How much does royalty percent matter when signing a lease?

I'm curious to know what affect the royalty percentage has on the total dollar amount gained from a lease.  Is there a rule of thumb for how much money is equal to one percentage point?  Are we talking thousands, tens of thousands, hundreds of thousands, or millions of dollars?  

The reason I ask is because in my area it's no longer feasible to get 20% (or more) royalties on a lease if I were to sign one today; I might be able to sign for 16-17%.  If I were to sign at 16-17%, I'd like to know how much I'd be leaving on the table.

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Permalink Reply by Philip Thackray on May 26, 2014 at 10:08am

Dallas,

Here is a recent article by Chris Acker.

http://naturalgasnow.org/shale-gas-decline-curves-demystified/#more...

It is about the decline curve but he works up representative numbers.  Chris is in the oil and gas business, and the pictures in that article are of a Cabot well pad on his property so I think he knows of what he speaks.  He is in the dry Marcellus NE, Pa specifically Montrose, PA in Susquehanna County PA.  He estimates $40,000.00 per acre to the landowner over the lifetime of the well with $4.00 gas and a 15% royalty.  Today, you should be able to negotiate no deductions for a dry gas NE Pa Marcellus well in a good area (much of Sullivan County look to be very good from recent Range Gas In Place maps - YMMV).  Using Chris' numbers and assuming little to no deductions then the dollars per acre to the owner over the lifetime of the well would be $40,000.00/15% = $2,666.66 per % royalty per acre per lifetime.

Phil

Permalink Reply by Jon on May 26, 2014 at 11:32am

how many years are in a "lifetime"?

Permalink Reply by Philip Thackray on May 26, 2014 at 11:42am

Jon,

I don't remember if Chris used a "lifetime of the well" in his article.  I would use 20 or maybe 25 years.  Since the income is heavily weighted to the front end the actual end of life is less important.  And as John Maynard Keynes said "in the long run we are all dead".

Phil

Permalink Reply by Dallas Martin on May 27, 2014 at 9:16am

Thanks Phil.  Good article; exactly the kind of information I was looking for.  My land is about an 1hr 45min from Montrose, PA and coincidentally we have about 160 acres which is the amount that Chris used in his example.

Permalink Reply by Philip Thackray on May 27, 2014 at 9:33am

Dallas,

I saw that you were in the Sullivan County group and assumed that you were in the dry Marcellus next to Susquehanna County.  Since Chris is in Montrose, I figured that article would be most appropriate for you.

Chris told me that this article will also appear in Marcellus Drilling News http://marcellusdrilling.com/ .  When he posts an article there he usually leaves contact information.  I don’t feel free to post that information but if it appears in the Marcellus Drilling news article feel free to contact him.  He is a real amped up enthusiast.

Phil

Permalink Reply by Tim Tarr on May 26, 2014 at 5:11pm

Here is a way to get an Idea:

   First get a GIP (gas in place) map. I use RRC's because their the main operator in my area.

         http://phx.corporate-ir.net/phoenix.zhtml?c=101196&p=irol-prese...

 The 5/12/14 presentation on pages 13-16 shows their GIP maps. Pg 16 shows the 3 play total GIP.

Take that GIP number and multiply it by 0.35 (35%) That's recoverable gas. Probably low, but it'll do. 

Take that recoverable gas number and divide it by 640 (acres in sq mile).

Now you have your recoverable gas/acre number in Bcf.

Gas is sold in Mcf so multiply that by 1,000,000 (1Bcf = 1 million Mcf) Now you have Mcf/acre

multiply that by your number of acres. Now you know how much recoverable gas you own.

multiply that by 4 (price of gas) Now you have an idea of $$$! Are you smiling yet? Don't get too excited.

I take that number and divide by 2 for all them there deductions they will take. now you have a net value for the GIP that can be produced.

Now for your royalties.

Just multiply your % by that number or Use that number times 0.04 (4%) to show how much you "lose" by taking that 16% instead of 20%. You also have to keep in mind that money may take a long time to get. Than again in five years price of gas might be $11.00.

Ok, now I want a retirement account for teaching. LOL

Permalink Reply by Tim Tarr on May 26, 2014 at 5:56pm

I forgot to say.

That's what they are letting out now. I think there is other news that will come out when they want to run up stock price or after they get everything HBP'ed. Time will tell but there is a lot more going on than they'll let any of us know about.

If you sign for less than you really would like try to get a severance Clause that defines what your leasing. Why give them everything for 15%?

Permalink Reply by Dallas Martin on May 27, 2014 at 9:24am

Tim, thanks for the explanation and the link to the GIP maps.  Both are very helpful.

Permalink Reply by Philip Thackray on May 27, 2014 at 12:07am

Tim,

I made a similar calculation in the Shell discussion at the Butler County Local group just after the Range report came out.  I just used the Marcellus GIP only as there is production data and EURs for this formation.  Here it is:

 

"Reply by Philip Thackray on October 31, 2013 at 9:28am             

From the company presentation on page 11, Range’s best Marcellus GIP averages 150 billion cubic feet per square mile.  And from the associated investor call transcript, the estimated recoverable amount is 25% to 35% so I’ll use 30%.  One square mile is 640 acres.  So the estimated lifetime production for a typical 80 acre well is:

(150 Bcf/640acres) x 80acres x 0.3(30%) = 5.6 Bcf

But on pages 24 or 27 of the presentation, Range states the EUR of an 80 acre well at >12 billion cubic feet equivalent.  Where did the additional 6 Bcf or so come from??"

That question remains unanswered.  Understated GIP?  Overstated EURs?

Regards,

Phil

Permalink Reply by Finnbear on May 27, 2014 at 3:58am

The simple answer is that you'll be leaving 3-4% of the total production of that well on the table. For a 16% lease, you could be making 25% more in royalties. No one can predict the actual volume of production of a well that hasn't been drilled yet.

Permalink Reply by Debra Lynn Pennell on May 28, 2014 at 6:31am
So if I have been offered 20% of 54 acres in a wet gas area, and have 20% of 111 acres not leased yet, but is still wet gas, what might the estimates be over a monthly period, then for how many years. I know it starts off and then declines, and a lot of factors enter into it. Is there anyone that can offer me an estimate, and how long from the time permits are approved for pipelines and actual production. Usually how long does it take to approve pipeline permits? Thanks. Debra Pennell
Permalink Reply by Stephen Fox on May 30, 2014 at 2:06am

Are all these assumptions based on one well per pad or 6 wells per pad. Very confusing to the layman. Own property in both Green County PA  and Monangalia county WV. Both equaling 20% of a 640 acre unit. If the unit were 1,280 acre unit I suppose everything would double? Longer legs for each well? How do we incorporate the Utica into this equation along with Marcellus? Any help would be greatly appreciated.

Steve

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