Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on October 28, 2013 at 16:34

A lot of horizontal wells will not make 4 times their cost to drill and complete.  At ~$10M per each for a successful well (no mechanical problems), they don't have to for an operator to drill more.  Risk penalties are generally in effect for each well regardless of how many may be drilled in a single unit.  Going unleased is a real roll of the dice that most mineral owners will likely regret.  The odds are not good. 

Risk penalties should never be levied against mineral owners.  They are appropriate for Working Interests.  LA allows an operator to recover the well cost attributed to unleased mineral interests but does not impose a risk penalty on the unleased minera interests.  More equitable but still not a guarantee that the mineral owner will see any income.  It is not unusual for a well to experience problems that can run the cost up significantly.  Or the price of the hydrocarbon produced can decline.  The Haynesville Shale is a good cautionary tale in that regard. 

Permalink Reply by Bernell McGehee on October 28, 2013 at 16:53

I believe the penalty is 250% of the cost or drilling, completion, and operating costs.

So, a mineral owner not leasing isn't likely to recoup anything.

I think I read somewhere that the mineral owner would get a 3/16th royalty, but I'm not certain of that.

IF...I repeat...IF the 250% of drilling, completion and operating costs is in effect and the 3/16th is in effect, then, who would imagine a mineral owner would come out ahead of a 20% lease with bonus money up front?

I can't see it. 

All that said, I agree, Steve.  Not leasing is an option...I just think it is a poor one.

Permalink Reply by Skip Peel - Mineral Consultant on October 29, 2013 at 1:28

(i) One hundred percent (100%) of the nonconsenting owner's nonconsenting share of the cost of any newly acquired surface equipment beyond the wellhead connections including, but not limited to, stock tanks, separators, treaters, pumping equipment and piping; and

(ii) Two hundred fifty percent (250%) of that portion of the costs and expenses of operations provided for in the pooling order, and two hundred fifty percent (250%) of that portion of the cost of newly acquired equipment in the well, including wellhead connections, which would have been chargeable to the nonconsenting owner's nonconsenting share thereof; provided, however, when a mineral interest that is severed from the surface estate is owned by a nonconsenting owner or when a mineral interest is subject to an oil and gas lease that is owned by a nonconsenting owner, the payment under this subparagraph (ii) shall be three hundred percent (300%); and

(iii) One hundred percent (100%) of the nonconsenting owner's nonconsenting share of the cost of operation of the well commencing with first production and continuing to such point in time.

http://www.ogb.state.ms.us/rulebook.htm

Section 53 - 3 -7, i,ii, & iii.

Permalink Reply by Steve on October 29, 2013 at 2:49

In other words the lawmakers in Ms. also want you to sign a lease, no matter how crappy the offer. Sounds unfair to me - but what do I know about politicians being in the pocket of big $.

Permalink Reply by Steve on October 29, 2013 at 1:29

I agree that it is not worth the risk. We do have at least one landowner in our proposed unit that is going unleased by choice, against the advice of our mineral agent, but he is the only one and he just has 5 acres in the proposed unit and that is in La. where there is no penalty.

Permalink Reply by Skip Peel - Mineral Consultant on November 9, 2013 at 18:00

GDP Huff 18-7H #1 - Ensign US Drilling SW Rig #751 reporting 72 days drilling @ 16,432' on 11/8.  The rig is assigned to drill the CMR 8-5H #1 next.

Permalink Reply by Bernell McGehee on November 9, 2013 at 18:08

I use an attorney, because I want the lease looked at anyway and the attorney will likely be aware of available options and contacts.

Permalink Reply by Andrew on November 11, 2013 at 13:20

Going non-consent in a MS well is a non-option because of the penalties. The MS operator has a much stronger bargaining position than the small mineral owner, so (unfortunately) accepting the best offer is usually the only real option. Even in LA where there is no risk penalty, getting a royalty from day one is usually the better option in most cases. If you factor in the time-value of money, it is almost always better to have a royalty unless your well is a top 1% producer (which are obviously much less common than duds and dry holes).

Permalink Reply by Skip Peel - Mineral Consultant on November 11, 2013 at 14:37

Andrew, I agree.  And would add regarding LA that as wells, particularly horizontal wells to very deep True Vertical Depths with long laterals, become more prevalent and costly, the instances where a well will payout significant royalty proceeds to leased mineral interests yet not recover its cost nor pay one penny to unleased mineral interests will not be uncommon.  It is a significant risk to base a decision to go non-consent on the hope that a well will not experience mechanical problems in drilling or in completion operations. 

Permalink Reply by George Christopher Henson on November 12, 2013 at 22:00

Murphy's law seems to prevail in most of my endeavors, so I base 'most' of my business decisions accordingly.
Example,,, I've bought three lawnmowers this year, I should have hired someone to cut my grass.

Permalink Reply by Steve on November 13, 2013 at 3:57

I do not disagree with yall's professional opinion that going non-consent is usually a mistake, but, for purposes of provoking a little more thought on the subject:  For a small landowner in the TMS it could be a risk worth taking depending on how this play works out. If Encana for example, is able to execute successfully on its much touted  "resource play hub" development program (  http://www.encana.com/about/strategy/hub.html ) ie; using one mega pad to drill +15 wells in a 2200 acre unit( potentially many more wells if down spacing occurs as it has in other shale plays), this could substantially reduce costs allocated to the non-consenting landowner. It does not take much oil at $100 per barrel for a landowner to make money, even if his % of the unit is tiny. These wells should produce oil at some rate for +10 years. It is likely in my opinion that the resource play hub design will eventually be implemented  in the TMS and, if proven successful,  will result in significant total development and operational cost reductions.  Just some food for discussion at this point. There are no absolutes in this discussion of what best to do - facts can change things. Many once thought the TMS was a pipe dream and its development ran against the wisdom of professionals. All mitigating factors should be considered.

Permalink Reply by mark edward marchiafava on November 13, 2013 at 4:00

Someone told me Sanchez paid $1200 per acre for some Amite county school land leases. Since Sanchez won't answer my question, does anyone have any credible info to substantiate/deny this rumor?

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