Replies to This Discussion

Permalink Reply by Dena A1 on October 19, 2008 at 5:39

Thanks Skip for posting this. It gives a insight on what one may expect.

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Permalink Reply by Robert Griffin R on October 19, 2008 at 6:26

What would be a reasonable estimate for royalty percentage minus operating costs for the 1 acre if force pooled and what year would be a reasonable estimate using your gas prices for well cost payoff and start of royalty payments? Anyone?

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Permalink Reply by Skip Peel - Mineral Consultant on October 19, 2008 at 6:34

Good question, Robert. Unfortunately, I am not qualified to estimate operating cost but I think the state mandates what constitutes operating expenses. I doubt that they monitor what producers are charging in that category. There have been some statements made in previous operator reports, including CHK, that HS horizontal wells in the 10.0 mmcfd production range pay for the cost to drill in the 60 to 90 day range. I have seen some for wells producing at higher IP rates that claim 30 to 45 days.

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Permalink Reply by Robert Griffin R on October 19, 2008 at 6:53

I assume well cost payoff based on current gas prices and pipeline delays will take considerably longer than estimates made several months ago when gas prices peaked.

Also, well operators could possibly keep wells choked down to stretch out payoff thus delaying royalty payments and reserving gas reserves until prices increase.

Or, they could increase flows and current revenues to pay for current drilling and continued fill-in leasing in sections where they want to start drilling now or soon.

Or, .....??

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Permalink Reply by Skip Peel - Mineral Consultant on October 19, 2008 at 7:05

Robert, I think that your second posit is most likely. If there is connection to market, I suspect an operator would prefer to max out initial production to recover the cost of the well as quickly as possible and use it to drill the next. They need strong cash flow not only to keep the rigs drilling but to build the infrastructure needed to support production. There are a lot of holes that need to get punched in the ground in the next three to five years. I doubt that any operator who has plans to continue to do so will shut in any production.

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Permalink Reply by JWindom on October 19, 2008 at 8:07

Hi Skip,

Question: could you explain the difference between mmcf and mmcfe? I see under definitions on CHK's page that Boe: barrel of oil (one barrel of oil equals 6,000 cubic feet of natural gas) and Mmcfe: one million cubic feet of natural gas equivalent

But what is the relationship between Mmcf: one million cubic feet of natural gas and Mmcfe: one million cubic feet of natural gas equivalent? Is there a 6,000 conversion factor in there somewhere?

Also where is the loss between gross and net? In CHK presentations they state "Current net production of ~50 mmcfe/day (~65 mmcfe/day gross)" Are they leaking 15mmcfe/day?

thanks,
jim

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Permalink Reply by Skip Peel - Mineral Consultant on October 19, 2008 at 12:10

IWindom, I am not able to define the difference. I used the term mmcfe as a direct quote from the CHK report. Whenever I see both crude oil and natural gas discussed as equivalents, the conversion term used I believe, is mmbtu. Conversion to British Thermal Units gives a means to compare the energy value of each hydrocarbon. When I first ran across the term, mcfe or mmcfe, I think it was in reference to natural gas liquids which are produced along with the gas in most wells. Just a guess. As to the difference between the gross and net production numbers, I assumed that the gross was the actual production and the net is CHK's ownership percentage in that production. Whether PXP or other operating partners, CHK's working interest is not 100% in every well they operate. I apologize for my inability to adequately answer your questions but I hope that my response may bring your questions to the attention of some of our more knowledgeable members. If not, you might wish to post your questions separately in a discussion topic of their own. I would be interested to hear the answers.

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Permalink Reply by Spring Branch,mineral owner on October 19, 2008 at 15:35

The 65mmcfe is what the wells are actually making (production) and the 50mmcfe is that portion of total production that belongs to Chesapeake. The difference between the two would either be Chesapeake's working interest partner's share or the portion that goes to royalty owners, one or the other. Only Chesapeake knows for sure. Sorry Skip, didn't see that you had already asnswered the question.

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Permalink Reply by Skip Peel - Mineral Consultant on October 19, 2008 at 15:46

Hey, Spring Branch. I guessed at the answer. Your confirmation is welcome. By the time the next CHK report is released I am hoping there are many members who can slice, dice and translate the data. If it were not for CHK being so forthcoming with HS data and the help we get from the knowledgeable members of GHS, we would be running around in the dark. Every member should examine this report. And hold onto a copy.

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Permalink Reply by Grillin' - MmmMmm on October 20, 2008 at 5:37

when the term "equivalent" is used, such as BOE or MMCFE, this is a way to convert oil to an equivalent volume of gas or convert gas to an equivalent volume of oil. So, when they save BOE, it is equal to the mcf of gas divided by six plus the barrels of oil. Or if they quote mcfe, then it is the barrels of oil timex 6 plus the mcf of gas. Some companies relate everything to barrels (most major O&G co's) and some relate everything to MMCFE (large independents and small co's that are mainly in gas plays, like CHK, HK, etc.) Just a way of trying to compare wells. So if a well makes 10 BOPD and 6 MCFGpday, then it is making 11 BOEpd. then if you want to compare that to a gas well, you can convert the gas well production to BOE's and compare.

Kind of contorted explanation but hopefully I got the point across.

The difference between gross and net is a bit easier and it doesn't relate to leakage. Say a well makes 100 mcf/day and CHK owns a 50% WI and other companies own the other 50%. And say that you as the mineral owner have a 25% royalty. The gross production is 100 mcf/day. CHK's gross WI production is 50 mcf/day and their net after royalty is 37.5 mcf/day. The net usually refers to the company's WI % after the royalty volumes are deducted.

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Permalink Reply by Skip Peel - Mineral Consultant on October 20, 2008 at 5:52

Thanks, Mmmarkkk. Every decline curve discussion needs a reservoir engineer. I was hoping you would show up in the thread. And I think that your explanation of BOE and MMCFE is one that most of us can grasp. That also says something about the wealth of technical information on the site and the ability of many of us laymen to grasp much of the industry basic terminology through the help of yourself and numerous other informed members. A tip of my hat to all.

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Permalink Reply by JWindom on October 20, 2008 at 15:49

Many thanks to all for your answers.

I think I understand now, so for a gas well that is producing only gas and no liquids (condensate or crude) then 1mmcfe would be equal to 1mmcf, am I correct?

The gross production less the royalty and other divisions to the net production makes perfect sense.

I hope I was not the only person who had these questions, that is what makes this site so useful.

thanks again,
jim

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