Replies to This Discussion

Permalink Reply by Les Bamburg on August 16, 2008 at 13:21

PG, the O&G company profits are going to be reduced if there is any unleased acreage since they only make profits on leased acreage. So for example if 160 acres are unleased in the section then O&G company would make profits of ~ 75% of those they would make if 100% of the acreage was leased. Revenue, capital costs and drilling expenses are all allocated on an acreage basis within the unit.

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Permalink Reply by sesport on August 15, 2008 at 18:18

Thanks Les. In your opinion, would the unleased mineral owner's revenue be paid after costs are recouped on each well, or after costs are recouped on all wells in the unit? Also, is there the chance that costs could exceed the revenue?

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Permalink Reply by Les Bamburg on August 16, 2008 at 13:29

Sesport, my opinion was payout would be determined on an individual well basis but others believe payout is on a unit basis. I have not found any Louisiana regulation that would clarify this point.

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Permalink Reply by reg on August 15, 2008 at 17:59

PG-- the goal is to be the last one in the section that does not lease. then you can command a either a high bonus and royalty, or just sit back and wait for the well to pay out. You are right. the company will not drill on just 64 acres, put they will drill in a 640 acre unit in which they have 576 of the acerage leased at a 25% royalty. In essence they own 75% of 90% of the minerals in that section. So if the well produces $50,000 per day the company gets 33,750.00 per day. Thats not a bad return on a $7 million dollar investment. In fact they get their out of pocket back in a little over 200 days.

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Permalink Reply by P.G. on August 15, 2008 at 18:23

So you are saying if you don't lease, they will drill your part for free, less expenses of course! I doubt that very much! Those executives aren't getting those bonuses and stock options by working free for anyone!
The reason I'm beating this issue like a dead horse is if someone is thinking of not leasing and just become working partners in the unit, this money amount issue is important! If these math formulas aren't real, I'm sure they'll be sorely disappointed.
And the formulas are not giving the driller a nickel profit for the unleased land owners. That has to be flawed!

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Permalink Reply by Snake Stewart on August 16, 2008 at 1:43

Hey P.G. , When someone states that it wouldn't be profitable for the O&G's to drill if there are too many unleased that i exactly what they are eluding to.They choose to drill in an area that isn't 100% leased , they will be getting fewer procedes from their endever. If an area has a large enough % unleased , say 20 % , they would rather move over and drill the section beside it that has 95 % leased. As I have stated on numerous occasions , They aren't looking for business partners. They need you leased to increase profits too the max , not to make it profitable! I'll get jumped for this but I feel that they could be profitable at 50.1 % leased on these haynesville wells. Not as profitable but profitable non the less.

For all you O&G's out there in a tizzy about what I just posted......Yada, Yada , Yada. You know its true so save it for tomorrow. We could all use a day off! HA! HA! Just kidin' boy's and girls.

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Permalink Reply by P.G. on August 16, 2008 at 2:32

Well sure it would be better for the O&G to have a 75/25 split versus a 50/50 split. But according to the math, as has been presented, the split is 100%/0% split of proceeds in the landowner's favor , after equal sharing of expenses. I'd pass on a bonus if I thought the wells were going to be like the ones we've seen come in thus far in the HS and I was going to get all of it! The drillers are providing free retrieval and sales service of the minerals for me, using their money! That would be much better than me drilling my own minerals! The only downside would be if the well they drilled was a dud!

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Permalink Reply by Snake Stewart on August 16, 2008 at 8:11

Hey P.B. , My gas! Not free service.There are no guarantees.If enough holdout , they will wait for the relatives to sign after you are old and decrepid.They have more then they can do right now just to HBP , muchless drill out according to their plans.

Before this is over I believe we will see much closer spacing then they are admitting. Their greed will show by trying to get it all out as fast as they can.They are not there to do you any favors.Please do not ever think that for a second. They are there to drill and make a profit , as much profit as is feasible. Thats what they do.

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Permalink Reply by Grice on August 16, 2008 at 2:48

Keep in mind that royalties are dispersed after operation cost have been recovered. These operation could include administrative fees, to which the O&G Company will not suffer, regardless of the percentage of land is leased under contract.

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Permalink Reply by reg on August 16, 2008 at 5:01

Just verified this after a long blog with PG last night. My equation is correct for the non-leasing land owner. I was trying to think of any expenses that I did not consider in my equation that I might have left out.

I did research on the bonus payments made to landowners. This is a significant cost - about 25,000.00 per acre or 16 million per section. This might push payout into the 3-5 year range if gas prices drop. However, this is not a cost that must be recouped before revenues are shared with a non-leasing land owner.
PG-- I know this "non-leasing anomoly" seems out of sync at first glance, but it depends on what your presuppositions are. Mine are from the mineral code. Most people in this area are getting their presuppositions from land men that are not familiar with the tremendous payout of horizontal drilling. If I am wrong, and I have been, I will gladly retract this. But from my sources, and they are reliable, the general premise and equation is correct.

Once again, I think everyone should consider leasing and I hope the information I am sharing will empower you to negotiate a higher bonus or a higher royalty.

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Permalink Reply by sesport on August 15, 2008 at 18:25

Okay, how would this apply to the 720 acre units DrWAVe posted about? If you own the 64 acres you mentioon, in a 640 acre unit that = 10% of the unit. Your same acreage in a 720 acre unit is now reduced to 8.9% of the unit. How do you see that working out?

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Permalink Reply by JWS3 on August 16, 2008 at 4:40

The 6-8 million dollar cost of drilling a well is no different from other major capital expenditures that many types of businesses make. Their payout from the investment is after taxes, interest, operating expenses. I am in a business that sells equipment that costs around 1.5 million dollars, it will generate 1.5 million dollars in revenue in 8 months to a year, but just like a gas well 100% of the revenue is not used to offset the inital cost. it is typical for the cost of the equipment to be paid back over 5-10 years. It is incorrect to think that because a well can generate 5 million dollars in 120 days that it will then be paid for. 5-6 years would seem more realistic. BTW, I am a landowner in Desoto, not in the O&G business.

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