Golden Royal Development Inc. (“Golden Royal”) was organized near the end of 2016 to engage in the business of purchasing and selling mineral leases and other interests in mineral rights. If Golden Royal is able to secure adequate financing, Golden Royal may also participate in drilling and/or mining operations. At present, Golden Royal’s cash resources are sufficient only to fund its ongoing operations. The operating assets that it now owns have been contributed by Jacob Roth, Golden Royal’s majority shareholder.
Oil and Gas Properties
On September 27, 2018, Jacob Roth assigned to Golden Royal all of the beneficial interest in two Wyoming oil and gas interests held in Jacob Roth’s name, and Golden Royal assumed responsibility for the expenses that accrue in relation to those interests. Specifically, the Assignment Agreement transfers to Golden Royal “all of the benefits that may accrue to (Jacob Roth) from ownership of the Interests, including any receipts of cash or distribution of assets, as well as the proceeds realized on sale of either Interest, any of which shall be promptly transferred by Roth to Golden Royal upon receipt.” Conversely, Golden Royal assumed “responsibility for prompt payment of all fees, rents, taxes and any other financial liabilities as may accrue to Roth by reason of his record ownership of the Interests. The assignment and assumption will be effective until Jacob Roth ceases to be record owner of the Interests.
The oil and gas interests now owned beneficially by Golden Royal, by reason of the aforesaid Assignment Agreement, are:
Fremont County, WYW-185478. This is a ten year mineral lease on 240 acres of public lands in Fremont County, Wyoming. The lease was granted to Jacob Roth by the United States Department of the Interior Bureau of Land Management, effective on February 1, 2017. The lease affords the lessee the exclusive right to drill for, remove and dispose of oil and gas (except helium) in the leased premises, which includes the right to build improvements necessary for the drilling operations. Jacob Roth paid a $415 filing fee to acquire the lease, and an annual rental fee of $360 is charged by the Bureau of Land Management. We do not know whether there is any drilling activity being conducted on lands in the vicinity of our leasehold.
Converse County, WYW-177129. This is a 1% overriding royalty in an oil and gas lease on 320 acres of public lands in Converse County, Wyoming. The lease was granted in 2010 by the Bureau of Land Management to Royal Energy Resources, Inc., a company then controlled by Jacob Roth, in exchange for a fee of approximately $10,000. In 2012 Royal Energy Resources sold the lease to Chase Oil Corporation for a cash payment of approximately $16,000, but retained the 1% overriding royalty. In 2017 Chase Oil Corporation transferred the lease to Grayson Powder River, LLC, subject to the overriding royalty. The overriding royalty was assigned by Royal Energy Resources to Jacob Roth in 2015, when he terminated his relationship with Royal Energy Resources. The underlying lease and, therefore, the overriding royalty will terminate on September 1, 2020, except that they will continue with respect to any production from a well drilled prior to September 1, 2020. No well has been drilled to date, and we are not aware of any plan by Grayson Powder River, LLC to drill a well on the acreage.
Precious Metal Interests
On December 6, 2018, Golden Royal and Jacob Roth entered into a second Assignment Agreement, which is identical to the September 27, 2018 Assignment Agreement except for the identity of the lease that is the subject of the agreement. The December 6, 2018 Assignment Agreement transfers to Golden Royal all of the beneficial interest in the following leasehold:
Crooks County, Wyoming Lease 0-43552. This is a lease granted to Jacob Roth on December 6, 2018 by the State of Wyoming in exchange for a $50 application fee and payment of a $640 annual license fee. The lease grants to Jacob Roth the right to prospect for, develop, produce and market such gold, silver and precious metals as may be found in 640 acres of public land located in Crooks County, Wyoming. We do not know whether there is any mining activity on land in the vicinity of our leasehold.
Currently, Golden Royal does not have the resources, personnel or infrastructure necessary to engage in oil and gas drilling or precious metal mining. Therefore, at the present time, Golden Royal is holding the three mineral interests described above, and plans to invest in additional mineral interests, as an investment with an eye towards resale. Our purpose in making these investments is to take advantage of increases in the value of the leaseholds that may occur. Such increases could be caused by higher global energy prices, new technologies that make exploration and drilling more cost efficient, or the emergence of markets for other resources located in the leased acreage. If any such circumstances, or any other causal factors, result in an increase in the market value of Golden Royal’s leaseholds, we will seek to negotiate a sale at a profit of the affected leasehold.
Our long term plan is to develop a capability of participating in the development of oil and gas properties. We do not anticipate becoming an independent producer of oil or gas. But we do plan to seek capital resources that will enable us to invest in drilling activity carried on by established producers. Our plan is to offer our capital stock to investors in private or public offerings and obtain approximately $2.5 million in capital contributions. We believe that cash resources in that amount would enable us to participate as a significant investor in a number of drilling programs sufficient to minimize the risk that all of our drilling programs will fail.
Proved Reserves and Estimated Future Net Revenue
The Securities and Exchange Commission defines proved oil and gas reserves as the estimated quantities of crude oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e. prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions.
The process of estimating oil and natural gas reserves is complex and requires significant judgment. Our policies regarding booking reserves require proved reserves to be in compliance with the SEC definitions and guidance. Since neither of our oil and gas properties is currently in production, we currently have no proved reserves.
Title to Properties
Title to mineral properties is subject to contractual arrangements customary in the oil and gas industry or the precious metals industry, as applicable, liens for current taxes not yet due and, in some instances, other encumbrances. We believe that such burdens do not materially detract from the value of our properties or from the respective interests therein or materially interfere with their use in the operation of our business.
