Black Gold, Texas Tea

Quote: Face

My question is how much weight to give these rights. We’re not looking at this as a way to become the next Jed Clampett; the purpose of the property is purely housing / recreation. We’re looking for somewhere to put a house and have ATV trails, fishing pond, and hunting grounds that are ours. But this “rights” deal is beyond my knowledge.

So how much weight should they be given? Is it something that’s just “nice”, could take it or leave it? Or would it be worth giving it some serious consideration as the benefits could be large?

I thank Face for asking me to contribute. Oil and gas abstracting was about my favorite job I ever had and I hope to be able to buy a stripper well the next few years. As I know there are others here in the northeast where we are in a gas boom this will hopefully answer Face's questions but give some good info to others as well. Sorry in advance if it is too long, but I do just love this stuff.

First, a bit about mineral rights and what they are. The USA is one of the only if not the only country in the world where when you own the surface you can own the rights to all the minerals below. In Mexico all oil is owned “by the people” and I am not sure what the law is in Canada. As we know in many other countries you don't even “own” the surface, you may only lease it. But here in the good old USA you own what is sometimes called “from heaven to hell” or the sky above and the minerals below.

Before 1859 there was no need to care about who owned the oil below as we didn't know about oil and gas. But people did sell the coal below. And the oil and gas. Soon people figured out that you could sell the surface and keep the minerals for yourself as a nice little extra profit center for you and your heirs. And that is where the “courthouse landman” comes into the picture. We look at all kinds of old records to see just who owns what below where you stand. Sometimes the surface owner owns it all, and I have heard about rights being divided 512 ways among heirs most of who never heard of the person who reserved the rights in the 1800s.

There are two ways you may NOT own the mineral rights to your land. First is if someone outright kept them for themselves. Say in 1910 George and Hattie Mae Huggins (real people, btw!) owned some land outside Pittsburgh and wanted to sell it. But they have a gas well on the land that is giving a nice royalty. So they sell it to Frank Bartholic (another real person!) but tell Frank they are keeping all the rights to drill for and produce oil and gas. Frank wants to farm and he needs a way to get his first plot so he takes the deal. Now Frank dies and leaves the property to his son, who sells it to someone else. Eventually someone owns it in 2013.

In 2013 a Landman from a gas driller knocks on the door and say, “hey, there is gas here and I would like to drill for it. Would you like a nice check every month? The person signs and AZDuffman gets a call asking to find out who owns the oil rights before they drill. AZ calls back the Landman and says, “tell them they are out of luck as George and Hattie Mae were the last owners of record on the mineral rights.” AZ stays away from the area lest the surface owner find him, and a genealogist searches for some lucky folks who find their great-grandparents left no will but legally it flows to them. Believe it or not this happens. And I have wild stories about where one might start looking.

Now there is another way to lose your mineral rights, but you haven't “lost” them, just the right to decide how they get used. Oil and gas leases aren't like leasing an apartment. When you drill you own the right to what comes out for as long as the well produces “in paying quantities.” This may be 1bbl per day. But this is important! Way back when the Huggins' signed the lease nobody thought we would drill a mile down. Today wells are limited by depths or/and formations. You may sell one driller the right to go only 1,000 ft down, or at least 1,000 ft. Or the Marcellus, Utica, or Barrera formations.

But say you have an old well on the property still producing. If a driller sees it, he can go to the local recorder of deeds and find who owns it. Depending on how broad the lease is, he could sub-lease and drill a more modern well. This is called a “farm-out” in the industry. As owner you would still get your 1/8 of whatever comes out, but your ability to choose say Range Resources over Chevron would be limited to non-existent.

Now time for a word on mineral rights. Land owners want sales to be as narrow as possible while drillers and buyers want them as wide as possible. Sometimes it will say “coal,” “oil,” “gas,” or a formation—eg: “Barrera Sands.” But other times it will say “minerals” or “hydrocarbons.” In the common-law USA these kinds of things get litigated, and right now it is in flux. Big flux. Caveat Emptor if you buy from someone. It can take 10-100+ hours to figure who owns what. Once I explained to a guy who wanted to know how to figure it out that a professional was needed and for me to even give a basic opinion would be $500+ if I even had the time and wasn't under a non-compete. And after all that I would just be able to say “probably” with no title insurance of any kind.

