Replies to This Discussion

Permalink Reply by Johnson on August 16, 2008 at 7:31

The law does not allow them to do it the way you describe. The first 6 million pays off the well....no choice in the matter.

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Permalink Reply by reg on August 16, 2008 at 7:47

Ex: (BTW I use 10.00 bc its easier for me. )
Cost of drilling and completion $6,500,000.00
Well produces 5000 mcf per day at 10.00 per MCF, so that's $50,000.00 per day. If price and output is consistent, then well pays off and begins paying non-leasing landowners in 130 days.

If you don't sign and they put a well in your section that produces, it will be unitized. If you are a non-leasing mineral owner in that unit, then you will not get a royalty, you will be a PARTNER in the well.

Once the well pays off (Produces 6-7 million in gas), you will share in proportion to your mineral interest minus monthly costs on the well. The math works out in your favor. For instance: you and your neighbor have the same size lot next to each other and ya'll are approached to lease your lots for a 1000.00 bonus and a 25% royalty. Your neighbor leases and gets a 1000.00 bonus, then they get a monthly royalty check for 100.00for the life of the well when the well produces.
You choose not to lease and you don't get your bonus or a royalty, but once the well pays off its drilling expenses, you get 100% of the value of your minerals minus your portion of the monthly costs. So if your leasing neighbor is getting 100.00 on a 25% royalty, you would get $400.00 minus about $20-30 in your portion of the monthly costs.

It’s important to note the following.
If a gas well produces 5000 mcf per day (5,000,000 cubic feet a day), it produces approximately $50,000 dollars per day in gas (before severance taxes) IF gas remains around 10 per mcf. At that rate of production the well pays off 6 million in 120 days, not ten years. That's 4-5 months on average-- that's why our area is being flooded with money. These wells pay off 10 times faster than regular wells.

In most cases, if the well doesn't produce then you as a non-leasing landowner don't have to pay any of the the expenses and you only missed out on a small bonus. Of course all of these wells will produce-- the Barnett shale has had 10,000 wells drilled with NO dry holes. Their not all huge wells, but there have been no dry holes. You need to talk to an oil and gas attorney and not the land men when making a decision. The small acreage owner is better off not leasing-- read up on this.

More specifically:

A well produces 5000 mcf a day (this is an average HS well—average will be 8000-15000 mcf)
5000 mcf = 5,000,000 cubic feet a day
For instance, suppose gas is selling at $10.00 per mcf.
So, 5000 mcf x $10.00 +$50,000.00
Therefore a well producing 5000 mcf a day will bring in $50,000.00 per day.

If the well costs $5,000,000.00 to drill, then it will take 100 days at $50,000.00 for the well to payoff. That is why the statement in this article is NOT TRUE. It will not take 3-5 years to reach payout.

Also, after severance taxes this well will net about $45,000 per day.

So $45,000.00 divided by a 640 acre unit gives you a per acre per day value of $70.31 per acre/per day.

For the leasing land owner of 10 acres:

Then take that number times your royalty. Assume you have a 25% royalty. This means you would receive $17.58 per acre that you owned in the unit.

So if you own 10 acres you would receive 175.80 per DAY! Or $5,274.00 in a thirty day month.

For the non leasing land owner of 10 acres:

However, if you don’t lease your ten acres, you would receive $703.31 per day once the well pays off in approximately 100-120 days. That’s about $21,099.30 per month.

Of course, any reasonable well costs will be deducted from your $703.31. So if the monthly well costs for a given month was $15,000.00 then take $15,000 divided by 640 acres in the unit times your 10 acre interest in the unit to determine your part of the MONTHLY COSTS. $15,000 divided by 640 = 23.44 x 10 acres = $234.40. So, your $21,099.30 check will have a 234.40 deduction for your part of the costs. Even at $100,000.00 a month in well costs your 10-acre portion would only be reduced by $1562.50.

S

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Permalink Reply by Grillin' - MmmMmm on August 20, 2008 at 9:29

In the payout calculation, you have to account for operating costs. So while gas is selling for $10/mcf in your example, you will have to deduct the operating costs, severance taxes and any other cost allowed via your lease terms. In some cases that will include transportation costs to a pipeline. This can be in the $1/mcf range, sometimes more sometimes less. So instead of $10/mcf, use $9/mcf to calculate how long it will take to payout the drilling cost of the well.

