The OIPA — OKOGA - What a Strange Organization

Oklahoma Oil and Gas Owners,

It’s no secret that Berlin is not a fan of the newly re-branded OIPA — OKOGA. They often complain that the oil and gas industry is unfairly targeted and that somehow oil and gas businesses are more deserving of special treatment than others.

The OIPA — OKOGA supported House Bill 2150 and claim the measure is needed to give mineral rights owners the opportunity to file court cases to battle over-restrictive rules. Some municipalities in central Oklahoma such as Newcastle, Piedmont, Minco, Amber, Tuttle and Blanchard have implemented rules that arguably conflict with the state statutes that that already bar local jurisdictions from adopting ordinances, rules or regulations that exceed the Oklahoma Corporation Commission’s authority to regulate the oil and gas industry.

From Berlin’s reading, nothing is currently preventing mineral owners from suing local governments if the governments enact rules that would be considered a taking pursuant to Article 2 of the Oklahoma Constitution. Do we now need rules explicitly stating who can file lawsuits? Are we going to constantly push back against bad legislation with more bad legislation?

Berlin’s favorite part of the OIPA — OKOGA’s involvement in the case is that they previously supported a municipality against an independent operator when the operator was claiming that the municipality’s rules and regulations conflicted with the state statue’s regulating oil and gas development. This is weird, but unsurprising for the unprincipled.

More to follow,

Berlin

Splitting the Baby and the Pooling Bonus

Oklahoma Oil and Gas Mineral Owners:

The Oklahoma Corporation Commission has been regulating on the fly as to rule changes on multi-unit horizontal wells. One of the recent changes is that applicants now must offer a formation election if the applicant desires to force pool more than one common source of supply. Berlin thinks that this effects the unleased Oklahoma mineral owner more than the commissioners had originally intended.

Your call Sol...splitting the pooling bonus for the Oklahoma oil and gas mineral owners.

Old World for the Mineral Owner:

The Commission effectively put a stop to applicants pooling from the surface to granite, instead allowing the the applicant to only pool her target formation and the formation directly uphole and directly downhole. For example, if the applicant proposed a Woodford well, she would have been allowed to pool the Mississippian, Woodford, and Hunton. For simplicity's sake, if my man Bruce was an unleased Oklahoma mineral owner and did not want to participate in the Woodford well with his 10 net mineral acres, he would elect out of the initial well and thus have given up his ability to participate in any Mississippian, Woodford, or Hunton wells while the forced pooling order was in effect. If the only option in lieu of participation was $1,200 per net mineral acre and a 3/16 royalty, Bruce would receive $12,000 from the applicant. 

New World for the Mineral Owner:

The situation has now changed with formation elections. The applicant now has to testify to the perspective value of a well in each formation she expects to pool in order to proportionally allocate the bonus amount. If she testifies that the Mississippian, Woodford, and Hunton are equally perspective, they would receive 1/3 of the allocated bonus each. Now if Bruce elects not to participate in the drilling of the initial Woodford well, he will only receive $4,000 from the applicant ($1,200/nma * (1/3) * 10). If the applicant does not propose a Mississippian or Hunton well during the primary term of the forced pooling order, Bruce will never have an opportunity to make an election and thus will never be compensated for his Mississippian and Hunton formations being pooled for a year.

Now many of you will shout "Berlin, you're a goon, Bruce's Mississippian and Hunton will be open after the primary term of the order." And that is true. Bruce will most likely be open in a year where he could lease or even propose his own well. But Berlin would argue that after a horizontal operator has drilled a Woodford well in the unit, the chances of another operator paying Bruce a premium for his Mississippian and Hunton rights would be unlikely unless better wells are eventually made in the the Mississippian or Hunton.

As there are pros and cons to formation elections for the Oklahoma mineral owner, there are also pros and cons for the applicant/operator. Pro: Her pooling bonus will be lower in the short term, in the case above 1/3 of what it would have been under the old regime. This will be even more advantageous for the operator who is pooling (as opposed to leasing) a greater amount of acreage. Con: Many companies are now valued on their net acres in multiple formations. So now if the operator pools more acreage and initially only drills Woodford wells, her Mississippian acreage count will not see a benefit from the pooling proceedings. This should be somewhat intuitive, she didn't pay for it, she doesn't own it (unless she can convince a bigger fish with someone else's money to pay her for the Mississippian acreage if it is during the primary term of the pooling order).

Conclusion:

Berlin predicts that these rules will change at some point in the future and that an Oklahoma mineral owner will again be permitted to elect out of all formations held by the pooling order in order to receive 100% of the pooling bonus from the outset (TVM, even if they don't call it that...).  

If you have any more questions on split bonus payments under Oklahoma Corporation Commission forced pooling orders or you would like to sell your Oklahoma mineral rights and royalties, please contact Berlin.

