Occupational Licensing and the Landman. Are there rules?

All,

Occupational licensing in the United States is on the rise. It has been estimated that up to 25% of jobs now require a license.[1] There are a number of reasons why occupational licensing is detrimental to economic growth. Licensing requirements protect incumbents by preventing new entrants in the industry through the cost to acquire and maintain a license and discourages movement from areas of lower opportunity to high opportunity as requirements are often state-specific and do not transfer easily to new jurisdictions. Now landmen may be required to become licensed.

Badges to purchase Oklahoma mineral rights? It could be a thing…

Historically, landmen have not had to maintain a license. It would place a large burden on both company and independent landmen if they had to maintain some type of license in every state where they worked. As the headwinds in the basins shift and new prospect lines are drawn, a landman could spend a great deal of time and resources complying with licensing and continuing education requirements.

Recently, an Ohio court ruled in Dundics v. Eric Petroleum Corp, Slip Opinion No. 2018-Ohio-3826, that an oil and gas lease falls within the definition of real estate according to the Ohio law and the negotiation of which requires a real estate broker’s license. If it can be interpreted that the assignment of oil and gas leases fall within the definition of real estate, then one can assume that almost any oil and gas trade of any size will have to be negotiated through licensed brokers.

Most proponents of the occupational licensing claim that it protects consumers. Which party is the consumer in this case? A consumer is usually defined as a buyer or user of goods or services. In oil and gas transactions, the buyer or user or lessee or assignee is usually a professional in the business. Do they need protecting? This is weird.

Fortunately the Oklahoma Real Estate License code explicitly excludes oil and gas from its definition of real estate by clarifying that “real estate shall not include oil, gas or other mineral interests, or oil, gas or other mineral leases; and provided further, that the provisions of this Code shall not apply to any oil, gas, or mineral interest or lease or the sale, purchase or exchange thereof.” [2] While this would currently exclude landmen from having to obtain a real estate license, there is nothing to prevent the state from creating a new occupational license exclusively for landmen.

Occupational licensing is an important issue and should be monitored and advocated against in the event that other states want to copy Ohio’s regulatory overreach. Berlin would be interested to hear your thoughts on the matter in the comments section below.

More to follow,

Berlin

[1] Rodrigue, Edward. “Four Ways Occupational Licensing Damages Social Mobility.” Brookings. February 24, 2016. Accessed December 2018.

[2] The Oklahoma Real Estate Commission. “Oklahoma Real Estate License Code and Rules.” OREC. November 1, 2016. Accessed December 2018.

a version of this post originally appeared by the same author on www.oklahomaminerals.com

The Seller's Dilemma

Oklahoma Oil and Gas Mineral Owners:

It is a weird feeling to get an unsolicited offer to purchase an asset from another party. Berlin's initial thought is something like "well, if Shortline Minerals thinks these are worth $5000/ac, they must know something I don't as I would be happy to sell for half of that." Berlin could sell for the $5000/ac price and turn around and deploy those funds elsewhere. However, it will always be in the back of her mind how and why Shortline is able to pay that much for her fringy STACK properties. Maybe they have a company landman on the take and Shortline knows that the section is scheduled for a density test. Maybe there was a seismic shoot in the area that Berlin didn't know about and the interpretations look promising. But it's also possible that Shortline has a low cost of capital, their sponsor has a low hurdle rate or that they are paid a commission on an acreage basis. Just because someone is throwing around a lot of money, doesn't make them right or that their project will ultimately succeed.

Should they sell their Oklahoma royalties and re-invest in their cash crop or hold and wait for horizontal development? They are in the horns of a dilemma.

This internal monologue is the second most often cited objection to not selling minerals (the first being, "pa told me never to sell and for some reason this is the one thing that I never questioned my parents about..."). Berlin thinks of it as a dilemma. After all, it sounds like a decent trade if someone is willing to pay 4-7 years of cash flow for the asset and assumes the regulatory and commodity price risk of owning producing Oklahoma royalties. And if the mineral has higher and better uses for the cash it can be a decent trade. After all, a leased mineral owner cannot easily add value to the minerals by increasing production through development. However, one could take the cash and invest it into an enterprise that they do have control over.

Berlin would be interested in hearing your thoughts on the issue, both from the buy and sell sides.

More to follow,

Berlin

A Well Proposal In Oklahoma - A Boon to the Mailman

Oklahoma Oil and Gas Mineral Owners,

Berlin's friend Bruce called her up on Friday, and after he finished ranting about planting his tomatoes before the last frost date, he got down to asking about well proposals and why he is receiving them in the mail for his Pittsburg County, Oklahoma mineral rights.

