Why everyone needs to understand the importance of unit size.

The function of units is to let producers tie up the maximum amount of property possible as HBP, (Held By Production). Smaller units force companies to fully develop what they lease.

 

Example: A vertical well according to most experts will drain roughly 40 acres once fracked even though most producers will require 80 ac to be held by a vertical. Some companies like Shell are saying that they can hold 1280 ac, (almost two square miles) with any kind of well. It doesn't matter if they drill a horizontal, vertical or even a shallow well. That is nothing more than their way of holding as much property as they possible can with the least amount of investment.

On a 5yr lease with a 5 yr option, which is cheaper, drill a shallow well @ a cost of $200,000 and hold 1280 ac forever, or end up having to pay all those land owners a second round of bonus payments and then still having to drill a well?

All landmen will of course deny it.  Easy enough to prove, tell them to put it in writing.

Never, ever, accept what landmen tell you verbally. In a short time they are nowhere to be found and all companies will maximize the lease to their advantage.

Next the landmen will say, "why would we spend all this money leave all those profits in the ground and not develop it?"

Here are 2 reasons:

First, currently the international market price for HBP acreage is $30,000 per acre. So they can flip at a great profit. Or entice international investment $.

Second: HBP acreage is considered an asset and listed as such on the companies books for accounting purposes, in turn that value is then reflected in a companies stock price. making stock holders billions of dollars.

There are states that won't even allow units larger than 640 acres. Pa will catch up but right now PA leasing is the wild west and they grab what ever they can as cheap as they can.

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Replies to This Discussion

Permalink Reply by Patrick on October 18, 2011 at 9:06am

Tom,

 

Thanks for the informative paragraph. My family has 19 acres in Butler Country, Marion Township. I was wondering if you know if they have the technology to basically set up drills on land near ours and then basically "suck" the oil and gas from underneath our land. Does that have to do with the "mineral rights." We are very new to the process and trying to understand everything before we consider signing a lease....

Any help is appreciated. 

Permalink Reply by DKinPA on October 19, 2011 at 4:05am

Tomcat,  you bring up some very valid points!  I believe the gas companies can do that if they wanted but I have not seen where they have done anything like that in the past.  In other areas (and we are lucky because we have the opportunity to learn from the areas that are ahead of us) they have drilled 2 horizontal wells on a pad which was permitted for 6 in order to HBP.  Then they come back through and complete the other 4 at a later date....not ideal but not catastrophic either.

Maybe you have information on where your scenario has occured....and it may have and I just don't know of it?

 I too question what a landman tells me but common sense would say that with the cost of leasing the land (payment to landowners + internal costs+ legal costs, etc.) plus the 1 million for moving and setting up the drill rig + $500,000 for pad development + permit costs + ? not to mention the cost of building the infrastructure to get the product to market, it would not be worthwhile to drill a vertical and forgo the production.  Now I could see them doing 2 horizontal wells as they have done before.....but they will do that regardless of the size of the unit.

On the other hand doing the 1280 is cheaper for the gas company than 640 so those savings should be negotiated into what the landowner gets in bonus and royalty......in other words a savy negotiator is going to turn this into a positive for the landowner not a liability!

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