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.


Friday, March 14, 2008

Howdy Neighbor! ... Cont'd

Billy K. Lemons is a professional oil and gas consultant at Resource Analyt(SM) & Management Group. I appreciated that he took time to comment and clarify some issues on my previous post by the same title. As you will see he is very thorough and precise in his answer to my question.

Question: Is it true that if a pipeline company has acquired an easement from a landowner, either by voluntary conveyance or involuntary conveyance (through condemnation), the pipeline company can place pipelines and other facilities, such as above-ground facilities, on the easement property without the consent of adjoining or neighboring landowners?

Answer: That may be a legal question that an attorney is more qualified to answer. But speaking as a landman in an educational way only, I’d say that the answer is generally, "Yes." Under typical circumstances, the pipeline company needs no approval of adjoining or neighboring landowners to exercise its rights acquired under the easement conveyance.

When a pipeline company acquires an easement on or across a piece of property, it acquires rights in that property, a portion of that bundle of rights referred to as real estate. It is free to exercise whatever legitimate rights it acquired under the conveyance, subject to: 1) the terms and conditions of the conveyance; 2) any superior rights owned by others in that same piece of property; 3) federal, state and local law; and perhaps 4) any restrictive covenants covering the property.

Under the typical “standard” right-of-way easement agreements that pipeline companies convince most surface owners to sign, the pipeline company has rights of ingress and egress across the entire property that is subject to the easement, and it has the right to exercise those rights at any time without any prior or contemporaneous notice to the surface owner. The recording of the easement conveyance in the official public records of the county where the land is located is notice enough. If you own the land upon which the easement is located, the company operating under such a standard easement can come and go in your backyard, or whatever, whenever it wants and not even show you the courtesy of first knocking on your door, much less your neighbor’s door.

Also under the typical standard pipeline easement agreement, the company has the right to install “surface facilities,” which can be any kind of above-ground system of pipes, values, gages, etc., without need for any further authorization from or notice to the owner of the property, much less the owner’s neighbors. But again, such things are subject to the terms and conditions of the easement conveyance, to federal, state and local law, and perhaps to any restrictive covenants covering the property.

So typically, if a pipeline company sticks some big, ugly gathering system facilities across the street from your house, you generally have nothing to say about it unless it’s in violation of law or is a bona fide nuisance of some sort.

The pipeline easement agreements we use with our clients in selling right-of-way and easement to pipeline companies are much more restrictive than the standard easement. Plus, we have two versions, one which excludes the right to install surface facilities (the version we use most), and another that includes rights to install specific, restricted surface facilities. In my view, one should never sign any standard or other easement presented to him by the pipeline company, unless for some reason he just has to. (Never believe the pipeline company when they tell you that you have to do this or do that. Always seek qualified outside counsel.) Neither should one ever accept the purchase price originally offered. It is always low-ball. Most any landowner gets burned badly who tries to represent himself in negotiations for pipeline rights-of-way and easements.

It seems to me that to protect yourself and your neighbors from unsightly pipeline facilities, your best bet it through better local ordinances. If the damage has already been done and the facilities are a bona fide nuisance of some sort, the courts may be your only recourse.

If a problem exists or is apparently forthcoming, the best advice I could give would be to take the matter up with your local real estate attorney. He or she can better advise you of your options.

Billy K. Lemons
Principal Consultant
Resource Analyt & Management Group
P. O. Box 632507
Nacogdoches, Texas 75963
936-569-7228 Office
936-569-7220 Facsimile


Chesapeake "Helps" Us?

I found another reference on the cost of production and value of production in the Barnett Shale. Last October, Chesapeake announced first D/FW Airport natural gas production and total production estimates that substantiate my recent analysis.

According to the Dallas Business Journal (, Chesapeake expects 2.5 to 3 billion cubic feet of production per well. At $10 per cubic foot, that substantiates my estimates. Each well will produce $25 to $30 million. If prices do not rise above the current $7 per 1000 cubic feet, these wells will still produce over $17 to $21 million each.

Further the article wrote that the cost of production will be only $2 per 1,000 cubic feet or $5 to 6 million per well. It is not clear if this cost includes royalties or other post-production or overhead costs. However, I tend to think that it does not include royalties but may include post production expenses.

In any case, if royalties add another $2 per 1000 cubic feet to the cost of production, Chesapeake will book a very healthy $7 to $20 million in profit per well after all their expenses. Note that this gas was "donated" to Chesapeake by the tax payers of Tarrant and Dallas County that set up and funded DFW Airport.

