In this depressed industry environment and rumors of unexplained shut ins around, I was curious about those who have experienced shut in activity (or I guess INactivity) on their producing units such as the process, duration, causes, communication (if any), and any other information. I thought I'd kept up on all of the important factors regarding being a land owner working with a producing gas company but somehow overlooked the entire possibility of being shut in. I suppose, at the time, the idea wasn't even a factor in mind, with the natural gas industry booming before politics and environmentalists put the stress on operations blocking transmission lines and adding regulations and costs that created an over-supply, de-valuing the commodity within our region. Now, it appears that the possibility - and even probability - of being shut in has been brought to the forefront and I'd like to get some information and education on it besides the obvious "no royalty payments". Thanks to all and hope that everyone will survive this slump.


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Unfortunately, from a broad perspective it is just that simple.  The specifics on how that affects a lessor's particular interest is going to be governed by the lease and any unrecorded agreements they may have with the operator.

Seems like a giant loophole that you could drive a semi through.  I've heard a lot of talk and promises about transparency and keeping the land owners in the loop because the gas company, land owners and shareholders are partners in the operations, etc, but this shut in situation seems to throw all that out the window. We do have a shut in clause but it isn't much and wouldn't do much since it refers to the lease expiring after 3 yrs shut in and shut in pymts of $5 per acre. I have also noticed that shut in units show minor production amts to the DEP which would keep the clock on shut in time from starting so am guessing that the shut in process is a safeguard for the gas company and nothing for the land owner. Seriously thinking that if a unit is shut down for no reason other than mkt prices or over supply, I might change my diehard position of hanging on to your mineral rights and consider selling at least a portion. I don't know.  I've followed projections for the natural gas mkt and it doesn't show any gains in the current environment. We aren't shut in, mind you, and I don't have any reason to think we will be other than the overall climate and word of some other units shut in with no apparent reason. Just thinking out loud and wondering what the thoughts are out there. Thanks for the reply.

All great points and concerns, Lori.  Also keep in mind that if a lease also has shallow production, it may not even be considered shut-in if the operator shuts in the pad.  Some leases require all wells to be shut-in to trigger the provision.

To be fair, the operator typically does not want to be shut-in for any length of time either.  Low prices or not, zero production means zero revenues but the bills keep coming and the MVCs don't disappear either.  That is more of a macro point as each operator has signed up to different midstream and debt agreements, but big-picture -- development should continue to decrease in the basin and production will be at a maintenance level.

Just my 2 cents. I wouldn't want the well producing when prices of Natural Gas are sub $2.00. More money in our pockets if companies are shutting in the wells right now and hopefully the prices of natural gas go up.

Hi Ryan - That's also a valid point however there's no guarantee they WILL go up (and won't continue to go down). Another aspect to consider is the political and social environment and push to eliminate (outlaw) all fossil fuels in favor of renewable alternative energy sources, despite the facts that they are expensive and unable to fully serve the need. And, yet another point that affects the gas companies themselves, as well as the land owners, is the fact that if wells are shut in there is no income. That means bankruptcies or at the very least, closures, employee layoffs and many supportive businesses out. When a rig is sitting idle, it is costing dollars. If any of these scenarios come into play, the gas under the ground = $0.  I don't necessarily think these things will come into play BUT the possibilities are there. It's all food for thought.

Great discussion. Although your final point is a common misconception, Lori. It is actually the rig costs and other costs associated with completions that operators have needed to cut down on in order to survive. Hence, the drilling the service companies are typically first to go bankrupt — and have.

The operators need the production revenue to operate on cash flow until the market recovers. For some, that still won’t be enough and will likely file before year end.

Good points, and I do agree; operating expenses need to be reduced however lack of operation leads to stagnation and ultimately negative revenue. I think my main point really is that, despite the depressed market, shutting in and halting production is suicide because you can't survive without some sort of revenue to infuse into your business, if only to stay flat. IF I were designing a survival strategy for natural gas drilling companies, it would probably be to capitalize on all ready made assets and halt or liquidate all or most new operations not already in production. In regards to the rigs and operations, I would focus on least costly endeavors such as putting rigs on already developed and producing pads/units with room to expand, cutting a huge portion of operating cost while still generating additional revenue. And push the midstream companies hard on pipelines because without them, it's all moot. If you can't get it to market, you can't sell it and once again, it has no value. Your last sentence is something that I've had in my mind from the beginning of this market decline. We are in a region rich is natural resources that hold value to the country; and world if export expands. To not do everything possible to protect and keep it operating is a fool's game and a loss that is incalculable. Coming full circle, that very thought is what spurred my curiosity about shut ins and the logic behind them, especially in this depressed market. Agree... I'd rather sell at $3 or $4 rather than $2 or less BUT $1.50 is still better than $0, as long as the cost to pump it and get it to customers doesn't exceed the sale, which is highly unlikely unless we go to a sub-dollar mkt. All of this is speculation, of course, as I have no idea what is in the minds of the COOs of these gas companies and probably lack a lot of information that could radically change my point of view. That said, though, I just don't see the logic in halting production because they may think they can sell it at a higher price years down the road when it would mean going out of business for lack of revenue in the meanwhile.  Agree - great discussion. The more landowners and others in the industry communicate the better understanding and chance we have of getting through this with our shirts. Knowledge is power, and using it can be salvation. At the very least, keeping you from stepping off the unseen edge.

