Oil & Gas Pro

ROYALTY INCOME DECLINES WITH THE DECLINE IN WELL PRODUCTION

For the purpose of this example, I will use several constant values. The following royalty payment calculations are based on 1 acre, a 640 acre production unit with 1well and a 25% royalty. Also the recent CHK report average for their 16 producing horizontal HS wells of 10.0 mmcfe/day (million cubic feet equivalent per day). That amount will be reduced yearly over a five year period based on the CHK decline curve data contained in the same report. I will plug in the following values for the price of a mcfd (thousand cubic feet per day): Year 1: $8, Year 2 : $9, Year 3: $10, Year 4: $11 and Year 5: $12.

Royalty per year:
Year 1: $11,375
Year 2: $2,431
Year 3: $1,783
Year 4: $1,530
Year 5: $1,205

These are arbitrary values that may not accurately reflect the production of your well nor the future price of natural gas. I offer the calculations as a way to emphasize the nature of royalty income. It declines as well head production declines. There are royalty calculators accessible on the Web. I have used several and the variance between their results is extremely slight. Forewarned is Forearmed. Good Luck, Skip

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landownerPermalink Reply by JeffNParis on February 14, 2011 at 1:25

Skip,

Given that two years have passed since the above projections, how much have things changed? 

JeffNParis


Oil & Gas ProPermalink Reply by Skip Peel - Mineral Consultant on February 14, 2011 at 3:35
Most operators have instituted restrictive choke programs as the consensus appears to be that it improves Estimated Ultimate Recoverable (EUR) reserves per well.  A few operators that have publicly touted the restricted choke concept have estimated first year decline on wells properly restricted appear to be approximately 50%.  I don't think there is a simple formula to turn a choke setting into a EUR projection.  In general the common choke settings when operators projected ~80% first year decline were in the 22/64" to 26/64" range.  You still see a few Initial Production reports in that range but it has become rare.  Restricted wells have a wider range but I would guesstimate that the majority are in the 10/64" to 16/64" range.  In some areas of the Play restricted choke setting are directly related to pipeline capacity.

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