Friday, February 29, 2008

Could It Be We Look Stupid?

If you had a $250,000 house, would you lease it to me for 30 years for $200 per month rental payments? Note that I will also agree to pay all insurance and maintenance during the term of the lease.

Well if you don't want to do that, how about selling me a 5 year option to that lease for $4000. Then you have a nice cash payment and I might not even exercise the option. And if I don't exercise the option, you can make another deal with someone else.

If the answer is "yes" to either offer, we need to talk. I have some swamp land that you would love.

But that (or much less) is what the operators are offering for a $250,000 mineral deposit under a typical 1/4th acre lot in Tarrant County (see my estimate). And owners are scrambling to take the deal. If that is what folks need and think is best for them to do, they are certainly encouraged to do so. But if not, why not explore other options?

Being a good steward takes effort. Email me at if you want to learn more and explore options before signing a lease. If a lot of folks work together, many options become viable.


Wednesday, February 27, 2008

What's That Funny Smell?

I woke up this morning to a glorious day. It was one of those famous North Texas winter days with the smell of spring in the air and a gentle breeze, lots of sun and highs in the 70's. Wow, why can't all winter days be like this?

As I went to the mailbox, I noticed the neighbor's dog, a black Lab named Stinky, galloping around my yard looking for someone that wants to play. Of course when I bent over a little to rub his ears, he bolted away wanting me to chase him. I wasn't up to that but enjoyed watching his energy as I walked across the yard toward the mailbox.

When I reached the box, I found a very official looking letter from Bale Estate Services. Hmmmm, "what's this?" I thought as I quickly opened the envelope. To my surprise, the letter said that a benefactor, Mr. B. Shale, had died and left me 1/2000th of his estate. It says that the total B. Shale estate was $500 million so my share will be $250,000.

Seems like I remember something like this on TV years ago. Yep, there was a show called "The Millionaire" where a guy would knock on a door and hand out checks for a $1,000,000. The rest of the show was spent observing what happened to the recipient after they received their windfall.

Wow, looks like I won the lottery and didn't even have to buy a ticket! How do I get my check?

Not so fast there Bugs Bunny. There is some fine print. Like the lottery, this is NOT a lump sum payment. Rather, the inheritance will be paid out over a period of 10 years and will be delayed a little.

Oh I see. Let me read the fine print. Payments will start two years from now at $56,000, then taper off 20% per year over the following 9 years until the whole $250,000 is paid.

Well that's not too bad. Where did I put that calculator? There it is ... OK, let's see. The payments will be $56k, $45k, $36k, etc. I guess I better not tell my spouse we are rich, but we can always use the extra cash. I'm sure we can spend it.

How about a new set of clubs and a big screen TV? We could use a better car and by the time the money gets here the kids will need their own car plus money for college. Could we afford one of those hot tubs, too? It was sure fun to dream as I walked back to the front door in a daze.

When I think about it, I believe that it is better that the money is paid out slowly. I won't have to pay as much income tax and I will have time to think and plan how to spend the money. Let's see, where do I sign to accept the offer?

Wait a minute there Speedy. There are a few more details in the fine print. To get the the payments started, you and the other 2000 recipients have to ALL agree to make a sizable up front payment to Mr. Shale's favorite charity ... the Foundation for the Betterment of Rough Necks, FBRN.

Oh yeah? How much do we have to give the FBRN?

Well it's not too much ... only $25,000.

TWENTY FIVE THOUSAND DOLLARS!!! How am I supposed to do that? No one has that much money sitting around. And how am I supposed to get the other 2000 recipients to sign up? That's impossible!

Calm down please. Mr. Shale knew it would be tough so he provided this option clause that makes it a lot easier. Mr. Shale arranged with Texpeake Services to help you out.

REALLY? What do you mean?

If you sign the option clause, Texpeake will take care of all the details and make sure the FBRN and all the other recipients get paid. Plus they will even pay you a nice "bonus" up front. Yep, they will pay you and all the other recipients $500 today and then pay 20% of Mr. Shale's payments as they arrive.

So let's see ... if I want, I can sign the option clause and Texpeake will pay me $500 now and $50k over the ten years that the on-going payments are made.

Yep, for their help, Texpeake will keep the other $200,000 of the payments to cover their donation to the FBRN and all the overhead that was required to keep track of the process. I know 80% seems like a lot to pay Texpeake for their management but it's a VERY complicated process and what other choice do you have? Here ... sign now and you get this nice $500 check.

WOW ... now I have a headache. Do I have any other choices? Neither one of these sounds like a "no brain-er." Plus I think I heard on the radio that some of the other recipients are getting a bigger bonus, up to $4000 and a little higher percentage, too.