Unless one is party to a Joint Operating Agreement, a well proposal in Oklahoma is a non-binding piece of correspondence. It is supposed to be the last of a series of efforts for all owners with the right to drill a well in a certain drilling and spacing unit to agree to drill (or not to drill) that well before a forced pooling proceeding is undertaken at the Oklahoma Corporation Commission. 

A well proposal will usually contain the following pieces of information;

1. The proposing party (and potential operator)
2. The location of the well (usually described to a quarter section level)
3. The target formation
4. The type of well (horizontal or vertical)
5. The depth of the well
6. The cost of the well (an AFE should be included)
7. The proposed farmout/lease terms in lieu of participation in the well

Ever since our friends at Chesapeake popularized not sending out a JOA even between parties who have agreed to the development of a unit, a well proposal should be viewed as a warning order that a forced pooling application will arrive in a few weeks.

Dr. Evil prefers that one forgets that elections under a pre-pooling well proposal are non-binding so he can deem Austin out of the well.

There is little room for negotiation in the terms of the well proposal. If an owner desires not to participate and would prefer to lease/farmout and doesn't like the terms presented in the proposal, the proposing party will say something like, "well, you had your chance hot shot, but now you'll just have to see what we testify to at the pooling hearing." The power of the forced pooling provisions gives her the ability to (1) call anyone she wants "hot shot," and (2) not care about responding to counter-proposals from other owners in the unit. Berlin has been told that is not the case in other states (property rights, who needs property rights?).

If an owner does want to participate in the well, he will still have to elect to do some when the forced pooling order issues. Despite the fact this is usually written into the well proposal, many parties still fail to elect under the order and the operator is more than happy to overlook their previously designated intent and deem them out of the well.

After Berlin explained these facts to Bruce, he asked the only questions that a reasonable person would ask after hearing about how worthless a pre-pooling Oklahoma well proposal is, "what's the point and who benefits?" Berlin isn't sure what the point of the well proposal is, they are often ambiguous and as stated above, non-binding. The beneficiaries are certainly the USPS who really enjoy when letters are sent certified at $7.00/piece and the potential operator's competition who get a 2-3 week notice that applications are about to be filed.  

Please comment below or contact Berlin with any more questions about well proposals or if you would like to sell your Oklahoma mineral rights.

More to follow,

Berlin

"Yes Please, I'd Rather Have a Dividend" - Stockholder

Oklahoma Oil and Gas Interest Owners:

As yall are well aware, Berlin's finance (that's "fuhnance") prowess is on par with her triple lutz, triple toe, which is non-existent. That being said, Berlin does know that as a stockholder one has claim to the future profits of the firm. Profits can be retained by the firm or issued as dividends to the owners. If the owner of the firm thinks that the firm will be able to invest the profits more wisely than the investor can elsewhere else, he will be grateful if the company retains the profits and chooses another wise investment for his capital. On the other hand, if the investor has better uses for the company's (his) profits than the company, he will push for dividends.

Production wedges....

In a Retuers' piece, Ernest Scheyder reports that investors in oil and gas concerns are demanding dividends and also according to the chief executive of energy investment at Tudor, Pickering, Hold & Co. “investors are looking for improving results, better returns and operational performance” (Maynard, wouldn't it be weird if they weren't?).

On one hand, at least these companies are now making a profit. On the other, it is not necessarily a vote of confidence for the stockholders to be demanding their cash. Since producing oil and gas requires that the company deplete its oil and gas reserves (read, assets), companies must always be acquiring new leases. Acquisitions and the development of these acquisitions require cash. Because it has proven difficult for companies to grow their production wedge out of free cash flows and with the owners taking their cash elsewhere, this will lead companies  to the debt markets which Berlin has mentioned before is problematic.

If you think Berlin has erred in her analysis or you would like to sell your Oklahoma oil and gas mineral rights and royalties. Please drop us a line or comment below.

More to follow,

Berlin

PS: Thanks to DC for his winning submission to Berlin's query regarding the meaning of "MERGE". "Must Everything Require Grand Epithet" = $10 Amazon gift card. 

Assorted Links (and a chance to win an Amazon gift card)

Oklahoma Oil and Gas Mineral Owners:

Here are a few links that Berlin read over the weekend that will be of interest:

Duke is sad that he didn't buy more Oklahoma mineral rights and royalties in the MERGE before the Governor James B. Edwards well was drilled by Citizen Energy. 

