In June the State of North Dakota’s oil and gas leasing agency entered into a five year contract with online auction firm EnergyNet, in order to be able to offer tracts between the state’s legislatively mandated quarterly auctions.
Noting the decision is ultimately up to the North Dakota Department of Trust Lands Commissioner Lance Gaebe, Drew Combs, director of the department’s Minerals Management Division, says eventually the division might conduct all its oil and gas lease auctions online because of the advantages to both the state and the bidders — advantages that include the state being able to reach many more prospective buyers; bidders being able to work from the comfort of their own offices versus having to travel to North Dakota for the quarterly auction; and the option of buying and selling tracts between quarterly auctions.
While online auction firms such as EnergyNet have been around for a number of years, North Dakota is the first state to use such a service for the sale of oil and gas leases.
Demand for oil and gas leases between the quarterly auctions was the impetus for entering into the agreement with EnergyNet, says Combs.
As operators put together state-required spacing units, which are typically 1,280 acres in size, unleased “holes” pop up in a unit, he says.
Some are leases that expire between auctions; or a few acres that are just missed.
The state may own all the acreage in a spacing unit, but in other cases it may only own a single acre, and sometimes companies need that isolated tract to proceed with drilling.
Combs first used EnergyNet in the spring of 2011 to sell 51 potash leases. Knowing most of the interested parties were overseas and that some would be deterred by having to wait for the next quarterly minerals auction and having to come to North Dakota, he thought it would be a good time to test online leasing.
The potash sale went well; “It turned out to be a good tool,” Combs says.
First test for oil and gas leases
Combs then decided to try the online auction for oil and gas, and in December 2011 EnergyNet held an online oil and gas auction for the division during which prospective buyers from 32 U.S. states and three Canadian provinces placed bids.
Based on these two successful online auctions, the division decided to get an online provider under contract. The agency put out a request for proposals and EnergyNet was eventually awarded the contract, which was signed on June 1. The first auction since the contract was signed in August when Kodiak Oil and Gas (USA) was the high bidder on an 80-acre tract in southeastern William County paying a total $560,240 or $7,003 per acre, as reported in the Aug. 19 edition of Petroleum News Bakken.
Combs says plans are to continue the quarterly live auctions and use EnergyNet on an as-needed basis. However, he sees so many advantages with the online service that eventually the division will likely consider moving exclusively to that service.
One advantage, he says, for bidders is that they won’t have to travel to North Dakota for the auctions.
Most of the oil and gas companies doing business in North Dakota are based in Houston or Dallas or Denver, and flying to North Dakota can be difficult. The people have to stay overnight, and all of this for a four-hour auction, Combs says.
Instead of communicating by cell phone with their brokers at the auction, Combs asks, “Why not get the guy that is writing the check to be able to sit in his office and then decide what he wants to do?”
The online auction process
In the EnergyNet process, the leases are posted and prospective buyers have two weeks to do their due diligence online. That is followed by a one-week open, continuous auction period.
All bids are posted as they are submitted so that bidders can follow the auction in real time.
“Everybody sees the bids as they are made so it’s all done in real time,” EnergyNet board chairman and cofounder Bill Britain told PNB.
Bidders have the option to disclose their identity, and most remain anonymous, but some, according to Britain, “want to put their name up there because they think it will scare the other buyers away.”
The beauty in the EnergyNet process, according to Britain, is that if the state wants to sell a lease for whatever reason, it doesn’t have to wait until the next quarterly auction, and EnergyNet can have it sold in a matter of weeks. “Whenever they call on us we’re ready,” Britain says. “It’s the eBay of oil and gas.”
EnergyNet works strictly on commission. For the service it provides to North Dakota, premium fees are paid by the buyers and the service doesn’t cost the state anything. “When the buyer buys the property, North Dakota receives exactly what he (the buyer) bid, and we receive an additional fee that is added to that,” Britain says.
Combs says he thinks the premium fee that buyers pay is well worth the service that EnergyNet provides. EnergyNet, he says, is in the business of divesting oil and gas properties, and they sell huge tracts. He added that EnergyNet has a marketing and advertising program and will send out mailings and even call brokers about upcoming auctions.
“They’re pros,” Combs says.
Information online
And in terms of due diligence, Combs explains that when someone goes to the EnergyNet website for a particular offering, everything they need to know is right there. In the August division auction EnergyNet posted well details, the AFE, production history for surrounding wells along with other information, “and that’s something you just can’t do at a live auction.”
Another advantage of the online auction service, per Combs, is that it can literally triple or quadruple the number of potential buyers: “It’s not just a bunch of guys sitting in a room.”
Combs also likes the way EnergyNet vets prospective bidders.
He says the criteria required for prospective buyers to be registered with EnergyNet are more stringent than what the state requires for their live auctions. Because of state rules and regulations, if a person is qualified to do business in the state of North Dakota, then that person can attend a lease auction and start bidding.
Combs says there have been a few cases where the highest bidder was not able to pay. But with EnergyNet, he says, the state isn’t part of that process.
About EnergyNet
Founded in 1999, Amarillo, Texas-based EnergyNet held its first online auction in February 2000. Since then the company has sold nearly 38,000 properties, with this year’s sales exceeding $1 billion. EnergyNet has had more than 3,000 sellers and more than 16,500 accredited oil and gas investors subscribing to its services.
EnergyNet has sold holdings for a variety of entities including Chevron, Bank of America, Stanford University, as well as various foundations, individual investors and individual property sellers.
The firm sells operated and non-operated working interests, overriding royalties, minerals and both public and private oil and gas leases, and recently signed a five-year contract with the Federal Deposit Insurance Corp. to sell foreclosed assets. l
Editor’s note: Revenue generated by the North Dakota Department of Trust Lands goes to fund public education in the state. As director of the department’s Minerals Management Division, Drew Combs oversees slightly more than 2.5 million mineral acres.
