Future royalties/decline rate....something to ponder

I've heard it all, but what's the truth. Does anyone really know how fast and how much royalties will decline? I have seen the decline (with mine) within the first year, but will they eventually stabilize? When I first signed, I was told the royalties would stay high for 4 years before a drop occurred. People are being told the wells will produce for 20 years or more. What would royalties be in 20 years? This is going to be very interesting.

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Permalink Reply by Joseph-Ohio on April 29, 2015 at 5:35pm
Thanks again !
MichaelPermalink Reply by Michael on May 5, 2015 at 11:27am

MichaelPermalink Reply by Michael on May 5, 2015 at 11:52am

I have tracked decline rates for most of the major shale plays for the last 8 years.  The average decline across All shale plays is as follows:

MONTHS 0 - 12 13 - 24 25 - 36 37 - 48 49 - 60 61 - 72 73 - 84 85 - 96 97 - 108 109 - 120
Production Decline 63% 35% 22% 17% 13% 10% 9% 8% 8% 7%

Data comes from presentations by majors in the annual statement of earnings, market presentations to investors, actual well performance.

Most shale plays give up 80 to 85% of their payload in the first 36 to 60 months.  Sure the wells can produce for a long time there after but from an individual royalty perspective the payout is quite small.  To answer your question 20 years out your income from a given well will be quite small relative to your first check.  Lease production can be a different scenario.  That depends on drilling schedule for the acreage, fracking and recompletion strategy.  The problem right now and for the foreseeable future is at current and forecast spot pricing fracking, drilling, and recompletions don't make economic sense unless there is a guarantee that you will pull 350,000 BOE out of the ground.  Many companies are NOT honoring their continuous drilling clauses.  If you don't like it sue me is their attitude.

Royalty owners WANT to believe the producer when they are told that the company will be drilling "soon".  Most of that is just talk because they are trying to protect the company's equity.

When you look at the long-term prospect the United States oil and gas reserves are growing.  The U.S. imports less now than it ever has.  Foreign countries have less impact on U.S. oil and gas prices than they ever have.  I personally think that the recent minor increase in oil prices is a traders artifact and not related to supply and demand.  It will be interesting to see how this all pans out.

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