Danoff
Premium
- 33,955
- Mile High City
Turns out there's drill-able oil under my house and I may own the mineral rights to it. Yipeee! I won the lottery! Riches!
Not so fast.
Who is going to extract that oil? Not me that's for sure. I didn't even know it was there. Turns out there is (at least one) energy company who wants to do it from about a mile away using the latest fracking technology. For those who are not in the know, the latest fracking enables energy companies to house dozens of wells on a tiny production pad away from homes. They drill each well out sideways a mile underground (waaay below the water table) to reach oil under roads, neighborhoods, lakes, etc. etc. This is great for reducing impact on the local communities and wildlife.
So an oil company can come get my oil without even setting foot on my land! Even sweeter! Again, not so fast.
Whether or not they can set foot on your land is open for negotiation in the contract that I'll sign with the oil company. As are a ton of things, like whether or not they're liable for any damage they cause to my house, whether or not I'm indemnified of any liabilities of the oil company, whether or not I'm a partner in business with the company, whether or not any royalties I get from the sale of the oil have production costs deducted from them, and which production costs, and what is the sale price that the royalty is calculated on... ugh.
Ok, so I hire a land management lawyer to negotiate a contract with the oil company right? And then riches! Nope
I live in a neighborhood with a bunch of houses, and there's an adjacent neighborhood with a bunch of houses, and there's another one... there are thousands of houses in the area that need to be operated under, and the energy company doesn't have time or resources to negotiate a custom lease with every single one of those houses. Instead, they negotiate leases with particular law firms or lease companies and those people then shop their leases around to homeowners. So there are only a few to choose from, and the terms aren't that great. Some of them include me warrantying that I do in fact own the mineral rights (no idea, that's not easy to figure out, they don't know either). Some of them grant the oil company surface access. Some of them allow the oil company to production fees out of the royalties, etc. All the problems mentioned above.
So there is one lease, one, a single lease, which has favorable terms (indemnity, non-partnership, no surface access, no production fees, and no warranty on the rights), which offers a signing bonus, which after tax and attorney fees is just over $1000.
But what about the royalties? There's a ton of money there right? Not really. Royalties are based on the sale price, and since the company isn't able to deduct any of the processing fees before shipping me a royalty check, they can just sell it first at a lower price, and then the person who buys it (probably the same company) can refine it. This effectively deducts the production fees from my "cut". Also royalties are contingent on me owning the mineral rights, and can have taxes and other administrative overhead. They also only last for 3 years. As best I can tell, my expected royalty check is somewhere near $0. Maybe $1000 over 3 years.
So we're looking at like $1000-$2000 over 3 years. Not so bad? Eh, there's going to be a drill tower right by my neighborhood while they drill the wells, and fracking makes people nervous and keeps house prices down. And then there's what happens to the well head when they're done extracting oil, at least one abandoned well head in colorado has exploded. There are mountains behind this drill tower that you can normally see from the golf course:
Ok so I've decided, $1k-$2k just isn't worth it for the hassle here. I'm taking a little risk by signing anything, and it pushes property values down, and I don't want to drive past that drill tower, or hear the noise from it, or whatever. I'm going to keep my oil then, you can't have it. If you want it later, we'll talk then. Not so fast.
Colorado has a forced pooling law, which is common in most states but unusually bad in CO. If you're in an oil/gas extraction area and your neighbors all sign the lease and you're the holdout, you can be forced into the pool of leases that your neighbors have signed. Usually forced pooling offers middle-of-the road contract terms, rather than the best lease that you could have signed. So maybe your royalties are lower, you don't get the signing bonus, and your surface rights may not be protected. So how many of my neighbors do I need to get to hold out to prevent forced pooling? Like... 10% of the population of an area? That shouldn't be impossible to make the company come back and offer better terms or hit the bricks and leave us alone.
Well.. in Colorado... the extraction company needs a total of one person to sign the lease to pool the entire area based on that lease (http://www.boulderweekly.com/news/forced-pooling-is-not-mandatory-swim-practice/).
Ok, hang on, let me get this straight. I struck oil, and that means I get $1000 and good contract terms if I voluntarily agree to put up with noise and visual pollution (and a little air pollution) and risks associated with signing and fracking, or I can hold out and get basically nothing and take MORE risk because of the state law. But under no circumstances can I keep oil that I theoretically own?
