Robin,
The producers have engineers and economists that can estimate how a well may relate to the producer's bottom line for future production and revenue in order to perpetuate their company business plan. Projected well information helps them make internal plans that suit the stakeholders (management) and shareholders (investors). Passive interest owners must make our own estimates and are at the whim of producer's management decisions. Re read the shut in provisions in your lease.
One old petroleum engineer who made a living predicting ultimate production on wells told me that the only accurate way to predict ultimate recovery was to tally up the production the day the well is plugged. Until then it is a constantly moving target based on the variance of operating costs, need to hold acreage for the future, and that totally unpredictable input, prices. None of which are under the control of the royalty owner.
The only production revenue that you can count on and plan with is the amount you put in the bank. I tell all of my clients (and have learned the hard way) to have no expectations of income past what has been received unless they are in the oil business and have a huge tolerance for risk. Oil production to the mineral owner is a gift just like the mineral rights themselves. Treat then as such in your expectations. One of my former clients actually gook out a mortgage on a house based on anticipated production revenue. Prices declined and the lender didn't care and the house was lost. Only count on what you have in the bank. Be thankful, spend it wisely, and enjoy the gift.
Thank you Gary, for your explanation. I really appreciate your answer. Since we are pretty conservative anyway, we will continue to view the royalties as a lovely bonus as they come in. It just seems crazy to me that there is no "formula" that the oil companies use when they sink money into their wells as to their ROI but I will live with that and be grateful for what we receive!
Robin,
To expand on Mr. Hutchinsons remarks, the reason that there is no "formula" for a royalty owner to use to estimate their income is that there are a great many variables to account for. Some of those variables change from section to section and have to do with geology (ie: risk of formation and wellbore damage) and some of the variables change day to day and have to do with the economy (ie: market price or price of repairs and materials).
A bad day in the Middle East could affect the economic viability of your well in Colorado. It is crazy that there is no real way to estimate ROI on a well, those who invest in oil and gas have zero guaranty.
Myranda
Robin,
The method oil and gas companies use to predict future production and revenue is throught the method of decline curve analysis. Once production has been established, various equations can be used to predict what future performance may be. Keep in mind, this is just an estimate though - things can change, wells can be lost due to any number of problems (mechanical, chemical, geophysical). The advice given above is wise. Unless you're an oil and gas company and have thousands of wells to diversify, don't count too much on your royalties.
Please see the attached spreadsheet. It is the program I developed to calculate future prodution and revenue. It is built from the oil company's point of view, but still might offer some insight. Please note that this is an excel document with a macro. The macro calculates internal rate of return and is not necessary for any other calculations - so if you prefer to keep macros disabled it will not affect the rest of the spreadsheet.
Note that green worksheets are data entry, blue worksheets are ouptut, and grey worksheets are calculations. Also, note that the letter "M" denotes thousands, and "MM" denotes millions.
2829-EconomicEngine.xlsm (2.3 MB)
Thank you for sharing this with everyone.
Jason Stewart said:
Robin,
The method oil and gas companies use to predict future production and revenue is throught the method of decline curve analysis. Once production has been established, various equations can be used to predict what future performance may be. Keep in mind, this is just an estimate though - things can change, wells can be lost due to any number of problems (mechanical, chemical, geophysical). The advice given above is wise. Unless you're an oil and gas company and have thousands of wells to diversify, don't count too much on your royalties.
Please see the attached spreadsheet. It is the program I developed to calculate future prodution and revenue. It is built from the oil company's point of view, but still might offer some insight. Please note that this is an excel document with a macro. The macro caclulates internal rate of return and is not necessary for any other calculations - so if you prefer to keep macros disabled it will not affect the rest of the spreadsheet.
Note that green worksheets are data entry, blue worksheets are ouptut, and grey worksheets are calculations. Also, note that the letter "M" denotes thousands, and "MM" denotes millions.
My apologies for multiple misspellings - typing too fast and got sloppy.
Jason Stewart said:
Robin,
The method oil and gas companies use to predict future production and revenue is throught the method of decline curve analysis. Once production has been established, various equations can be used to predict what future performance may be. Keep in mind, this is just an estimate though - things can change, wells can be lost due to any number of problems (mechanical, chemical, geophysical). The advice given above is wise. Unless you're an oil and gas company and have thousands of wells to diversify, don't count too much on your royalties.
Please see the attached spreadsheet. It is the program I developed to calculate future prodution and revenue. It is built from the oil company's point of view, but still might offer some insight. Please note that this is an excel document with a macro. The macro calculates internal rate of return and is not necessary for any other calculations - so if you prefer to keep macros disabled it will not affect the rest of the spreadsheet.
Note that green worksheets are data entry, blue worksheets are ouptut, and grey worksheets are calculations. Also, note that the letter "M" denotes thousands, and "MM" denotes millions.
Wow! I am consistently surprised by the generosity of all of you in this forum sharing your knowledge and experience. I will try the spreadsheet later this week. Thanks for all of your answers!
thank all of you , indeed. I have an oil well on the drilling schedule in divide county, nd.
if it is medium lucky and produces 250 barrels a day, (could be 600, could be 40.)with 17 per cent royality, with severance (a one time thing, or ongoing? I pay transportation costs?
think Bakken oil is selling for seventy per barrel right now - got that off the internet, not sure, so how much would that be before taxes? Thank you.
Robin S said:
Wow! I am consistently surprised by the generosity of all of you in this forum sharing your knowledge and experience. I will try the spreadsheet later this week. Thanks for all of your answers!
