Thanks so much for explaining this, J.S.!
I have added an article to the home page about online resources for mineral owners. Please suggest any improvements in the comments section.
http://www.mineralrightsforum.com/profiles/blogs/internet-resources…
The following link, from a large acreage being offered in Terry & Hockley counties, gives some very good maps, geology and information about activity to date:
http://www.albrechtai.com/divestments/Smith%20Energy%20Brochure.pdf
very nice jw this tells me I was right at what is going on now if(if)we can look to the years ahead on what we all hold minerals on.
Thanks JW for the link. Can one of you more knowledgeable members decipher what this offer to sell really means? What does the geology information reveal about production potential, especially in the NW area of the county around the Red Headed Stranger well.
J.W., Thanks for your insights. To clarify — are you saying that if it shows on the Texas Railroad Cmsn. website that a well is a “dry hole” that it may not be accurate? Or are you just referring to ‘rumors’ of a dry hole?
Peter, using you estimation of 37,000 bbl (net 27,750 bbl), and $90 oil, and assuming well to be pumped 330 days per year, with no provision for taxes or upkeep, by my calculations, a well must produce 38 bopd for a 3 year payout and 23 bopd for a 5 year payout. If we add 35% for taxes and upkeep then the three year payout requires 51 bopd and 31 bopd for 5 year.
Now, how long (in years) are oil companies willing to go for breakeven?
Robert, you say that there may be some disappointing results in store for the past three months concerning the northeastern and midcenter portions of Terry County. However, this evening, I’ve searched the results of every completion report in Terry County for the past three months and I can’t find a single dry hole in the county during the past several months. Accordingly, could you provide more information concerning any recent dry hole reports in the Midcentral portions of the county. I’m not at all concerned about the Northeastern portions. Any information you could provide would be greatly appreciated. When you suggest the prospect of “dry hole” I would like you to clearify what you consider a dry hole. For example, would that number be as high as 25 bbls per day in your opinion ?
Craig:
Companies in these new development areas are being very secretive about their results, for competitive reasons, so you can’t expect to search the completion reports and get any kind of up-to-date results. The other thing to remember is that many companies want to suppress competition, and so rumors of “dry holes” are to their advantage. In addition, there are multiple zones that need to be tested and developed throughout this area. This cannot be done quickly or on the basis of a handful of isolated wells. This will take time.
A dry hole would basically mean it is not capable of producing oil or gas in paying quantities. Just because a well is completed as a producer doens’t always signal it is time to give everyone “high fives”. Sometimes an operator can actually lose more money over the long haul by completing a marginal producer than if they would have just plugged the well and moved on (no completion/lifting/equipping/operating/treating, etc. costs incurred if plugged). The deciding factor for future development is their anticipated return. For example: Assume the vertical wells in the area cost $2.5 million to drill and complete, are subject to 25% royalty (operator pays 100% of the costs and gets 75% of the revenue). At $90 oil the well would have to make a little over 37,000 barrels just to get their investment back from drilling and completing the well (not including operating costs, time value of money, repairs, and the bonus they paid us to lease, etc., etc.). Now assume the first well they drilled is averaging 16 barrels a day (this is about what the red headed stranger is averaging). For a multitude of reasons I can say this well would not get close to 37,000 barrels. Result = limited future development. They may drill a few more to see if they do any better but if the same results continue they will cease drilling because they are losing money. As to the question regarding the divestiture of Smith Energy’s stuff in the area: Anytime someone is trying to sell something one must create hype and interest. Rarely do people like Smith Energy sell good assets, especially utilizing a broker. My point is the fact they have had poor results, are selling, and selling utilizing a broker is not good news for the area.
Agree with the last two comments. A company doesn’t sell a hot location. They cut their losses and go somewhere else and hope they can find a buyer. I know W&T has finished drilling the well west of Wellman late last week, so fracing will be next. if this well and the one planned east of that location do not produce significant numbers, they will probably be divesting themselves of this area as well. Very disappointing to say the least.
