Ed, Petro Hunt probably assigned your sisters and cousins lease to Liberty Resources for the “usual” 23% royalty and cash. Petro Hunt would keep the difference between what they leased your sisters and cousin for and 23% and there is no telling how much cash they received, more than would be offered to mineral owners.
Learned something new today, courtesy of the NDak Oil & Gas Commission. I couldn’t find ‘my’ well on their GIS map, so I posed the question to them. Turns out that the driller has put two wells on one pad, and the second well, which is in the Confidential list, wasn’t visible. To see it, go to the GIS site, enter the coordinates, then click on “Rect Identify” in the list on the top left, and draw a rectangle around where the hidden well is, and, on the bottom of the screen, the hidden well shows up. The visible well is marked LOC in the list which comes up, in my case.
Has anyone else had any trouble with Zenergy suspending royalty payments for interests in McKenzie County. It is doing so based upon a title opinion prepared by counsel, allegedly in-house counsel, who has never been admitted to practice in North Dakota. The situation is an absolute mess and they are very unpleasant to work with.
Mr. Kennedy, I need an opinion from you. Push has come to shove, and I’ve been asked by the driller to sign up for participating, or going non-consent. I have reason to believe that oil’s about to spurt forth, and in reasonable quantities. Therefore, any idea what the going cost is of drilling and finishing a well? Any number would be helpful. Also, when it comes time to cap it, those costs? I am by nature willing to gamble to a degree. Also, if I participate in the drilling costs, seems to me I become an investor, and not someone who inherited the mineral rights, and therefore perhaps eligible for depletion credits (yes, I’ll talk to a CPA).
Ed, the operator has to give you an AFE outlining what they intend to spend and on what. You have 30 days to decide from the time they send the AFE, if it’s not in your hands, they are just using pressure tactics on you because nobody can be forced into paying for a well blindfolded.
Ed, drilling costs can range anywhere from 7-11 million dollars on average depending on area and just how good a well they intend to drill and complete. If they use nothing but man made ceramic sand to prop the fractures open, it’s going to cost more than cheap silica sand but it should produce more and faster too. If they sent you an AFE it should have the cost of your participation on it but remember two things 1) they like to inflate the costs somewhat and 2) sometimes they really do have a cost overrun. I have no experience with Liberty Resources LLC as an operator but I doubt they are there drilling the most expensive well that they can. Liberty is probably drilling wells on par with Zenergy who has wells near you but possibly not as expensive and good as Murex who also has wells near you, all I looked at are going to be profitable.
Ed, a leased mineral owner can deduct depletion of the oil, what he can’t do is deduct depreciation of the well equipment, tangable completion costs and other things that make up post production costs. I believe that you could even deduct flared gas as a loss if you participate. The CPA is the one to talk to.
This is the fun /tedious part. Your well has probably already started producing. I would go to the NDIC O&G site, go to General Statistics and look up any sales of oil. The well may still be on the confidential list but sales must be reported to the state and the state makes that information public. It’s a pain in the rear because there is production information for all wells there and the wells are grouped loosely by field and operator. It’s a little bit more information than you had if you can find any sales, if the sales is not there yet it soon will be.
Ed, I think they have not sent you the AFE or you wouldn’t need to ask about the well cost. Liberty wants to pressure you while keeping the estimated well cost unknown. The fact is that you have 30 days from the time they submit the AFE to you. Liberty does not want to send it. If liberty had drilled a dry hole or a well that barely dribbled oil, they would probably hurt themselves trying to get the AFE into your hands.
Ed, I would ignore them until they put that AFE well estimate in your hands, it should have a breakdown of your participation cost and if it doesn’t just divide the total by your spacings acreage 1280 plus any lots, to find the cost per acre. Other than that, I would bide my time and see how much more I could learn before you really have to make a decision. They are not really in a hurry, except a hurry for you to lease, probably before you know what the well has produced. The cost of wells are high but if it looks likely that you will get half or more of your money back in the first year and the rest of it back in 2 years more and considering that unlike the operator, you don’t have to pay anyone a royalty, it will pay you back and start making money considerably faster since you make 1/3 more per acre than the operator. Ed, If any of this is unclear, just let me know.
It’s ok Ed. 11 million including the 1 million for production equipment pump gathering line ect. About $8,600 per acre.
Inherited or not, you get a depletion deduction of 15% of gross production attributed to your acres.
Participating in the well would make those investments subject to depreciation for tangible items and intangible costs I believe you can deduct in the first year along with some tangible costs. Once again, the cpa is the one to talk to.
Ed, if you participate for this well, you could lease for the next if the operator is agreeable, but he may not be. You could be non-consent in the next wells so you don’t have to lease to the operator. You could work a farm out deal with an investor.