Also, you state that the non-leasing mineral owner becomes a "partner" in the well. This is a very confusing and misleading term and I'd recommend you use a different term. They are not partners; they are simply unleased mineral owners, who have rights to their proportionate share of the hydrocarbons produced, less well costs and operating/transport costs. Not as nice/easy as "partner" but much cleaner.

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Permalink Reply by drillbit on August 16, 2008 at 5:29

The landman sited by KSLA is wrong. Someone not leasing is not "non consent". The non-leasing entity is an "unleased mineral owner". Big difference.

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Permalink Reply by Snake Stewart on August 16, 2008 at 5:35

Unfortunately for all of us it appears that there isn't as much reporting going on as there is repeating ! When you shell out millions of dollars , that were wrestled away from ignorant landowners early on , it seems to give you somewhat of a free ride in regards to what is allowed and what is actually checked.These guy's report news for a living yet seem less informed then some of the newer members to this site.

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Permalink Reply by J W on August 16, 2008 at 6:02

IN MY LEASE I HAVE A NO COST LEASE.SO I DONT PAY FOR NOTHING. AND WHEN THAY DO DRILL A WELL THEY HAVE 120 DAYS TO BUT IN A PIPE LINE.SO IF THEY DONE THE LEASE IS NO GOOD.

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Permalink Reply by Grillin' - MmmMmm on August 20, 2008 at 9:33

John: is that "no cost lease" as in you have no deductions for transportation expenses, severance taxes, etc? If you do, firstly, congrat's! Second, you may want to get some advice on severance taxes. If they aren't deducting severance taxes from your revenue then the severance taxes aren't being paid and you may get a visit from one of the State's taxation departments!

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Permalink Reply by The_Baron on August 20, 2008 at 8:52

Keep in mind wells have monthly maintenance, required filing of reports, saltwater disposal, not to mention equipment breakdowns.

The operator also pays the royalty owners their share. Now thats about 25% of the top. Plus severance taxes. Don't be suprised that when you ask for detailed information from the operator, that they will charge you for the time and supplies (copies, postage, etc.) it takes to fufill your request. No one works for free these days.

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Permalink Reply by Grillin' - MmmMmm on August 20, 2008 at 9:35

There are regulations and lease terms about what the company can charge you. Generally, it is limited to operating expenses on the "lease", not overhead and executives.

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Permalink Reply by Grillin' - MmmMmm on August 21, 2008 at 2:44

Good point. I believe the forced pooling statute should cover some of this but I'm sure it is not as clear as mud.

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Permalink Reply by BirdDawg, plain ole' idiot on August 20, 2008 at 10:18

Mmmarkkk,
I have had a working interst in several wells for the past four or five years. I can assure you that the working interest owners (at least in this case) get charged for overhead, administrative overhead, payroll, phone bills, truck notes, office expenses and I could go on and on. I will have to try to find an invoice and I could list some of the most ridiculous things you could ever imagine. We even paid for a salt water disposal well and got charged for salt water disposal. A friend of mine told me when I got into this that they would "operate us to death" and advised me not to invest. As usual, I did not take that excellant advise. And that is why I am now in the process of selling any working interests I have. And I never want anymore. But, I realize all companies may not operate like this, and I am not saying that this type of deal is representative of all oil and gas companies. And oh yeah, I almost forgot, several times we were told by service company people that to do work for old "so and so" that they had to buy a certain individual in the company various things to get their work, and to "just make out another invoice". So guess who paid this additional expenses? I bet you guessed right - the working interest owners. Please realize I am not implying that any of the bigger or more reputable companies do these type of things, but I know what I got into. Not for me anymore.

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Permalink Reply by BirdDawg, plain ole' idiot on August 21, 2008 at 0:24

Jim,
I am sure your right about the bigger companies. And about my life expectancy. No more working interest for me, I don't care how big the company is. I think you have a pretty good idea what a working interest owner is up against.

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