A reader had questions about her next step regarding an oil lease proposal from an oil company.
An edited reply follows.
1. I will let others answer your question about the “need” for a legal review.
2. The clock starts ticking once the leases are signed. If they do not drill and / or if they drill and don't produce any oil within five years of the lease date, the lease is null and void and the mineral rights can be leased again. As long as they produce at least one barrel of oil each year the lease remains in effect.
3. Vertical wells and horizontal wells (Bakken) are different with regard to spacing. With regard to horizontal (Bakken) wells this is generally how the process works.
Your parents literally OWNED specific mineral acres. I would assume the smallest "parcel" is one acre but there's no reason they couldn't be smaller, e.g., a quarter or half acre.
So, hold that thought.
There's many ways this can be done, but this is the most common way.
The state of North Dakota originally established that a horizontal well drained one section, 640 acres. That was the standard for the first few years of Bakken development. It was more economical for the oil companies to drill one well for two sections adjacent to each other (1280 acres). And now, the standard spacing unit in the Bakken is 1280 acres.
To drill a well, the company goes through an exhaustive and costly process to present to the state where they want to drill the well, to include where the surface hole will be sited; how deep the well will be drilled, where the horizontal legs will go, and where the bottom hole will be.
There is a lengthy permitting process.
The operators need a permit for every well to be drilled even if they are on the same pad drilling the same spacing unit, the same section or sections.
If the spacing unit is the standard 1280 acre (two sections) the company doesn't need additional reasons to explain why; if it's more than the standard, then the company needs to explain why when applying for the permit.
Before the company can drill (before or after the permit is approved) they need to have ALL mineral owners agree to sign a lease. If any one mineral owner refuses to sign a lease the oil company cannot drill. So, one person that owns one acre can stop millions of dollars of royalties going to other mineral owners.
Because this would be a poor use of natural resources, the state can force a lone holdout (or plural, multiple lone holdouts) to "sign" a lease. This is called pooling or forced pooling. They may not actually sign a lease but the oil company will be allowed to drill the well and pay the holdouts what the state agrees is a fair price. There are few reasons not to sign a lease when it gets to that point.
Over time, through various processes, more than one oil company may "control" different number of acres in a spacing unit (1280 acres). If no one shows any interest in drilling, even the smallest oil company can go to the state to get permission to drill, at which point a bigger oil company may decide they want to drill the well. Those two or three oil companies then duke it out at the state level arguing why they should get the permission to drill. Generally, the oil company with the majority of acres, wins.
So, that's why, in your case, Phoenix (through outright ownership or leaseing) wants to control 51% of the acreage. It's still not guaranteed they will get permission to drill but 51% goes a long way in convincing the state they should get permission. Even after getting permission, the operator still needs to get a permit for each well.
I don't know how many acres your parents owned in the spacing unit or the oil field or the county or the state that Phoenix wants to lease from you. Your lease will say.
The oil company tells the state which two sections (1280 acres) they want to drill. Again, they can drill multiple wells in each drilling unit but they need a permit for each well. When you get the lease for signing, I don't think you will be told the size of the spacing unit -- all you’ll be told from the oil company is they want to lease those two acres for five years. They themselves may not be sure what they will finally do and even if they do, they may want to keep that confidential.
At some point, the oil company will get a permit at which time you will know more.
I can guarantee the well in your area will be at least 640 acres; it might be 1280 acres; unlikely to be 1920 (three sections).
The smaller the spacing unit, the better for a mom-and-pop / small mineral owner but that's out of one’scontrol, whether it's 640 or 1280 or 1920 or something else.
In a long note like this there will be typographical and content errors. In addition, I don't understand the whole process, especially with timing or time-lines but that's in general how it works.
4. There is not much drilling activity in Montana compared to North Dakota, and it's possible that some operators won't get around to drilling a Montana lease within five years -- that's their risk -- but the mineral owner’s advantage. The mineral owner keeps the bonus, regardless, and if they don't drill, there is always the possibility that they will want to renew the lease so someone else does not get it. But, you can expect a similar bonus for the lease to be renewed.
5. This should generate many more questions but it's a start.
6. And, you "own" the mineral rights that you are planning to lease to Phoenix. Do not ever sell your minerals. The lease is for five years but if a well is drilled and it's productive, the lease remains in effect as long as oil is being produced, even if it's a hundred years. The company needs a separate permit from the state for each well but needs only one signed lease from you (the mineral owner) for those specific acres no matter how many wells are drilled in that spacing unit.
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