Progressive Royalties
Progressive Royalty?
I’ve been reading the blogs and watching the news about all the different Haynesville Shale groups and associations and their concerns about getting as many people together as possible so they will have a better chance at negotiating with the O&G companies. I’ve been surprised at some of the animosity, sniping, and negativity directed at people who have suggested uniting these associations together to form larger groups to have a larger voice as this Haynesville Shale opportunity develops. I’ve come up with an idea that will take the cooperation of all the groups and associations combined to accomplish and it will benefit all mineral owners that have not yet signed a lease.
Everyone seems to be concerned about getting a BIG signing bonus. While I understand that getting the signing bonus is important it is NOT the most important aspect of the lease. The royalties over the lifetime of the well is MOST important. The O&Gs are offering 25% and some people with a large amount of land have probably negotiated a larger percentage of maybe up to 30%. Everyone seems willing to let the O&Gs have 70% to 75% of the royalties for the lifetime of the well which is estimated to be 20 to 30 years and possibly 40 years. I have a problem with that.
Here is my idea. Instead of a flat royalty percentage for the life of the well, why not have a progressive royalty percentage that will increase over the life of the well? I propose that the percentage can start at 25% and increase 5% every 3 years. This will give the people a 50% royalty after the 15th year which is only half of the life of the well.
Yeah, I know. Now y’all think I’m crazy, but lets’ look at some facts. In years past you were “lucky” to get as little as 1/32 royalty for YOUR mineral rights, then it was 1/16, 1/8, 3/16, and now 1/4 is the standard. How do you think these percentages have increased? Out of the goodness of the O&Gs hearts? I don’t think so. It is because people were willing to stand up and demand that they receive a fair share of the profits from their oil or gas. Now let’s look at some more facts.
The O&Gs will tell you that they need this 70% to 75% to help them recover money spent to find the gas and then drill and produce the well. According to Chesapeake in their announcement about their joint venture with PXP, their finding costs were less than $1.00 per mcfe and the operating costs were $1.83 per mcfe. They also stated that the average cost of drilling a horizontal well and completing it was $6.5 million per well in the Haynesville Shale play. They said that the initial production rates on the eight horizontal wells they have completed have ranged from 5 to 15 million cubic feet of natural gas equivalent (mmcfe) per day on restricted chokes and they believe these truly exceptional wells would have been capable of even greater initial production rates if they had been produced on open chokes as Barnett and Fayetteville Shale wells have been. How about we crunch some numbers?
Let’s say we have 1 well and use a very conservative number (according to their estimates and allowing for first year drop in production) of 3mmcfe (3000mcf/d) and use a wellhead price of $8.94mfce. Each year this well will make $9,789,300.00. After paying out the 25% “royalty burden” as they refer to it, the finding costs per mcfe, the operating costs per mcfe and the cost of drilling and completing the well, the company will make, after only the second year, $1,986,250. Each year after that the company, after paying royalty burdens, finding and operating costs, will make $4,243,125.00 per year. If we use 20 years (once again being conservative) as the life of the well the company stands to make $78,362,500. Not bad for a weak producing well.
Now if we use the progressive royalty payout as I’ve suggested the company will still make $51,441,925.00 in 20 years and if they were to stop leasing today and only complete the 6,875 wells the say they will drill on current leases, that equals to $353,663,230,000.00 if the wells are ALL low producers as in this example. We know that this will not be the case.
The O&Gs stand to make TRILLIONs of dollars from the people of the Haynesville Shale and if they are as concerned and compassionate for our communities as they profess (according to charitable donations and commercial spots) and our economy, they will be willing to negotiate a progressive royalty. If they are not willing we need to come together, not as indivdual groups, but as one voice. We need to say that the people NW Louisiana may be poor, but we are not stupid and are not willing to give away the lions share or OUR gas. Give us what is fair.
If you think they will walk away from TRILLIONs of dollars you are the one who is crazy. Everyone from this point forward needs to demand a progressive royalty. One person or one group or association will not be able to accomplish this. If everyone doesn’t work together this will never happen and the O&Gs will continue to get richer off the poor. Kudos to the people trying to get associations to work together.
