Mineral owners in the United States and Canada are not often trained in the oil and gas industry, but need expertise to help them protect and maximize their family’s mineral assets.

Professional minerals managers provide valuable services to their clients researching chain of title, establishing legal standings in existing oil and gas leases, negotiating new oil and gas leases, and watchdogging oil companies for payments and lease compliance.

Oil and gas minerals managers come from three primary professions: Trustees, Lawyers, and Petroleum Landmen. Although each provide similar services, they differ in their training, expertise, and pricing. To help decide which one is right one for you, we have described their unique value-add.

Some of the best mineral managers have worked as roughnecks when they were young. They have experienced the oil business from the ground up. They understand the mechanics of exploration and production. And they’re experienced in executive land operations, courthouse title work, and lease contracts. Many CEOs of major oil companies were roughnecks and then trained as lawyers or petroleum landmen.

Trustees
It’s common to inherit mineral and royalty interests from parents or grand-parents in trusts set up to be managed by bank trust officers. Trust officers provide various services, but they are essentially asset managers with strict fiduciary duties to be loyal, impartial, transparent, and accountable to you.

Often employed by banks or trust companies, trustees charge for their services in two ways: 1) By the hour, and 2) A percentage of the annual income generated by your assets. In some cases, they charge an annual % of the total value of your assets. These % charges can be very costly to mineral owners. But in return, mineral owners gain a peace of mind having a professionally licensed fiduciary manage their minerals for them.

Charging for their time, trustees offer a menu of services, each corresponding to a specific fee. Researching oil and gas production history in the mineral region might be $350 per hour, while filing and other clerical duties may cost $55 per hour. Negotiating leases may cost $450 per hour. Copies may be $0.50 per page. Answering an email or talking on the phone with your trust officer carries a specific fee.

Trustees may be compensated for their time in developing your minerals, but they are prohibited by law from earning any profits actively marketing or developing your mineral interests. Trustees are held to such a high level of standard and are subject to such severe liabilities for breach of trust that most trustees will limit themselves to managing your minerals only, and do not provide development services.

To ensure you receive the highest bonus payment and most favorable lease terms that the market will bear, trustees will seldom generate or conduct a formal bidding process like lawyers and petroleum landmen by inviting competing oil companies to lease your minerals. But they can answer the phone, research the competitive market in the region of your minerals, and negotiate a lease offer for you. With their entrepreneurial hands tied safely behind their back as a fiduciary only, they are passive managers—not proactive developers of your minerals.

Culturally, they are super conservative. Trustees are not paid so much to grow your assets, but to make sure the value of your minerals don’t diminish. As a result, they may be able to protect your minerals, but they won’t maximize your mineral value. They will be happy and feel successful if they earn you a 1% annual gross return on their watch.

The unique value proposition of trustees is a good fit for financial institutions, large family offices, and high net worth individuals seeking peace of mind, more interested in conserving their assets than growing them.

Lawyers
Similar to trustees and petroleum landmen, lawyers also charge by the hour—normally the highest rate of all three. And while fiduciary trustees are discouraged from developing the assets they manage, lawyers are not. Under a menu of services and a client agreement, lawyers may provide both management and development services.

Developing minerals, however, takes months and sometimes years to achieve a lease. Paying legal fees of $350 to $550 per hour for months is not practical for most individuals. So, it’s more common for public companies and large private agribusinesses that own tens of thousands of mineral acres—and who are subject to public legal scrutiny and shareholder oversight—to afford lawyers.

Culturally, lawyers are trained to be adversarial, not cooperative. As a result, they can run off more business than they close. They operate from fear, protecting you from liability and worst case scenarios by eliminating your risks with lengthy, burdensome contracts.

Lawyers will often hire petroleum landmen to develop and negotiate their client’s leases with oil companies, while they focus on the management side.

Petroleum Landman
Minerals managers with a petroleum landman background are usually individuals operating from their home or small office with little operating costs. As a result, they charge far less than trustees and lawyers, usually $50 to $175 per hour. Several universities provide Petroleum Land Management degrees—an inter discipline mix of business, geology, petroleum engineering, and oil and gas law.

