I Struck Oil - A Danoff Story

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Danoff

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Turns out there's drill-able oil under my house and I may own the mineral rights to it. Yipeee! I won the lottery! Riches!

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Not so fast.

Who is going to extract that oil? Not me that's for sure. I didn't even know it was there. Turns out there is (at least one) energy company who wants to do it from about a mile away using the latest fracking technology. For those who are not in the know, the latest fracking enables energy companies to house dozens of wells on a tiny production pad away from homes. They drill each well out sideways a mile underground (waaay below the water table) to reach oil under roads, neighborhoods, lakes, etc. etc. This is great for reducing impact on the local communities and wildlife.

So an oil company can come get my oil without even setting foot on my land! Even sweeter! Again, not so fast.

Whether or not they can set foot on your land is open for negotiation in the contract that I'll sign with the oil company. As are a ton of things, like whether or not they're liable for any damage they cause to my house, whether or not I'm indemnified of any liabilities of the oil company, whether or not I'm a partner in business with the company, whether or not any royalties I get from the sale of the oil have production costs deducted from them, and which production costs, and what is the sale price that the royalty is calculated on... ugh.

Ok, so I hire a land management lawyer to negotiate a contract with the oil company right? And then riches! Nope

I live in a neighborhood with a bunch of houses, and there's an adjacent neighborhood with a bunch of houses, and there's another one... there are thousands of houses in the area that need to be operated under, and the energy company doesn't have time or resources to negotiate a custom lease with every single one of those houses. Instead, they negotiate leases with particular law firms or lease companies and those people then shop their leases around to homeowners. So there are only a few to choose from, and the terms aren't that great. Some of them include me warrantying that I do in fact own the mineral rights (no idea, that's not easy to figure out, they don't know either). Some of them grant the oil company surface access. Some of them allow the oil company to production fees out of the royalties, etc. All the problems mentioned above.

So there is one lease, one, a single lease, which has favorable terms (indemnity, non-partnership, no surface access, no production fees, and no warranty on the rights), which offers a signing bonus, which after tax and attorney fees is just over $1000.

But what about the royalties? There's a ton of money there right? Not really. Royalties are based on the sale price, and since the company isn't able to deduct any of the processing fees before shipping me a royalty check, they can just sell it first at a lower price, and then the person who buys it (probably the same company) can refine it. This effectively deducts the production fees from my "cut". Also royalties are contingent on me owning the mineral rights, and can have taxes and other administrative overhead. They also only last for 3 years. As best I can tell, my expected royalty check is somewhere near $0. Maybe $1000 over 3 years.

So we're looking at like $1000-$2000 over 3 years. Not so bad? Eh, there's going to be a drill tower right by my neighborhood while they drill the wells, and fracking makes people nervous and keeps house prices down. And then there's what happens to the well head when they're done extracting oil, at least one abandoned well head in colorado has exploded. There are mountains behind this drill tower that you can normally see from the golf course:

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Ok so I've decided, $1k-$2k just isn't worth it for the hassle here. I'm taking a little risk by signing anything, and it pushes property values down, and I don't want to drive past that drill tower, or hear the noise from it, or whatever. I'm going to keep my oil then, you can't have it. If you want it later, we'll talk then. Not so fast.

Colorado has a forced pooling law, which is common in most states but unusually bad in CO. If you're in an oil/gas extraction area and your neighbors all sign the lease and you're the holdout, you can be forced into the pool of leases that your neighbors have signed. Usually forced pooling offers middle-of-the road contract terms, rather than the best lease that you could have signed. So maybe your royalties are lower, you don't get the signing bonus, and your surface rights may not be protected. So how many of my neighbors do I need to get to hold out to prevent forced pooling? Like... 10% of the population of an area? That shouldn't be impossible to make the company come back and offer better terms or hit the bricks and leave us alone.

Well.. in Colorado... the extraction company needs a total of one person to sign the lease to pool the entire area based on that lease (http://www.boulderweekly.com/news/forced-pooling-is-not-mandatory-swim-practice/).

Ok, hang on, let me get this straight. I struck oil, and that means I get $1000 and good contract terms if I voluntarily agree to put up with noise and visual pollution (and a little air pollution) and risks associated with signing and fracking, or I can hold out and get basically nothing and take MORE risk because of the state law. But under no circumstances can I keep oil that I theoretically own?

Wow.

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I know I know, only Danoff can complain about getting $1000 in the mail.
 
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eran0004

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Could the neighbourhood start their own "extraction company" and get the extraction rights (basically, buy the oil they already own) to prevent another extraction company from getting it?
 

Danoff

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Could the neighbourhood start their own "extraction company" and get the extraction rights (basically, buy the oil they already own) to prevent another extraction company from getting it?