I’ve been reading the blogs and watching the news about all the different Haynesville Shale groups and associations and their concerns about getting as many people together as possible so they will have a better chance at negotiating with the O&G companies. I’ve been surprised at some of the animosity, sniping, and negativity directed at people who have suggested uniting these associations together to form larger groups to have a larger voice as this Haynesville Shale opportunity develops. I’ve come up with an idea that will take the cooperation of all the groups and associations combined to accomplish and it will benefit all mineral owners that have not yet signed a lease.
Everyone seems to be concerned about getting a BIG signing bonus. While I understand that getting the signing bonus is important it is NOT the most important aspect of the lease. The royalties over the lifetime of the well is MOST important. The O&Gs are offering 25% and some people with a large amount of land have probably negotiated a larger percentage of maybe up to 30%. Everyone seems willing to let the O&Gs have 70% to 75% of the royalties for the lifetime of the well which is estimated to be 20 to 30 years and possibly 40 years. I have a problem with that.
Here is my idea. Instead of a flat royalty percentage for the life of the well, why not have a progressive royalty percentage that will increase over the life of the well? I propose that the percentage can start at 25% and increase 5% every 3 years. This will give the people a 50% royalty after the 15th year which is only half of the life of the well.
Yeah, I know. Now y’all think I’m crazy, but lets’ look at some facts. In years past you were “lucky” to get as little as 1/32 royalty for YOUR mineral rights, then it was 1/16, 1/8, 3/16, and now 1/4 is the standard. How do you think these percentages have increased? Out of the goodness of the O&Gs hearts? I don’t think so. It is because people were willing to stand up and demand that they receive a fair share of the profits from their oil or gas. Now let’s look at some more facts.
The O&Gs will tell you that they need this 70% to 75% to help them recover money spent to find the gas and then drill and produce the well. According to Chesapeake in their announcement about their joint venture with PXP, their finding costs were less than $1.00 per mcfe and the operating costs were $1.83 per mcfe. They also stated that the average cost of drilling a horizontal well and completing it was $6.5 million per well in the Haynesville Shale play. They said that the initial production rates on the eight horizontal wells they have completed have ranged from 5 to 15 million cubic feet of natural gas equivalent (mmcfe) per day on restricted chokes and they believe these truly exceptional wells would have been capable of even greater initial production rates if they had been produced on open chokes as Barnett and Fayetteville Shale wells have been. How about we crunch some numbers?
Let’s say we have 1 well and use a very conservative number (according to their estimates and allowing for first year drop in production) of 3mmcfe (3000mcf/d) and use a wellhead price of $8.94mfce. Each year this well will make $9,789,300.00. After paying out the 25% “royalty burden” as they refer to it, the finding costs per mcfe, the operating costs per mcfe and the cost of drilling and completing the well, the company will make, after only the second year, $1,986,250. Each year after that the company, after paying royalty burdens, finding and operating costs, will make $4,243,125.00 per year. If we use 20 years (once again being conservative) as the life of the well the company stands to make $78,362,500. Not bad for a weak producing well.
Now if we use the progressive royalty payout as I’ve suggested the company will still make $51,441,925.00 in 20 years and if they were to stop leasing today and only complete the 6,875 wells the say they will drill on current leases, that equals to $353,663,230,000.00 if the wells are ALL low producers as in this example. We know that this will not be the case.
The O&Gs stand to make TRILLIONs of dollars from the people of the Haynesville Shale and if they are as concerned and compassionate for our communities as they profess (according to charitable donations and commercial spots) and our economy, they will be willing to negotiate a progressive royalty. If they are not willing we need to come together, not as indivdual groups, but as one voice. We need to say that the people NW Louisiana may be poor, but we are not stupid and are not willing to give away the lions share or OUR gas. Give us what is fair.
If you think they will walk away from TRILLIONs of dollars you are the one who is crazy. Everyone from this point forward needs to demand a progressive royalty. One person or one group or association will not be able to accomplish this. If everyone doesn’t work together this will never happen and the O&Gs will continue to get richer off the poor. Kudos to the people trying to get associations to work together.