Ed, you are in the drivers seat, you choose what it’s going to be. You can participate, you can go non-consent, you can lease, you can do one third of each if the operator is smart enough to see that leasing 1/3 of your net acres is better than leasing none. If the operator is not interested in making a deal, you could participate half and be non-consent 1/2.
I believe that you have the right to participate in less than the totality of your acres and the operator would still have to make the statutory offer to lease those acres in which you chose not to participate, or they can’t impose the risk penalty on them if you decide to go non-consent with them. In my dealings, after if I decided that I would not participate for all or be non-consent on all or lease some, I would let whoever know that we are negotiating to see whether the operator is going to make no money(participation), a little money (non-consent) or a fair chunk of money from what part they lease.
Ed, I looked around again and nobody else had a well with a first full month as good as yours and even with quite a bit less performance Triangle is drilling some spacings with 3 wells. I don’t think it’s such a gamble when you know the well is producing and that it’s good production. Depending on how April and May went and the price they are getting for the oil, that well could be 1/4 to 1/3 paid off already.
I checked the General Statistics from the O&G site. They’re there only through March. Checked Feb and Mar, and found line entries for the well. No production shown. The only interesting number is Runs, which went from around 6700 to 17000 from February to March. Now, if I only knew what Runs were! It’s nice to have the flexibility on a well by well basis.
Ed, runs are barrels of oil sold. April numbers may be out in a week because general statistics runs a little extra behind.
Ed, there was one question I didn’t answer, a really long time from now, after I am long dead, my wells will need plugging. If I were still alive I would assign my interest in the well about to be plugged to the operator who would have to pay me for it’s salvage value and I would no longer be responsible for any of the wells bills, including plugging. Since I will not live to see that event, I will have to leave written instructions to my successors because I want them to be paid for the plugging of the well and not pay for the plugging of the well.
I need be reprimanded. Tucked on the back of the package they sent me was the AFE! Without being specific, the numbers for drilling and completion are roughly ten million. There’s a third column of numbers which add to roughly one million, that’s titled 'Production." Thanks very much for the analysis, and I apologize for not being more thorough. My understanding of depletion is that it’s only available to an asset acquired through investing, whereas I derived my interest through inheritance. I’ll check on the production figures. If I have any difficulty, I’ll let you know. One further question: if I agree to participate, am I on the hook for only this well, or for all wells drilled in this spacing unit? As you told me earlier, there’s a second license to drill from the same location.
If I choose to participate, and after I pay my share of the costs upfront, are ongoing costs taken out of my revenues automatically, or am I billed regularly as a separate transaction? Also, if I choose to participate, am I leaving myself open for ‘unknown’ financial responsibilities that may pop up that are not covered from my share of revenues?
Ed, the cost to obtain production can be comparatively high in some cases, usually after the well has declined drastically in oil production. I have a well that I get a statement for that produces 2,000 barrels of oil per month and the cost of production per acre per month is under $1.40 a month for a 5 year old well that now has a pump on it. Ed, the cost of operating a well varies from laughably low to costing more than the production from the well is worth.
Since you do not have to pay anyone a royalty from your production you will pay probably 1/3 more per barrel than the operator does and if you can’t pay your bills with 1/3 more money, the operator will surely be hurting and want to stop HIS bleeding. Even if the bleeding is not too bad for the operator [ which would mean it was even easier on you] and the operator kept on operating the well to hold the lease by production, you have the right to opt out at any time by assigning your interest in the well to the operator and you would retain your rights to the minerals and in any other wells.
Ed, your well had a decent first full month at 17,000 bbl oil sold, in fact your well seems to be the best in the area. Triangle is drilling a third well in some of the spacings near you with the spacings already held, so I would say that they think the area is good. Look at the GIS map. In this instance, I would say follow the ducks.
There are many factors that affect the ongoing cost. Amount of brine produced that must be disposed of, none of the wells in your area that I looked at were heavy with brine, it costs a few dollars per barrel of brine to transport it and put it down a hole somewhere. The pump might have an electric bill of $1500 a month divided by 1280, the per acre cost is pretty reasonable, even if it were 5 times that much. I presume with as many wells as there are in your area that infrastructure exists and you wouldn’t have to worry about trucking oil and it’s costs. Road maintainence, this is not a superhighway. As long as a truck can get there to take brine out and a pumper can get there in his 4wheel drive, an oil company isn’t likely to spend money on upgrading a road. Oil companies are cheap when it comes to how much they spend to get ongoing production, they pinch pennies.
Ed, you could ask the operator to “net you out” that is, to take out expenses before sending you your check. I wouldn’t be in favor of that. Send me the bill and I will write you a check, it’s ok, my tunnel carpal is not that bad, I can write a few checks, if it makes it easier to keep an eye on you.