Severance tax will be ongoing - search the ND state wbsite for rates. Ad Valorem will also be a continuing tax (but based on an assessed value of your minerals rather than a fixed rate per barrel). It depends on your lease, but you are probably responsible for transportation costs. I believe ND oil sells at a discount from NYMEX prices due to pipeline capacity issues. When you get your first statement you will be able to get a better idea of the discount.
Hi Jason,
I found your well analysis spreadsheet EconomicEngine and was wondering if you could share the password with me because I would like to try using it on some of my wells and it wouldn't let me change the input data without a password.
Thanks
Fred Emmer
Jason Stewart said:
Robin,
The method oil and gas companies use to predict future production and revenue is throught the method of decline curve analysis. Once production has been established, various equations can be used to predict what future performance may be. Keep in mind, this is just an estimate though - things can change, wells can be lost due to any number of problems (mechanical, chemical, geophysical). The advice given above is wise. Unless you're an oil and gas company and have thousands of wells to diversify, don't count too much on your royalties.
Please see the attached spreadsheet. It is the program I developed to calculate future prodution and revenue. It is built from the oil company's point of view, but still might offer some insight. Please note that this is an excel document with a macro. The macro calculates internal rate of return and is not necessary for any other calculations - so if you prefer to keep macros disabled it will not affect the rest of the spreadsheet.
Note that green worksheets are data entry, blue worksheets are ouptut, and grey worksheets are calculations. Also, note that the letter "M" denotes thousands, and "MM" denotes millions.
Robin:
I have a pretty decent database in Weld County. I'd be happy to share my projections with you if you give me the details of your well. Feel free to message me if you'd prefer not to post it here. One other consideration you might want to consider is that in many areas of Weld County, downspacing is going on, so you may end up with multiple wells before it is over. Bear in mind, that what I would project would just be the well's gross production. You will have to use your own crystal ball to predict future oil prices.
We are currently into about one year of receiving royalties from EOG from a well in Weld County CO.
Is there any way to predict the lifespan of the well?
Decline Curve will give the results
The projected output and decline rate?
Same answer as above
Is that something EOG would tell me if I call their royalty-related number? Is there a way to predict production based on their investment in the well?
No, they are unlikely to share such information
Is there a formula of some sort investors use or is there an educated guess to be made?
All such estimates are projections. They will be as accurate as the data they are based on (garbage in, garbage out problem) Without at least a two or three year history of production, decline curves are notoriously inaccurate and the shale plays created a serious problem with the old Arp's formula where the "b" factor was considered to never exceed 1.0. Today some are using 2.5 or higher, and reflects the "power law" curve of the decline rather than the more common hyperbolic curves of days gone by in conventional reservoirs.
But do keep in mind that most wells hope to break even in 18 months and no more than 3 years. And most wells produce 50% of their oil and gas within the first 18 months. Thus the remaining reserves after that point will be dribbled out over a number of years...10 to maybe 30. But if you are in a drilling unit, additional wells may be drilled - perhaps several at a time, or one at a time... The lifespan of the whole project will give you a more sustainable income stream than you can expect from a single well.
I assure you the producers and investors have utilized engineers to make some predictive estimates.
You don't drop several million into an investment venture for a a shot in the dark, not in current times.
There's plenty of technology used by the engineers to predict. Of course it's not fail proof.
I researched horizontal wells simliar to ours and current processes being used. ie.
they choose to pump hard and fast for a quicker return and the well stops producing in around 5 yrs (some can go 10yrs) with production declining dramatically, by 50% in yr 2, and down from there. I have not been able to test this research/theory because our producer has had some serious producing failures.
I agree that one can only consider the royalty as a surprise gift each time. Prices fluctuate, wells fail, producers can be idiots, some don't pay regularly, never count on it as part of any budgeted income.
Robin,
After drilling my first well in Michigan over 30 years ago, I asked a seasoned petroleum engineer who was in the well with me to predict the total production from the well. (It is still a dandy well) He said he could and would do so the day after it was plugged. He explained that as engineers, we could use physical information like depth, pore pressure, water saturation, choke size, well bore pressures and such to predict what volume could come into the well over time and without physical mishaps. However, the externalities of politics, prices, operator expertise, operator debt, partner's appetite for capital expenditures, distance to lease lines, regulations, operator's balance sheet, etc. so far outweighed the physical aspects in any prediction that prediction itself was an exercise in futility.
My decades of watching wells confirms his proclamation. Unless we are operators, control over production is lost when the lease is signed. What we can control is what we do with the revenue. After confirming DO decimals, I find it wise to treat well income as a pure gift as Lisa Willmon does and assume it will be zero for a period of 4 years (there is oil business financial logic in 4 years) and put it all in the bank except for the amount needed on April 15 to pay the proportionate share of income taxes. On April 1 after 4 years of accumulation, take out the previous year's income tax payment on minerals income plus 50% of the bank balance. Spend it. You know exactly how much it is. Continue to deposit all mineral income as received in the bank. You will always know the balance, how much you can spend, and will never run out of mineral generated money. Its a gift. Control it and be thankful to the benefactor. Any thing else is a waste of time.
Watch the well established, well financed, cash rich oil companies buy up the debt ridden short sighted oil companies that spent borrowed money on expensive wells then had to decimate the production potential of the wells in order to meet their debt needs.
Thank you all for your follow up! You'll note that I wrote the original query in March of 2012 :)
Our income has gone down from the beginning payouts but we're still grateful for the monthly checks and understand that there is no way to predict the future.
Robin