Replies to This Discussion

Permalink Reply by The_Baron on January 26, 2011 at 4:06

Fred,

 

A lot of HA wells have not paid out and probally never will. In addition to the costs terry mentioned, there will also be monthly supervision and operating costs.

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Permalink Reply by P.G. on January 26, 2011 at 4:10

Surely there has to be some that has turned a profit that were in units that weren't 100% leased. How would the drillers stay in business if their wells never paid out?

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Permalink Reply by Linda Whatley on January 26, 2011 at 4:11

Good question P.G.  ....   Answer anyone????

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Permalink Reply by The_Baron on January 26, 2011 at 6:33

Its a little more complicated than it may seem.

 

I personally believe many of the larger companies are raising mon ey through other means, such as the stock and bond markets as wel as hedgeing.

CHK for example sells its gas to its subsidiary. Its subsidiary enters into agreements to earn a higher value for its gas, so in effect CHK will profit more on the gas as a whole, since it is selling gas in large volumes produced by dozens or even hundreds of wells, while the individual participants will not beifit from this pricing advantage.

 

Also, large operators have the benifit of offsetting the lesser quality wells with the big blockbuster wells. It could also be argued that the way supervision and operation charges are booked and charge out to WI and UMI would benifit the operator as well.

 

Just thoughts based on my own experiances and opinions, but somthing to think about.

 

You also have to consider that right now they may be just trying to hold their leases, in the hopes that gas prices will spike again. YOu could argue that if prices were to drive up to $12/mcf again, that these wells that are not economical today would be then.

Permalink Reply by Henry on January 26, 2011 at 7:05

Somebody is making money.  No one is forcing EXCO or EnCana to put 8 wells into their sections.  they choose to.

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Permalink Reply by Linda Whatley on January 26, 2011 at 7:27

Guess we won't know for sure till some of the UMOs let us know when they start receiving checks! 

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Permalink Reply by The_Baron on January 26, 2011 at 9:28

I wouldn't use the severance tax rebate paperwork to indicate when a well actually pays off. The costst allowed to be billed towards the rebate are strictly set, and do NOT include monthly operations or supervision. The rebate paperwork is an interesting guide, but the UMI should rely on statements from the operator.

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Permalink Reply by Spring Branch,mineral owner on January 26, 2011 at 10:33

Gosh Darn, your first two paragraphs are not quite accurate IMHO because only drilling and completion costs go into the calculation for severance tax exemption. Curative costs and ongoing operating costs may not be included in the calculation for severance tax exemption, but are cetainly included in the calculation to arive at one times money back for the UMI to begin getting paid.  The State of LA would not know when or if a well goes into profit based solely of the return of drilling and completion costs as regards severance tax.  Besides the state can always rely on the two year cut off, the UMI can not.  I'm not saying that there aren't wells that have become profitable.  I'm sure there are plenty of them.  On the other hand, I'm sure there are also plenty of Haynesville wells that are not profitable after two years.  I would also suspect that profits from hedging activities do not go to the benefit of the UMI for the breakeven calculation.

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Permalink Reply by Les Bamburg on January 26, 2011 at 11:17

GD, you hit the key in that many operator's hedged the majority of their 2010 production in 2008/2009 at prices above $6.00 per MMBtu and are likely making a profit.  Even at $4.00 per MMBtu many of the currently drilling wells will earn a profit albeit a much lower profit than $7.00 prices.  

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Permalink Reply by Kat Bloomfield on January 28, 2011 at 2:13

The elephant in the room is the effect of the Louisiana Supreme Court case which holds that any ahnd all benefits an operator obtains from drilling must be shared proportionately with all mineral interest owners.  The Court mandated that the settlement proceeds of take or pay litigation HAVE to be paid to the mineral interest owners according to the percentage of their interests.  In that case, operators leased lands, drilled for and obtained production, and had "hedged" against price fluctuations through the use of take or pay contracts. 

Query:  Because take or pay contracts are a form of hedging and the Supreme Court ruled as it did, i.e., that the royalty owners were due their royalty share of the settlement proceeds of the take or pay litigation, aren't royalty owners and other mineral interest owners, such as a UMO, also due their proportionate share of benefits obtained by hedging on gas markets and otherwise?

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Permalink Reply by Les Bamburg on January 28, 2011 at 3:46

Kat, take or pay obligations relate to the physical sale of natural gas and therefore can be tied (allocated) to specific sources such as units or leases.  Financial hedging, on the other hand, is not related to physical sales of natural gas so it would be a difficult argument.  Anyone can sell a NYMEX gas futures contract even if they have no physical gas and reap the benefits or incur the loses related to that activity.  

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Permalink Reply by Kat Bloomfield on January 28, 2011 at 5:41

true.  Yet, an operator that hedges also can reap the benefits and also have physical contacts witht he gas.  And "anyone" doesn't have an obligation to mineral/royalty owner; whereas the operator does.

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