at 16:47

Thank you for all of your comments.  It is apparently difficult to simply own mineral rights.  I can't stop them from drilling, and it seems that they can drill over-and-over... turning an unleased mineral owner into a HOSTILE BUSINESS partner, as opposed to a royalty owner.  I think I'd better think about what MY time is worth (at my age)  >  GR

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Permalink Reply by Skip Peel - Mineral Consultant on February 8, 2020 at 2:49

UMI's are not business partners.  They are simply non-consenting mineral rights owners.  The Louisiana Mineral Code provides protections for UMIs that are considerably more beneficial and fair than other oil and gas producing states.  You should feel fortunate your minerals are not being produced non-consent in Texas or Oklahoma for example.

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