Landmen are generally far more experienced in managing and developing oil and gas minerals than trustees and lawyers. Most are career oil men and women. It’s typical they worked for a major oil company in the land department gaining real world experience for years. As a consequence, they are trained to run title in the courthouse and negotiate oil and gas leases. They are fluent in lease amendments, ratifications, pooled unit agreements, division orders and managing day to day operations of the assets they’ve been given responsibility to manage and develop.

Landmen tend to be good communicators with people from all walks of life. Because they have low operating costs, they can customize their fees to the budget of their client. It’s not uncommon for a small mineral owner to not have the budget necessary to pay a minerals manager for the services they need to complete their chain of title, negotiate a lease offer, or transform unleased minerals into income producing assets.

Fortunately, some landmen have the flexibility to perform their development services at no or little charge—in return for earning part of the bonus and royalty income they generate for their clients. Landmen who perform these tasks at their sole cost and risk may provide these services for a premium. This way, the client who has little budget and the landman with expertise, both benefit.

Unlike trustees and lawyers, landmen are more flexible in their fees and ability to assume risk. They are culturally more entrepreneurial, so they make great developers of minerals. And with their big company training and negotiating skills—they have unique value-add qualities for clients of all sizes.

Oil and gas companies in the state of Texas must obtain a permit from the Texas Railroad Commission (RRC) in order to commence drilling operations. Operators applying for permits must conform to certain regulations which set forth spacing and density requirements. When leases cover smaller tracts of land, operators exercise pooling rights, combining the leases into a larger unit that will meet the spacing and density requirements.

A well written oil and gas lease requires the lessee (operator) to obtain the express consent of the owner of the royalty interest in order to pool that interest. Without that consent granted in the lease or other agreement, the operator has no right to pool the interest. In recent years, operators have circumvented this requirement by applying for and receiving permits to drill “allocation wells”.

The term “allocation well” is used in the oil and gas industry to refer to a horizontal well that is drilled across lease lines without pooling the tracts on which the well is located. Originally, these wells were permitted by the RRC based on the operator’s assertion that it has production sharing agreements (PSAs) with the royalty owners. The PSAs provide that the production from the well is allocated between or among the tracts crossed by the well lateral, for purposes of calculating royalties due, based on the number of feet of well lateral on each tract compared to the total lateral length of the well.

The PSAs have advantages and disadvantages for royalty owners. The royalty owner will get royalties on production from a new well that might not be drilled unless a production sharing agreement is signed to allow drilling across lease or unit boundaries. The disadvantage is that production from one well serves to hold all the acreage in both units for as long as it produces.

More recently, the RRC has issued permits for allocation wells without requiring the operator to obtain production sharing agreements or pooling agreements from royalty owners in the tracts crossed by the wellbore. In effect, this allows operators to force-pool tracts, which in Texas is only allowed under limited circumstances and requires an application, notice to affected parties, and a hearing.

The right to consent – or not consent – to the pooling of one’s royalty interest has been long-recognized by Texas courts, and is a significant right for all royalty and mineral owners in Texas. Texas does not have a forced-pooling statute, like those in Oklahoma and Louisiana, that force mineral owners into pooled units against their will.

The RRC staff’s issuance of permits for allocation wells was challenged by royalty owners in DeWitt County. They protested a permit application by EOG to drill the Klotzman Well 1-H in the Eagleville Field. A hearing was held in the Klotzman case and the examiners for the RRC ruled that the commission rules do not authorize the RRC to issue allocation well permits. The Commissioners overruled the examiners, but did not provide any basis for their decision.

Several DeWitt County royalty owners have joined to file a lawsuit against the RRC in Travis County District Court, asking the court to reverse their decision on permitting such wells. The outcome of this ruling will affect all royalty owners in Texas. If operators are granted permits to drill allocation wells in the absence of pooling agreements with the royalty owners, the rights of royalty owners to negotiate pooling provisions in their leases will be seriously eroded.

R. King & Co. guide to oilfield acronyms and drilling terms for royalty and minerals owners to help them understand drilling and daily cost reports from their operators.

