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Permalink Reply by Philip Thackray on May 30, 2014 at 3:30am

Stephen, Debra,

O&G companies seek to optimize PER ACRE production.  PER ACRE production is controlled by the spacing of laterals and the fracking design.  Lateral length does not affect PER ACRE production.  Closer laterals and bigger fracks should improve PER ACRE production but both of those increase cost so optimum spacing and frack designs are chosen.  For a given dollar value of the PER ACRE production, the selling price of that product is the well output gross PER ACRE.  Multiply that by your acreage and that is the well output gross.  (The production period can be per month, per year or per well lifetime)

In a rectangular unit with optimum spacing and fracking design NOTHING ELSE MATTERS except your acreage.  Unit size and lateral length DO NOT MATTER.  If the unit gets bigger, your percentage of the unit goes down in proportion to the increase.  If the laterals get longer, the unit gets bigger and your percentage of the unit goes down in proportion to the increase.

So… to determine what your income will be, the PER ACRE production must be determined.

PER ACRE production can be determined if some assumptions are made about the hydrocarbon content of the shale itself.  A typical 4000 foot lateral is assumed to drain 80 acres.  In my calculation a few posts above I determined that based on Range’s published data for a “best” Marcellus shale location, an 80 acre well would produce 5.6 Bcf of gas (if it is a wet area this gas would contain methane + NGLs and perhaps condensate).  Since this is the production from 80 acres, the PER ACRE production is 5.6 Bcf / 80 acres = 70 Million cubic feet per acre.  Since gas is sold by the thousand cubic feet we convert this number to 70,000 thousand cubic feet (Mcf) / acre.  To simplify this calculation let us assume that the “gas” is all methane and that methane is selling for $4.00 / thousand cubic feet.  Therefore, the lifetime well output “gross” production PER ACRE is 70,000 Mcf x $4.00/Mcf = $280,000.00.  Ignoring deductions, If your royalty is 15% then your PER ACRE income is $280,000.00 x 0.15 = $42,000.00 PER ACRE over the lifetime of the well.  See also Tim Tarr’s calculation at an earlier post above.

Similar reasoning and calculations apply to any shale layer accessed by a lateral.

Phil

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