The early science of crude oil discovery explained that it seeped up out of the ground. You simply had to know what it was, and how to make money from petroleum. The early discoveries were in Pennsylvania, and crept through the Great Lake states where transportation was available on barges. Oil had quickly become refined to kerosene, and dominated the lighting needs of the dark cities.
In Oklahoma, the first oil deal was called the ‘lease.’ It allowed the producer to bring drilling equipment onto the land. Oklahoma royalty owners were there at the beginning of the oil and gas industry and have seen all the changes that have helped shape Oklahoma’s production. With production of the oil came royalty, the percentage paid to the land owner. For decades, royalty was 1/8th (twelve and one-half per cent) of what would become billions of barrels of oil in Oklahoma. Early barrels sold for a dollar per barrel, but prices would become volatile and drop to 10 cents. The volatility would make and break producers for decades.
The American Royalty Council (ARC) has become the 21st century voice of royalty owners – offering the experience that the oil and gas industry has become the energy industry, and change is always on the horizon. ARC sustains the efforts of many county, state and regional royalty owner groups that met for education and support as the petroleum industry grew in the state. Although early producers burned natural gas and considered it dangerous, the modern-day royalty owner must be a prudent partner with those who produce and regulate the natural resources and disallow the waste of our natural resources due to a lack of knowledge and communication. Today we speak in e-commerce and WWW.AMERICANROYALTYCOUNCIL.COM. Energy is the life blood of our economy, and those who are part of the production revenue stream are consumers. It takes energy to make energy. As we look to the future, oil and gas will continue to be vital ingredients for all so-called ‘alternative’ supplies. A new generation of royalty owners will begin.
THE FIRST DEAL
Unlike many states, Oklahoma had been divided into tracts of land containing 160 acres. There were land runs, dozens of relocated Indian tribes, and statehood saw the tribal lands again divided. The rules of settlement often required only a few years of residency. As oil exploration arrived, speculation became a way of life. The concept of ‘severed’ mineral rights quickly brought investors from eastern cities. At statehood, Oklahoma was witness to the dismantling of the Standard Oil Trust, the infamous Rockefeller monopolies at the turn of the century. This would shape attitudes that still filter the perceptions of Oklahoma’s most valuable industry.
Oklahoma has had enormous oil fields. It has created tens of thousands of royalty owners. In the early days the crude oil was hauled by mules in wagons full of wooden barrels to local refineries for what was primarily city use. Oklahoma was a vast ocean of tallgrass prairies and the land was used for farming and ranching. The automobile was a novelty, electricity had not found its way to the rural world, and airplanes (that would take our favorite son, Will Rogers) were on the drawing board.
World War I focused the need for gasoline as new machines took troops overseas and gasoline powered battlefield equipment meant more and more crude oil needed to be produced in the U.S. and shipped by tanker to Europe. With every increase, the relationship between producer and royalty owner evolved. The years referred to as the ‘Roaring 20’s’ became the image of the victorious Americans in top hat and silk. The automobile had become the mode of transportation and often was driven by chauffeurs. The collapse of the stock market ravaged its investors and left unemployment approaching 25%. Trains burned coal and hauled oil across the country as people looked for a new day.
In Oklahoma, families lost farms and valuable mineral rights that they did not know what lay beneath their dusty soil. Others severed their minerals and saved what they could. Those who had means held their ground and looked for a way for their families to continue in the state. During these uncertain days families began to do what families do. They married, divorced, lost children and moved to the lands of their dreams. Royalty owners have moved throughout the county and even around the world. With each decision, the mineral rights began to be divided. It became more difficult to locate people, and the state needed to extract its natural resources in an orderly way. The Oklahoma Corporation Commission (OCC) was created to oversee the way oil was produced. Royalty owners would have to learn to be regulated. It was the days of populism and to the royalty owner the companies had too much power over their mineral rights.
World War II would need all of the oil the world could produce. Oklahoma joined all producing states in providing expertise to oil discoveries in foreign lands. Victory in Europe and the Pacific opened the U.S. workforce to Eisenhower’s view of the German Autobahn that led to America’s interstate highway and the love affair with the car – the bigger the better. Oil was cheap and plentiful no matter where it came from. Oklahoma’s royalty owners paid off debts at the bank, sent their children to college and made gifts to their church.