So onto the question, “can they drill a well next to my swimming pool?” The short answer is “no.” The longer answer is “it depends.” First, many if not most leases limit where the land can be drilled. Some say nothing within 500 feet of a house, but at the same time give the right to drill for water, which is needed in quantity to drill an oil or gas well. There are also laws about where you can drill. If NY ever decides to allow fracking you can be sure the DEC (Department of Environmental Conservation) is going to have hundreds of pages of regs about how, where, and when you can drill.

This leaves me back to Face asking for advice about if it is worth it to get the rights. Here is my advice to him, and others in list form.

1. Have you done your due-diligence? Anyone can think or say they own mineral rights. What they do and do not own will take research to find out. If you pay cash be very careful. If you use the rights as collateral expect the bank, assuming you find one willing to write a mortgage against the rights, to want a very thorough title search. My best guess is that will cost $3-10,000 with insurance. A good landman will want about $300 a day to research it, then there are lawyers to pay as well if you want a legal opinion.
2. Why do you want the rights? If you want them to drill consider your government. In PA drilling is easy compared to NY. I do not expect NY to allow fracking for 20 years, if ever. We are talking about a state which took until the late 1990s to settle claims from the early 1970s Attica riots and is super-regulatory to any chemical in “the environment.” I dealt with the DEC for 5 years, I know.
3. Do you want the rights just to block other drilling? Law states that you must give a mineral owner “reasonable” access. Trust me, no outfit is going to force a modern drilling rig in your land. Too much bad publicity and there are other owners who would take the money. If they are just going horizontal under you well you will probably never know the difference.
4. Last, are you just worried about if you can enjoy your land? If this is the case, simply take time to educate yourself on what really happens and what the crazies are saying. Gas wells are just the size of an SUV in many cases, though drilling rigs are much larger. The drilling rig leaves after work is done. Pipelines are buried and make great ATV trails. I walk my mother's dog over one all the time.

Hope this helps any and all!

Damn! I was hoping for advice. I ended up with a master education! Thanks AZ! Lots of interesting stuff, I’ll try to focus on what are my immediate concerns first, a sort of introductory questioning…

First was the financial aspect. There are $X in the ground in the form of resources which will take $Y for me to obtain in the form of lawyers, surveyors, whatever. As far as the “X” value goes, my knowledge is slim. My father’s g/f has a well on her land; all she gets is free gas (still not a bad deal). One of the properties I looked at had 3 wells, only one was listed at ~$2,400 a year revenue. That is my complete knowledge on how lucrative I can expect a well to be lol. If you could supply maybe a typical well’s revenue, that’d be a start. The “Y” value I’m clueless on, and I suppose varies wildly depending on situation, especially considering some rights are included, some can be bought, etc. But, if in your experience you can comment on the $X v $Y and whether it’s worth it from a purely financial standpoint, I’m all ears.

The second issue I suppose you could call the protection of my land. I, like you, enjoy the oil roads. They’re great for hiking, ATV’ing, whatever. Hell, if they didn’t exist, I’d be building them anyways. This saves me a lot of work. And the pumps and tanks themselves I’m familiar with, they’re no issue whatsoever. Ditto for the corp. coming onto my land for service. My concern here is what the forum commented, that future wells could be put in after I’ve obtained the property. Since minable areas around here already have so many wells and roads, this wasn’t a possibility I considered, but the possibility that they could want more could be a big deal. I mean, with the roads and wells in place, I can decide whether it’s acceptable or not and buy it / not buy it. But once I buy it, I’d hate to have maybe a good trail ripped through, or a hunting area destroyed, or a pump just a little too close to home or my pond than I’d like, you know? Part of me thinks that with so many established roads / wells already that it’s a non issue, but with the boom I envision in the future, it’s made me think.

I guess I said all that to ask this – concerning the financial aspect as well as the protection of my property, are the rights worth pursuing?


P.S. -

Quote: AZDuffman

I hope to be able to buy a stripper well the next few years.

Me too! =D

Face, are you sure you want to buy?

Try renting and see how it goes.

Quote: whatme

Face, are you sure you want to buy?

Try renting and see how it goes.

I've never rented or leased anything before. Hate the idea of just giving money away.

But not sure how I could in this case. I mean... it's land. Only land leases I'm familiar with are very short term, like hunting rights.

Try renting the stripper well!!!

It sounds like you are concerned about woods and views being lost in the long term and believe they will be there in the short term. If that's the case consider a 10 year plan, If you like a place and believe you will enjoy it why not live there for 10yrs and then see what changes.

