Is this a rotten deal?

WARREN

For 7,000 property owners in Mahoning County, 7,000 in Trumbull and 450 in Columbiana whose “deep” mineral rights were transferred June 26 from Everflow Eastern of Canfield to Chesapeake Energy of Oklahoma, the result could be — eventually — higher royalties for the property owners than they now receive.

But having Chesapeake in possession of rights to the Utica shale formation won’t be as lucrative for the property owners as those who sold their mineral rights to BP America this spring, said Atty. Mark Finamore, who represents several townships and villages as well as private-property owners.

Rights to the Utica shale are sometimes referred to as “deep rights” because the Utica shale formation is lower in the ground than the Clinton shale, which Everflow has been mining in the Mahoning Valley for several decades.

Chesapeake bought the deep mineral rights to 28,000 acres for about $35 million from Everflow in February, according to a filing with the U.S. Securities and Exchange Commission.

It is not known how many of those 28,000 acres are in Mahon- ing, Trumbull and Columbiana counties. Calls to Everflow regarding the leases were not returned, and Chesapeake declined to comment.

“There’s no negative impact, no disadvantage to them for their rights being assigned” to Chesapeake, Finamore said of the property owners.

In fact, the transfer will be a “windfall” because if and when Chesapeake begins to drill on that land using horizontal fracturing, it’s likely that the company will be able to extract a much larger amount of gas and oil than Everflow could using the older vertical form of drilling, Finamore said.

The terms and conditions in the original leases with Everflow transfer to Chesapeake, Finamore said, including the percentage of royalties being paid — in most cases 12.5 percent.

The Everflow property owners won’t get a signing bonus such as the BP owners got, Finamore said. They received their signing bonus when they signed their lease — typically $100, Finamore said.

BP, conversely, is paying its property owners a signing bonus of $3,900 an acre on the 84,000 acres it has leased in Trumbull County. BP is paying its property owners royalties of 17.5 percent.

Those people who signed leases with Everflow didn’t know at the time that technology would make it possible for drilling companies to use horizontal fracturing to extract oil and gas from the much deeper Utica shale layer, Finamore said.

They made the best deal they could at the time, but their leases — some as old as 25 years — will prevent them from getting the kind of money the BP property owners are getting, Finamore said.

Two of the leases for the Everflow property owners obtained at the Trumbull County Recorder’s Office gave Everflow and any company buying the lease the right to extract minerals “for five years and as long thereafter as operations are being conducted on any such unit or oil or gas can be produced in paying quantities.”

If a property owner wishes to, he can try to argue that his lease should be canceled on the grounds that the well is dormant. Short of that, the lease allows the drilling company to keep the mineral rights for an indefinite period of time, Finamore said.

“As long as operations are being conducted and gas and oil can be produced ... their lease goes on in perpetuity,” Finamore said.

Trumbull County Recorder Diana Marchese said most of the leases transferred to Chesapeake June 26 involved Everflow but possibly not all.

The recorder’s office reported that the title work on the leases produced the largest single fee ever charged in Trumbull County for a title transfer — $34,159 — and took several employees two weeks to complete.

In Trumbull County, most of the leases are for land in the townships of Warren, Weathersfield and Howland, but there are some in Bazetta, Champion, Liberty and Lordstown. Many of the parcels are small — in many cases only a quarter of an acre, records show.

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Permalink Reply by Paul Martinelli on August 8, 2012 at 1:13pm

You can search the ODNR  well database for the well to get some information.....it may have been plugged.   It should also show production data, year by year.

Permalink Reply by James Kerns on August 8, 2012 at 8:58pm

William, go to the tank battery and you should find a chart box, it may be inside the doors on the seperator if its a horitzontal seperator, or it may stand alone if the seperator is vertical (watch out, favorite nest for paper wasp's). if you have a 7 or 8 day chart, you may have a well that is commercially viable (count the days printed on the outer circumfrence) depending on the activity of the red pen. The blue pen is line pressure, it will be a fairly constant 40-80 lb range depending on other factors i won't go into right now. The red pen will give you an indication of how much gas is selling through, lots of red ink with pressure spikes in the form of long curved spikes of activity going almost off the chart, and you may have a well that is making money.

Those big long pressure spikes, if the well is a rabbit well, can be counted to get an idea how many times a day the well is tripping or running, and selling gas. If you have a pumping unit out there, you will only see alot of sales activity when the well is pumping. Some of these old wells only pump one day a week. When the pumping unit is going, it may only be making a couple barrels an hour of fluid and most of that may be brine water.

