Replies to This Discussion

Permalink Reply by 0i7okn54zwbdo on March 13, 2012 at 10:14pm

A spud fee is not a per acre payment. Period. It is a bonus payment that is worked into a contract. If CHK wants to use this person's surface and he is unleased then they don't need to give him a spud fee, they need a new lease. That means that he is subject to new lease prices. The spud fee is an additional payment that comes at the commencement of operations and has NOTHING to do with the initial payment for the lease.

Permalink Reply by 0i7okn54zwbdo on March 14, 2012 at 10:34am

I've never seen a spud fee that was tied to acreage. It has always been a flat payment at a predetermined price. If that has changed then I'm obviously out of the loop.

To answer your question, no I'm not a landman or a shallow well driller. I'm a guy on the inside who sees how these companies operate and I've been posting information and advice to keep people from falling into the traps that O&G companies lay. However, on this particular issue I happen to fall on the other side of things. If you've been paid $5,000/acre for a lease and there is a $15,000 spud fee included I think that's a fair deal. After all, the lease bonus payment exists because the O&G companies have to compensate you for the contract. Add to that 20% of production and you've gotta pretty sweet deal. Adding a spud fee is nothing more than a little pot sweetener.

Permalink Reply by Finnbear on March 14, 2012 at 10:49pm

Marcus,

You are definitely out of the loop if you think pad fees aren't currently being tied to a per acre figure. You are missing the point here and you don't seem to understand the value of the land that is no longer usable to the landowner for the time the well is being drilled and also for the life of the well.

Here is a for instance that is currently playing out in my neighborhood. I have used nice round numbers to make it easier to understand but this is happening right now.

If six neighboring dairy farmers, each with 100 acres, each with 100 cows, lease their farms to ABC Oil & Gas for a $2500/acre signing bonus, each now has a quarter million dollars before taxes. ABC Oil & Gas decides to unitize that 600 acres and put a well pad on neighbor #2 and drill some wells on that pad and each farmer having 100 of the 600 acres will receive an equal royalty. ABC Oil & Gas uses 10 acres of farmer #2's land during the drilling process which removes that acreage from production for part of two growing seasons. Farmer# 2 grows all his feed for his cows but has lost the ability to farm 10% of his acreage. That feed and the income it produces for him is worth about $1000/acre/year in today's dollars. Now he either has to get rid of 10 of his cows, or go buy that feed elsewhere for the two full years while the wells on that pad are developed, or go buy 10 more acres. Farmland in his county was selling for $10,000/acre before the shale rush. Now they want $20,000/acre if it has mineral rights, but there is nothing available close enough for him to economically farm. He only has 90% of the income coming in that he had before, and that 10% of feed he now has to buy costs him more on the open market than he was able to produce it for himself and with less money coming in his only choice is to downsize 10% across the board, or subsidize his farming operation with some of his oil and gas money.  Farmers # 1, 3, 4, 5, and 6 are still growing 100 acres of crops, milking 100 cows, and collecting equal royalties and are able to bank all of their royalties, keeping them separate from their farming operations which are self supporting. After all the wells are drilled, ABC Oil and gas reclaims the area down to a 5 acre permanent pad site on farm #2. With 5 acres back, farmer #2 can now grow enough extra feed to add 5 cows back to his herd, getting him back to 95% of where he was before this all started, but still 5% behind his 5 neighbors and 5% behind where he started. Farmers #1, 3, 4, 5, and 6, are happy. The oil and gas hasn't affected their farming operations a bit plus they are each collecting equal royalties on their 100 acres.

Farmer #2 had to cut back his operation by 10% for a couple years and 5% for the life of the wells but he gets the same royalty as his 5 neighbors. He lost the ability to produce $10,000 worth of feed per year for two years, and $5,000 worth of feed per year for the life of the wells. Over the next 30 years he plans to keep farming, that is $160,000 in lost income (in today's dollars) from the acres he no longer has access to.

Farmer #2 got $15,00 for his troubles (and some oil and gas insider said he got a good deal).

See the problem here now? At the very least, the spud fee should be current market value per acre for the acres involved in the permanent pad site which would be $50,000 for farmer #2. This still leaves him $110,000 in the hole compared to his 5 neighbors.

Still think he got a good deal?

