I have a lease that limits the pool size on a Horizontal well to 320 acres. Now the company is getting ready to drill and they are asking to raise that to the maximum of 640 acres. They say that more acreage in a pool is more productive. Does any one know if that is true? Does anyone have any facts on this issue that they can point me to? To raise the amount of acres in a drilling pool seriously dilutes the royalty. Any thoughts please? Montague county, Texas. Barnett shale.
I would not buy it. I mean if they drilled diagonally across the 640 how much wellbore would they gain as opposed to drilling the 320? At the cost of diluting your royalty to roughly 1/2 of what it originally was? The operator gets to hold twice the acreage with a single well so you can see where the 640 would be favorable to him. The beauty, from the operators point of view is that his net revenue from the well does not change while your net revenue is reduced. The operator makes the same money and gets to hold 100% more acres and your interest is diluted severely cutting your royalty if you are not also present in the second 320 with an equal amount of acres. At this point I say it's a bad idea.
I do see where there could be some common ground, there could be more wells on the 640, but you need a drilling commitment for those other wells, with liquidated damages if they are not drilled before you agree to the 640. I would say that if they could drill a well on a 320 and they increase the spacing to a 640, they should be able to sneak at least 3 wells into the 640. While you are at it you could include a higher royalty from the beginning or on a sliding scale such as 2.5% higher royalty after payout, might as well while you are there. With this bargain I would say that the deal could be acceptable, have your trusted oil and gas professional look the new agreement over for you.
People in the industry may try to sell this to you as "a smaller piece of a larger pie" when in fact, it's a much, much smaller piece of a merely potential or non-existent pie if you have no guarantee that any more wells will ever be drilled. You can't spend merely potential or non-existent royalty.
I think you were probably mulling things over along this line before you asked the question.
Rick,
It is only true in the short run (1 well) when the length of the horizontal leg is doubled, perforated and treated. Otherwise it is a just a way to hold more acreage at the sole advantage of the operator. The operator can plan to develop or sell after the first well is completed. In the long run with multiple wells drilled and producing with full development, a larger unit is to the advantage of the mineral owner as he gets to share in more longer under a good, well financed operator.
In Texas, where units are usually not rectangular and cross several ownership boundaries, many operators drilling horizontal wells are asking owners to share in the length of the horizontal leg production relative to the entire leg length vs. hypothetical unit acreage. Perhaps a more fair deal to the mineral owner at no expense to the operator. It is a short sighted operator that drills an "H" leg on the basis of royalty rate rather than geology.
If you want to encourage drilling, and who doesn't, agree to a larger unit only in the subject formation on the condition that the horizontal leg is proportionately longer, then treated and completed as such.
Thanks Gary and R.W. We have consulted an oil and gas attorney(s) and they basically said it is a "crap shoot" either way you go....either less acreage in a pool and shorter well, or larger acreage/longer and potentially larger production. In other words "more of less, or less of more" They eventually advised us to sign the amendment to the lease. I am dealing with Pioneer Natural Resources and they have always been very helpful and upfront with me. They have been very willing to answer my questions. I certainly understand the financial advantage from their point of not having to drill as many wells. The advantage for us is that this drill necessitates them extending the lease (additional bonus $). Also, the senior staff land man I am dealing with told me they are scheduling 2 wells in this particular pool and possibly 3.
Thanks so much for your comments, any other thoughts is appreciated.
Rick, if they are scheduling the wells then they should have no problem with the drilling commitment and liquidated damages, should they? If they are not stretching the truth.
Lease bonus is less than 1% of what an operator expects to make off your oil, small price to pay. Also small price to pay to divert 40% or more of your royalty to hold someone else's unproduced minerals by production.
I am very willing to answer your questions but I'm not going to give you a good deal either.
IF THE ONE WELL DOES NOT PERFORM AS EXPECTED, YOU MAY BE STUCK WITH ONE WELL FOREVER AND ONLY COLLECTING 60% [because of the slightly longer wellbore] IF THAT, OF THE ROYALTY YOU WOULD HAVE HAD. Yes I was shouting. I'd shout it from my front yard if I thought you would hear me.
Let me say this again, the operator drills a slightly longer lateral and he makes at least as much money as he ever would plus gets to hold a lot of untapped acres, essentially he can't lose if there is anything to produce. Only you are in position to lose anything. I am disappointed in your lawyer for not pointing that out. It's not a crap shoot for the operator, just for you. You are gambling big so I really hope you win big, because if you don't get a great well, those other two will not materialize. If the well is good but not good enough to justify two more wells, the operator will make money off the holding and appreciation of the acres that are held and not produced. You will be the only one risking anything of value. Get a drilling commitment, with damages if the 2 future wells are not drilled, not to make extra money, just so you don't lose money. Good luck, you will need a great first well, a well could be good and profitable but it may still not be worth drilling two more. I wish you the very best of luck, I hope you get a fantastic first well and that the next two wells are drilled in the next 20 to 40 years. I also hope you didn't pay that lawyer too much.