More to follow,

Berlin

Spudding Before Forced Pooling

Oklahoma Oil and Gas Interest Owners:

Bruce was a bit pissed when he called up Berlin today. Apparently, his fence line weaning efforts cost him about 6 hours of sleep after he found the fence knocked down and the calves back with their mommas.  After he calmed down a bit, he asked why so many operators are spudding their wells before a forced pooling order has issued and what his options are as an unleased Oklahoma oil and gas mineral owner named as a respondent in the pooling proceedings.

There are a few reasons why an Oklahoma operator might spud a well before an Oklahoma Corporation Commission ("OCC") forced pooling order is issued.

1. As Berlin discussed yesterday, the OCC is short staffed and the review and issuance of orders is taking a substantial amount of time and in some cases up to 5 months after the pooling was recommended at the hearing. In order to feed the rig monster, operators must keep drilling their wells. After all, a pooling order is not needed to obtain a permit to drill.
2. If a forced pooled unit is not formed and there is no Joint Operating Agreement or any other voluntary pooling of leasehold interest between the working interest owners in the unit, there is no mechanism to govern the development of the unit. One of the consequences of this action is that there are no mechanisms to handle costs. And if a fellow working interest owner can't pay his costs, the operator will not provide well info. In short, operators will spud a well without a forced pooling order so they will not have to share well information in the short term with their competitors.
3. Forced poolings can be a time suck. Dealing with asinine requests on pre-pooling letter agreements, setting protest dates, and finally the protests themselves are often an exercise in busy work. If an operator has a high working interest in the spacing unit, she might just spud the well and file a pooling application in time to have the order issue before the division order title opinion needs to be rendered. 

The rig monster never sleeps, but enjoys purchasing Oklahoma oil and gas mineral rights before a horizontal well is drilled. It increases his NRI and keeps his LPs happy.

The operator incurs a risk when he drills before a pooling order has issued. Hopefully, he has used the time to evaluate the well and if he's made a good well, to lease the offsetting acreage. However, if he had issues drilling or made a marginal well, he is in danger of owning 100% of the working interest as the other working interest parties will have scouted the well and will elect out of the unit when the pooling order issues at a later date. So what are Bruce's options as an Oklahoma oil and gas mineral owner? Once the order issues, he should read the order as it will contain the usual options, however, he should be more strategic as he will have more information available to him.

1. If the operator has made a good well, Bruce's interest will now be substantially more valuable. Bruce could participate in the well if he has completed his diligence on the property and scouted the location. However, Berlin's recommendation is that only professional mineral owners should participate in wells. Still, his mineral interest should command a premium with non-op companies who have other people's money to spend. Bruce should be able to negotiate an oil and gas lease with better terms than those found in the forced pooling order.
2. If the operated drilled a dud, it is unlikely that any non-op will seek Bruce out for his interest unless the non-op just wants to participate with a small amount of acreage in order to obtain well information. In this case, Bruce should just elect the option in lieu of participation under the pooling order that works best for he and his family's situation (ie does he need cash now to buy replacement heifers or maybe more royalty later if an operator decides to density the section). 

Berlin hopes she answered Bruce's question. If you have any more questions about forced pooling, or you would like an offer to sell your Oklahoma oil and gas mineral rights. Please drop Berlin a line or comment below.

More to follow,

Berlin

Free Rider Problem: Fee Increases at the Oklahoma Corporation Commission

Oklahoma Oil and Gas Interest Owners:

The Oklahoma Corporation Commission (the "OCC") plays a large, but often misunderstood role in the Oklahoma oil and gas industry ecosystem. The OCC is the regulator of almost all (less Osage County) oil and gas production in the state. Jack "Show me the" Money (a name destined for fame on the business desk) at NewsOK wrote a column regarding the proposed fee changes at the OCC.

Malcolm Smith: Never heard him discuss Oklahoma royalties or the free rider problem, but man could he ride.

The processing time for final orders has increased over the past year as activity has increased in the STACK and SCOOP.  This slows down drilling activity in the state. If the OCC did not want to increase fees or negotiate for a larger budget to hire more folks, it would be different than every other government agency since the beginning of time. But, before an increase in fees is implemented, the state should conduct a study on what the different applications actually cost to process. For instance:

"Increasing the permit fee to drill a well. The permitting fee now is $175, regardless of the type of well. The new fees would range from $750 for a vertical well to as much as $3,500 for a multiunit, horizontal well. The commission estimates the cost to process applications currently ranges from $580 to $2,900, depending on the type of well involved."

Instead of "estimates," the OCC should have a dollar figure that represents the cost. And, if in fact a application does cost $2,900 to process, why should the fee be $3,500? Government entities should not be profiting from their operations. If anything, their revenues (i.e. fees and taxes) should cover the marginal cost of administration while the agency should always be attempting to lower their marginal costs.