I can't even begin to understand what would go into that. I don't know if the extraction company buys "rights" from the state, or bids, or bids with the city. I don't know whether it's even up for grabs at this point, I think by the time we heard about it there was one company that had the authority to come in and drill in set spots. I think the city government might be the gatekeeper for authorizing drilling on a particular site within the city. But I know that the state has some very strict laws preventing cities from stopping drilling from happening. Once a company gets that site authorized, they can obtain a lease and force pool.

I don't think there's any realistic way for the neighborhood (or groups of neighborhoods, or even the city) to stop this train (there have been protests, and a city council seat recalled).
 

Rallywagon

what a long strange trip
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At least you get a heads up before being getting the green weenie..
 

Robin

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So I shan't look forward to photos of you and the family riding into Beverly Hills atop your farm truck just yet?

I thought exactly the same thing! :lol:

Sounds like it isn't really worth it because there are so many hoops you have to jump through and people to take a cut that you will be left with more hassle than cash.

There has been a massive backlash to Fracking here in the UK, public sentiment hasn't been great and it has meant nothing has progressed beyond a few small test sites. It has already been banned outright in Scotland.
 
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Danoff

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Sounds like it isn't really worth it because there are so many hoops you have to jump through and people to take a cut that you will be left with more hassle than cash.

...and yet... I have no choice. This is as though the state declared eminent domain on behalf of a private company.
 

Danoff

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Pfft. Doug had a whole oil field.

The exact first thing I thought of when I read the thread title.

Doug even then made an (inaccurate) story out of it.

https://jalopnik.com/how-to-spot-someone-whos-lying-on-an-internet-car-forum-1691704100

I could never in my wildest dreams have invented Colorado's forced pooling law. Apparently if I could have I'd deserve a spot in the state government. I feel like such an idiot contemplating voluntarily signing a contract that I don't want to sign just because I get manhandled by the law if I don't. I kinda want to protest and just tell them to beat it, but I'd just be shooting myself in the foot.
 
8,814
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Can you file an injunction against the company? The whole thing is kind of insane.

Have there been any seismic 'event's in CO due to fracking? I remember that happening in Texas.
 

Dotini

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CR80_Shifty
I was a petroleum landman in Texas in the period 1979-1981. There was no forced pooling. If a person had as little as an acre of unleased mineral rights, he could potentially make a small fortune by leasing to me. An independent driller, after receiving the appropriate permit, would drill and produce a well on the surface above. I would sell him the lease in return for a fee and an override. The surface rights were separated from the mineral rights long ago in Texas, the surface owner pretty much being screwed. I put my straw into numerous malts back then, and made a deal of money. Enough to retire on for a few years while I practiced international mountain climbing, studying yoga and women. To this day, I still receive overriding royalties. Once upon a time in the west, anyone with smarts, luck and effort could get rich.
 
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ryzno

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ryzno
I was a petroleum landman in Texas in the period 1979-1981. There was no forced pooling. If a person had as little as an acre of unleased mineral rights, he could potentially make a small fortune by leasing to me. An independent driller, after receiving the appropriate permit, would drill and produce a well on the surface above. I would sell him the lease in return for a fee and an override. The surface rights were separated from the mineral rights long ago in Texas, the surface owner pretty much being screwed. I put my straw into numerous malts back then, and made a deal of money. Enough to retire on for a few years while I practiced international mountain climbing, studying yoga and women. To this day, I still receive overriding royalties. Once upon a time in the west, anyone with smarts, luck and effort could get rich.
I would read a autobiography of your life. The things you post are very interesting.
 

Dotini

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I would read a autobiography of your life. The things you post are very interesting.

Thank you!

I've been urged to submit an article to the AARP magazine regarding the benefits of fencing, massage and anti-inflammatories for the elderly. But this is the first time anyone has suggested an autobiography! :eek: I will say "No way!"

Really, deep down inside, I'm actually quite shallow. it's just a random 7 decades of life of getting up early and showing up for work or practice. Like Forrest Gump.
 

Danoff

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Here's what it looks like today... these homeowners either got nothing, or very little, based on my personal experience due to forced pooling (epsecially if they're in CO, which not all of these photos are). Based on how long drill towers are up to drill wells (sometimes a year or two), these drill towers went up AFTER the communities in these photos, dropping house values (temporarily) while they're up.

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Frederick-Colo-Fracking2.jpg

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dentondrilling.jpg
 
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ryzno

Slowest of the Fastest!!
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ryzno
Here's what it looks like today... these homeowners either got nothing, or very little, based on my personal experience due to forced pooling (epsecially if they're in CO, which not all of these photos are).

image

Frederick-Colo-Fracking2.jpg

img.jpg

gettyimages-610406170-8483a1949dcc0275c612aabf7c9ddbc445bdb231-s900-c85.jpg

images

dentondrilling.jpg
Is the $1000 a one time thing or monthly etc? I got confused.
If it's a one time thing and only you know. Say no.

