How well does ChatGPT know land work?
I'm returning to the oil and gas world after a 15-month detour into marketing.
I'm pretty sure I've mostly still got it, but I'll no doubt be a bit rusty right out the gate. So I recently decided to review some basic concepts and then realized this was a great opportunity to test ChatGPT's oil and gas land work knowledge.
Findings
ChatGPT did well with basic facts and concepts.
But it didn't do so hot when it came to calculations.
This discrepancy shows the challenge of using ChatGPT: It's fine for some things but then gets others completely wrong. Someone with experience can spot some of these red flags. But what about someone inexperienced relying on ChatGPT to teach him or her something new?
The prompts
Without further delay, let's dig into the prompts.
The good
First, let's start with what ChatGPT got right:
Prompt: What is a Mother Hubbard clause?
Image of ChatGPT's Mother Hubbard response
ChatGPT's response:
A Mother Hubbard clause is a provision in an oil and gas lease agreement that allows the lessee to include additional lands within the leased premises that were not specifically described in the original lease. The clause is named after a well-known nursery rhyme character who owned a cupboard that was “bare” except for a bone for her dog. The clause is also sometimes referred to as an “open-ended” or “blanket” clause.
The Mother Hubbard clause typically includes language that states that the lease covers not only the specifically described lands but also any adjacent, contiguous, or appurtenant lands owned by the lessor. This language can give the lessee the flexibility to expand the leased premises as necessary to include additional lands that may become available in the future.
The use of a Mother Hubbard clause can be beneficial for both the lessor and the lessee. For the lessor, it can help to ensure that all potential oil and gas resources on their property are fully developed. For the lessee, it can provide greater flexibility in their operations and can help to avoid the need to negotiate a new lease for each additional parcel of land that they wish to include in the leased premises.
However, the use of a Mother Hubbard clause can also be controversial, as it can result in the inclusion of lands that the lessor may not have intended to lease. As such, it is important for both parties to carefully consider the language of the clause and to negotiate its terms in good faith to ensure that it is fair and reasonable for all parties involved.
Feedback: This answer covers the basics, though it does so wordily. ChatGPT explains the concept of the Mother Hubbard clause, gives some background, and then explains why it's controversial.
Prompt: What is a habendum clause?
Image of ChatGPT's habendum response
ChatGPT's response:
A habendum clause is a provision in an oil and gas lease agreement that defines the duration of the leasehold interest granted to the lessee. The clause is typically located near the beginning of the lease agreement, after the granting clause that conveys the leasehold interest to the lessee.
The habendum clause can be written in a variety of ways, but it typically consists of two parts: the primary term and the secondary term. The primary term is the initial fixed period during which the lessee has the right to explore for and produce oil and gas on the leased premises. This period is typically measured in years, and can range from a few years to several decades, depending on the specific terms of the lease.
At the end of the primary term, the leasehold interest will either expire or continue into the secondary term, depending on whether certain conditions have been met. These conditions can include the payment of rental or delay rental payments, the drilling of a well, or the production of oil and gas from the leased premises.
The habendum clause can also include other provisions that modify or qualify the duration of the leasehold interest. For example, it may include shut-in royalty clauses that allow the lessee to maintain the lease in force even if no production is occurring, or depth clauses that limit the lease to a specific depth below the surface of the land.
The habendum clause is an important part of the oil and gas lease agreement, as it defines the duration of the lessee's rights to explore for and produce oil and gas on the leased premises. As such, it is important for both parties to carefully consider the language of the clause and to negotiate its terms in good faith to ensure that it is fair and reasonable for all parties involved.
Feedback: ChatGPT explains the concept and details its significance. No problems here.
The bad
As I've already hinted, ChatGPT floundered when it came to describing some crucial calculations (which I find funny, because artificial intelligence is just a bunch of math).
Prompt: Convert 45 net mineral acres subject to a 25% royalty to net royalty acres.
Image of ChatGPT's conversation of net mineral acres to net royalty acres
ChatGPT's response:
To convert 45 net mineral acres (NMA) subject to a 25% royalty interest to net royalty acres (NRA), we need to know the total acreage of the tract. Let's assume that the total acreage of the tract is 320 acres.
First, we need to calculate the decimal acres:
Decimal Acres = 45 / 320 = 0.140625
Next, we can use the formula:
NRA = NMA x (royalty interest / decimal acres)
NRA = 45 x (25% / 0.140625)
NRA = 45 x 178.5714286
NRA = 8035.7142857 acres (rounded to 2 decimal places)
Therefore, 45 net mineral acres subject to a 25% royalty interest on a 320-acre tract is equal to approximately 8035.71 net royalty acres.
Feedback: Woo boy. ChatGPT is way off base here.
The total acreage of the tract is irrelevant if you've already calculated net mineral acres.
There are two methods I know of for converting net mineral acres (NMA) to net royalty acres (NRA).
Method 1:
Net mineral acres x 8 x Lease royalty
So in this case:
45 x 8 x 25% = 90 net royalty acres
Method 2:
Net mineral acres x (Lease royalty / 0.125)
So in this case:
45 x (0.25/0.125) = 90 net royalty acres
Prompt: How do you calculate net revenue interest?
Image of ChatGPT's net revenue interest explanation
ChatGPT's response:
Net revenue interest (NRI) is the percentage of revenue from oil and gas production that is payable to the owner of the mineral rights after deducting the share of revenue that is allocated to royalty owners and other interests. The formula to calculate NRI is as follows:
NRI = (Net Mineral Acres / Gross Acres) x (Decimal Interest – Royalty)
where:
- Net Mineral Acres is the number of mineral acres owned by the mineral rights owner
- Gross Acres is the total acreage of the property that is subject to the lease
- Decimal Interest is the percentage of ownership interest in the minerals, expressed as a decimal (e.g., 0.25 for 25% ownership)
- Royalty is the percentage of revenue allocated to the royalty owner, expressed as a decimal (e.g., 0.20 for 20% royalty)
For example, let's say a mineral rights owner owns 10 net mineral acres out of 100 gross acres and has a 25% decimal interest, subject to a 20% royalty. The calculation would be:
NRI = (10 / 100) x (0.25 – 0.20) = 0.005 or 0.5%
Therefore, the mineral rights owner would be entitled to 0.5% of the revenue generated from oil and gas production on the leased property, after deducting the royalty owner's share.
Feedback: What the flip, ChatGPT!
While real-world net revenue interest (NRI) calculations are often complicated, the textbook formula is simple:
NRI = (Net mineral acres / Unit acres) x Lease royalty
The gross acres of the property don't matter, because you've already considered those in your net mineral acreage calculation. But the acres of the unit/well would be crucial. Yet ChatGPT didn't mention the unit acreage.
Also, the owner's decimal interest isn't needed, because that also should have been considered in the net mineral calculation.
The ugly
ChatGPT got some things right while completely failing at others.
This exercise was good for me, because it showed that I do still have that oil and gas mojo. But I'm worried for anyone taking ChatGPT's word in blind faith.
If you're using ChatGPT to learn something unfamiliar, please act like an investigative journalist: Dig deeper into ChatGPT's claims and research anything it tells you as if it's the least reliable source you've ever met.
Because in some ways, it is.
#oilandgas #landwork #ai #chatgpt