Falsifying Production?

I think that the oil company that is holding our oil rights on production may be falsifying their production.  Is there a way to check that?

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Permalink Reply by John Goold on March 31, 2013 at 5:52pm

What is stupid about this is if you are going to falsify production you should at least do payable production.  I have talked to people that have payable production and they are getting at least 80-100 dollars per month per well.

Permalink Reply by Markus on March 31, 2013 at 8:54pm

I am confused by this discussion because I am not sure how it got into the area of costs/ payable production/ economics of a well etc.  I know that all leases read differently so every case will be different.  Though, if a well is producing oil and/ or gas, it is producing.  I can see that if a well was shut off and abandoned or neglected by its so-called operator for a while an argument could be made that the lease is invalid.  Though simply stating that a well doesn't produce enough gas and/ or oil to make it economic for the producer seems like a tough argument to make.  

Most of the 50,000 wells producing in OH are considered "stripper wells" and produce on average eight barrels or less per month of oil and/ or less than 130 mcf per month.  Note that 85% of all wells in the US are considered stripper wells producing 1/6 of all oil produced in the US.  In Ohio for 2011, 82% of all wells in the state produced less than 10 barrels of oil per month.  In the same year, ~70% of all wells in the state produced less than 5 barrels of oil  per month.

My understanding of royalties for many of these old leases is that 12.5% is paid to the mineral owner right off the top, before costs.  So, if $1,000 of oil and gas is sold in a period (could be a month, year, or even several years), the royalty owner receives $125.  Likewise, if only $10 is sold in a period, the royalty owner receives $1.25.

Who remembers the days from the late 1990's when oil was at $9 per barrel?  Because such low prices would technically make most older wells uneconomic, should the owner of a well(s) have been forced to surrender such leases and plug such wells simply because the fluctuation of prices forced such an action?  Prices rise and fall so the economics change as well over time and the operator bears this risk.

Instead, well production as discussed is really about production.  If a well produces only 10 barrels of oil per year, regardless of the owner's costs, it is producing.  Many gas wells do not have pump jacks (like on my property) but they do produce some quantities of gas and they are inexpensive to maintain.  Even at low gas prices, they are technically still producing.

I am sure some will jump all over this, call me a "silly person" or "oil man" or "troll" but I think that both sides of an issue need to be stated for this site to be of real benefit to readers.  If an operator has been deceptive in its actions, you should be able to call them out but there are plenty of small operators out there that do the right thing and have been doing so through periods of both high and low prices.

I know people around me with multiple gas wells on their property producing some but not much gas.  Years ago, the operator offered to give the wells to the landowners for domestic use which would include releasing the lease and giving the wells away.  The landowners at that time chose to not take the wells because they a) didn't want to post the bond with ODNR (anything over one well requires a bond, even for a domestic well owner) and they b) didn't want to have to bear the costs associated with whatever maintenance would be required to keep the wells flowing.   This was all before the talk of Utica etc.  Now that they see money, they have changed their tune. Interesting huh?

Permalink Reply by John Goold on April 1, 2013 at 12:40am

There are cases where it is clear they knew about the shale possibilities and they are keeping the wells to tap into that like in our case where there is documented evidence they used insider information to obtain the property and drill wells that never produced.  Taking over the wells and releasing us from the lease was never offered to my family.

Permalink Reply by Paul Martinelli on April 1, 2013 at 1:38am

So....what is a ballpark figure for a well to be considered "payable production"  in terms of gas produced? Is it 800MCF/year? more? less?

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on April 1, 2013 at 2:04am

Cash flow in from production outpaces the cost of maintaining the well.  That's usually the threshold.  

Permalink Reply by John Goold on April 1, 2013 at 3:30am

I think there would be factors involved such as how close the well is to the oil company, the proximity to other wells and the efficiency of the company.  I believe that a homeowner who is benefiting an average of $100/month or more from royalties and/or free gas from the shallow wells over the years cannot say much about being held on production.  It is people like us who have received in general $10/month or less with insufficient production and pressure to provide us with free gas that should get some kind of relief.  There has been absolutely no advantage to either us or the oil company to continue with those wells other then to hold the lease for shale exploration which greatly benefits the oil company and harms us.

 

Permalink Reply by John OBrien, landowner advocate on April 1, 2013 at 4:40am

Marcus, 

All above sounds reasonable enough.  You seem to have some real knowledge on the matter, so, let me ask you this.  1) If indeed a well was ever abandoned, at what time frame does state law (Ohio if you know) require it to be plugged?  One year?  More?   2) When pump jacks are used, for oil obviously, at what depth, or production rate, or age of the well (in other words grandfathered or not) is the producer required to A) have a dike around it, and B) have proper brine storage tank on said well and haul that brine to disposal wells?

Also, I was under the impression that the shallow (vertical only) wells on one of my farms (drilled within the past 6 years) were supposed to be at least 300 feet from the property line, and require 20 acres each minimum?

Would these types of violations ever negate a lease?

Lots of questions I know, but you seem to have the answers. (I'm not trying to trip you up, it is not a quiz, lol)

Thanks

Permalink Reply by John Goold on April 1, 2013 at 4:49am

I haven't come across a lot of answers to the questions you mentioned but I have collected a lot of knowledge off this website and learned it was worth pursuing with another attorney.  All the items you mentioned should probably be reviewed by a knowledgable attroney and be careful what the attorneys say even some of them are not that knowlegable about oil/gas law.

Permalink Reply by Markus on April 1, 2013 at 5:21am

John:

Unfortunately, I don't know the answers to your questions.

I would think that when it came to issues such as spacing and distances from property lines and buildings, that would have been exposed when the surveyor issued the survey showing well location relative to property lines and buildings.  I would be pretty shocked if a well was drilled that broke such terms or a survey issued putting a well location where it shouldn't be.  I am not sure where one could turn in that matter.

I would presume ODNR would be the one to issue such violations when it came to diking etc and propose corrective action and time frames for action.

Though, from what I have read, ODNR seems to want to distance itself from issues relating to leases stating that they recommend issues related to leases be dealt with between the two parties, and if issues cannot be resolved, then legal avenues are the next step.  But again, I don't really know.

Permalink Reply by Tom R on April 1, 2013 at 3:33am

As far as the question "What constitutes payable production?" goes, you might be interested in this bit extracted from an example lease posted on the PA DCNR website.

"32.01 For purposes of this lease, if a gas well does not produce more than an average of one
(1) Mcf/day of natural gas in a calendar year (calculated by dividing its annual production in Mcf by
365 days), it shall be considered uneconomic (i.e., not in paying quantities) to maintain and operate; and if
during the following calendar year gas production from the well also fails to exceed a one (1) Mcf/day
average, Lessee shall plug and abandon the well as per Section 33 (Plugging), and restore the wellsite and access road to the satisfaction of District Forester, all no later than six (6) months after the end of the
following calendar year."

Permalink Reply by Billy Park Whyde on April 1, 2013 at 3:50am

An example lease that's a bit of knowledge but not law.

Permalink Reply by Paul Martinelli on April 1, 2013 at 3:53am

I am in Ohio....if your question was directed to me.

 

these are old "stripper" wells....oil production is usually ZERO

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