Among my conversations with landowners...
Updated: Aug 26, 2018
I found myself on the phone a while back with a landowner who struck up a conversation about so-called “legal advice” he had received from an attorney. We had resolved the issue he was originally calling about, so I thought I’d hear what he had to say about the new topic. The “advice” he said he’d received sounded like it belonged in a script worthy of Comedy Central. Here’s a sampling of the more hilarious advice this landowner received from the attorney, after he was approached by a landman to sign the oil and gas lease my employer now owned.
The landowner was told that the person asking them to sign a lease might not be an employee of the company wanting to take that lease. Most landowners who have ever signed a lease already know that oil companies very, very rarely send employees to landowners’ homes for leasing, at least not anymore. They did in the 70s and 80s, but lawyers got involved and conjured up financial liability for oil companies using the practice. So now, anyone who shows up on a landowner’s doorstep making initial contact most likely is going to be an agent, not an oil company employee. Right away, I figured out how much snap this lawyer has, who gave this advice to the landowner.
The landowner said he asked the lawyer why someone who doesn’t want the lease would pay the bonus money to get it. The lawyer told him that it’s “quite likely” that an agent’s brokerage firm will not actually drill the lease, because they will only want to assign the lease to a real oil company. Didn’t anything click with this so-called professional, when he told the landowner that? Anything at all? The concept of bad-faith leasing aside, the lawyer should know that the agent was already working under a contract with a real oil company to take leases in the area where his land is located. Taking leases on “spec,” without a game plan, went out with the 1980s! Why? Because lawyers got involved and conjured up financial liability for individuals and companies using the practice. Why didn’t “bad faith” ring a bell with this lawyer? It should have. So, of course numb-nut, the agent is going to assign the lease to the real oil company! It’s in their contract!
What the lawyer didn’t tell the landowner—probably because he didn’t know it—is that oil companies use a brokerage firm working under their own oil-company name, to guard against “lease busting.” Lease busting is the underhanded practice where an independent landman goes into a crowded, over-active deed records room to look at the leases recorded the day before. And to spy on the legitimate landmen working there careless enough to leave their laptop screen unattended. From the legal descriptions in the leases, and any maps they can steal, they can figure out the area where leasing is most active. If they can get to the next unleased landowner first, they can offer their own deal figuring that the company working the area will buy it from them and they can reserve a fat override in the process. But they have to know who that real oil company is, first. It’s a huge risk, financial and otherwise, to take a lease not knowing the identity of the company that, in the end, wants to have it. Lease busters get burned taking the lease before they know who really wants it.
The lawyer told this landowner to call around to his neighbors and find out what other landowners had already been paid for signing their leases. I asked the landowner if he would divulge that information to a stranger calling him, claiming to be a fellow mineral owner, asking how much money he had just deposited into his own bank account. Of course, he said no. The landowner said he would be willing to tell them his royalty rate, and maybe that he forced the agent to add a clause making that royalty cost-free, but he would never talk about specific amounts of money. And the lawyer should have known that, so why advise a client to try? Would the attorney advise this landowner to talk dollars with a stranger on the phone? What an idiot.
The coup de grace, though, is when the lawyer advised the landowner that it was a bad idea for the landowner to sign a lease with an agent instead of with an oil company employee. The lawyer told the landowner that he might get a lower signing bonus and royalty rate than he could get directly from an oil company employee. Again, the agent is already working on behalf of an oil company (and the lawyer should know this!) and has been told what signing bonus and royalty rate combo the company is willing to offer. The agent can’t stray too far from that base in the dickering. Period. Not for leases covering small net acres. And no, and I mean a resounding NO, a landowner won’t get a better net deal by letting an attorney do the negotiations on their behalf. The landowner said that was the final piece of advice the lawyer gave him—“let me do it for you.” The landowner was glad he turned down the lawyer, saying it would have cost him $500—plus the lawyer wanted to take 30% of the signing bonus as compensation for negotiating the “better deal”!!
The real scoop—all of it—for a landowner, is this: make friends with your neighbor mineral owners. Go to the local diner for early breakfast a couple of days a week, and get to know the other mineral owners who visit regularly. Eventually, you can talk to them about the dollar specifics of the oil and gas leasing going on in the area, after they know who you are and that you’re for real. Landowners talking to one another is the only sure-fire way to make certain all of them get the same offer. Yes, agents and landmen are known for sizing up a landowner in the first minute or so, to decide whether or not to low-ball them on their authorized offer. Agent landmen do get kudo points (and sometimes a commission) for getting a lease for a lower signing bonus and royalty rate than what is authorized.
Oh, one last thing. Mineral owners need to know that a company’s drilling plans for any particular area is highly proprietary. Companies that drill wells don’t even let their own partners in the area know—companies they have a contract with to participate with them in drilling—until they file for the drilling permit. And since every drilling permit application is a public record, the whole world knows their plans, then. But not before then.