Friday, August 22, 2008

Forced Pooling - A great explanation

For those of you curious as to what "forced pooling" is, I had a poster Dion War from the site post the following (it's as good an explanation as I have ever heard).

As an unleased mineral owner, you would be treated much like a working interest partner, which would be responsible for their share of the well cost, proportionate to what you own in the unit (if you own 32 acres in a 640-acre unit, you would responsible for 5% of the well cost). You can be forced pooled, however, in LA, you cannot be forced to participate (come up with your share in advance), nor can you be penalized for not participating (in that you are not charged more than your share of the well cost for not participating). Generally what this means is that if XYZ Oil Co. drills their well in your unit without your lease, they carry your share of the cost as well as theirs.

However, they can net your share of the royalty against your share of the well cost. What this means is until the well pays out (breaks even, or produces more revenue than the well expenses), you won't see a royalty check. After payout, however, you receive your full proportionate share of the revenues. This can stop however, if the operator conducts further operations (reworks, frac jobs,etc.) on the well, to the extent that your share of revenues will be "netted out" against those costs, until those are paid.

What does this mean?

If the well never pays out, you get nothing.
If the well barely pays out, you would have been better signing a lease.
If the well is wildly successful, you get lots of revenue, and are admired greatly by your friends (and reviled by others in your unit that 'settled for a lease').

Many people choose to forego all of that and lease. You get a bonus, just for signing the deal. You get a certain percentage of production, period, irrespective of how much the well costs are. And you support the operator by granting leasehold (working interest) to the lessee. The only time that it doesn't 'work out' for you as much as the holdout is if the well goes gangbusters, and you 'settled' for a lease that still will pay you a nice chunk anyway, without the risk.

Working interest and net revenue interest are important in that XYZ Oil Co. is going to compare prospects based upon "what's in it for them". As I have told countless landowners, "XYZ Oil Co. is not in the business of drilling and operating a well for YOU." These guys are in it for the money, and the real money is not made my owning and operating wells for the landowner's benefit. And, generally the oil company provides a benefit to you by exploring for and producing minerals that you do not have the time, money or expertise to bring to the market yourself. So if you own 200 acres in a 640-acre unit, and don't lease, no one is going to want to drill a well. There is just not enough financial incentive for them to do so. If you own one acre, two acres, maybe even ten acres (as long as there are not too many like minded owners in your unit), they probably will take the risk, and drill it anyway.

As to your question as to 'how will they know to pay you?' I could be flip and say 'How did they know to lease you?' but that's a little too flip for an honest question. XYZ Oil Co. has abstractors (or landmen) run preliminary title to find out who owns what, how much, and where. They lease you based upon that research. Some companies wait to do the full research later (which is why many people receive a draft, this gives XYZ time to prove up the title). At some time between the decision to drill a well and the well coming into production, XYZ Oil Co. makes the decision to commission abstracts to determine full title on the tracts in the unit. This research is handed off to attorneys, who then give a title opinion as to who owns what interest, and who to pay. XYZ then sends out 'division orders' to the identified owners, telling them they own Tract X in the unit, their interest, and a royalty fraction. This fraction times total net production (less taxes and costs applicable to you) from the unit

Not quite what I had in mind

Dion continues...

In LA, you can be force pooled by DNR-Office of Conservation, by Commissioner's order. You cannot be forced to participate, nor can you be "force leased" (this is called integration, and happens in Arkansas).

You also cannot be penalized in multiples of payout (as long as you are not "in the oil business") for being non-consent or unleased, as long as you don't execute a binding contract (like a Joint Operating Agreement), or as long as you don't take and hold the leases yourself (either of which would constitute you "going into the oil business").

This is the way this usually works. XYZ Oil Co., identifying you as unleased mineral interest, sends you a division order stating you have 0.xxxxxxxx unleased interest in the unit, asks for correct address and SSN/TIN info, etc.
If all the info looks correct, you don't have to really do much. Another letter follows with a well statement, outlining the well costs, your interest, and your share of the costs. You can generally elect to pay them, or have them held out your share of the production.

Each month or quarter or so, you will receive a followup statement (although you should be able to obtain one at anytime as a courtesy) updating the well costs figures and revenue.

Hopefully, you reach payout. Then the statements will shows costs paid in full, and your full share (as UMI or unleased mineral interest) credited from the net proceeds of production.

This is not the same scheme where you choose

(A) "Leased" at $500 and 1/5.
(B) "Leased at $300 and 1/4
(C) Non-consent. (200% penalty)

Please make your choice within thirty days.

I am working on a DOI sheet right now. There is no column for "non-consent".

Hope this helps.

Thursday, August 7, 2008

Haynesville Shale & T Boone Pickens

T Boone Pickens Plan – Will it work?
Last night I saw a commercial for the Pickens Plan ( If you have not checked his plan out, make sure you do. The last time we saw a Texan putting on a personal campaign of such magnitude was Ross Perot. Pickens plans on spending $58 million promoting the use of wind power and increased use of natural gas. Perot spent around $64 million dollars on his 1992 campaign.

Remember the last Texan to mount such a PR capaign?

Some have questioned his motives. I will hold off. If his plan does free us from foriegn oil dependence, he deserves all the riches that come his way. That is how these things come up with a good idea, you should be rewarded for your brillance. If it fails, well, that is a different story.

Well, Pickens piqued my curiosity so I went to website to check it out. His plan is intriguing. I know his plan would mean good things for the natural gas industry, but can it work? Well, after my thorough research, I have determined that I don't know. Perhaps some of you out there have the answers. For me, the better question, "is it worth a try?" It certainly sounds better than the ethanol route the government has so heavily invested in. Any thoughts?

Haynesville Shale Snake Oil Salesman

The theme of this week is Snake-Oil Salesman and making enemies.

There seems to be a consensus among those with whom I speak to that there are a lot of people asking you to pay them millions of dollars to not do much. I was at one of these meeting in Sabine parish near Toledo Bend last Wednesday. The gentleman got up and essentially said, “My uncle is an Oil and Gas Attorney and he’s got a mean lease” now give me millions. The guy was unprepared as was evident when the older, but well versed oil & gas crowd started firing questions at him that he wasn’t prepared to answer. After leaving the meeting with my brother-in-law, we discussed how it seemed that none of the middle men that we had heard to date were informative let alone worth the millions they want us to put in their lap. My question. Why use them?

Also interesting was an “exchange” I had while visiting the great town of Natchitoches this week. I was in local store and a woman came in and asked, “Whose sign is that on the vehicle outside?” Of course, I proudly said, “mine, why?” The reply was downright cold as she walked past me without a response and certainly without the southern hospitality I have come to expect from this great state. The store clerk picking up on this said, “I don’t think she likes your sign….” I replied, “No, I don’t think she likes landowners communicating.” My hunch was confirmed when the clerk told me she did work for a seismic exploration company doing work in Natchitoches. Does this confirm a thought that I have had that the Oil & Gas Company’s (and their subsidiaries) do not like landowner’s communicating with each other?