What is Net Mineral Interest? We understand that contacting an oil and gas law firm can be intimidating. In an effort to alleviate some of the stress and the unknown of contacting our firm, Oil and Gas Coordinator Josh May will discuss some of the types of calls we receive and the approach we take in talking to and representing clients. If you have an oil and gas issue, question, problem, or just want to talk about something that is going on with your property or with the industry, please do not hesitate to contact us at (304) 845-9750 for a free consultation. We are licensed to practice in Ohio, West Virginia, and Pennsylvania. Our practice areas include, Personal Injury, Wrongful Death, Oil & Gas, Medical Malpractice, and Social Security.
What is Net Mineral Interest?
Over the last two weeks I’ve shared some background information about the process I go through when I receive a new prospect through the various mediums we’ve made available to reach GKT; and we also looked at some common questions or fears that I hear the most when talking to new prospects. Now that we’ve set the backdrop for the series, we’ll begin to pivot towards more direct types of caller questions. Throughout the course of the next few weeks, this series will begin to highlight some of the more common types of prospect calls we take and I’ll provide detailed information about each type of call and how we go about handling them. We will not use specific names of clients, but we may detail specific situations that we’ve handled on behalf of some of our clients.
Did You Receive A Lease Packet?
Today, we’re going to examine probably the most popular type of call I take on a weekly basis, what in the world is net mineral interest? We receive a handful of these calls each and every week, and this subject can be tricky to explain and understand. But that’s why we are here, to help you with your oil and gas questions and concerns.
Typically what happens is a landowner receives a packet out of the blue telling them they own some mineral interest. This may or may not be the case. If you receive this type of lease package in the mail, you should immediately contact our office at (304) 845-9750 for a free consultation. We’re happy to walk you through what you’ve likely received and answer your questions. To better explain where we currently are in the oil and gas industry, it’s worth looking back at how the oil and gas industry got started in the Ohio Valley.
How did we get here?
Oil and Gas leasing is not new to the Ohio Valley or West Virginia. In fact, landowners have been leasing minerals in counties such as Marshall, Wetzel, Tyler, Doddridge, and a whole host of others for hundreds of years. The difference, however, came around 2004/2005 when the leases our parents and grandparents were used to signing started looking a lot different. In November of 2004, Range Resources drilled the “Renz 1 Well” in Washington County, Pennsylvania. The significance, of course, was that the “Renz 1 Well” was the first Marcellus Shale well drilled in the area and set the table for what has quickly become one of the richest shale development plays in the entire world. This discovery would forever change the landscape of our area and the entire Ohio Valley, and provide challenges and opportunities for land and mineral owners for generations.
The Early Days
Early on, however, very few people anticipated the opportunities and this quickly put many landowners at a disadvantage. As a result of the lack of knowledge or understanding regarding the Marcellus, and later the Utica development, some land and mineral owners sacrificed a great deal of revenue by jumping in early. It wasn’t necessarily their fault, landowners just didn’t know what was going to happen but the oil and gas companies certainly did and sought to take advantage of the situation. Luckily, our communities have done a really nice job “catching up” so to speak. GKT created the Marcellus and Utica Shale Litigation Group, and GKT was one of the first to have a dedicated oil and gas practice with an attorney that handles strictly oil and gas issues.
We continue to be the leading oil and gas law firm in the Ohio Valley. A lot of you have joined landowner groups such as our record-setting $100 million lease negotiation deal that we (GKT) put together in 2014. The historic lease agreement is still the largest ever in the Northern Panhandle. In addition, many of you have joined organizations such as NARO to try and stay ahead of the game and arm yourselves with knowledge of what is happening on both the state and local level. Furthermore, most have turned to the power of the internet in an effort to learn as much as they can about oil and gas development and the complex terminology you commonly see in lease negotiation contracts. It’s taken some time but, collectively, land and mineral owners have done a fairly good job of closing some of this gap.
Fast forward 16 years later, most landowners have likely signed at least one if not several oil and gas leases. Still, oil and gas contracts expire every day so there are acres that free up from time to time. However, the reality is that the majority of the acres out there have been leased. In fact, many of you reading this have already had some or all of your acres placed into a drilling unit and have been receiving royalties. We call this the “low hanging fruit” and the majority of it has been scooped up by now. For the most part, what’s left in our communities are those parcels that include multiple owners which can be complicated to sort out. Enter the partial/fractional interest conundrum.
