Expected income on well(s) in Grady County

Oklahoma Mineral Rights Grady County, OK
1

I inherited deed that included mineral right. My Mom and Dad had them. Last year before my mom died, they started drilling 5 more wells on the land. Up to this point the checks have been small. Barely $100.00 a month. I guess the wells started pumping. This month was almost $7,000.

Question I have. What kind of income should I expect from here on out? Also they have just put in to drill 5 more wells. Just trying to get a feel for this. Lately I have been getting offers to sell for $25,000 an acre. This is a 10 acre deed, which I own 29.556%.

Thanks

2

gdjoslin, I just moved your post over the the Grady County Ok category where it should get more viewing. The first category covered the whole US and may not be watched by Grady folks.

3

That $7K check is probably the first check which would be for about 6 months production.

So divide it by 6 and you could get a little over $1K each month, GD.

Hope that sounds good because it is pure speculation on my part!

4

Where is the acreage located?

First check is typically the highest as natural decline kicks in.

Obviously you will get another bump when the other 5 wells come online.

5

Actually, I think the first check is for 4 months production since the companies generally keep you two months behind. Others might want to weigh in on this because I could be wrong.

6

Thanks. sections 31 & 32-7N-5W, Grady County

7

I see if I have the engineering done across that area and send you the production profiles

Are you at 1/8th or 3/16th’s?

8

Could be Joyce.

So divide it by 4 and get maybe $1,750 per month.

That’s even better!

9

Thanks. We are 3/16.

10

First, look at your check stub. The sales dates will be there. Next you need to compare gross volume sale per month to see what the well is doing. Oil varied in price as much as 20% in the months of April, May, June, and July. That can throw your numbers off. The first month will be a partial month and may not be relevant for 2 reasons. It may be only a partial month of even 1 day. And things go on in a well early into production that may impact the volume.

The well will decline in production, so even with production number you can’t average the first full 4 or 6 months of production and expect the well to continue to produce at that average rate. But you can use those number to create a decline model that will predict it. There are some more advanced engineering models that Jeffery is probably using that will help much more than this.

But let’s look at the production of a well within 2 miles.

Sales Barrels Decline
Month Produced Rate
2016-12 18,198
2017-01 27,171
2017-02 20,691 24%
2017-03 19,256 7%
2017-04 17,672 8%
2017-05 16,355 7%
2017-06 14,983 8%
2017-07 13,765 8%
2017-08 12,893 6%
2017-09 12,217 5%
2017-10 11,460 6%
2017-11 11,174 2%
2017-12 10,566 5%
2018-01 9,826 7%
2018-02 8,713 11%
2018-03 9,562 -10%
2018-04 8,489 11%

If I average the first 4 months of production or start with the 4 full months I still get about 21,300 for the month of April or May. Both would be off by 4000-5000 barrels. Or around 25% off. So the above estimate (if actually based on 4 months) would be closer to $1300 IF the price of the oil had remained consistent through that period.

Now if we take the percentages and toss that first big drop, the production is dropping about 6.5% a month. So let’s start in May of 2017 and toss that number at it. So the middle column is actual and the rest are calculated based on the 6.5% per month decline.

Sales Barrels Calculated
Month Produced
2016-12 18,198
2017-01 27,171
2017-02 20,691
2017-03 19,256
2017-04 17,672 18004
2017-05 16,355 16523
2017-06 14,983 15292
2017-07 13,765 14009
2017-08 12,893 12870
2017-09 12,217 12055
2017-10 11,460 11423
2017-11 11,174 10715
2017-12 10,566 10448
2018-01 9,826 9879
2018-02 8,713 9187
2018-03 9,562 8147
2018-04 8,489 8940

Now you have to factor in your guess for the price of oil changing in that time. And a guess may be the correct term there. But let’s say it did remain constant. Let’s show the decline in $ and say the price of oil was exaction the same and use that $1750 number.

This is what it would look like for 20 months. $1,750.00 $1,636.25 $1,529.89 $1,430.45 $1,337.47 $1,250.54 $1,169.25 $1,093.25 $1,022.19 $955.75 $893.62 $835.54 $781.23 $730.45 $682.97 $638.58 $597.07 $558.26 $521.97 $488.04

Now, this percentage rate drop will change as these well reach 24-36 months of production.