Permalink Reply by Jack Straw on August 8, 2012 at 11:23pm

I strongly suspect that there are many uneconomic wells out there, played out - producing very little. Yet, for years, they have produced at rates that do not justify the expenses of maintenance and accounting.

One reason that they have (for years) produced these sub-economic/uneconomic wells was to defer the substantial expence of formaly plugging and abandonment.

Now, of course, there is another strong incentive to HBP.

 

All IMHO,

                  JS

 

 

Permalink Reply by william r rinehart on August 9, 2012 at 11:58am

Paul,

I have the production reports, they say last year they got 333, don't know is that 333 cfm 333,000 cfm. The last ten years have been about the same, does ODNR check this and confirm or is it left to the driller to fill in any number he thinks he needs to stay active?

Jack I agree, I think its around $12,000 to plug.

Jack do you know the answer to this?

Bill

Permalink Reply by Jack Straw on August 10, 2012 at 11:10pm

RE: "does ODNR check this and confirm or is it left to the driller to fill in any number he thinks he needs to stay active?"

I would suspect that the ODNR accepts the production statistics provided; unless they suspect under reporting.  

I am a bit more familiar with PA, there the state occasionaly inspects well sites (old and new). They report anything unusual regarding their visual inspections.

The various states tend to be sensitive to wells that are no longer in production and yet are not properly P&A'd. The states attempt to locate the last operator, to have these wells plugged. If the operator is no longer in business, these wells are referred to as "Orphan wells" - in PA, the state has monies set aside to deal with Orphan wells (though I suspect that they have a large backlog dealing with a 100+ year history of drilling/production).

Perhaps someone familiar with how matters are handled in Ohio will interject and better educate both of us.

RE: "I think its around $12,000 to plug"

This of course will be a function of well depth, etc.

I would guess that $12,000 to plug would at the lower end of costs - for perhaps a 1000' well. But then again, I would invite persons more knowledgible to respond.

 

All IMHO,

JS

Permalink Reply by william r rinehart on August 20, 2012 at 11:55am

James, Jack,

I have a photo on my cell phone of the chart you spoke about if i sent this to you could you look at this chart and tell me if it is indeed producing commercial amounts?

Jack this is not an orphane well, the hiers to the original lease I am told receive 1 cent a year.  Blue line on chart constantly stays below 40 lbs of pressure only rises when pump runs which is about 3 times in 8 days, it is on a 16 day chart.

Bill

Permalink Reply by James Kerns on August 20, 2012 at 9:25pm

Hi Bill, Its been many years since i have done a chart calculation and more information would be needed, but the sixteen day chart and the low line pressure are pretty good indicators that the well is probably not producing much. You would have to know if there is an orfice plate restricting the flow at the meter, what size or is it open, you would need to know the buyers line pressure (Columbia, East Ohio, etc., is there a compressor station in the area, and other factor's for an accurate read on that well. Is it a pumping unit or a gas lift (Rabbit well) because you say when the pump runs?

Permalink Reply by Jack Straw on August 20, 2012 at 10:09pm

There is nothing that I could add to the excellent responses from James and Fang.

 

JS

Permalink Reply by Kathi Albertson on August 20, 2012 at 10:40pm
Our lease states that it is up to the lessee to determine whether or not the well is capable of "commercial production". Since we have yet to receive a royalty check for any production in 2012, it seems to me that there ought to be some standard by which "capable of commercial production" is determined. Does anyone know if such a standard exists? It seems to me that they are just waiting for some bigger fish to come along that wants to drill in our area so they can flip the lease.
Permalink Reply by william r rinehart on August 21, 2012 at 12:10pm

Fang,

we spoke to the heirs of the original lease they pay 1 cent a year, honest. Jack I am not sure about they other things you ask. Kathi that seems to be the magic question, at what amount is consider commercial prodcution? Enough to heat one house a year?

James and Frank thank you for your input, sorry I could not provide more information. We contacted ODNR and they are meeting with the guy, whom is also hbp, so something may come of that. Devon energy has a guy running around down in cambridge trying to figure this thing out, at some point we may just look into an Attorney soon. Devon energy wants to pay the land owners, not a shallow well driller that flipped the old lease.

Bill

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