If you have a contract that has expired or acres free to lease, contact our office at (304) 845-9750 to learn about the latest Landgroup opportunity.
The Partial/Fractional Interest
Many of you probably already know this, but mineral title in West Virginia can be a real mess. There are a massive amount of properties out there that have several different mineral owners who own a piece of the total interest. In some cases, there can be thousands of people who own a mineral interest in the very same parcel. You can imagine how complicated it might be to track down every single mineral owner, but that’s the law. Under the law, in order for a piece of property to be drilled in West Virginia, the oil and gas company is required to account for 100% of the interest in each parcel. It doesn’t matter if you own 100 acres or 1/10th of an acre.
Oftentimes, especially in tracts where there are multiple interest owners, the company may wait until they absolutely need the interest in order to pursue a lease. A lot of the leases that are being signed now, 15 plus years later, are these leases with fractional mineral interest owners. A lot of times, you may receive a packet in the mail and have no idea if you even own an interest in the tract. It’s possible that the interest has been passed down from generation to generation and you own some small piece of what’s left. So, what should you do if you receive one of these packets in the mail? It’s a complicated process. If you’ve received one of these packets, protect your interests and contact our office at (304) 845-9750 for a free consultation. If we are unable to assist you, we may be able to refer you to someone who can.
Should I just sign this and send it back?
The short answer here is No. In fact, you should never sign anything without first understanding what it is you are signing. It seems like common sense, but time and time again we have talked to people who thought they knew what they were signing only for it to turn out that it could not be further from the truth. Unfortunately, there’s nothing we can do to get you out of a contract you already signed. We are happy to review your contract, give us a call at (304) 845-9750.
Now To The Good Stuff
As I’ve stated previously, if you own any considerable amount of oil and gas interest, it’s highly unlikely a land agent hasn’t made a dent in your door by now. They’ve already chased down all of the “low hanging fruit.” If the random packet comes in the mail with a cover letter and a lease for you to sign and return in the mail, and it’s the first you are hearing from that company, chances are you fall into the category of owning a very minuscule net interest. In order to determine your best steps moving forward, there are a few important questions to answer.
- What is my net mineral interest? Before anything else, this is the first question you should be asking the gas company. So what is net mineral interest? Net mineral interest is the total amount of interest specifically owned by a singular party. For example, if I’m sent a lease packet for a specific parcel that is 50 acres, I likely do not own all 50 acres. The 50 acres represents the “gross mineral interest” of the tract. Like I’ve discussed, there could be hundreds if not thousands of people that own a portion of that 50 acres. The “net mineral interest” is exactly what you own of those 50 acres. In a perfect world, we wouldn’t be dealing with net and gross acreages. Everyone would own 100% of every parcel and life would be much easier for everyone. Obviously, that is just a pipe dream. Some of these properties have been carved up like a Thanksgiving turkey and you just have to hope for the best. Before signing anything, find out what your “net mineral interest” is. It will help guide your path.
- What is my bonus payment? When we negotiate oil and gas leases, we typically do so by negotiating a certain price per acre. You’ve probably heard people say they received $7,000 per acre or more for their leases in the past. This is just the general rule of thumb when negotiating with the gas companies. However, if you receive a packet for a small interest you might own, you may see a different pricing structure. It’s important to understand what they are paying, and oftentimes it might be confusing. Because some of these interests are incredibly small, it may not be worth your while to accept a price per acre bonus. What I mean by that is let’s say, for example, your “net mineral interest” is 0.0023 net mineral acres. With current market conditions being a lot lower now than in years past, let’s say the going rate for the area is $3,000/acre. When you multiply $3,000 X .0023 you get a whopping $6.90. The pen you write with probably cost more than that, and the gas companies know this, so in order to try and be fair and reasonable, they may offer you a “flat rate” bonus payment. Usually, these are a few hundred dollars and generally when they do that, they are offering to pay you more than what the price per acre formula is for your interest. Make sure you understand what they’ve used to calculate your offer.
