Monday, February 25, 2008

How Many Wells and When?

To get 50% recovery of the 30 trillion cubic foot gas reserve in the Barnett Shale requires a lot of wells and a lot of fracturing. The Star Telegram in early December 2007 provided some guidance. In that article it was suggested that, to get 50% recovery of the reserve, a spacing of 20 acres per well is needed.

At that spacing, almost 30,000 wells would be needed in Tarrant County. That is a lot of "Christmas Trees", separators, well head valves and pipelines.

To put it in perspective, the RRC reported about 1500 completed wells in Tarrant County in 2007 plus there were about 1500 approved permits. Thus only about 10% of the wells required to produce the gas in Tarrant are completed or permitted.

Chesapeake, XTO, Carrizo and others are moving as fast as possible to tie up leases and drill enough wells to hold those leases, but the total number of rigs in Tarrant is only about 50. Each rig can drill about 12 to 15 wells per year so a total of about 700 wells can be drilled each year by all the current rigs. At this rate, to drill the required additional 25,000 plus wells will require about 40 years.

And what about getting pipelines to all those wells to gather production for sale. That many wells will require at least 1000 miles of new pipeline plus all the related separators, compressors, tank farms, etc.

Is it possible that equipment shortage is why no operators will commit to a specific royalty stream? Or could that be the reason they want 5-year leases that allow them to pool up to 640 acres? That lets them use a single well to tie up the minerals on a large block of land for 20 years while they drill more wells.

The operators tie up land and get a good return on investment but owners get strung along for years. Until wells are drilled in a tightly spaced pattern and fracturing is thorough, owner royalties will be meager. For example at 25%, one well that produces $20 million in gas on a 640 acre well pool will generate royalties of less than $8,000 per acre (under $800 per acre per year) while if wells are on a 20 acre spacing, royalties could be up to 32 times higher.

Of course as more wells are drilled in the large pools, more royalties will be generated. However, if it takes 40 or 50 years, the current owners will likely not benefit or care.

To encourage high royalties, leases need clauses that terminate the lease if production royalties are too low. But the typical leases let operators off the hook. Owners can rarely get control back and get another operator to execute the development in a timely manner. Operators do NOT want termination clauses and most owners don't know or think to demand them. If not demanded, guess what will happen.


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