Whenever we need to get home repairs—roof, driveway, plumbing—we ALL shop around to find the best contractor at the best price to do the work.
Royalty owners should do the same.

A recent working paper published by the Federal Reserve Bank-Kansas City titled “Capturing Rents from Natural Resource Abundance: Private Royalties from U.S. Onshore Oil and Gas production (Jason Brown –Federal Reserve Bank-Kansas City, Dr. Timothy Fitzgerald-Texas Tech University, Dr. Jeremy G. Weber-University of Pittsburgh) used over 1.5 million lease records obtained from DrillingInfo to study the pass -through of financial benefits to royalty owners in resource plays.

It made me think of the time when I was travelling from a Utica conference in Columbus OH to Pittsburgh and I stopped at a McDonald’s in Washington PA.

As I walked in there were two good ol’ boys jawing at each other, and the conversation went something like this:

Good ol’ boy #1:” You got your draft yet? Shoulda paid you by now , since you only getting’ $300/acre..”

Good ol’ boy #2: “May be, but I got that sweet 18% royalty….what’d YOU get, fool?”

Good ol’boy#1: “Crap, I only got 16% but I beat your$300/acre by $200/acre more!”

Good ol’bopy#2: “Say what??”

And therein lies the crux of the matter….especially given the authors’ conclusion that: “Thus, mineral owners benefit from resource abundance primarily through greater production, not by negotiating better lease terms from extraction firms.”

The value of producing minerals is determined by many factors , not just by bonus, or even royalty.
So we’re going to look at some of the due diligence—the “shopping around”—that royalty owners should perform when they are making their decision to lease.

1. Are you actually going to get iron on the ground?

I have a friend who has family minerals in West Texas who was approached by two separate outfits that wanted to lease her 120 acres. One group was offering about $200/acre more than the other; the proposed royalty burden was the same.

When I used DrillingInfo to check permit and completion activity and production results for the company offering $200/acre more, I found no drilling history in Texas.View Full Article