a little math problem

i've been kicking this one around for a while and havent been able to decide definitively what the answer is, so if anyone wants to add their thoughts i'd appreciate it.

this involves the difference between mcf's and mmbtu's and how they are accounted and paid for to royalty owners.

lets say your lease says that you are to be paid by the mmbtu.

lets assume that the price on your royalty stub is the correct weighted average mmbtu price for the month.

as anyone who has seen a royalty stub knows, the well is reported in mcf's...volume.

the problem that im trying to understand is, why are you being paid the mmbtu price X the volume?

isnt that being paid the price of apples for your oranges?

the way im figuring this is, good, your being paid the correct price, but for the wrong volume.

since gas here in nepa contains roughly 1030 btu's per cf, an mcf contains 1.03 mmbtu's.

in order to calculate royalties on an mmbtu basis, shouldnt the calculation be, price per mmbtu times the volume times 1.03?

where am i going wrong here, or why arent we being paid that way?

wj

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Permalink Reply by Jack Straw on April 6, 2013 at 5:57pm

RE: "the way im figuring this is, good, your being paid the correct price, but for the wrong volume."

OK, mcf is a measure of volume, while mmbtu is a measure of the energy content.

It is a curious coincidence that 1 mcf of methane (dry natural gas) has an energy content of about 1 mmbtu.

 

RE: "since gas here in nepa contains roughly 1030 btu's per cf, an mcf contains 1.03 mmbtu's.

This might be an "average" for the area, but individual wells will potentially depart from that average.

 

RE: "in order to calculate royalties on an mmbtu basis, shouldnt the calculation be, price per mmbtu times the volume times 1.03?"

O &G Operators sell natural gas on a BTU basis, not a volume (mcf) basis; it is the amount of energy contained in a certain volume that is of commercial importance.

To fairly calculate royalties, the O &G Operator should (at least once a year, or otherwise by State regulation) test the Natural Gas stream from each well; measuring the respective BTU content. From that measurement, the O &G Operator should adjust the payment of royalties to account for the BTU content (of that particular well). The reason that it should be measured on a regular basis is because it can change with time.

 

If the volume of the Natural Gas produced is not (regularly) adjusted for BTU content, something is wrong. If you have a well in production, you might like to ask your O & G Operator when they last measured the BTU content of the Natural Gas produced from your well(s) ... and ask how they apply a correction for the BTU content in calculating your royalties. You may be greeted with stunned silence.

 

All IMHO,

                 JS

Permalink Reply by Mark McGrail on April 7, 2013 at 12:43am

JS,

Isn;t the reason the measurement is mmbtu to account for NGL's, condensate etc. ?

Permalink Reply by wyalusing jim on April 8, 2013 at 1:13pm

Reply by Jack Straw

 

"To fairly calculate royalties, the O &G Operator should (at least once a year, or otherwise by State regulation) test the Natural Gas stream from each well; measuring the respective BTU content."

jack, industry practice is to test the btu content and prove the accuracy of the metering equipment way more often than annually. stuff happens out on those pads, they want to make sure that their equipment is operating properly so that they are being paid accurately and fairly too.

in many cases the testing occurs weekly, and more often if necessary.

wj

Permalink Reply by wyalusing jim on April 9, 2013 at 3:10am

 Reply by Jack Straw on Sunday

"RE: "the way im figuring this is, good, your being paid the correct price, but for the wrong volume."

OK, mcf is a measure of volume, while mmbtu is a measure of the energy content.

It is a curious coincidence that 1 mcf of methane (dry natural gas) has an energy content of about 1 mmbtu."

actually jack, it isnt all that curious, it's just a physical fact. 1 mcf of natural gas contains approximately 1 mmbtu of energy.

in order to make things safe and ensure that customers get a consistent product, the 1 mmbtu standard was imposed.

some wells produce lesser quality gas, some better. they blend them to make sure that it all comes out equal to the consumer.

wj

Permalink Reply by Joseph-Ohio on April 7, 2013 at 1:31am

My impressions:

So-called 'Wet Gas' has Natural Gas Liquids to consider and it's BTU content is higher by virtue of that Natural Gas Liquid content.  Natural Gas Liquids abbreviated as NGL or NGLs.

So-called 'Dry Gas' does not consider Natural Gas Liquid content and my read is that there isn't much there to consider.  Dry Gas seems to me to compare to Gas Company Natural Gas / City Gas / for consumer's sevices / domestic use (for heating and industry including power generation). 

