Reference no: EM131279518

Royalty Calculation Problem Set

INSTRUCTIONS
Unless a problem says otherwise, assume for purposes of acreage and interest calculations all sections are 640 acres, equally distributed.

Complete all interest calculations to the 6th decimal.

Unless otherwise noted, assume all conveyances are valid and any pooling was authorized and exercised in good faith.

Do not try to calculate or assume taxes in any of your net revenue calculations.

Don't forget to account for surface ownership in your answers.

Submit your answers on a separate sheet, with the map on page 3 attached.

You may work in groups but each student must turn in a separate assignment. If you have any questions, or if something doesn't look right, please ask.

The total assignment should not take more than 2 pages typed + the map.

• Daenerys owns a 3/8ths mineral interest in Section 8. The other 5/8ths are owned by Viserys. Daenerys and Viserys both enter into a lease with Westeros Oil and Gas on the AAPL form lease, which includes a pooling provision authorizing an oil unit of up to 640 acres, and which has a 1/8th Westeros pools 320 acres of Section 8 with 160 acres of Section 9 in an oil unit. Westeros also has the oil and gas lease on Section 9, all of the minerals of which are owned by Kahl, which also contains a pooling clause and authorizes up to a 640 acre oil pool but which has a ¼ royalty.) Westeros drills an oil well, before either primary term ends and establishes production in paying quantities.

1 a) What are the net revenue interests of the parties in the oil from the unit?

Daenerys:
Viserys:
Kahl:
Westeros:

1 b) What is Westeros' working interest?

2) Enoch owns a fee simple interest in Carinholm. Enoch conveys Carinholm to Olive, reserving an undivided 1/4 mineral interest. Olive then leases Carinholm to Peregrine Energy Partners (PEP), for a 3/16 royalty. PEP then grants 2% of 8/8th of the production, free of costs, to Jacob. During the primary term, PEP drills a successful well which produces in paying quantities.

1 a) What is the interest of Olive? What share of production should she receive?

1 b) What type of royalty does Enoch have? If the well produces $100, how much will Enoch get?

1 c) What was most likely conveyed to Jacob? If the well produces $100, how much will Jacob get?

1 d) Now imagine that the well was dry, and the lease terminated for failure to establish production during the primary term and there is no dry hole or continuous operations clause. What does each of the parties have?
Enoch:
Olive:
Jacob:
PEP:

3) Harry and Ginny, a married couple, own 100% of the minerals together in the state of Arcadia. They lease their minerals to Felix Felicis Exploration with very favorable 1/5 royalty on gas. The Royalty is payable "for gas sold at the well on the proceeds, but for gas sold or used off the premises based on the market value at the well." Felix drills a successful gas well and in the September, the first month of production, produces 1000 mcf. However, to reach the market pipeline the gas must be transported 70 miles inland through Felix's pipeline where it is separated, dehydrated, and pressurized. It is then sold into an interstate pipeline at a contract price of $2.00, based on a long term contract that Felix entered with Malfoy Midstream a while ago.

Ginny knows that the Henry Hub price for gas in the next county was $3.00/mcf in September, but she has been paid royalty at a value of $1.50/mcf after all of the deductions for post production costs (which amount to $0.50/mcf). The well on her property produced exactly 1,000 mcf in September. There is no other gas production in the immediate vicinity other than that produced by Felix. She has hired you to help recovery the royalties she thinks she is owed for the September Production.

1 What price would you use to calculate royalty under the Tara Rule?

2 What price would you use to calculate royalty under the Vela Rule?

3 Which method of calculating market value would both appropriate and beneficial to your client - Actual, Comparable, or Workback?

4 In less than 50 words, outline your clients argument that Felix has breached its implied covenant to market Harry and Ginny's production.

4) Han owns the NE/4 and the W/2 SE/4 Section 10 - T1N-R6W, surface and minerals. Han leases to Leia Oil, reserving a 1/8 landowner royalty, in a lease that includes an unedited AAPL form 675 pooling clause and also includes an anti-dilution clause that provides that "if any pooled unit is created with respect to any well drilled on the land covered hereby, at least all/sixty percent (60%) of such pooled unit shall consist of the land covered hereby." Leia pools the W/2 SE/4 of Han's lease with the E/2 SE/4 Section 10 - T1N-R6W into a 160 acre spacing unit for oil. The E/2 SE/4 Section 10 is owned by KyloRen, LLC and has a 1/4th royalty. The well produces at a rate of 100 barrels per day and the oil is sold for $45/barrel. How much royalty is owed to Han per day?

5) Magenta owns all of Section 10, T28N-R7E, surface and minerals. The following conveyances occur in the following order.
• Magenta "conveys the S/2 NE/4 to Janet."
• Magenta "conveys the E/2 SW/4 to Eddie."
• Magenta "conveys the NE/4 to Riff Raff, reserving 50% of the minerals"
• Magenta "conveys the W/2 SW/4 to Brad, reserving a 1/16th nonparticipating royalty interest."
• Magenta "conveys the NW/4 NE/4 to Frank, reserving 75% of the minerals."
• Magenta conveys 2/64th of the oil and gas that may be produced and saved from the NE/4 NE/4 to Betty.
• Your client, Creature Exploration, buys a lease from Magenta (lessor) for all of her interest in Section 10 for $100/acre with a 1/4th

Complete the Following.
1 Lease description (ie. On the lease, what is the land description of the MI leased from Magenta - if you mean to lease only her interest)

2 Gross surface acres owned by Magenta

3 Net mineral acres owned by Magenta (consider both how many acres she owns an interest in, and what percentage of those minerals she has. Ie. A 50% interest in 10 acres is equal to 5 net mineral acres.)

4 Bonus paid to Magenta

5 Assuming the entire section is leased, and pooled together as a spacing unit, what is Magenta's net revenue interest?

Problem :

USE THE PLAT OF SECTION 10 BELOW TO PLAT THE INTERESTS OF THE PARTIES AFTER ALL THE CONVEYANCES. Make sure to note surface, mineral, and royalty ownership. (Plat is available in assignment - posted under Files- but the formatting is not working well here).