The Oil Drum

The land seems like a betteer idea to me, too although my money is going in assembling shallow US oil prospects for tertiary development. Cheap wells with a very high probability of economic success.

Gold and silver have no intrinsic worth, and a huge amount of speculaion in owning the. In the early 1990 gold got down to $280 US an oz. Its what-about $70 now, which sounds pretty good, except wasn't it about $1,000 an oz 10 years before that? So gold isn't a good store of value. Then ther's the problem of storage, If kept at home, there's a good chance of robbery, ect. If in the bank safety deposit box, what happens when the bank goes belly-up? How do you get your precious metals out? And on deposit with a government overseas? Your faith in human nature is profound if you trust the Government of South Africa over the US government.

I ran across a new oil and as lease provision on new oil lease, less than 6 months old, and was in the royalties clause. It stated that the Lessee (producer) owed royalties on the actaul market value of the oil and gas at the time of production rather than the price received. I did a double take, then sat down and thought about what it really meant. The way I interpreted it was the Lessor, the mineral owner had been paid royalties based on the sales price received for the oil which had been sold in advance to lock in a high price- a futures contract like described in the intro above- but had gotten stung as market the price rose above the contract value and the Lessor was mad and planning to stop that in the future.

I just reread that and it sounds confusing, even to me and I wrote it. So I'll give a hypothetical example but with names changed to hide the unindicted co-conspirators.

The Lessor, the mineral owner owns minerals in several different oil leases. On one a company has been paying royalty based on a 30 year old lease contract, and then decides to sell the producing lease to the Highbinder Oil Company. Highbinder, in order to get cash to finance their trade, presells the oil as a future for $40.00 a barrel. But in the next couple of years the oil price goes up to $80/bbl, but the lessor is only receiving royalties for the oil at $40/bbl because the Lessee presold his oil, even though his neighbor across the fence is receiving royalties based on the new market value of $80/bbl. Needless to say, he's hot and may even get a lawyer and sue the Highbinder oil company for the rest of his royalty. Its similar to the take or pay royalties that sank the gas pipeline companies about 25 years ago in Texas.

Now I haven't seen any lawsuits like that-yet, but I expect we will. So you guys buying stock in companies that presell their oil and gas as futures need to take that potential liability into account. And, if you own a minority interest in the Working Interest and the Highbinder Oil Company has presold your oil too and left you with owing royalties on the landowners oil while not receiving any benefit from the futures contract too, need a lawyer. Just seeing that lease clause proves som attorney is already thinking about that kind of lawsuit. Bob Ebersole