Eagle Ford Shale Mineral Rights Scams Aplenty

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When any gold rush comes to an area, the scam artists and bottom feeders are among the first to ride into town. In the Eagle Ford shale play, mineral rights leasing and buying scams are multiplying daily. While there are lots of legitimate land men and mineral rights brokers out there, your best interests may not always be the same as theirs. The victims of  Eagle Ford shale mineral rights buying scams (or poor deals), are often elderly farmers and ranchers, or absentee property owners who haven’t a clue about what is going on the Eagle Ford shale play. They may have heard from a neighbor that land is going for $2000 an acre for oil leasing, and they may be tempted by an an offer for three times that amount, to buy their mineral rights outright, not fully realizing that such a deal leaves them with no chance of realizing any profits from the oil and gas that most likely lies beneath their property.
Why Is Selling Your Eagle Ford Shale Mineral Rights Usually A Very Bad Idea?

Mineral rights in Texas are considered “real property”, and may be bought, sold, retained by the seller or passed on along with the surface property at the time of a real estate transaction.  When a landowner leases their land for Eagle Ford shale oil and gas exploration, the terms of the lease will specify a period of time, such as three to five years, in which  the oil company has the right to explore the depths leased for petroleum. In addition, a lease normally grants the mineral rights owner a portion of the revenue from oil or gas recovered, or “royalty”. Royalty agreements  such as twenty five percent are common in much of the Eagle Ford shale. The mineral rights owner stands to gain from an up front lease payment, in addition to a hefty amount of potential royalty from any future production on the property. Because of the almost 100% success rate of Eagle Ford shale wells, the prospects of  large royalty payments are often very good, if not certain, whenever drilling does come to your area.  To give you an idea of just how much Eagle Ford shale acreage is worth,  Marathon Oil Company recently paid over $21,000 an acre for leases owned by a holding company in the eastern part of the Eagle Ford shale.

With such huge potential to earn long term royalty from property with mineral rights, who in their right mind would consider selling them you might ask? The only situation in which selling Eagle Ford shale mineral rights would make any sense, would be one where the owner needed a large sum of money, greater than that which would have been paid under a lease agreement, to solve some current financial problem. For example, if the going lease payment for your area was $2000 an acre, and you were offered $10,000 an acre to sell your mineral rights, and you needed the money for a life saving operation, to avoid foreclosure, etc., then it might be worth considering. For landowners with no heirs, who are elderly and whose land may be several years away from seeing drilling, and who simply want to enjoy a few years of the “good life”, an outright mineral rights sale might make some sense. In some cases a person may own “non-participating” mineral rights. These mineral right owners don’t have “executive rights”, and therefore will not reap any up-front  lease bonus money, but may share in royalty payments once a well is drilled. It may make some sense to sell non – participating mineral rights if it looks like drilling may be many years down the road and you really need the money, however once sold, the seller loses out on any chance of getting future royalty payments.

For almost all others, and for their subsequent generations of heirs, selling Eagle Ford shale mineral rights for almost any sum is usually a colossally bad idea.  Oil and gas companies now have a very good idea (using 3D seismic and well logs) of what lies under most of the Eagle Ford shale play area. If land is leasing for a high amount in your area, chances are there’s near 100% certainty that oil or gas lies below your property.
Let’s do a little simple math and take a look at just what a bad idea selling Eagle Ford shale mineral rights might be.

Scenario 1. John and Mary Rancherfolk, of Live Oak county,  get a phone call one evening from a nice lady in Dallas who wants to talk to them about their mineral rights. She states that she works for parties who are willing to pay up to $5,000 an acre for the mineral rights under their 1000 acre ranch. John and Mary agree to a meeting and ultimately  sign over all of the mineral rights beneath their land for a lump sum payment of five million dollars. That’s more money that the couple has ever seen in their lives, and they are happy as they can be with the deal.  They’ve got a granddaughter off at college and they plan on taking care of her tuition, as well as paying off the note on the land and doing some improvements to the ranch. After taxes hit them at the end of the year, they don’t have quite as much left, but it’s still more than they’ve ever seen.  A year later, an oil company drills five Eagle Ford shale oil wells on their property. Since they don’t own the mineral rights anymore, all that they receive is compensation for surface damages, and a new Carrizo – Wilcox Aquifer water well as a bonus. They watch the oil trucks come and go, but don’t have any idea how much royalty they have given up.

Scenario 2.  The Rancherfolk’s neighbors, let’s call them Tom and Sally, sign an Eagle Ford shale lease on their 1000 acres with an up – front, $1,500 per acre lease bonus, and a royalty provision of 25% of any future production. They put 1.5 million dollars in the bank, and like the Rancherfolks, pay a hefty amount of it to the IRS, but still are able to take care of lots of things they’ve always wanted to do.  The same year that the Rancherfolks see rigs moving in on their land, drilling begins on their property as well. Five horizontal Eagle Ford shale wells are drilled, which have initial production rates of 800 barrels per day, per well.  That’s 4000 barrels of production per day, in addition to any sales of natural gas, of which Tom and Sally receive one  quarter of all sales. Oil is selling for $100 a barrel, natural gas for $4.00 per MMbtu, and their first royalty check is for three million dollars, for one month’s production. As the wells level off a bit,  and are ultimately put on pump jacks, the payments dwindle off a bit, but still amount to just over twenty million dollars the first year alone.  Over the life of the wells, and with several more being drilled over the next ten or so years, well, let’s just say that Tom and Sally, and their heirs, come out much better in the long run than the Rancherfolks did.

This example shows the need for good advice, such as that from a qualified attorney,  before entering into any agreements to sell or lease your Eagle Ford shale mineral rights.  Right now, somewhere, you can bet there is an agent talking to a landowner  in South Texas about selling or leasing Eagle Ford shale mineral rights. Beware when they come calling on you or your family and know what you might be signing away!