Views: 88
Replies to This Discussion
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Permalink Reply by Shaq on
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Your numbers are off by a lot. Why not just make it easier and look at the total production estimates. They are saying 6.5 - 8.5 BCF per well. Let's be conservative and call it 5. Let's also call wellhead price only $7. That equates to only $35 million over the life of the well.
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Permalink Reply by Assignat B2 on
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You are correct when you say my numbers are off, but I wouldn't say by a lot. I wasn't able to find any firm numbers on what the average annual decline rate for a horizontal well actually is. If you or anyone else has this information I would be interested in knowing what it is. Also I apologize for not being more clear. Some wells will not do as good and some (probably most) wells will do much better than this and I was trying to make the point that if the O&GS averaged this amount from all their wells how much money is at stake and the leverage we have when we stand together.
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Permalink Reply by CAS on
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Yes, you are crazy. 1/32 and 1/16 royalty has never been the standard. 1/8 was the standard (on the lease forms) for the past 80 years, and technically still is. I wouldn't say 1/4 is always standard either. It may be standard for companies intending to drill the Haynesville, but it wouldn't necessarily be for the Cotton Valley or others.
And there are companies signing for progressive royalties, such as 28% BPO and 30% APO. But those are few and far between (mainly for large land owners). A company will NEVER agree to a 50% royalty. HA!
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I believe I said in the past you were lucky to receive those percentages, I did not say they were the standard, hence the word lucky. Also since we are discussing the Haynesville Shale and 25% seems to be the standard we are in agreement on that point. I find it interesting that you say that the O&Gs will sign progressive royalties, but only for large land owners. If WE group together as I have suggested I believe we will be considered large land holders. As for the O&Gs never agreeing to a 50% royalty, I am pretty sure that as the people of the Barnett Shale were organizing someone told them, "a company will never agree to 25% royalty, thats just for large land owners." The point that I have tried to make is that we do not have to "settle" for a 25% royalty for the life of the wells that will be drilled into OUR minerals. They need us as much as we need them.
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I agree! 640 acres is 640 acres. Same as a pound is a pound no matter what shape it's in once it's weighed up. O/G may want to deal with 3 people instead of 300, hence the need for these coalitions. If your in one get to know your reps in your area. Trust in them will help to kill a lot of the "issues".
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Permalink Reply by Bobi Carr ("parker") on -
Just trying to stay educated.
What is BPO and APO?
THANKS
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BPO stands for "Before Payout".
APO stands for "After Payout"
"payout" - Generally, that point in time, determined by
agreement, when a person has recouped his investment in the
drilling, development, equipping and operating of a well or
wells.
I found these and many other definitions at http://sec.edgar-online.com/1996/05/15/00/0000720676-96-000008/Sect...
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Permalink Reply by TCB DS3 on
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Progressive leases are very common and often used in long term commerical real estate leases i.e. department stores in malls etc. I think it is way over due for use in o/g leases. My family has often received leases with 1/16 and 1/8 and were told that is all the o/g will give as late as 2002. The reason you sometimes see post that are "full of animosity, sniping, and negativity directed at people who have suggested uniting these associations together to form larger groups to have a larger voice as this Haynesville Shale opportunity develops" is because landman read and use this site and want to sow these kinds of disunity seeds. Information is power and power is money just ask chk pre-their forced announcement about the shale. Keep the ideas flowing. TCB O
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Thanks for the support.
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They are in commercial leases, and they're usually based on sales realized. They are extremely uncommon in ogm leases, unless you're dealing w/ the state or a timber company. IBUT...I've heard of more in the past few onths than i ever have before.
If you signed a mineral lease for 1/16, I am very surprised. 1/8 is not surprising. And I don't think many landmen (no, I'm not one) are actively trying to pit landowners against o&g companies (at least, i certainly hope that's not the case).
Assignat, you're right that grouping together is WAY better than negotiating single-handedly. And don't think that a 25% royalty is a bad royalty. That's 25% of the ogm w/out having to pay a dime (out of millions) of the expenses incurred in pulling it out. Of course, 30% is a lot better.
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Permalink Reply by RAY on
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forget the progressive royalty....just become a working partner & get
100% after cost.
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