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 (http://dallas.bizjournals.com/dallas/stories/2007/10/29/daily15.html, 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?

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!

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.

IT'S YOUR GAS ... ENJOY IT!

Want To Know More?

There is a lot of information on the web about the ins and outs of the natural gas industry. In fact there is more information than many will want to explore. Links to some of the sites are provided here in the right hand column.

One good overview is provided by the Natural Gas Supply Association . One of links on this site provides a fairly detailed layman's description of the process from wellhead to burner. Be prepared to spend a while absorbing all the information.

Another resource on the Barnett Shale is provided by the Rail Road Commission of Texas. The RRC also has a maps on line that give you details of all permitted wells and pipelines in your area. These maps allow you to click on a well site or pipeline and see all the permits and related surveys as well as any well production data.

The Barnett Shale Energy Education Council is sponsored by several of the major Barnett Shale operators. It provides a good overview of the situation from the operator's point of view.

Another good overview is provided at Wikipedia's Barnett Shale entry.

These links and the ones in the right hand column of this site are some of the best online resources I have found and several of them have links to additional information. If you find a good one, leave a comment here and I will make sure it is posted.

IT'S YOUR GAS ... ENJOY IT!

Howdy Neighbor!

What would happen to your property value if this were next door? They sound like a jet engine and can be heard for over a 1000 yards.

When drilling is complete, wells supply gas to pipelines. Pipelines need to be at high pressure to move the gas cost effectively so compressors are required on the pipelines.

Nothing in the typical mineral lease specifies where these can be placed. In fact gas pipelines are treated like utilities in state law. They can place their capital equipment on property they control ... where it is needed without the consent of nearby surface estate owners.

It's like street repair. Work is done when scheduled without nearby owners consent. Even if it causes severe hardship or business failures, the public entities (utilities, cities, counties, states, etc.) that do the work do not have to get permission since their work is considered to be "in the public interest."

This compressor pictured above (owned by EOG) is in Mansfield. Property owners nearby are very upset but quite helpless.

Other compressors can be seen north of DFW Airport across Highway 121 from Bass Pro. Since drilling has only begun not many compressors have been installed ... yet. But the number will increase with time. How many are required and where they will be located is never discussed while operators and landmen are gathering lease commitments. Owners beware! You must be proactive with city and county government to get zoning and ordinances to control pipeline facilities.

Far more common will be valving and well head "Christmas trees." There will eventually be about 30 of these per square mile. Of course they will likely be enclosed in fences and may have landscaping planted to hide them. But who will maintain the fence and landscaping?

And what hazard does this equipment represent in an urban setting? What happens if it is struck by a high speed car full of teens? What happens to the neighborhood nearby if the well head is smashed by debris from a tornado? Is lightening a hazard?

In rural areas, current industry practice and state regulations are probably adequate. But in a city, such controls have not been well tested. Do insurance rates currently reflect such new risks?

I hate to be a worry wart but I know that I would look elsewhere if I were shopping for a new home and saw one of these installations next door to an open house. What would you do?

IT'S YOUR GAS ... ENJOY IT!

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 enjoygas@sbcglobal.net if you want to learn more and explore options before signing a lease. If a lot of folks work together, many options become viable.

IT'S YOUR GAS ... ENJOY IT!

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?

IT'S YOUR GAS ... ENJOY IT!