I own 1.23333 mineral acres in a certain section, township and range. Not much to talk about,
but there has been some increased drilling activity in the general area of my minerals that
apparently prompted someone to do some mineral owner research in the section where my
minerals are located. How do I know? I know this because I received a letter offering to lease
my minerals.
The offer wasn’t a lot of money. They offered $1000 per acre and a 3/16 royalty for a 3 year
lease with a 2 year option. That would provide a lease bonus of $1,233.30. But, for minerals
that haven’t been leased in a long time, any offer is a good offer to consider. Plus, it tells me
that there is a good chance an exploration company or a development company is targeting the
section containing my minerals for drilling.
I could try negotiating a higher bonus, and I don’t like the lease continuation option, but even if
I got double the offer amount, which is not likely, the bonus would be $2,466.60, which would
be much better, but still not in the easy answer money range. Therefore, I think I’ll take a
different approach on this offer; one a lot of mineral owners might not take. An approach that
may not even be considered or known available as an option to some mineral owners.
As an owner of minerals, when I lease my minerals, I surrender the rights I have in those
minerals for the length of the lease given to the person or company leasing my minerals, usually
for a bonus amount and royalty percentage. If I decide not to lease my minerals, I still have a
chance to gamble a little that any pooling procedures will give me better leasing terms than the
original lease offer. Or, I can make the decision not to lease, or take the pooling terms, and
elect to participate in the well proposed to be drilled that includes my minerals.
It comes down to economics and tolerance for risk.
Do I need the bonus money? Can I afford to pay my share of the drilling costs? Do I want to
risk losing all my drilling dollars and the lease bonus or pooling money on a dry hole or a well
that will never reach payout? What benefits, including tax benefits, will be created by
participating in the drilling rather than just taking the lease or pooling terms? Will there be an
opportunity for an additional well to be drilled? Will the well be exploratory or developmental?
And, there are more of these same type questions to consider in your decision.
There are other more sophisticated transactions that could be considered if my mineral acreage
was larger, but based on my personal facts and circumstances, I will always consider
participating in drilling when my “working interest” expense percentage is less than one
percent. Depending on the estimated cost of the proposed well, my percentage test could go
higher, but the limiting factor is how much in raw dollar outlay am I willing to lose on a dry hole.
I also factor into my decision the potential for splitting up my minerals if the working interest
cost are too high. I do this if I still I think there is a good opportunity associated with drilling.
By splitting the minerals, I can lease some and then have the remaining minerals provide the
right to participate in the proposed well, thereby controlling the anticipated cost for
participating.
Leasing minerals when the opportunity arises is easy and a safe bet. It’s also an easy way to
sign away asset growth and earnings. Do some research and calculate your potential benefits
from not leasing and participating in any well that gets drilled. While the participation
approach is definitely not for everyone, it could produce a higher economic outcome than just
leasing, but, and it is a big but, you need to understand there is a great risk for losing your
money, proceed with caution.
I’ve decided to pass on the lease for now. They will most likely be back with another offer in a
few weeks. But even if they aren’t, I may miss out on the bonus money, but I’m convinced
these particular minerals are destined for drilling participation anyway.