Quote: Face

Damn! I was hoping for advice. I ended up with a master education! Thanks AZ! Lots of interesting stuff, I’ll try to focus on what are my immediate concerns first, a sort of introductory questioning…

Now, now, you know well that if you ask me the time you may learn how a clock works and why the prime meridian is where it is.

Quote:

First was the financial aspect. There are $X in the ground in the form of resources which will take $Y for me to obtain in the form of lawyers, surveyors, whatever. As far as the “X” value goes, my knowledge is slim. My father’s g/f has a well on her land; all she gets is free gas (still not a bad deal). One of the properties I looked at had 3 wells, only one was listed at ~$2,400 a year revenue. That is my complete knowledge on how lucrative I can expect a well to be lol. If you could supply maybe a typical well’s revenue, that’d be a start. The “Y” value I’m clueless on, and I suppose varies wildly depending on situation, especially considering some rights are included, some can be bought, etc. But, if in your experience you can comment on the $X v $Y and whether it’s worth it from a purely financial standpoint, I’m all ears.

Sorry, I don't know much on the production side, I was a courthouse landman and was told to not worry about that. I can say that the landowner almost always gets 1/8 of production and sometimes a certain amount of free gas over and above that. I have heard that what you get to use is sometimes referred to as "casinghead gas" and seems to be of a lower value than the other gas as the lessees seem more willing to give it up. Do more research on that because all of my knowledge comes from reading leases. I would also check about using gas right from the well as it is not dried and has no "smell" added, so it may damage appliances long-term. Or not.

I do know some finance so to value it now just do a NPV (net present value) calculation on the $24,000. Be sure to take into consideration how long it will produce and where you think prices will fall. From my research of stripper-well revenue I put the rough value of a well at 12-16 months production.

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The second issue I suppose you could call the protection of my land. I, like you, enjoy the oil roads. They’re great for hiking, ATV’ing, whatever. Hell, if they didn’t exist, I’d be building them anyways. This saves me a lot of work. And the pumps and tanks themselves I’m familiar with, they’re no issue whatsoever. Ditto for the corp. coming onto my land for service. My concern here is what the forum commented, that future wells could be put in after I’ve obtained the property. Since minable areas around here already have so many wells and roads, this wasn’t a possibility I considered, but the possibility that they could want more could be a big deal. I mean, with the roads and wells in place, I can decide whether it’s acceptable or not and buy it / not buy it. But once I buy it, I’d hate to have maybe a good trail ripped through, or a hunting area destroyed, or a pump just a little too close to home or my pond than I’d like, you know? Part of me thinks that with so many established roads / wells already that it’s a non issue, but with the boom I envision in the future, it’s made me think.

Remember you do have some protections. Leases state how close they may come to your land. The DEC and Feds have other regulation in place. Now if someone drills you may have to give an easement and they may have temporary equipment up. Worst case is the courts. Someone wants to drill you can ask for them to place a bond. It isn't like you will wake up and find a crew of roughnecks and roustabouts in your front yard. They will have to give some kind of notice. And to repeat, I do not see NY allowing fracking before 2035. The state is a place where people scare themselves to death over the word chemical/environment/fracking. I

To sum up I guess I would say decide what all of it is worth financially, then decide the intangible benefit of the security you feel you will get. Just remember that you may not get all the rights you think you are getting if who-knows-who kept a portion of the rights for themselves who-knows-when.

As I stated, the laws on this change all the time. PA may end up making former career a lot less lucrative.

Quote: AZDuffman

Do more research...

I certainly will. Thanks for cluing me in on where to start. It's a big help.

Quote: AZDuffman

It isn't like you will wake up and find a crew of roughnecks and roustabouts in your front yard.

I lol'd =) And lol'd again just rereading it.

This was probably the biggest fear, even more so than missing out on potential financial gain. So far, it sounds like this whole deal is something to consider and be aware of, but not a make or break issue.

Quote: Face

I certainly will. Thanks for cluing me in on where to start. It's a big help.

If I still lived in WNY I would show you what you need to do for basic research at the courthouse. Of course if I still lived in WNY I never would have gotten trained as a landman in the first place, nor gotten interested in gambling and this board. Space-time continuum strikes again!

Quote:

This was probably the biggest fear, even more so than missing out on potential financial gain. So far, it sounds like this whole deal is something to consider and be aware of, but not a make or break issue.

Exactly right. There are so many "ifs" it is amazing. If you have a smart-phone download the Baker-Hughes Rig Count App. You will be amazed how drilling stops where NY starts.