Permalink Reply by steve keller on March 14, 2012 at 11:00pm

finbear my point exactly i still have not signed and they still haven't budged and as of today well has been permitted.

Permalink Reply by 0i7okn54zwbdo on March 13, 2012 at 10:15pm

$2,000/yr for free gas? No wonder CHK is running out of money.

Permalink Reply by Utica Shale on March 14, 2012 at 9:25am

Marcus,

 You wrote, " ... No wonder CHK is running out of money ..."

 

 It was $3,000 per year when gas was near $15.00 per MCF !!!

 And I did write (variable) because it does vary with the price of Nat Gas.

 You obviously do not have the landowner's best interest at heart.

 

 You claim Chesapeake is running out of money???

 But yet I read this ...

 

"... 11 days ago, the Board of Directors of Chesapeake, used three helicopters to take a  tour of the company's assets in Ohio, West Virginia and Pennsylvania ..."

 

 Cry me a river of tears, please.

 

 It is Steve's right, and every landowners right, to get the maximum profit for his minerals,  his surface acres, his timber,  his pipleline right-of-way, etc.  just like Chesapeake makes every effort to get maxium profit for their products and services.

 

Permalink Reply by Tom Frey on March 14, 2012 at 10:09am

I agree with Utica shale

Permalink Reply by 0i7okn54zwbdo on March 14, 2012 at 10:28am

They need $12,000,000,000 by the end of the year to keep operating. They're nothing more than a shale real estate company. The people whose old leases are now held by companies like Hess or Anadarko will find them to be a better partner in the go ahead. I simply don't trust CHK and I feel entirely entitled to such an opinion.

Permalink Reply by Tom Frey on March 14, 2012 at 10:32am

Marcus can you answer Shale Gales question?

Permalink Reply by 0i7okn54zwbdo on March 15, 2012 at 10:27am

If you think that drilling will interfere with your ability to farm your land or graze your cattle then don't sign a lease.  Just be a farmer and ignore the landmen who knock on your door.  If you want a bonus payment and potentially a well then understand the risks associated with it.  Development of these shale fields is disruptive, messy, noisy and can take years.  If that's not something you want to be part of then opt out.  Nobody said that every landowner has to sign up.  Not for nothing, but the NPV for a decent shale well situated on a 160 acre drilling unit with a 15% LOR is roughly $2,500,000.  If you cannot operate a farm minus 10 acres and take that money to the bank then your business model is flawed.

Permalink Reply by Finnbear on March 15, 2012 at 10:43am

And if you have 2 identical farms next to each other, both signing the same lease terms with the same company and farmer 1 ends up with a well pad and farmer 2 doesn't, then with only a $15,000 spud fee, farmer 1 is going to come up short compared to the identical situation next door. His farm business model is unimportant here. His compensation for the loss of use of that land is what is at stake here.

Permalink Reply by 0i7okn54zwbdo on March 15, 2012 at 4:16pm

Gale, you're a riot. You clearly are just another blow hard who has no idea how the economics of these things work. Most of these shale plays don't really turn out the way the O&G companies tell you they will. Of the 14,000+ wells in the Barrnet only about 15% of them are highly profitable. The rest are either barely treading water or are entirely uneconomic. A weak well costs just as much to drill as a monstrous producer. Of the $15,000,000 spent so far on the Geatches unit in Mahoning county how much have they recapitalized? Need some help? Zero. It is not in production and has not made them any money. After 16 months they have realized no gains. They will never make back that original investment. This is not a rarity. This is far more common than companies like CHK will admit. A 160 acre drilling unit (a size that will be more present in the less rural counties) has an estimated 8,000,000 bbls in place. At 3% recoverability (ODNR estimate) that's 240,000 bbls recovered over 20 years. Assuming that this is condensate and not oil the price would be roughly $60/bbl. So Company X has a 75% NRI that gets them a NPV of $10,800,000. So after paying the landowner $5,000/acre and footing the bill for a $10,000,000 well the net profit is...zero.

The point? If you're a landowner get as much as you can before this thing falls apart. The Marcellus has seen a 66% reduction in reserve estimates. That's evidence that these things are often more hype than actual success. Get a good contract, get a good royalty, get paid and get on with your life. Don't spend a nickel of your royalty (either in real life or in your mind) until it's actually in your pocket.

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