Applicants and operators bear a majority of the burden of the fees at the OCC. While it is true that the applicant is the reason of the marginal labor expense at the OCC, the "benefits" of regulation accrue to all parties who own an Oklahoma oil and gas interest. One of the purposes of the OCC is to prevent economic waste and to protect correlative rights. While the applicant for an increased density application will have to pay the fee for the time of the clerks, administrative law judges, and commissioners to review, the Oklahoma mineral owners and the working owners in the offset wells are the parties who benefit from the OCC's technical and administrative review of the application. This is an example of a free rider problem. 

The solution to this issue would be some type of split to fund the OCC between both taxpayer dollars and fees from the applicants. Berlin can hears the shouts now "hey Berlin, this is how the OCC is already funded!" And Berlin knows that. She would just appreciate some data and logical reasoning before the public spends even more private dollars.

More to follow,

Berlin

PS: Please contact Berlin if you would like to sell any Oklahoma mineral rights. We pay top dollar to buy Oklahoma oil and gas royalties and will close quickly.

Four Key Pieces of Correspondence for the Oklahoma Mineral Owner

(This post originally appeared on www.oklahomaminerals.com on November 8,2016)

All,

Landmen are no busier than most professionals during the work day, but it is often stated that company landmen never return the calls of mineral owners. While this might be true of the bottom 10% of the profession, most landmen know that by placing a single call to a mineral owner, he could spend 30 minutes explaining knowledge that could easily be obtained throughsimple internet research. An informed mineral owner, who asks a poignant question, is much more likely to receive the answer he needs than the owner who calls to ask the difference between a spacing application and a well proposal.

Admittedly, if one owns a single tract of minerals or maybe just inherited the minerals, then the inaugural process of leasing and receiving the regulatory paperwork while the company is assembling the drilling and spacing unit would surely baffle most.

In general, there are four key pieces of correspondence that an Oklahoma mineral owner will receive from the landman. These occasions are detailed in brief below.

The Offer to Lease

Often, the first time an Oklahoma mineral owner will be contacted by a landman is when the landman’s company is assembling a prospect. The mineral owner will be contacted by phone and/or mail with an offer to lease their mineral interest. Most landmen will offer at least two options which will differ in the amount of cash bonus per net mineral acre and the royalty.

The Well Proposal

After the landman has made a bona fide effort to reach an agreement with all owners who own the right to drill a well in the proposed unit, he will send a well proposal to the parties with whom he has not yet reached an agreement. The well proposal will offer final terms in lieu of participation in the well and details of the well to be drilled such as location, proposed depth, target formation, estimated depth and cost of the well in the event the party would like to participate. It is important to note that in Oklahoma, an election to participate in the well is not binding until the party elects under the pooling order.

Oklahoma Corporation Commission Applications

Initially one of the most confusing aspects of being an Oklahoma mineral owner is the receipt of Oklahoma Corporation Commission (“OCC”) applications and orders. Some owners ask why they are being sued and others ask to be removed from the mailing list. Owners receive the applications and orders because Operators and applicants are required by law to provide notice of their activities to the owners who their activity affects. These applications are orders are mailed from an attorney who represents the applicant in OCC matters. The three most common applications that an owner will receive are the spacing application, location exception application, and pooling application. These applications will be discussed in detail at a later date, but the pooling application will be the application that will have the largest effect on the mineral owner’s rights and pocketbook. The OCC publishes a handbook for mineral owners that can be found http://www.occeweb.com/og/PubAsst/WebRoyaltyOwnersHandbook3-2015.pdf

The Division Order

If an operator successfully drills and completes a well, the next correspondence the mineral owner will receive from the company is the division order. A division order is an instrument which sets forth the proportional ownership in the produced hydrocarbons. The proportional ownership is communicated to the owner on the instrument in a decimal form. After the division order is signed and curative title issues are completed, the mineral owner should receive their first check within six months from the date of first production from the well.

In conclusion, the four key pieces of correspondence that an Oklahoma mineral owner will receive from the landman and the company, are the offer to lease, the well proposal, Oklahoma Corporation Commission applications and orders and finally, the division order. All four of these topics will be expanded upon in future articles. If there are any other topics you would like to discuss, please mention your ideas in the comment section.

More to follow,

Berlin

Protesting OCC Applications as a Company Policy

There are many reasons why one would want to protest another's applications at the Oklahoma Corporation Commission. Protests serve a purpose, but at the end of the day both oil and gas companies and Oklahoma mineral rights owners make more money if wells are drilled.

Protesting just to protest is uncivilized. Frivolous protests waste both money and time. Cases without merit will eventually be dismissed or ruled against by the ALJ and all that the protesting party has accomplished is the production of economic waste. The Applicant's show will go on.

It's a small club, and irresponsible action at the OCC is not easily forgotten. The shoe will be on the other foot some day in the future.

More to follow,

Berlin