TERM          DEFINITION

AFE             authorization for expenditure
AZ               azimuth
BHA            bottomhole assembly – the lower portion of the drillstring
blinds          a circular metal disk installed in a pipeline to prevent flow
BLW            barrels load water
BLWTR        barrels load water to remove
BOP            blowout preventer
Borets         provides electric submersible pumps
BPDR          barrels per day rate
BPM            barrels per minute
BPH            barrels per hour
BTMS          battery thermal management system
CIBP           cast iron bridge plug
CSG            casing
CT               coiled tubing
CTD             coiled tubing drilling
CUDD          fracking contractor
dart             device dropped through string to activate downhole equipment & tools
DSA             drill stem assembly
EQ               equalizing valve
ESP             electric submersible pump
FCP             final circulating pressure
FLAP           fluid level above pump
GPM            gallons per minute
GYRO          gyroscopic surveying instrument – device used to determine direction angle at                      which wellbore is drifting off the vertical

H2S             hydrogen sulfide
HWDP         heavyweight drillpipe
ID                inside diameter
JFS             jacking frames
JTS             joints
KOP            kickoff point
LCM            lost circulation material
LD               lay down (pipe)
MD              measured depth
MIRU           move-in rig up
MISURU      move-in, set-up, rig-up
MWD           measurements-while-drilling
NOGO         device of a known and precise dimension that is lowered into a well to                                 determine the dimensions of another device or opening already in the well
NU              nipple up
OD              outside diameter
PBR            polished bore receptacle
pill              small volume of a special blend of drilling fluid used for a specific purpose
PJSM          pre-job safety meeting
POOH         pull out of hole
PP              pulling prong
PPG            parts per gallon
PPM            parts per million
rabbit          internal drift diameter gauge used to check casing or tubing joints
RDMO         rig-down move off
ream           enlarge wellbore
ROH            run in hole
ROP            rate of penetration
RPM            revolutions per minute
RU              rig up
RWTP          review within time period
SDFN           shut down for night
SICP            shut in casing pressure
SIP              shut in pressure
slips            device used to grip the drillstring in a non-damaging manner and suspend in                         rotary table
SLM            slick line measurement
SPM            suspended particulate matter/strokes per minute
SUB            submersible
TAG             throw away gun (perforating gun)
TBG             tubing
TFNB           trip for new bit
TIH              trip in hole
TMD            total measured depth
TOH            trip out of hole
TOTCO        electronic survey tool
TVD             total vertical depth
UBHO          universal bore hole orientation
VIS              viscosity
WO             well in work over
WOB           weight on bit
WOC           waiting on cement
WS              well string

The surge of light, tight oil unleashed by the U.S. energy revolution has caused a profound shift in the world oil market. The demand for oil is no longer the dominant factor, but the new supply made possible by the increase in U.S. production to nine million barrels daily.

Faced with an unprecedented challenge to its market domination, OPEC decided to maintain current levels of production, which led to U.S. oil prices trading in the high $60 per barrel for the first time since the summer of 2009.

OPEC’s motivations for standing pat have been ascribed to their desires to smother the U.S. fracking boom, avoid losing market share, or allow time for the oil market “to stabilize itself eventually”, according to the Saudi Oil Minister. In the view of many industry analysts, OPEC will be surprised by the resilience of new U.S. oil production, and fail to achieve the first two of its goals.

Oil prices at five-year lows have made the economic climate for U.S. oil production more challenging than it has been in years. But royalty owners should remain optimistic about monetizing their mineral leases. A new IHS analysis of well data finds that 80% of new tight-oil production in 2015 would be economic between $50 and $69 per barrel. Data from individual companies reveals that some projects are profitable down to about $40 a barrel.

Technological advances that lower the cost of drilling each well have been driving this change. Statoil reports that their costs have fallen 50% in two years, and could keep falling another 15% by 2016. In addition, producers are generating more oil per well. The result is fewer wells, at lower cost, with higher overall production.

OPEC’s gamble on allowing oil prices to plunge may hurt their own members, and non-member Russia, more than the U.S. Venezuela depends on oil revenues for up to 65% of government spending and its economy is already in chaos. Iran depends on oil for 50% of its budget and sanctions have cut its oil exports almost in half. With oil providing over 40% of the Russian budget and the value of the ruble falling rapidly, Russia is headed for recession.

U.S. mineral owners can take comfort in the fact that experts believe the biggest impact of lower oil prices on future output will be a slowdown and reduction in major new investments around the world. The losers will be countries in Africa, Asia and Latin America trying to woo investment for new oil and gas projects. This lack of new projects will benefit U.S. royalty owners in the long term because it will cause oil prices to rise once again.