I know that it's common practice to use 1000 BTU / Hr / Cubic Foot to estimate the Heating Content of City / Service / Domestic Natural Gas.

Being paid by the BTU / Cubic Foot and using 1030 BTU / Cubic Foot for so-called 'Dry Natural Gas' seems in step to me.

Being paid by the BTU / Cubic Foot and using 1030 BTU / Cubic Foot for so-called 'Dry Natural Gas' component plus being paid more for the Natural Gas Liquids (NGLs) also seems in step to me.  However, it is difficult for me to envision how much additional payment the landowner should receive for the recovered NGLs.  That would (it seems to me) vary well by well considering the geographic location of the well and each well's NGL content.

Perhaps there is a way to determine a landowner payment method based only on the BTU content of the recovered resource ?  Maybe that's what is happening already for all I know.  Is it ?  What I'm writing about here is based on the premise that any given cubic foot of recovered resource in a well producing so-called 'Wet Gas' would contain the 1030 BTU / Cubic Foot for the 'Dry Gas' component plus more BTU's / Cubic Foot for the NGLs.  I've read where the BTU per Cubic Foot content was as high as 1300 BTU / Cubic Foot in some so-called 'Wet Gas' wells.  Would paying the landowner by the BTU content be what everyone could call 'fair' ?  

Permalink Reply by wyalusing jim on April 7, 2013 at 1:55am

nepa has ngl's too. there is approximately 3% ethane in the gas around here, and thus the 1030 btu number.

all companies prove their meters and analyze the btu content on a frequent basis. (more then once a week)

but my question isnt in the theoretical realm. there is an answer which really has nothing to do with anything other than math. im just not 100% sure what it is.

wj

Permalink Reply by gillian barber on April 8, 2013 at 12:53pm

In the dairy biz, the raw product--milk-- is tested multiple times a month for each individual dairy farm.  Results are averaged, and we get paid for each component--butterfat, protein and solids.  

Permalink Reply by Farmer John on April 7, 2013 at 3:24am

Hi Mr. Wyalusing Jim.  I'll try to jump in here, though I think you are so close to your answer that you need practically no help.  It looks as if you know that the reported production of your well is a VOLUME report, in mcf's  initially of WHAT no one knows - not even whether it's apples or oranges.  Just a volume of "something".  Honestly, it could be methane, methane and some longe-chained hydrocarbon mixture, some mixed inert gases, and maybe even just some "Hot Air".

So that the buyer is paying for some known energy content, (assuming chained hydrocarbon rejection - meaning let's leave the bits of ethane, propane, etc. in the sale item and price), the gasco analyzes a sample of your well's output and determines that you have "gas" (lucky for you -- it's worth more than hot air) with an energy content of 1030 btu/cf. They will THEN be able to sell it as such, and give you your royalty based on:

 

Wellhead Volume (cf) of Gas Produced (energy content unknown initially)  X  Energy Content Lab Test Determined/cf

 

So it's not Apples to Oranges as much as Unknown being determined and then priced accordingly.

 

Hope I answered your math question.  If not, perhaps take another run at the question.

 

 

Permalink Reply by Joseph-Ohio on April 7, 2013 at 6:09am

So, it's sounding like the landowner ends up having to trust the O & G Company's lab in determining what constitutes the Natural Gas Liquid component of the recovered resource and then in turn what the landowner ends up getting paid for.

Pretty hard to audit that unless you have your own lab - and not many landowners that I know do !

Oh me oh my - cynical me !

Permalink Reply by Joseph-Ohio on April 7, 2013 at 9:17am

I would guess it's certainly possible.

What would it take ?

Money ?  How much ?

Expertise.

Time.

I guess a landowner would trust the lab that he / she hires over the G & O Company lab.

But, would the G & O Company trust the landowner's lab ?

Would it end up in court ?

I would bet that it would.

That's the problem with these things every time you turn the page you find a new can of worms to deal with !

 

Permalink Reply by wyalusing jim on April 7, 2013 at 7:43am

one thing farmer john.

we do know almost exactly what the gas leaving our wellpad consists  of.

at the wellhead, the gas contains approximately 3% ethane and insignificant amounts of other ngls, thus at the wellhead, it has approximately 1030.

this equates to 1.03 mmbtu/mcf at the wellhead.

wj

Permalink Reply by wyalusing jim on April 8, 2013 at 1:04pm

"Did you perform your own test on the gas?"

no, but just as good.

i wont go into specifics about how i know because jobs could be lost. suffice it to say that i am satisfied with the accuracy of the btu measurements and my knowledge of the constutuent components of my gas.

wj

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