Seems unbelievable, but $1.50 - $2.00 is uneconomical for most operators.  The cost of LOE(~$0.30), compression (~$0.30), gathering (~$0.50) and FT ($0.40-$0.60) (not to mention additional processing/separating fees in wet gas areas) add up very quickly.  However, by the nature of the FT agreements, a deficiency penalty is owed if the operator does not deliver X amount of gas, forcing some to continue to flow uneconomically.

Companies that signed up to these deals at $3-4 gas are paying the price now.  The behemoth midstream companies are not incentivized to grant any relief on these, otherwise the solvent shippers would request the same treatment.

Hope these helped add some context!

Hi Lori,  

Great discussion.  Oversupply has stabilized NG prices very low but what the Corona Virus is doing to the worlds supply chain is already crushing energy demand.  When our current political leaders said they were draining the swamp what they meant was they hollowed out about 40% of everyday rank and file govt workers.   That included the CDC, USDA and the FDA along with every other govt agency.  Worse our country demolished almost all the work the Bush and Obama administration did building protocol for pandemics.  We have known since 1919 that a virus would eventually become uncontained and have been preparing to minimize the outcome ever since.  All the experts have now been fired or demoted.  If you saw the news yesterday how we handled bringing the folks back from the infected cruise ship the cat is out of the bag.  Putting aside the pesky health related problems of overrun medical facilities, illness and potential deaths, world commerce is already slowly grinding to an almost halt.  95% of almost everything in everything comes from China.  Over the counter medication is already disappearing from the shelves as people learn there may be shortages coming.  If business and factories get shut in need for energy will decrease also.  Hopefully the virus will go away with sunshine and dafadills as our president suggests but even at this point the world economy will be dinged till the end of year.   The good news is if we learn a lesson, in about 15 years after the cracker plants are up and running and industry builds out to manufacture using the raw cracked ingredients we will have a flourishing economy using a stable NG supply.  At the moment we should expect that the NG industry will be depressed for a while.  

Adding my two cents worth

Talking with a friend a few days ago about the corona virus this point came up. With all the discussion about other endeavors, namely the oil and gas that concerns this site, much attention has been placed on the dangers of  this new virus.  Could it be that in the scheme of world politics some new subject (namely Corona virus) has been inserted to divert the attention and fears of the common folks?

Now there is talk that their will be or actually is a shortage of protective gear such as face masks and other items? These items might be bought up and even hoarded  by many folks as an attempt to calm their fears.  It certainly is not above the merchants and suppliers  of these items to play up to these fears in order to extract more dollar bills from the common folks!

Attention could be diverted from the oil and gas problems and other issues the citizens are dealing with.  And the politicians could then run wild with their plans to disrupt the better ideas enjoyed by common folks!

Granddad Ladd

Granddad Ladd,

here is the link to the CDC Covid 19 update page

The CDC is not in the propaganda business and they have actually been politically restrained recently so the current info may be slow in its release.  It is silly to think millions are quarantined in China and all schools closed in Japan to sell more masks or effect our US politics.  I was hoping with your friends exit from GMS we can again have O&G discussions without being hijacked with conspiracy theories.  Covid 19 is effecting world energy use which effects demand for O&G. 

Agreed on the Corona Virus business. The media is taking it completely out of control and causing the panic. Even data from China has been sensationalized and made worse than it actually is. It's what they do, and of course, if they can use any story to their advantage, they will - true or not. I don't believe that Covid 19 has any more effect on the O & G industry than the regular flu strains we deal with every single year. The ONLY reason there is such negative speculation and reaction is because it is being incited by media activists. If everyone would calm down and actually read or listen to the facts, it would be a non-starter. People die from flu every year. Far more than stats for Covid 19 are reporting, in fact. They are the people who have weakened immune systems due to age (both young and old), have other conditions or illnesses that the virus worsens or worsens the virus, or don't seek medical care when necessary if symptoms don't improve. The only story here is that China's health care system sucks and that when there is a health condition that is spreading worldwide, we need to implement strict quarantine and entry protocols into our country to reduce the spread. It's all craziness. This is the 3rd viral epidemic plaguing China which should tell the rest of the world something about China's healthcare and safety protocols. But it has NOTHING to do with O & G consumption. Despite the number of cases and deaths overall, it is not enough of the world population to affect the economy, other than via fear instigated by the media causing market frenzy. These media outlets should be fined for their unscrupulous tactics and inciting panic. It's ridiculous. Cover your mouth when you sneeze. Wash your hands several times a day. Avoid hand shakes and hugs over the flu season. Try to keep your hands away from your face and mouth. And if someone in your house is sick, spray surfaces with disinfectant and continue to follow basic flu season protocol. That's IT. (Apparently they don't do any of that in China.)  SARS, MERS, and now Corona; all from China, and we managed to survive them all. People need to get control and stop the panic.


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