Do I wait and hope for more than Texpeake is offering or take the sure $500 now? Why not just borrow the $25,000 for the FBRN and pay a little interest instead of having Texpeake handle everything? I could sure use the other $200,000 but would all the others join with me or will they just sign the Texpeake option?

I don't even know if this is real. Who is Mr. B. Shale anyway? Did he really have a $500 million estate?

Wow there sure are a lot of questions. I don't have time to figure this out. My head is spinning a little so, OK, let me review the bidding before I sign. If I sign the Texpeake offer, I get a check now for $500 then in two years I start getting a 20% share of the estate payments, about $11,000 the first year, right? No further delays or considerations, right?

Well, not exactly. Texpeake may not get it started quite that fast. They will give you the bonus check alright but it may take longer before you get the follow-on payments. Texpeake is very busy handling all the new estate payments and can't guarantee a payment of $11,000 in just 2 years.

Really, why is that?

Well first you will note that the total amount that must be paid to FBRN is 2000 times $25,000, about $50,000,000. That's more than Texpeake has available right now and besides the folks at FBRN can't spend more than about $2.5 million a year ... it's not a large group. Their charter only allows them to spend what they need each year. Their non-profit status with the IRS would be in jeopardy if they took too much at once. Thus it will take Texpeake and the FBRN about 20 years to make all those donations and therefore it will take a long time to get all those B. Shale estate payments underway.

But don't worry. The agreement with Texpeake allows them to pool all the recipients so everyone starts to get their proportionate share of the payments as soon as the first $5 million in payments to the FBRN are made and the two-year waiting period has passed. Your payments will be stretched out but you will still get the whole $50,000 you are due. It will just take 30 years instead of 10 years.

Now my head is REALLY spinning. I wish I had not gone to the mail box. This is just too bizarre for words! It just doesn't smell right.

And what IS that smell? Oh C%*P ... Stinky left a "present" in my yard. Now I have to go clean my shoe and those spots on the carpet too. Where did I put that bottle of aspirin?


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.


What Happens At A Well Site?

Once a well is permitted, the drilling process begins. First the well site is prepared and the rig is brought in and made ready for drilling. Different rig manufacturers have somewhat different processes but one that is very efficient is shown on here .

After the rig is ready drilling begins. Here is an animation of what happens in the hole. The drilling process takes a week or two and is followed by casing the well and hydraulic fracturing.

The drill bit is suspended from lengths of pipe. During the drilling process, the drill pipe has to be lowered and raised repeatedly. Here is a movie of the process of lowering and adding lengths (about 90 ft) of pipe with a highly automated set of rig tools.

Once the well is drilled, the rig is torn down and moved to a new site (2 to 3 days) or skidded to the side about 20 ft (6 to 8 hrs) to a new well location as shown in this animation .

Dale Resources has also posted a good overview presentation.


Sunday, February 24, 2008

Mineral Owners Lose In Court

There are several MUST read documents available at Texas A&M Real estate Center . These documents explain many issues to consider when leasing.

For example, surface owner rights are subordinate to mineral owners. Also surprisingly, even if the lease indicates royalties are to be paid without post-production expenses being deducted, that is not supported by case law. In fact, owners end up sharing in those expenses.

Here are some quotes from these documents.

1. One of the earliest and most significant cases decided by the Texas Supreme Court held that the mineral estate is dominant over the surface estate. The grant of the mineral lease gives the mineral lessee the implied right to use as much of the surface as is reasonably necessary for the exploration and development of the minerals. The surface owner’s consent is not required for this right to be exercised. The mineral lessee is liable for surface damages only in limited situations.

2. The shared expenses depend partly on where the lease fixes the royalty. Commonly, the royalty for oil is set "at the well" or "wellhead." In such cases, the mineral owner’s royalty payment is free of production costs, but all costs subsequent to production are shared. (Two 1996 Texas Supreme Court decisions, Heritage Resources, Inc. v. Nations Bank, 09-0515, and Judice v. Mewbourne Oil Co., 95-0115, so held even though the lease addendum stated the royalty was free of such costs.) If the lease fixes the royalty "in the pipeline," "at the place of sale" or at other delivery points, different costs subsequent to production may be shared. These costs may include items such as compression expenses necessary to make the product deliverable into the purchaser’s pipeline, expenses necessary to make the product salable, transportation costs and the expenses used in measuring production.

Until you sign the lease, you own both the surface and mineral estate in a single deed and have control over your estate. After signing, the mineral and surface estates are in separate deeds and will never be combined again. Plus you end up losing control of the surface estate too. I am not a lawyer and can not give legal advice but the old saying "BEWARE of strangers bearing gifts" seems to apply.