As is customary in the minerals extraction industries, other than a preliminary review of local records, little investigation of record title is made at the time of acquisitions of undeveloped properties. Investigations, which generally include a title opinion of outside counsel, are made prior to the consummation of an acquisition of producing properties and before commencement of drilling operations on undeveloped properties.
Competition
The market for mineral leases has been substantially changed by the policies of the Trump Administration. In the past two years, the Department of the Interior has dramatically increased the number of acres of public land that it has made available for mineral leasing: during the 2018 fiscal year three times as much land was offered in auction as during the average of fiscal 2013 through fiscal 2016. Further, Interior Department regulations provide that if a parcel of mineral rights pass through auction without attracting a bid, then during the following two years anyone can purchase the rights with an upfront fee of $1.50 per acre. The combination of an increase in available land with the opportunity for purchase at negligible prices has caused a marked reduction in the average price of mineral leases. In Montana, for example, the average lease price for oil and gas properties in 2018 was 20% of the average price in 2016.
The marked reduction in the price of mineral leases has drawn many more participants into the market, particularly speculative investors similar to Golden Royal. Many market participants are speculating that the widespread protests against the post-auction “giveaways” will result in changes to regulations, which will lead the an increase in average lease prices. This activity creates demand that has, to some extent, offset the effect on lease prices of current Interior Department policies.
The competition that we will face in the coming years, therefore, will depend in large part on the policies of the Interior Department. For the period after 2020, the nature of those policies will likely depend on the outcome of the national elections in 2020.
Governmental Regulations, Approval, Compliance
If we elect to participate directly in development of oil and gas properties, our operations are or will be subject to various types of regulation at the federal, state and local levels. Such regulations includes requiring permits for the drilling of wells; maintaining bonding requirements in order to drill or operate wells; implementing spill prevention plans; submitting notification and receiving permits relating to the presence, use and release of certain materials incidental to oil and gas operations; and regulating the location of wells, the method of drilling and casing wells, the use, transportation, storage and disposal of fluids and materials used in connection with drilling and production activities, surface usage and the restoration of properties upon which wells have been drilled, the plugging and abandoning of wells and the transporting of production. Our operations are or will be also subject to various conservation matters, including the regulation of the size of drilling and spacing units or pro-ration units, the number of wells which may be drilled in a unit, and the unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases, which may make it more difficult to develop oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and gas wells, generally limit the venting or flaring of gas, and impose certain requirements regarding the ratable purchase of production. The effect of these regulations is to limit the amounts of oil and gas we may be able to produce from our wells and to limit the number of wells or the locations at which we may be able to drill.
If we elect to participate directly in mining the acreage on which we hold precious metal rights, we will primarily be restricted by federal and state environmental regulations, which significantly restrict the methods that can be employed in extracting precious metals, and require remediation of damage done to the environments in which we may mine. Such regulations will increase the cost of mining significantly, and accordingly reduce the profitability of our mining and, most significantly, our ability to attract investors to participate in any such mining activities.
Failure to comply with any laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of injunctive relief or both. Moreover, changes in any of these laws and regulations could have a material adverse effect on business. In view of the many uncertainties with respect to current and future laws and regulations, including their applicability to us, we cannot predict the overall effect of such laws and regulations on our future operations.
We believe that our operations comply in all material respects with applicable laws and regulations and that the existence and enforcement of such laws and regulations have no more restrictive an effect on our operations than on other similar companies in the energy industry. We do not anticipate any material capital expenditures to comply with federal and state environmental requirements.
Environmental
Operations on properties in which we have an interest are subject to extensive federal, state and local environmental laws that regulate the discharge or disposal of materials or substances into the environment and otherwise are intended to protect the environment. Numerous governmental agencies issue rules and regulations to implement and enforce such laws, which are often difficult and costly to comply with and which carry substantial administrative, civil and criminal penalties and in some cases injunctive relief for failure to comply.
Some laws, rules and regulations relating to the protection of the environment may, in certain circumstances, impose “strict liability” for environmental contamination. These laws render a person or company liable for environmental and natural resource damages, cleanup costs and, in the case of oil spills in certain states, consequential damages without regard to negligence or fault. Other laws, rules and regulations may require the rate of oil and gas production to be below the economically optimal rate or may even prohibit exploration or production activities in environmentally sensitive areas. In addition, state laws often require some form of remedial action, such as closure of inactive pits and plugging of abandoned wells, to prevent pollution from former or suspended operations.
Legislation has been proposed in the past and continues to be evaluated in Congress from time to time that would reclassify certain oil and gas exploration and production wastes and/or certain mining waste as “hazardous wastes.” This reclassification would make these wastes subject to much more stringent storage, treatment, disposal and clean-up requirements, which could have a significant adverse impact on operating costs. Initiatives to further regulate the disposal of oil and gas wastes and mining wastes are also proposed in certain states from time to time and may include initiatives at the county, municipal and local government levels. These various initiatives could have a similar adverse impact on operating costs.
The regulatory burden of environmental laws and regulations increases our cost and risk of doing business and consequently affects our profitability. The federal Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, also known as the “Superfund” law, imposes liability, without regard to fault, on certain classes of persons with respect to the release of a “hazardous substance” into the environment. These persons include the current or prior owner or operator of the disposal site or sites where the release occurred and companies that transported, disposed or arranged for the transport or disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for the federal or state government to pursue such claims.