Did the Airport Board drive a hard bargain? You tell me.

Do Chesapeake and/or the Board even say thank you? No, Chesapeake just has land men combing the neighborhoods trying to sign up more leases and Airport Board continues to charge incredible prices for parking.

How could they say thanks? Perhaps they could at least build a few free parking spaces at DFW and set up a low-cost airport shuttle service. Perhaps they could make reduced-cost gas available to local utilities. If gas was sold to utilities at $4 per MCF, then everyone in Tarrant and Dallas county would benefit directly from the gas production at DFW.

But instead, Chesapeake has the audacity to continue to offer as little as 1/5th of signing bonus they paid at DFW; i.e., as little as $2,000 compared to the $10,000 per acre. Give me a break!

Is it just me, or do others feel like they have been and are being smashed in a massive rip off?


Tuesday, March 11, 2008

Misunderestimated ??

Hey ... Don't complain about my Bushisms. I was born in Midland, TX and I drank the water too.

In my previous post, I estimated that the value of recoverable gas in the Barnett Shale area is over $1,000,000 per acre. However, that may be too low since it was based on an estimated 160 billion cubic feet of gas reserve per square mile and a 50% recovery of that reserve. Actual reserve values and recovery factors vary.

It is difficult to get data on the lifetime production of an average well and it's effective acerage but the correct value could be much greater than $1,000,000 per acre. The amount in the reserve depends not only on the size (acerage) of the property but on the thickness and condition of the shale deposit.

According to the Texas RRC, a number of the new wells in Tarrant County start out producing over 50,000,000 cu.ft. of gas per month. Current prices are about $7 per 1000 cu.ft. (MCF) so these wells are producing $350,000 per month.

But does anyone think the price of natural gas will NOT increase over the next 10 years? A better estimate of the average price is probably at least $10 per MCF. Some estimates that I have seen place total production from $10 million to $30 million per well.

Of course production depends on many factors. Underground faults can both cause leakage losses and make it difficult to fracture the shale properly. The skills and techniques of the driller and completion experts can also effect production and recovery factors.

However, the greatest factor determining production is the density of drilling and fracturing. If a well has an 2000 ft long horizontal or "lateral" section and if the fractures in the shale spread out 200 feet on either side of the lateral, the area addressed by that well is 2000 ft by 400 ft or 800,000 sq.ft.

Since an acre is 43,560 sq. ft., this 2000 ft lateral can recover gas from just under 20 acres. Thus we see that a single well can only tap the gas from a fairly small area. If only one well is drilled in a 160 acre pooled drilling unit, not much of the gas will be recovered. The density of wells is thus the most significant factor in producing gas from the Barnett Shale.

By drilling eight wells in a 160 acre drilling unit and using techniques like simultaneous fracturing, recovery can exceed 50% ... perhaps significantly. While this may be optimistic estimates, it would thus seem that a resonable estimate might be over $1.5 million per acre!

*********** $1,500,000.00 per acre ************

Note that when a property owner signs the typical lease, they are allocating 75% or more of their gas to the well operator. The owner only retains benefits from the 25% (or less) royalty.

Estimates of well cost range from $2 million to $5 million per well. If a single well costs less than $5 million and taps the gas in about 20 acres, the owners of land may be agreeing to pay the operator an average of $15 million for drilling that $5 million well ... a $10,000,000 per well profit! Even if the profit is only about $5,000,000 per well, is it any wonder operator representatives are being paid to go door to door and are offering almost $20,000 per acre in signing bonuses.

Hey ... I'm open to other information on the productivity of typical Barnett Shale wells. However, to date not a single expert in the oil and gas business has challenged my previous estimate. It's been several weeks since I published it and NOT ONE email or comment has been received to challenge this finding.

Perhaps no corrections were suggested because the experts know that the estimate was VERY conservative. Correcting the value would not be in the interest of the operators since owners would likely become more aggressive in pressing for higher royalties and bonuses if groups were aware of the profits margins.

I wonder what will happen now. Note that I have also heard (but not yet confirmed) that, based on recent drilling data, higher recovery factors may be possible with new techniques. Could $2 million per acre be more correct? Could $0.5 million or more per acre in royalties be possible? Probably not but who will step up to help owners understand the basic economic considerations of a gas lease? And is a 100% plus profit fair?

I am reluctant to sign anything till I know for sure that the deal is fair and drillers are being forthright in their dealings. What about you?


Haven't Signed Yet??

Know more about where you stand if you have not signed a lease yet. See this article on the Star Telegram Blog.