Non-consent, participation, and election letters. If you own a working interest (see my previous post on Types of Oil and Gas Interests) in an oil and gas lease you might receive an election notice from the operating company. When an operating company decides to drill a new well on a lease or perform significant work on an existing well it must notify all other working interest owners. This is done by sending out an election notice to each working interest owner notifying him or her of the type of work proposed and his or her share of the estimated total cost.
Each working interest owner must either elect participation or non-consent. If the owner elects to participate, she must pay for her proportionate share of the project costs even if it far exceeds the original estimate. After the well is drilled or the work is complete she then receives her proportionate share of revenue less royalties, taxes, and operating costs. If the owner elects non-consent in a project she is not obligated to pay any portion of the project cost, however, she will incur a non-consent penalty.
The exact terms of a non-consent penalty are dictated by either the state or a joint operating agreement (terms agreed upon by oil and gas companies as they develop a field together). A typical penalty dictates that the working interest owner who elects non-consent receives no share of revenue from the well until it has paid out three times the actual project cost (this is often referred to as a 300% penalty.) Once the well has paid out 300% of the project cost, the interest owner who elected non-consent will once again receive his proportionate share of revenue less royalties, taxes, and operating costs.
The purpose of elections and the non-consent penalty is two faceted. First, it precludes a single working interest owner from preventing the remaining interest owners from drilling a well or conducting necessary work. Conversely, the penalty prevents a working interest owner (read cash-rich operating company) from “muscling” out smaller interest owners – and forcing them to sell their interests – just because they do not have sufficient cash to fund a project.