Saturday, March 15, 2008

What's The Deal?

OK folks, I think I understand the situation. The big oil and gas operators have figured out that there is a lot of money to be made in Tarrant County if they can get minerals leased before the competition beats them to the punch and before property owners figure out how to organize and demand a more significant share of the proceeds.

They have drilled a few wells and found that the Barnett Shale gas reserve is real ... VERY REAL. They also found that property owners don't know what's going on and don't have time to figure it out and get organized. They found the average drilling unit can produce $20 to $30 million in gas per well drilled. They know how to complete wells for under $5 million per well (perhaps as little as $2 million). They have demonstrated a 90% or so success rate. Thus they expect to book about 50% of the proceeds from a well after all royalties and expenses. They found that government officials at the city, county and state level are not yet aware of any significant new environmental, property value or explosion hazard risks to their constituents from urban drilling. They have the know how, regulatory environment, political clout and legal position to control the gas production once the leases are signed and drilling is begun. Their initial well investment is quite small and the production of early wells will pay for the rest of the development process. Return on their INITIAL investment to lease and drill the first wells is HUGE (easily 10,000% or more).

Folks, as I see it, we only have two choices.

  1. organize a little and sign the best lease deal that community volunteers can negotiate or

  2. organize enough to produce the minerals ourselves.

The first option will result in a 50 or 60 year process that will pay the average 1/4th acre lot owner about $50,000 or $60,000 over the life of production. Those payments will come as an initial signing bonus of a few thousand followed by royalties averaging about $75 per month (current dollars) for 60 years. That is not a bad return for a minimum investment of time and no money invested up front. That is the option most are choosing at this time.

The second option offers the opportunity to enjoy a quicker return and a larger return but requires a little more effort up front and a modest investment not required by option 1. If enough 1/4th-acre owners put their land and resources together, the development time could be reduced to under 5 years (compared to 30 or 40 years for option 1) and the total production share could rise to $120,000 to $180,000 (a factor of 2 to 3 more than option 1). The initial investment required to get the additional $60 to $120 thousand can likely be held to under $5,000 to seed the production process (perhaps a little as $2000).

Current owners can lease their mineral estates to the big operators for a "share" of the production or they can tend their own garden, plant some seed and harvest a bumper crop themselves. It depends on whether one wants to be a "share cropper" or an independent farmer.

In either case the upfront costs will be paid. Like the farmer must pay for the seed and the cost of the tractor and the cost of the fuel to operate the tractor and the cost of hired labor, such costs will be deducted from the production proceeds. The only difference is that, in one case, most of the profits are enjoyed by the stock holders of the operators, in the other, they are enjoyed by the mineral owner. It is your choice.

To leave a comment about what you want to do, click on the word "comment" below. To email this article to a friend, click on the envelope icon below. If we are ever to get organized, we must take action and get involved. It starts today ... it starts with you.


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