We are still waiting to sign a lease, but before we do, I'd like to hear what people think the future might bring on a couple subjects:
1) Do you think the O&G cos will create a large unit (1280 ac) and then drill one well on one pad to hold the entire unit HBP, or
a) will they drill several wells on one pad and produce them to the max now? or
b) will they drill several wells on one pad and choke off most of them, produce one and then produce them to the max later when the price of gas is higher? or
c) will they come back in later when the price of gas is higher and drill more wells from the same pad?
2) Is it better to be in a small unit (640 ac) with 6 wells or a large unit (1280 ac) with 12 wells?
These are great questions...I will be waiting with you for the responses!
Hi Mike, we havent leased our property yet either. You have some good questions. First I beleive its better to stay inside the 640 acres. Reason? less acreage less property owners to split royalties with, and yes one well could hold all the acres, but its very expensive to move these drilling rigs and I would think it would be easier and less expensive to drill more wells while the rig is on site. As you, we are all concerned as to how the O&G companies will operates these new wells and will they treat the land owners fairly. I guess we'll just have to wait and see. We have been talking to an oil company since early April. First offer was $50. an acre. Last offer was $4300. two weeks ago. 19% net royalties. There sure is alot of rumors out there and alot of B S too. I think everyone has to look out for theirself and do whats best for their family. My big concern right now is the shape of the economy and what that might do to the big oil companies. One thing for sure, if anyone gets screwed its going to be the little guy.
Bob, be cautious with anyone offering a NET royalty. If there is any way possible, you really want to push for a GROSS royalty...
6 wells in a 640 unit or 12 wells in a 1280 acre unit is the same. It is your percentage of the unit. You will have a 50% less percentage but twice the wells for production. In my area in Pa. different companys drill differently. Some will drill all the wells however Chesepeake has so much area to hold before they have to release that if they can they will only drill one well. At some future date they will come back to drill the rest. I do not think they will be in a rush unless the price of natual gas rises. With only one well getting drilled a smaller unit is much better.
1280 you will have a smaller piece of the pie, however the pie is bigger once they max out the unit. The more wells they drill the better for your unit. If your unit size is restricted to 640, that may stop them from drilling 2 or 3 additional wells down the road when your royalties are beginning to sharply decline. There are numerous scenario's you can think of where each option would be better than the other, however the majority of this you cannot control.
at the end of the day you want to sign a lease with the most restrictions you can without handcuffing the operator to a point where they cannot efficiently, and economically develop your minerals.
another thing to take into consideration as with everything, gravity always wins. The numbers keep escalating, however the bubble will burst. Has in every other play. Once these guys are done jockeying for position in Ohio the competition decreases, and the offers will level out around 3-4 thousand an acre.
1) Large units to HBP as much as possible.
a) There are some areas of Pa where some companies drilled six or more wells on one pad at one time. But most drill two or even only one. This allows them to HBP more land more quickly. Also, drilling six wells at once might overload existing infrastructure like pipelines, compressor stations, dehydrators and more.
b) Costs a lot of money to drill and then shut in several wells for any length of time. More likely to drill one or two now and come back years later to drill more.
c) Once they determine the best, most productive spots, and a lot of land is under HBP, they will come back to drill more wells on existing pads. The higher the price, the quicker they will do so.
2) If you're old like me you want a smaller unit so that your royalties on one or two wells is less diluted. If you're young, the larger unit will give an income that is spread out over a longer time span.
All of which is just IMO.
Pretty much exactly what I was thinking, except for b) - I wasn't sure if the cost to move the rigs and come back would outweigh the cost of drilling now ( I know the wells cost~$5.5M each) and is it going to be more expensive in the future to drill? (maybe more regulations?)
True about b) Pa. is going to have impact fees shortly. And no one knows what other regs and costs will be placed on the industry.
On the other hand, from what I read here and hear elsewhere, they are continuously getting better and better at drilling. New techniques get better production from newer wells, reducing the cost/production ratio. Things like recycling water cuts costs. It takes a shorter time to drill a well, again saving money. I'm sure there are a lot more things they are doing to cut costs. And it will get better over time.
Hard to say if the increased production and more efficient operations will outpace the increase costs incurred by government. But I think that it would be too expensive to drill six or more wells on a pad and shut in all but two of them. Six wells at $5.5 mil equals $33 mil invested......would take a long time to get that out of one or two wells, especially at current prices.
It costs less to move that rig than it does to lose 1280 acres of leasehold that is expiring and is all owed another 2-5k/acre.
I wonder how the landowner will feel if after the first well pad is permanently reduced to 1 acre and then the O&G come back in and make another 5 acre well site?
Will the landowner get recompensed for the "new" well site?