Sunday, March 1, 2009

Another Year and Counting

What a difference a year makes. The price of gas has fallen dramatically since last year at this time and interest in leasing and drilling has decreased with it.

Signing bonuses of $25K per acre and 25% royalties are no longer the norm in Tarrant County. Instead, $2k and 20% is the going rate. However, that may be a blessing. It will give us time to consider things and reduce the pressure to join the herd.

In fact, mineral owners may end up getting much more by just waiting. This is due to an interesting development in the way the RRC is handling "forced pooling." It may change but for now the new approach seems to be a significant benefit to the "holdouts" while also providing for the continuation of development that would otherwise be stiffled by the holdouts. According to an article in the Start Telegram --

Baen and John Barber, a Fort Worth lawyer working with a Fort Worth neighborhood group, pointed out that under the ruling, unleased property owners will likely be paid much more than their neighbors who signed leases.

In its order, the commission required two different payments to the unleased parties: One is a standard royalty payment equal to 20 percent of the value of production; the other is a 100 percent working interest on the other 80 percent of production. A working interest is paid only after the costs of drilling, operations and production are recouped, while the standard royalty is paid as soon as production begins.

Barber said he estimates that the Railroad Commission’s terms would produce a total royalty equal to 60 or 65 percent of the value of production.

That means that the holdouts will get a LOT more than those that signed a lease before drilling began. They will forgo the initial signing bonus of about $1000 for a 1/4 acre lot, but eventual royalties will increase from about $50,000 to about $150,000 over the life of the related wells.

That is much more in line with what I think would be a fair split of the value of gas in the area. If they would just offer a 50/50 split of production (50% royalty) and reasonable ($50,000 per acre) signing bonus, both the drillers and the owners would benefit equally. But as long as most owners will settle for less, the development companies, like Chesapeake and Devon, are obligated to maximize profits for their shareholders at the expense of the mineral owners.

I'm sorry if you already signed a lease and would like to get out of it but, for now, a contract is a contract and you got what you negotiated. It's too late unless the lease expires or is terminated per the terms of the lease agreement. But don't be too eager to sign an extension if it is offered in the future. If you do, you will only get the bonus and royalty in the agreement.


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