ROYALTY INCOME DECLINES WITH THE DECLINE IN WELL PRODUCTION

For the purpose of this example, I will use several constant values. The following royalty payment calculations are based on 1 acre, a 640 acre production unit with 1well and a 25% royalty. Also the recent CHK report average for their 16 producing horizontal HS wells of 10.0 mmcfe/day (million cubic feet equivalent per day). That amount will be reduced yearly over a five year period based on the CHK decline curve data contained in the same report. I will plug in the following values for the price of a mcfd (thousand cubic feet per day): Year 1: $8, Year 2 : $9, Year 3: $10, Year 4: $11 and Year 5: $12.

Royalty per year:
Year 1: $11,375
Year 2: $2,431
Year 3: $1,783
Year 4: $1,530
Year 5: $1,205

These are arbitrary values that may not accurately reflect the production of your well nor the future price of natural gas. I offer the calculations as a way to emphasize the nature of royalty income. It declines as well head production declines. There are royalty calculators accessible on the Web. I have used several and the variance between their results is extremely slight. Forewarned is Forearmed. Good Luck, Skip

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Permalink Reply by OLD HILLBILLY on October 20, 2008 at 6:28
WOW MY 2 ACERS WILL NOT MAKE MUCH? GUESS I SHOULS SELL? WHAT DO YALL THING ?
Permalink Reply by Skip Peel - Mineral Consultant on October 20, 2008 at 7:07
It'll make 8 times what my 1/4 acre will Old Hillbilly. Whether you choose to sell or take the mail box money, I think you should wait until after the first of the year to make a decision. The value of a mineral acre is tied to bonus offers currently (not good) but will be tied more to production in the not too distant future once there is sufficient production for investors to base value upon (probably better). Higher natural gas prices would be a big help also. If the last month has taught us anything, it is that volatility is a component of any energy related asset. I paid $2.78 for a gallon of gasoline today. Last month I was hoping gasoline would not go much above $4.00 around here in 2009. Maybe we should just convert our vehicles to CNG. Save on transportation costs and support an increase in demand for our natural gas.
Permalink Reply by Atlpilot on October 20, 2008 at 12:29
Skip, I agree that Old Hillbilly should wait until after the first of the year. Unless we are just too dumb to learn from past history with the price of oil, I believe that the demand for NG as a transportation fuel , and for other uses, will increase substantially in the USA. I live in a small city in Georgia, and just read in the local newspaper that they are holding public hearings on the final stages of a study to convert all municipal vehicles to NG. This study is in conjunction with 30 other small cities in GA that are planning to do the same thing. They said that they will go ahead with the conversion regardless of the price of oil, as they expect oil prices to increase again in the future. I don't know all of the details, but they plan to make the city refueling stations available to private individuals with NG cars. I have a hunch that the same thing is going on in cities across the country. I personally believe that the long term trend for NG price is up with occasional volatility.
Permalink Reply by Skip Peel - Mineral Consultant on October 20, 2008 at 14:41
Atlpilot, it will take some years before public refueling stations for CNG are available. I believe that the key to public acceptance of CNG as a transportation fuel is private, home refueling systems. If a residence has natural gas service, as we here in Shreveport-Bossier do, there are home refueling systems currently available that connect to our home gas supply. To convert the natural gas to CNG in order to fill a vehicle tank is a slow process but current technology would allow most vehicles to be refueled overnight. Wide spread use would almost certainly drive down prices making it affordable for most of us and demand would bring improvements in fill time. For most of us, we could get started with such a system in the near term. Long distance trips would obviously have to wait for public refueling stations but for most of us 95% of our driving is around town or within a 50 mile radius. The public just needs to push for the installation of such home systems, certified vehicle conversion services and automakers to mass produce new vehicles such as the Honda Civic GX.
Permalink Reply by Robert Griffin R on October 20, 2008 at 17:41
Just add a CNG fueling station at every Haynesville well, and vertical well for that matter, and using your Chesapeake credit card and well pressures fill your tank really quick. Gas will be free for all residents of the parish where the well is located.
Permalink Reply by The_Baron on October 21, 2008 at 3:58
The royalty owners may object to the free gas.
Permalink Reply by MARG on February 14, 2011 at 5:48

In the olden days, teen-agers and "thieves" filled up cars at gas wells in our area.  They would leave it running into the river, etc.  We provided gas for many people; some ruined cars, but it seemed that some were more pro and knew what to do.  We lost a  lot of money like that,  and the man "taking care" of the well must have known.  After many years, a daughter of a neighbor told me that they never bought gasoline when she was growing up---they lived about a block away from a well so they got it there.  This well was one we had royalty in, but since we did not live nearby, she had no idea that she just told me that they were stealing from us.  LOL That is also dangerous for just anyone to be at a well, etc.  I cannot see giving gas to everyone as they do not give us anything in return.  Can't tell the grocer that I give free gas, what can you do for me?  My Dad kept a check on the well and tried to help keep the river from getting so polluted as he was concerned of the environment and people down the river who were eating fish. etc.  I cannot see some people getting free gas and others not.  We cannot all get things free; although many did get free NG for their homes in the olden days.

 

 

 

 

Permalink Reply by The_Baron on February 14, 2011 at 5:55
I am pretty sure a car won't run off of crude oil.
Permalink Reply by Les Bamburg on February 14, 2011 at 6:41
Baron, I thought you were older than that! :-)
Permalink Reply by Phillip Briggs on February 15, 2011 at 9:59
I have used the condensate to fuel up kerosene lamps and lanterns.
Permalink Reply by Les Bamburg on February 14, 2011 at 6:40

MARG, yes there are many stories about people running their cars off "drip" condensate all the way up to the 70's.  At my first work location, one of the employees had just gotten fired for taking drip for his car.  Over time it became less of an issue because newer engines wouldn't run using produced condensate as fuel.

 

Side note - in natural gas processing the pentanes and heavier product is called "natural gasoline" because was originally marketed in the 30's (?) as an alternative to refined gasoline for cars. 

Permalink Reply by Phillip Briggs on February 15, 2011 at 10:02

I'd buy a system for home refueling in a heartbeat.  I might even buy a new vehicle, just for that purpose.  I have free and legal natural gas here at the house. My royalty payments on the well are pitiful since the price crash... figure my free home use is worth more than the royalty check, by a factor of 3.

 

Does anyone know of actual available systems?

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