- Is my mineral interest part of a production plan? I think the answer to this question is becoming more and more important when dealing with oil and gas leases. Because there is a lack of competition in the field now, and the market is currently suffering, there’s probably not many suitors for your interest. Primarily, it likely is one gas company who is interested in taking the lease because it falls in their territory and they likely need it to complete a unit. Because of that, I think it’s worthwhile to try and find out if your interest is marked for production in the near future. If the answer is yes, it could be a benefit to include this in the negotiations. Try and find out as much information as you can from the agent. Find out if your interest has already been placed into a unit or has plans to be placed into a unit within a year. If it has been placed into a unit, ask the land agent to send you a copy of the “Declaration of Pooled Unit” or, at minimum, the name of the unit(s) that you are in. If you are going to be in multiple units, ask to be sent every “DPU” that includes your property. Not only do you want to know this information, but it will give you an idea as to whether or not you have any leverage or power in the negotiation.
- Can I negotiate the lease and the bonus payment? Generally speaking, all contracts are negotiable. The issue is whether your interest is large enough to make a real difference. There is nothing I hate more than evaluating a lease offer and later determine it’s too small to make much of a difference, but that’s just the harsh reality sometimes. In this instance, we’re not saying your lease doesn’t matter or there aren’t things you might be able to obtain, but sometimes when your interest is close to nothing, the terms of the lease may not make much of a difference. In a round-about way, when we’re dealing with extremely minuscule interests, the difference between signing the best lease in the world and the worst lease in the world comes down to the shavings of a penny you might find after scratching a lottery ticket.
When dealing with an extremely fractional interest, the value is usually just in the bonus. Oftentimes, especially if the gas company has the majority of the other interest already leased or they need the interest to complete a unit, they may be more inclined to pay above market just to get it done. It’s likely still not going to be worth all that much at the end of the day, but it’s a way to squeeze a few more bucks to put in your pocket.
As for the terms of the lease, the gas company may be willing to change/alter a few things, but don’t look for them to be willing to accept a full-blown redline/mark-up of their lease. They understand there are a few items that may be worth adjusting, but if we’re dealing with a fractional interest, many of the terms in the lease won’t affect you like they would in a lease where there was real acreage at stake. One of the things to look for in the terms is whether or not they are offering a “gross royalty clause.” Most of the time with these types of leases, they are offering a “net royalty clause” meaning they can deduct post-production expenses from your share of the royalty. Again, depending on the size of the interest, the deductions may be next to nothing but it’s worth asking for a gross royalty without deductions. If you are not the surface owner of said tract, which oftentimes is the case with these types of leases, then you don’t need to concern yourself with many of the surface-related items you see in the lease. If you are confused about what something means or whether or not you should accept something, it’s imperative that you seek legal advice before signing. Contact us at (304) 845-9750 and we can help you sort some of these things out.
- Do I have to sign this lease/What happens if I say “No”? You are not required to sign an oil and gas lease. It is your right to be able to either accept or reject their offer. Sometimes it may actually benefit you not to sign the lease they are offering. The thing to keep in mind here is that the gas company may have other avenues available to them in order to obtain your interest in the event you decline to sign a lease with them. What are these other avenues? We will explore the specifics of these avenues in the coming weeks, but understand the gas company can look to either partition your interest, “force pull” your interest if we’re dealing with Utica acreage, or file under the co-tenancy statute. In all of these measures, it takes the decision-making out of your hands. Oftentimes, the end result is that the gas company is awarded a lease or outright ownership of your mineral interest. You are left with whatever the courts or the Oil and Gas Conservation Commission decides is fair and reasonable. As mentioned, sometimes it actually works out in your favor, but we’ll get into these methods of acquiring mineral interest in the weeks to come. If you hear an agent for the gas company tell you that they’ll just take your interest anyway, regardless of whether or not you sign it, these avenues are what they are referring to. Don’t be concerned, you are not left with nothing, but it’s important to know what options you have when faced with a decision of whether or not to sign these types of leases and it’s better to not take their word for it. If you have any questions about a fractional interest lease and what your options might be, please contact our office at (304) 845-9750.
Let Us Help You
Don’t feel that you are forced to sign something just because the gas company told you that you had to. You have rights and those rights are valuable. If you have questions about an Oil and Gas lease, no matter what the size of the interest, contact our office and speak to someone who can help you. There may be different ways of approaching these situations and it’s important to know what options are available to you. Call today for a free consultation at (304) 845-9750.