Ed, this is an extended long lateral Bakken well which generally aren’t in need of huge workovers. The XXL Bakken OIL well will not derive the kind of benefit that a verticle or horizontal gas well might from an expensive refracking that cost half as much or more than the well itself did. Most of the chilling horror stories that people tell are VERTICLE wells or verticle gas wells on smaller spacings. A $500,000 workover on a well on 40 acres is $12,500 per acre, on 1280 acres it would be $390. If you look at one of these horror stories, make sure it’s an apples to apples comparison.
Let us say that your well only produces 500,000 bbl oil over it’s life at an average of $80 per barrel sale price. That would be $40,000,000 or 31,250 per acre and it cost $11,000 to drill the well and production costs per acre, you would be left with $20,250 per acre, most of which came in the first 5-7 years. I would consider this a pessimistic estimate. With a lease I would estimate that you would receive 1/3 of that $20,250 and you wouldn’t have had the deductions. Then you add in 2 more wells because from the map, it looks likely that at least 3 wells is supportable. Continued.
I’ll look at April’s numbers next week, then make a decision on participate/non consent. I do appreciate all the thoughts and analysis.
What is the magnitude of the ongoing costs of a well? Are we talking a fairly fixed number, something in the 5-10% range with oil prices being what they are? Are their major factors which affect the ongoing costs?
Ed, it’s not a suicide pact. At 17,000 bbl oil in the first full month, I doubt the well is going to be in the position to lose money for a long time. You have the option to sell your working interest in the well that might pay you more than you would ever receive from a lease and pay it to you up front so you don’t have to wait 30 years to get it, and retain your mineral rights and the right to any future wells. Worst case you can assign your interest in the well to the operator.
If you just can’t pull the trigger on participation, you could always be non-consent, pay no money up front, take the 16% royalty from the start. With the 50% penalty the well will pay out much later for you and you probably will not derive as much benefit from your eventual working interest but there would still be some benefit, not least of which would be the option in the future to participate which you would not have if you are leased.
It’s quite a decision to make, seeing the “runs” sales is more information than most people get before they have to decide. Good luck with your decision.
Robert
Mr Kennedy, can you tell me what is going on in 150/99/4 150/99/3 and 151/99/34. I am getting royalties from sec 4 and sec 34. Don’t know where the heck we stand in 3. They a Loomer wells…I don’t know what to ask or how to ask it. I am learning just enough to be dangerous from the NDIC oil and gas. I just got an offer for $7500.00 per acre.
Totally not interested but am curious to know what is going on. I see permits have been issued. Is there a report or reports that I could purchase that would shed better light than the daily report or the statistics section? Your input please.
Deloris, it’s my pleasure to take a look and I see that there is very good production from 150-99 section 3. 132,110 barrels oil as of April and producing 4,177 barrels in April and this without a pump on the well. From looking at the map I can see that the wellhead for this well is in 151-99 section 34 and the wellbore passes through section 3 and into section 10. It’s called offsite drilling.
Deloris, it’s a good thing in my opinion that you aren’t interested in selling because XTO has permits to drill 6 ADDITIONAL wells in 150-99 section 4. There are spacing withing 2-3 miles of you where this has already been done so it’s not a stretch to believe it can happen in your spacing OR all of your spacings eventually.
There is also a salt water disposal well being drilled in 151-99 section 27 so infrastructure to massively increase production is being put in, as we speak.
Since the well producing 150-99 section 3 actually has the head in 151-99 section 34 it may look on your check stubs as though you are being paid for 2 wells in section 34 where the heads are while the oil is actually coming from 150-99 sections 3-10. I would check that.
If it turns out that you are actually not being paid for oil from section 3 and you have good title in section 3, XTO would owe you a considerable amount of interest.
Deloris, I know of no service that would be more helpful than what you could gleen from the NDIC. The NDIC provides the facts and raw data, albeit a little bit behind and the trick is to interpret, look at the underlying causes so you can come up with a good working hypothesis for the future. Like medicine, oil and gas is not a science, it’s an art although both use science.
I suppose, if I were not so incredibly lazy I could start a service, but I am lazy so people will just have to settle for getting my opinion for free. I feel amply rewarded just to be able to help people. As a bonus, I learn something from each of the thousands of wells I look at for people. Have a great day Deloris!
Robert
Ok, I was starting to feel left out when I visited the Oklahoma forums because they were getting much better offers to sell their mineral rights than I was for mine.
I have no intention of selling mine.
I just wanted to let the group know that I received an offer in the mail to buy my acres in T-149 R-96 section 4 for $10,000 per acre if my royalty was 3/16 or better. This doubles any previous offer for acres in this area that I have received. Just thought everyone would like to know about the offer.
I just received a similar offer in s12-149-96. Check out the most recent press release from QEP and you will see some nice slides on the really good production from the Three Forks right in there. I suspect a lot more drilling to come! And a lot more offers, but not interested.