A good link to explain the Hydraulic Fracturing process:
A dry hole is where they hit no hydrocarbans or not enough to ever put the well on production. A well may be disappointing, or even not recover its drilling costs, but still make enough to be profitable to produce. This is where early production numbers can be misleading, as some companies do suppress numbers to try to keep the local market from getting too hot. This is called tight holing a well.
I don’t think one should read too much into the fact that Smith Energy decided to sell out and move to a different area.
Note that the Smith Energy sales brochure was distributed on August 17th 2012 and that date was before most of the disappointing results started to suffice in the area. Plus, one must realize that Smith’s decision to sell probably wasn’t determined during a spur of the moment decision. Rather, let’s assume that it must have taken Smith at least 30 days to reach their decision to sell out.
That would move the August 17th date back to at least July 17th 2012 which is certainly a time before all the negative rumors in the area started to suffice.
I believe none of the oil companies could have expected to see 600 to 1200 barrels per day emanating from vertical oil wells. So it would seem to me as though the oil companies are still in the blind concerning the results of any horizontal drilling activity in Terry County.
Even if the Red Headed Stranger horizontal well turns up dry as many have rumored, that rig is so far to the Northeast, one could almost think of that drilling activity as Lubbock County rather than Terry.
So I still think of this as a wait and see moment and I believe the results of Proctor 94 will be the true determining factor for Terry County.
Just my two cents; who knows ?
Another important issue to consider is the fact that the Northeastern portions of Terry County aren’t included in the Wolfcamp Shale formation maps.
Neither is any portion of Hockley County or Lubbock County.
Click on this link to see the map:
Paige:
I was referring to “rumors” of a dry hole, not an actual report on the Texas RR Commission site.
Regarding “dry holes”: Part of the issue is that there are so many zones, and it is not totally clear what to go after yet. A few hundred foot interval of shale cannot be considered one zone; it might have an “upper”, a “middle”, and a “lower” section, and even more. The fracturing process on shale cannot possibly be effective on such a such a thick interval. For example, in several areas the Wolfcamp itself is 1500 feet thick or thicker. And then, there are other zones of interest in other formations.
“Date of completion” is cloudy, to be sure. Other states, like Oklahoma, also have a time frame to report, but there is absolutely no enforcement if they don’t report. What you see in many cases there, especially on sensitive wells, is completion reports that come in well over a year later. Also, there is absolutely no monitoring of the amount of initial production rates that you actually report. Whan a well “comes it”, it initially has a huge amount of frac water with it, and it may take a long time to get lined out. You may choose to measure and report at about any time you wish, so the results may be skewed to your advantage. And the initial production reports for some companies are simply not to be believed out there in the real world. There are a lot of secrecy practices and techniques surrounding wildcat well drilling and development to be sure.
The penalty for not timely reporting can be chickenfeed also. A $250 fine isn’t going to persuede an operator that they really need to get that report in.
Paige, I was a little curious about that question myself so I attempted to search the statutes, concerning the filing of false reports to the RR Commission. Something that used to happen often is when an oil well would run dry, the operators or owners would report production rates at one barrel per day rather than zero … in order to avoid (or defray) the costs and inconvenience of plugging the dry hole. Once a well is reported as a dry hole to the Railroad Commission, the owner/operator must plug the hole within one year of non-activity. The Railroad Commission estimated the average cost of plugging a dry hole, somewhere between the range of $10,000 and $30,000. So in response to the increasing number of false reporting, the Texas Legislature enacted an administrative penalty of $1,000 for each time a well owner/operator files a false report with the Railroad Commission. Plus the Railroad Commission will file an enforcement action (administration action) against the owner/operator and fine them an additional penalty of $10,000 for having failed to plug the hole. Accordingly, I can’t see any laws or statutes that would offer too much of a deterrent to avoid filing false reports.
Thanks, Craig, for the insightful info.
I was talking at the NARO convention with an Operator/royalty owner from Midland about how long they have to file reports with the RRC. He said they have 90 days from “date of completion” to file their report…but ‘completion’ isn’t narrowly defined, so that’s where the companies (for competitive advantage) have some wiggle room and can delay posting results. The more I learn, the more complexities are revealed! It IS a fascinating industry, for sure!