This election allows the compelled working interest owner to pay the expenses on thewell in arrears- from the proceeds from the well
if any, but subject to a deduction of the actual costs allocated, plus a risk penalty of 200% percent
meaning the costsallocated to the compelled working interest party are 300% of the actual costs. As a practical matter, this would make most wells uneconomic for the compelled party to participate in.
Some operators will use this provision “to operate the partners todeath” –
meaning run up expenses to try to force them out of the well.
In the case of a leased tract, a royalty shall be deducted from the non-participatingowner's share of production, which shall not be subject to charges or costs, butshall be separately calculated and paid to the non-participating owner on behalf of the royalty owner as follows:(i) During the recovery of the actual well costs, 1/16 or 6.25%,(ii) During the recovery of the first 100% of the risk penalty, 3/32 or 9.38%,(iii) During the recovery of the second 100% of the risk penalty,
the lowestroyalty fraction set forth in an existing lease in the unit,
but no less than1/8 or 12.5%. Nothing in this subparagraph relieves any lessee of its obligationto pay, from the commencement of production, any remaining royalty andoverriding royalty owed under the terms of its lease.
The compelled party, since they are by definition a mineral rights owner, are entitled to a royalty interest on the well, but at a reduced rate, as described above, as long asthey are paying their working interest cost share in arrears
from the well’s
proceeds (if any).
"Integrated participating owner" or "participating owner" means anowner who elects to participate in the initial well in a spacing unit,
paysall costs associated with participation
and complies with all of therequirements for participation,
including the terms of integration, specified inan order of integration issued pursuant to the compulsory integration provisions of this section.
This election means that the compelled interest owner is paying their pro-rata shareof drilling and fracking
as those costs are incurred. Therefore no “risk penalty” is
assessed against them, but they are rolling the dice that the well will be economical.Or they will lose their investment in the well.
(3) "Integrated royalty owner" means an owner who has either elected to be anintegrated royalty owner or who does not elect to become either a participatingowner or a non-participating owner.
The integrated royalty owner shallreceive a royalty equal to the lowest royalty in an existing lease in thespacing unit, but no less than one-eighth.
The integrated royalty owner shall