Thanks R.W. for your insight.
r w kennedy said:
Rick, if they are scheduling the wells then they should have no problem with the drilling commitment and liquidated damages, should they? If they are not stretching the truth.
Lease bonus is less than 1% of what an operator expects to make off your oil, small price to pay. Also small price to pay to divert 40% or more of your royalty to hold someone else's unproduced minerals by production.
I am very willing to answer your questions but I'm not going to give you a good deal either.
IF THE ONE WELL DOES NOT PERFORM AS EXPECTED, YOU MAY BE STUCK WITH ONE WELL FOREVER AND ONLY COLLECTING 60% [because of the slightly longer wellbore] IF THAT, OF THE ROYALTY YOU WOULD HAVE HAD. Yes I was shouting. I'd shout it from my front yard if I thought you would hear me.
Let me say this again, the operator drills a slightly longer lateral and he makes at least as much money as he ever would plus gets to hold a lot of untapped acres, essentially he can't lose if there is anything to produce. Only you are in position to lose anything. I am disappointed in your lawyer for not pointing that out. It's not a crap shoot for the operator, just for you. You are gambling big so I really hope you win big, because if you don't get a great well, those other two will not materialize. If the well is good but not good enough to justify two more wells, the operator will make money off the holding and appreciation of the acres that are held and not produced. You will be the only one risking anything of value. Get a drilling commitment, with damages if the 2 future wells are not drilled, not to make extra money, just so you don't lose money. Good luck, you will need a great first well, a well could be good and profitable but it may still not be worth drilling two more. I wish you the very best of luck, I hope you get a fantastic first well and that the next two wells are drilled in the next 20 to 40 years. I also hope you didn't pay that lawyer too much.
Mr. Kennedy:
What would be your definition of a great well and a good well. I am in two behemoth pooled units in Wilson/Karnes counties run by EOG--Pruski with 1,349.71 acres and Barkley with 1,218.51 acres. As far as I know, drilling has commenced on both and anticipating seeing production numbers on the Texas RRC website in the coming weeks. At that time I will have a better feel if a new car is in the foreseeable future or just a set of new tires for the old clunker. Thank you in advance for your reply. Regards, Mark
r w kennedy said:
Rick, if they are scheduling the wells then they should have no problem with the drilling commitment and liquidated damages, should they? If they are not stretching the truth.
Lease bonus is less than 1% of what an operator expects to make off your oil, small price to pay. Also small price to pay to divert 40% or more of your royalty to hold someone else's unproduced minerals by production.
I am very willing to answer your questions but I'm not going to give you a good deal either.
IF THE ONE WELL DOES NOT PERFORM AS EXPECTED, YOU MAY BE STUCK WITH ONE WELL FOREVER AND ONLY COLLECTING 60% [because of the slightly longer wellbore] IF THAT, OF THE ROYALTY YOU WOULD HAVE HAD. Yes I was shouting. I'd shout it from my front yard if I thought you would hear me.
Let me say this again, the operator drills a slightly longer lateral and he makes at least as much money as he ever would plus gets to hold a lot of untapped acres, essentially he can't lose if there is anything to produce. Only you are in position to lose anything. I am disappointed in your lawyer for not pointing that out. It's not a crap shoot for the operator, just for you. You are gambling big so I really hope you win big, because if you don't get a great well, those other two will not materialize. If the well is good but not good enough to justify two more wells, the operator will make money off the holding and appreciation of the acres that are held and not produced. You will be the only one risking anything of value. Get a drilling commitment, with damages if the 2 future wells are not drilled, not to make extra money, just so you don't lose money. Good luck, you will need a great first well, a well could be good and profitable but it may still not be worth drilling two more. I wish you the very best of luck, I hope you get a fantastic first well and that the next two wells are drilled in the next 20 to 40 years. I also hope you didn't pay that lawyer too much.
How many net acres do you have Mark and what royalty? I'd really like to see you in a new car too!
Mark, it just occurred to me that you quoted what I said to Rick. You are pooled into some pretty big units already, Rick has a choice to do something about his situation and safeguard his interests. I would also note that I believe there are a lot more 640 acre units with one well than there are units of 1,200 acres or more, I think you have a lot better chance for multiple wells.
All my wells are in 1280 and we have been upspaced to 2,560 acre spacings in some cases. I would not kill to be in a 320 acre spacing but before I came to that conclusion I was thinking to myself that maybe the person I would have to kill would be someone I didn't like. Joking, I think.
Mr. Kennedy, thanks for the quick response. I was joking about a new car; however, I would like to see enough cash flow to do some much needed repairs on the little piece of land which I inherited from my late wife's parents about two years ago. As I said its a little piece with 15.75 acres in the Pruski Unit and approx. 9.00 acres in the Barkley Unit. I have 1/5 royalty and I own 100% of the minerals. Thanks again.
r w kennedy said:
How many net acres do you have Mark and what royalty? I'd really like to see you in a new car too!
Are they wanting to EXTEND the Lease or AMEND the Lease, or both? In all three cases, you can demand more money.
Rick Ellis said:
The advantage for us is that this drill necessitates them extending the lease (additional bonus $).