Wow.
I know I know, only Danoff can complain about getting $1000 in the mail.
Not so fast.
Who is going to extract that oil? Not me that's for sure. I didn't even know it was there. Turns out there is (at least one) energy company who wants to do it from about a mile away using the latest fracking technology. For those who are not in the know, the latest fracking enables energy companies to house dozens of wells on a tiny production pad away from homes. They drill each well out sideways a mile underground (waaay below the water table) to reach oil under roads, neighborhoods, lakes, etc. etc. This is great for reducing impact on the local communities and wildlife.
So an oil company can come get my oil without even setting foot on my land! Even sweeter! Again, not so fast.
Whether or not they can set foot on your land is open for negotiation in the contract that I'll sign with the oil company. As are a ton of things, like whether or not they're liable for any damage they cause to my house, whether or not I'm indemnified of any liabilities of the oil company, whether or not I'm a partner in business with the company, whether or not any royalties I get from the sale of the oil have production costs deducted from them, and which production costs, and what is the sale price that the royalty is calculated on... ugh.
Ok, so I hire a land management lawyer to negotiate a contract with the oil company right? And then riches! Nope
I live in a neighborhood with a bunch of houses, and there's an adjacent neighborhood with a bunch of houses, and there's another one... there are thousands of houses in the area that need to be operated under, and the energy company doesn't have time or resources to negotiate a custom lease with every single one of those houses. Instead, they negotiate leases with particular law firms or lease companies and those people then shop their leases around to homeowners. So there are only a few to choose from, and the terms aren't that great. Some of them include me warrantying that I do in fact own the mineral rights (no idea, that's not easy to figure out, they don't know either). Some of them grant the oil company surface access. Some of them allow the oil company to production fees out of the royalties, etc. All the problems mentioned above.
So there is one lease, one, a single lease, which has favorable terms (indemnity, non-partnership, no surface access, no production fees, and no warranty on the rights), which offers a signing bonus, which after tax and attorney fees is just over $1000.
But what about the royalties? There's a ton of money there right? Not really. Royalties are based on the sale price, and since the company isn't able to deduct any of the processing fees before shipping me a royalty check, they can just sell it first at a lower price, and then the person who buys it (probably the same company) can refine it. This effectively deducts the production fees from my "cut". Also royalties are contingent on me owning the mineral rights, and can have taxes and other administrative overhead. They also only last for 3 years. As best I can tell, my expected royalty check is somewhere near $0. Maybe $1000 over 3 years.
So we're looking at like $1000-$2000 over 3 years. Not so bad? Eh, there's going to be a drill tower right by my neighborhood while they drill the wells, and fracking makes people nervous and keeps house prices down. And then there's what happens to the well head when they're done extracting oil, at least one abandoned well head in colorado has exploded. There are mountains behind this drill tower that you can normally see from the golf course:
Ok so I've decided, $1k-$2k just isn't worth it for the hassle here. I'm taking a little risk by signing anything, and it pushes property values down, and I don't want to drive past that drill tower, or hear the noise from it, or whatever. I'm going to keep my oil then, you can't have it. If you want it later, we'll talk then. Not so fast.
Colorado has a forced pooling law, which is common in most states but unusually bad in CO. If you're in an oil/gas extraction area and your neighbors all sign the lease and you're the holdout, you can be forced into the pool of leases that your neighbors have signed. Usually forced pooling offers middle-of-the road contract terms, rather than the best lease that you could have signed. So maybe your royalties are lower, you don't get the signing bonus, and your surface rights may not be protected. So how many of my neighbors do I need to get to hold out to prevent forced pooling? Like... 10% of the population of an area? That shouldn't be impossible to make the company come back and offer better terms or hit the bricks and leave us alone.
Well.. in Colorado... the extraction company needs a total of one person to sign the lease to pool the entire area based on that lease (http://www.boulderweekly.com/news/forced-pooling-is-not-mandatory-swim-practice/).
Ok, hang on, let me get this straight. I struck oil, and that means I get $1000 and good contract terms if I voluntarily agree to put up with noise and visual pollution (and a little air pollution) and risks associated with signing and fracking, or I can hold out and get basically nothing and take MORE risk because of the state law. But under no circumstances can I keep oil that I theoretically own?
Wow.
I know I know, only Danoff can complain about getting $1000 in the mail.
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I will say "No way!"