The Perfect Oilfield (unfortunately, not the STACK/SCOOP/MERGE..): 

Once one starts tacking on zeros to the production numbers, Berlin's former tong working brain starts to spin a bit (like chains...). It sounds very impressive and I'm sure the Bedouins of that desert prefer the sovereign didn't own the mineral rights. H/T to Tyler Cowen for the link and the introduction to Shellman's blog.

‘Enormous’ Merge Play Resource Rivals Major World Gas Fields (fortunately, the MERGE, unfortunately not the STACK/SCOOP)

The secret has been out for some time, but the Governor James B. Edwards well drilled by Citizen Energy, has led to the development of the MERGE (...who coined this one and what does it stand for?*) and that means money in the door for Oklahoma oil and gas mineral owners in the Tuttle/Minco/Union City area.

Sheriff Takes Food from Prisoners, Locks up Whistle Blower (weird and legal, but shouldn't be)

For some reason, we take liberty for granted. Vote them out.

More to follow,

Berlin

*the wittiest explanation for the MERGE acronym will receive a $10 Amazon gift card. Email Berlin or comment below. Competition ends close of business 27 March 2018.

Do You Boat Acreage or Push Paper?

Oklahoma Oil and Gas Interest Owners,

Are you going to fill up the boat with acres of leasehold and Oklahoma mineral rights or worthless paper and wasted efforts?

Back when Berlin started schlepping leases, her boss claimed there were really only two kinds of landmen; there were landmen who boat acreage and landmen who chased rig lines and pushed paper around their desks. Then he asked, what kind of landman did Berlin want to be? While at Amoco one had to do both, but there was certainly a bias towards the landman who could boat acreage. After all, what is a landman's purpose if she can't secure mineral rights for the technical team to exploit?

The early successes of Chesapeake Energy further emphasized the importance of acquiring leases. McClendon's philosophy was that if Chesapeake owned it all, the company wouldn't have to bend to the will of the Conoco's of the world to facilitate a trade (like a 20 year earn-out on some Western Anadarko Basin properties....thanks gents for the stellar proposal).

The ease and speed of modern communication has altered how most landmen spend their time. It is now possible for a landman to spend his entire day emailing about an issue that could be solved in a phone call or worse yet, one that doesn't even need to be solved at all. Requests from the division order departments about curative, land managers about title tracking, and nitpicking another company landman over the smallest details of a pre-pooling letter agreement can be all consuming. The relative cheapness of the communication medium hides the immense opportunity costs of engaging in this type of behavior. 

Cal Newport often writes about how the quality of work and the productivity of the average knowledge worker is in decline. He claims we are now worse at creating valuable things. And this is true. Economic oil and gas prospects are valuable. As land staffs become bloated and perform less of what Newport has coined "Deep Work," it takes more man hours to put together an oil and gas prospect. Putting together a prospect requires boating acreage. And boating acreage requires deliberate, focused efforts from running title to the disciplined negotiation that is necessary to acquire oil and gas leases in a competitive environment.

There is a lot of paper to push around these days, but does it need to be pushed?

More to follow,

Berlin

Is $10 Actually the Bonus Per Acre?

Oklahoma Mineral Rights Owners,

Berlin received another call from Bruce today. He was angry and slightly confused. Bruce was sure that some fly-by-night lease flipper was fixin' to cheat him out of his lease bonus. The Duncan, Oklahoma based outfit had offered him $1,100 per net mineral acre for a 3 + 2, oil and gas lease at a 3/16 royalty for some of his granddaddy's minerals in Beckham County, Oklahoma, which Bruce accepted.

No Oklahoma oil and gas mineral owner is getting jammed on ole girl's watch.

However, upon review of the lease, Bruce read the following statement "Witnesseth that the said Lessor, for and in consideration of Ten and more Dollars, cash in hand paid, the receipt of which is hereby acknowledged...do grant, demise, lease..." Bruce asked the buyer to replace the ten dollars with the actual bonus due and the buyer balked. Bruce asked Berlin if this was proper or if he was getting jammed.

Berlin told Bruce that this is the industry standard and that lessees of Oklahoma oil and gas leases do not place the actual bonus paid of record by writing it into the oil and gas lease. As long as Bruce was satisfied with the terms of payment, the "and more" of the consideration and granting clause that he was presented is legitimate. 

Berlin has written about the terms of the basics of the oil and gas lease before, but if you have any more questions about an oil and gas lease or you are interested in leasing or selling your mineral rights please comment below or drop us a line.

More to follow,

Berlin