Are You Surprised?

The D/FW Airport is at odds with Chesapeake. The Airport believes that royalties are not being computed properly (are too low) and that hiring practices at Chesapeake have not lived up to the terms of the lease agreement. For more details read the article by Trebor Banstetter at the Star Telegram.

Are you surprised? I'm not. The oil and gas business has had a less than stellar record for fair and honest dealings. Why would they change now?

Shaving funds from royalties is not a new concept. The terms of most leases are unclear on exactly what prices are to be used in calculating royalties. They often use terms like "similar" or "comparable" that are subject to interpretation (and legal disputes). If you have a lease, what does it say (please post a comment)?

According to Trebor,

Under the lease, Chesapeake is required to pay a 25 percent royalty based on the highest market price paid for gas from a field comparable to D/FW, or based on the actual proceeds received from the gas sale, whichever is greater.

Note that Chesapeake and other developers do not have any trouble reporting the worth of their gas leases and proven reserves to shareholders based on Nymex prices but they don't want to use those prices in paying royalties. Wonder why? Could it be that they want to obfuscate royalties so that they can "adjust" them appropriately to "wellhead" prices that are difficult to pin down?

If they will shave royalties to huge mineral owners with deep pockets like the D/FW airport, what will they do to small property owners in residential areas? The development companies say, "just trust us." If you think they will be on your side, think again.

The state could protect mineral owners rights and insist that all royalty agreements be based on public commodity market prices, not on some black, off-the-record, closed-door market that is subject to relatively easy manipulation and "management." But, not unlike many issues, it takes time for the consensus to form and government officials to do the job for which they are elected.

So it is up to us. Public pressure is required to move the pendulum in the direction of the public good. You get what you bargain for ... not what you deserve. Let your city, county and state officials know how you feel.

I know it is not easy to make a change. I know it takes effort and persistence to pursue and communicate with lawmakers. However, if you want the public to be protected, it is time for action. No one else will do your part. If you do nothing, the developers just get richer and smile all the way to your bank to cash your check.

IT'S YOUR GAS ... ENJOY IT!

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?

IT'S YOUR GAS ... ENJOY IT!

Gas Prices To Rise?

In a 2/13/2008 article at "Money and Markets" entitled "Natural Gas Looks Undervalued; Ways to Play It," Sean Brodrick believes that natural gas prices are unusually low compared to oil. If oil stays up, natural gas should also rise to maintain the historic ratio of oil to gas energy costs.

If so, this will make the future of the Barnett Shale even brighter and make cooperative or commercial development even more profitable. Could gas go up 50% or more? I hope so ... at least till I get my electric or gas bill.

IT'S YOUR GAS ... ENJOY IT!