BOOM & BUST
In no industry does the term ‘bust’ mean more than the volatile oil and gas industry. The economics of inflation had kept the production of crude oil fairly stable for decades, and natural gas was still very cheap or wasted. In the 1970’s, a new royalty owner appeared as the world shrunk in size following WW II and the enormous growth years of the 1950’s. While Americans moved from a rural economy to suburban lifestyles and agri-business, the new owners of the oil markets joined forces and formed ‘OPEC.’ The Organization of Petroleum Exporting Countries had seen a new power – the control of energy.
No one used more energy than the United States and the costs were manifest in unusual forms. The public stood in line for gasoline. There was anger, but also fear. The oil producers were faced with concessions offered by countries that did not want to follow the same financial arrangements that had produced great wealth for their countries. They wanted more. Domestic producers needed to meet the needs of a country that was accustomed to very cheap gasoline. Equipment was sparse, and new leasing was a demand that had producers offering higher royalty rates. Three/sixteenths and even one quarter royalties were being offered to mineral owners who had little or no experience with the competition. The era would generate billions of dollars in oil and gas revenue and the royalty owners were there to receive their share.
It was called a BOOM, and few people knew how to handle the pace. The already ‘fat cat’ reputation of oil companies expanded as stories of excess grew to urban myth. The OCC had its hands full of ‘force pooling’ hearings and the challenge of the rules again drew a wedge between owners and producers. However, ‘lease bonuses’ became myth as well. Royalty owners could easily fall for the jackpot mentality rather than make sure their lease was a good one with a reputable operator. The smart players made good deals. Today there are still good deals. In that era, oil prices had risen from $3 per barrel of oil to over $35 per barrel. Prices for natural gas had also risen dramatically from pennies to $1 per million cubic feet (mcf). For years, oil and gas leases had allowed the lessors to use gas on the premises of their farms, and in some cases irrigation equipment was powered by natural gas. In the coming years, the commodity of natural gas would be traded as never before. The 1980’s would bring an all too familiar bust followed by the liberation of Kuwait in the 1990’s causing crude oil prices to rise and collapse. It was ‘boom’ and ‘bust,’ and Oklahoma’s royalty owners have been there to see it all. Each family represents a small business, and their contributions are in the economics of the state for all to witness.
THE AMERICAN ROYALTY COUNCIL
Oklahoma’s crude oil production has fallen from 200 million barrels yearly to 60 million barrels per year. Without renewed values for crude oil, wells would be abandoned at a catastrophic rate. Natural gas has become the savior for the Oklahoma oil patch. Royalty owners are the natural grassroots proponents of high quality goals for public perception that must be sustained for the economic well-being of Oklahoma. The American Royalty Council has created a forum for royalty owners and producers as well as the representatives from the new ‘mid-stream’ components of companies that must maintain the infrastructure that takes our natural resources to market. An elder statesman of the oilpatch once commented, “We send grain and natural gas to others, and they return a $5 box of cereal.” Maximization of Oklahoma’s great legacy of oil and gas takes outspoken support of the partnership that exists between royalty owner and producer. ARC is committed to improving that goal. For far too long the misperceptions have created a poor dialogue. Oklahoma is a mature producing state, but there are “miles to go before we sleep.” ARC is proud to support our industry. The tragedy of the impact of Hurricane Katrina is witness of the devastation we face without our energy production healthy and capable. ARC brings generations of common sense to the national dialogue we have begun to undertake in the United States. Oklahoma’s royalty owners have been partners to thousands of wells. They have fueled the engine of our state and our country. Be sure to visit the ARC website for energy news, education, and a forum for your voice to be heard in promoting Oklahoma’s oil and gas production in the future. The website offers a unique perspective of the oil and gas royalty owners’ connection to the property – the deed, lease, division order and the check stub which are the primary documents that define the interaction between mineral owner to royalty owner and the production.
(Oil & Gas Investor – May 2007)