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.