Rambling On Leasing/Selling One's Minerals --April 5, 2023

This is idle rambling and I may not have this correct, but a reader with mineral rights said he received an offer from a land man to buy his one-acre mineral for $320 (lease) and 20% royalty.

Since this is as good as the oil company would offer the question I had is why would the landman make this offer.

I spoke with a land man today. I asked that question.

Part of this may be incorrect but readers smarter than I can probably connect the dots and see how this works.

Two possibilities:

• the land man calling was working on behalf of the oil company, Kraken in this case; or,
• the land man was working for himself (his company).

One acre in 1280-acre spacing: 0.00078125.

If the land man has the rights / the lease to that one acre, the land man has the option to participate in drilling the well.

Let's say the well ends up costing $5,000,000 to drill.

The landman will have to pay the drill 0.00078125 x $5,000,000 for his fair share to drill the will.

00.00078125 x $5,000,000 = $3,906, call it $4000.

Forgetting about taxes, expenses, etc, let's say the well produces 30,000 bbls of oil the first month.

Let's say oil is selling for $80 / bbl. 

The landman will get that first month:

30,000 bbls x 0.00078125 x $80 = $1,875, call it $2,000.

The reader will get 0.20 x $2,000 or $400.

The landman will net $2000 - $400 = $1,600 that first month.

The decline rate will drop the second month of production to, let's say, $1,200. 

After two months, the landman has $1,600 + $960 = $2,560.

The third month, the land man might have $3,000 total from the well.

By six months, the landman should have his total investment returned, and the well will continue to produce for thirty years.

Break, break.

Oil companies in the Bakken are drilling a well only if it is "forecast" to production at least one million bbls of oil over the lifetime of the well.

Let's say the average price of oil over thirty years is $75. A one-million-bbl well generates $75 million.

The landman will get a return of [$75 x 1 million bbls x 0.00078125] = $$60,000.

That one acre will generate $60,000.

The landman will get 80% of that or $48,000.

The reader, regardless of what he does -- whether he goes with the landman or whether he goes with the oil company -- will get about the same deal. 

The landman will have invested $3,900 for a $5,000,000 well and as much as $8,000 for a $10,000,000 well.

So, now one can run the numbers and see if an $8,000 investment generating $$48,000 over 30 years is a good deal or not.