Please be careful, I have seen people buy houses with a new well production thinking the income was going to remain fairly consistent. It put them in financial hardship, made even worse when Oil prices dropped from $100 a barrel to $35 a barrel

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11

Thanks. All we are doing with the money is paying for a vacation here and there. We were already taking the vacation. Just using this money instead of pulling it out of another account.

If it matters. It is gas and oil. Found this on the deed East Half of the Northeast Quarter (E/2 NE/4) of Section 31, Township 7 North, Range 5 West, Grady County, Oklahoma; AND West Half of the Northwest Quarter (W/2 NW/4) of Section 32, Township 7 North, Range 5 West, Grady County, Oklahoma

12

I didn’t run the gas numbers but this well had both oil and gas production. I just went back and checked and they were similar in the months reported. Averaged a 6.7% drop after the first few months.

13

I believe the depletion rate is getting better with improved drilling and fracking techniques but unfortunately these numbers may not be too far off!

The Post Carbon Institute’s report argues that the EIA is overstating the potential of U.S. shale, calling the projections “highly to extremely optimistic, and are therefore very unlikely to be realized.”

The report argues that while U.S. oil production has doubled from 2005 levels, and shale gas has also exploded over the same timeframe, there are underlying problems that will always bedevil shale production. For instance, shale wells typically see production deplete by 70 to 90 percent in the first three years, while fields see output drop off by about 20 to 40 percent per year without new drilling.

That means that the industry has to constantly plough more money back into production, just to keep output flat.

Maybe M Barnes can provide some better numbers.

14

the production profile would resemble something like this:

image
image1167×660 31.8 KB

notice the shape of the curve in the early years and then the more traditional straight decline as the well exits the hyperbolic and enters into a terminal decline.

The length of time the well produces depends on the operator’s net revenues exceeding operating costs

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15

shale wells typically see production deplete by 70 to 90 percent in the first three years, while fields see output drop off by about 20 to 40 percent per year without new drilling.

It’s hard to see how the oil companies make much profit with that high decline.

Lets say the well produces 500 barrels per day or 15,000 barrels per month at $60 per barrel equals $900,000 per month (less 25% deduction for royalties, taxes, expenses, etc.) for a net of $675,000 per month or $8,100,000 per year minus depletion at 70% over 3 years equals or 24% per year equals $6,156,000 income first year and $4,202,000 the second year and $2,430,000 the 3rd year or $12,788,000 over 3 years.

At $10 million per well, they don’t turn a profit until the 3rd year.

Drilling and completions continue to progress with reduced drilling time and lower total well costs that averaged $10 million per well during the second quarter.

https://www.bloomberg.com/research/stocks/news/article.asp?docKey=600-201808020700PRIMZONEFULLFEED7337032-1&ex=true&ticker=CS1:GR

They should make $2,430,000 the 3rd year and less thereafter but that is about 7-8% return on the $10,000,000 initial investment.

And since 98% of the wells produce less than 400 barrels per day, it takes even longer for 98% of the wells to make the $10 million well cost back and turn a profit.

That’s why the oil companies are working hard to reduce that decline rate and I’ll bet they’re going to have some big improvements pretty soon!

Edit: And they are working hard to reduce the cost of drilling too!

16

Thanks all. We are lucky. We have enough money to get by. We owe nothing. House and car are paid off. So this “extra” money is just that extra. Will use it for vacation, instead of taking money out of another account. Perhaps we will get to take an extra vacation or two.

Thanks again. BTW Not used to this forum. However it looks like I can only make one replay at a time. then have to wait for some one to respond. Is that correct. Or am I doing something wrong.

17

Rick…that is just great information so I printed it for my files–for future family members to have and for my reference…you must be a numbers guy!

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18

Don’t go hog wild and spend that money. Invest it in something that will hold value. This oil and gas business is chicken one day, and feathers the next.

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19

As I said earlier. New to this game. Just got 5 more W-9 s to fill out. Do the require one per oil right? Confused why I have so many. Thanks

20

Just for paperwork files on the operator’s part, they want one per well. Each well has it’s own set of decimal interests and it helps their bookkeeping and keeps the IRS happy.