Also I remember your HOA is a PIA. I'm sure they don't want that. Down here an HOA is an instant property value increase.
 

Danoff

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Is the $1000 a one time thing or monthly etc? I got confused.
If it's a one time thing and only you know. Say no.

Also I remember your HOA is a PIA. I'm sure they don't want that. Down here an HOA is an instant property value increase.

It's a one time deal, that's a signing bonus. I have no choice in the matter, there is no saying no. If I try to say no, I forgo the signing bonus and get a worse deal for the rest of it.
 

Liquid

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Simpsons did it.

latest


Although that is pretty awful that only one person needs to sign away rights for all the oil to become tappable.
Can you talk to the state authorities about it? Or maybe go above to federal authorities if it's a Colorado-specific law?
 
6,063
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BALD_GYE
Here's what it looks like today... these homeowners either got nothing, or very little, based on my personal experience due to forced pooling (epsecially if they're in CO, which not all of these photos are). Based on how long drill towers are up to drill wells (sometimes a year or two), these drill towers went up AFTER the communities in these photos, dropping house values (temporarily) while they're up.

image

Frederick-Colo-Fracking2.jpg

img.jpg

gettyimages-610406170-8483a1949dcc0275c612aabf7c9ddbc445bdb231-s900-c85.jpg

images

dentondrilling.jpg
Those don’t look so bad, like a phone mast or something.. are they loud?
 

Danoff

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Those don’t look so bad, like a phone mast or something.. are they loud?

Yea, they put up sound barriers to try to help with that. They're not the worst thing in the world, but what do you think the house values are for that neighborhood while they're up vs. when it's an open field? It's a temporary thing, but if you have to sell in that time period it's a bad deal. People have other concerns about fracking affecting the water table.

I'm not unwilling to put up with the drill tower for a year or whatever, but it needs to be worthwhile. I'm more upset that I have no input into the deal whatsoever. Here's a lowball price, you have no choice in the matter, we get access to your property.
 

Danoff

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https://www.cnn.com/2019/06/10/business/oil-boom-production-opec/index.html

Oil prices continue to fall hard as the US becomes the leading world producer of oil. How do we produce so much cheap oil? Read above, we force mineral rights out of the hands of their owners (also fracking, but everyone knows about that part).

(I can see the new drill tower pumping my oil from most locations in my neighborhood).
 
9,401
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mustafur
Your state government is compromised, and that's ignoring the long term effects of fracking, many areas have experienced a sharp increase in minor earthquakes after it.

This would never pass here, not in a million years.
 

Danoff

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Your state government is compromised, and that's ignoring the long term effects of fracking, many areas have experienced a sharp increase in minor earthquakes after it.

This would never pass here, not in a million years.

Yea there were some weird effects in Oklahoma, I'm not sure that can be generalized though. The state government is for sure compromised.
 
9,401
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mustafur
Yea there were some weird effects in Oklahoma, I'm not sure that can be generalized though. The state government is for sure compromised.
I didn't realize it was this bad in some areas in the US, was there any independent environmental tests on the area first?

From what I found on Fracking in Colorado, county and Local Governments can't overrule the states decision to allow Oil and Gas company's to do fracking anywhere in the state so one county paid an Oil company to just go away and not do it in their area.

Imo the States Supreme court is compromised and should be the main aim of criticism here as they have the power to stop this regardless of who is in charge of the state.
 
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Liquid

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@Danoff Was there no further development on any monetary gains you yourself are entitled to or will receive?

Or are you playing it clever in case someone from the IRS screens this thread? :D
 

Danoff

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I didn't realize it was this bad in some areas in the US, was there any independent environmental tests on the area first?

From what I found on Fracking in Colorado, county and Local Governments can't overrule the states decision to allow Oil and Gas company's to do fracking anywhere in the state so one county paid an Oil company to just go away and not do it in their area.

Imo the States Supreme court is compromised and should be the main aim of criticism here as they have the power to stop this regardless of who is in charge of the state.

I don't know whether there was an independent environmental assessment. I do know that the extraction company had to get the plan approved by the city, but as you point out, I think that the city's hands were tied by the state in how much they could actually demand. People around here were furious, but until the rest of the state is motivated, our minority gets trampled.

I'm not so upset about the environmental impact. It's actually pretty low impact environmentally, as long as they're not causing earthquakes or polluting the water table it seems minimal. It's ugly, but that won't last forever.

I'm most upset that I own this property and it's being taken from me against my will and I'm extra upset that it's being handed to a private company to make a profit off of.

@Danoff Was there no further development on any monetary gains you yourself are entitled to or will receive?

Or are you playing it clever in case someone from the IRS screens this thread? :D

So far I have been paid $1800 (net). I expect that to be the end of it but I'll let you know when the gold pool gets installed.