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Permalink Reply by Skip Peel - Mineral Consultant on August 11, 2009 at 13:21

Logan. Obviously the number of wells needing to be drilled to hold existing leases not already Held By Production (HBP) varies quite a bit from one operator to the next. For the majority of operators (not the majority of acres) in the Haynesville Shale, they have to drill a few or none. That is because they currently have production which holds their leases. That's because they were already drilling other formations on their leasehold when the play was discovered/announced. The bigger shale players who went on a leasing binge have a greater inventory of undrilled leases but please keep in mind that a significant percentage of their leasehold was obtained from operators who fit the description above and thus require a limited number or zero wells. Here is an example. An operator touts the fact that they have 504 prospective Haynesville well locations. This equates to 63 sections or ~40,320 acres of leasehold. Let's say that 33 sections have existing production which holds the leases in force either through older production from shallower formations or newer Haynesville Shale wells already drilled. To keep the remaining 240 potential HS well locations, the operator must drill 30 wells. Let's say they have 18 months left on the leases covering the 30 sections. They must average completing less than 2 wells per month to hold all of their undrilled sections. Presently there are a surplus of "stacked" and available drilling rigs. And they can be contracted at a steep discount. This is just an example and obviously any development activity requires a capital investment. The major shale players should have the capability to drill all that the leases they care to hold. They may not care to hold all that they currently have under lease as Chesapeake's release of the Caddo Parish/Cross Lake state leases demonstrates.

Now with this in mind, go to Les B.'s Drilling Rig group and make note of how many rigs Chesapeake, Petrohawk, Encana, etc. have drilling presently. They will all add rigs next year as more of their leases near their expiration date. You already answered your own question as to when operators would drill more than one well per section/unit, when the price of natural gas increases.

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Permalink Reply by Parkdota on August 11, 2009 at 13:57

I didn't think they'd let any go, but I guess that is possible. I also didn't think about a surplus of rigs so that would help as well. Our lease was structured with two different companies. Pinnacle gets the Cotton Valley and Ecana gets the Haynesville. Both had/have 3 years to drill or leave (no extensions). So, they both drilled. I guess some people were/are in the type of lease that lets the operators have flexibility or wiggle room.

Ecana has said they're going to drill 50 this year and 75-100 next year. I took their current acreage holdings and divided by 640 and they'd have to drill roughly 575 wells to keep leases, which seemed like a lot to me. Maybe they drill on the ones with more direct contracts, do extensions on others, and let some go. I am concerned that if they have to drill so many that it would take a long, long time to get back to our property.

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Permalink Reply by Skip Peel - Mineral Consultant on August 11, 2009 at 14:15

Logan. You are assuming that ECA has to drill their entire lease acreage divided by 640. That is not correct. As I mentioned previously a significant portion of their stated leasehold is already HBP. They don't have to drill anything like 575 wells. Probably less than half that number.

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Permalink Reply by Parkdota on August 11, 2009 at 14:22

Ok, I see....that makes more sense. Thanks for the info.

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Permalink Reply by VSC DeSoto South on August 11, 2009 at 15:35

Interesting discussion, very enlightening...thanks!

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Permalink Reply by Skip Peel - Mineral Consultant on August 12, 2009 at 6:56

The Shreveport Times coverage of the Haynesville Shale Play has been atrocious. And characterized by numerous and significant inaccuracies.

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Permalink Reply by JeffNParis on August 12, 2009 at 7:04

Skip,

We have 190 acres in S6 T15N T15W. They are putting a pipeline between our land (in the northeast corner of the section) and the section above us. Our lease runs out August 2010. Knowing what you know, do you think they'll put a well in our section before our lease runs out?
If not, and they re-leased the land, what would they pay to re-lease?

One final question, does CHK pay something to actually put a well on someone's land?

Thanks for sharing your professional knowledge on this blog.

Jeff

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Permalink Reply by Skip Peel - Mineral Consultant on August 12, 2009 at 7:17

JNP. Yes. I don't know. And it depends on the language in your lease. You're in too good of an area and one of only four sections without a HA unit order in your township. If by some strange circumstance your lease was to expire, call me. LOL! Just kidding. No one knows what lease bonus payments will be a year from now. If you signed a standard lease form and did not prohibit surface operations or include language specifically addressing compensation for a well pad, the operator can locate a well site on your lands within the regs of the LOC. I think many members confuse the purpose and potential benefit of a no surface use clause. For some it intends exactly what it appears to but it also means that an operator will have to negotiate additional compensation for surface uses. I council my clients to always include a no surface use clause but to tell the lessee's landman that they will consider allowing use of the surface on a case by case basis.

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Permalink Reply by JeffNParis on August 12, 2009 at 7:54

Thanks Skip. They just signed the last group of holdouts in our section. How soon do you think they'll put us in a unit? The Seismic has all been done and they are putting the pipeline in crazy-fast. Any idea why these four sections have not been unitized?

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Permalink Reply by JeffNParis on August 12, 2009 at 8:19

One more thing Skip...I know you were just kidding that if they didn't re-lease to call you...but all kidding aside...what would you do? I see you are an independent landman - what does that mean?

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Permalink Reply by Skip Peel - Mineral Consultant on August 12, 2009 at 8:36

Keith. JNP is just kidding. LOL! The odds are heavily in favor of you getting a well prior to lease term expiration. Independent landmen are self employed as opposed to working for an E&P company or as a salaried position at a land or investment company. Many landmen are independents who work on a day rate for whomever needs their services for a short term project. The majority of my clients are land owners. I have some who are investors and a couple best described as service providers. Most of what I do for all of them is research and tracking reports. The answer to your question regarding what to do if your lease were to expire requires additional information. The location and size of your tract and the nature of the surface specifically.

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Permalink Reply by JeffNParis on August 12, 2009 at 11:31

Thanks Skip. Hope I didn't get you in trouble with Keith. It's good for us to know what an indy landman does. I'm sure you do things for many grateful clients. Thanks for your answers. We'll sit tight and wait!

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