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Permalink Reply by Frank Nesmith on April 5, 2013 at 12:21am

Got this in my email just yesterday:

There's been quite a bit of discussion about the rapid production drop-off of Pennsylvania's unconventional gas wells, so our database team decided to analyze the DEP's production records for the last three years, and calculate the actual drop-off values.

 

Our research shows that, on average, PA gas well production drops off 42% in the second year of production, and 56% in the third year.

 

The average production values, per-well, for the wells we examined:

 

2010 - $760,000.00

2011 - $442,000.00

2012 - $337,000.00

 

Regionally, southwestern PA wells have less drop-off than northeastern wells. Our review of production values for northeastern wells (Bradford and Susquehanna counties) show that the rate of drop off is 47% in the second year, and 60% in the third year. In southwestern counties, the rate is 29% for year two, and 44% for year three.

 

It's also worth noting that in our sampling, wells in the northeastern part of the state have much higher production values than wells in the southwest.

Northeast wells averaged 1.8 million dollars during the first year of production where southwestern wells averaged 624 thousand dollars.

 

We've added production drop-off graphs at our Graphs and Statistics area, where Full Members can view a more in-depth portrayal of how production drop-off plays out in the state. To view the graphs, visit:

 

www.MarcellusGas.Org/graphs/PA#pdrop

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Permalink Reply by Jim Litwinowicz on April 5, 2013 at 2:19am

I'm confused by this report.  If the best wells are in the NE Pa and they average 1.8 mil the first year and decline 47% the first year how can a company make a profit when it costs 6-8 mil just to drill a well? With their added costs like pipelines, compression, dehydration and more, they would be losing s ton just based on these numbers.

Also, these numbers appear to be based on dollar figures rather than volumes produced. Were these decline rates corrected for the drop in prices?

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Permalink Reply by Frank Walker on April 5, 2013 at 8:48am

Jim

Excellent question.  I was asking the same question a couple of years ago when my first several royalty checks came in and I could see the rapid falloff in production.  I never knew though, whether choking was at play.  I still don't know, but I don't think choking is involved.

Anyway as you point out I, too, don't see the entire exercise as being all that profitable for the gascos.  Still, the checks keep on keepin' on.  I'm not complaining.  

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Permalink Reply by Jim Litwinowicz on April 5, 2013 at 11:26am

If gas averaged $4/MCF in 2010, and I think it was higher then, then that well only produced 190 million cubic feet per year or only 520,540 MCF per day.  That is very low since a lot of wells are reported at 5 to 10 million CF per day.  And if gas was at $5/MCF, the numbers are even worse. Something doesn't make sense.

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Permalink Reply by Roger Pyle on April 5, 2013 at 3:58am

Rather than posting dollar values, what were the volumes?

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Permalink Reply by Brian Woodcock on April 5, 2013 at 12:55am

Thanks Matt, personally, I think the companies involved ars being controlled by the Big Money people. Yes we have plenty of shale gas, yes the price of gas is currently low, yes oil in west PA and East Ohio are better returns right now. So lets down play the importance of our future gas plans so we can position our landmen to get cheap leases and royalties, what do you think? I think the future is going to be great as long as the land owners and lease renewals are more carefully renegotiated. Brian.

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Permalink Reply by paleface on April 5, 2013 at 9:44am

Matthew I think what they meant by bad rock is the way it releases gas and the holding capabilities and the way it crumbles when fracted,probably a different type of rock in the western part of the state.I think we have to remeber these are not gas pools its being extracted from shale so a fast decline I would think is normal so the gas companys will have to keep drilling to make money.I heard the ex CEO from Shell say thats why they are drilling so much in the Bakkan because the decline rate is so quick,maybe Brian Powers could give us a better idea.  

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Permalink Reply by wyalusing jim on April 5, 2013 at 10:59am

" I say the real money is in the bonus or lease payment."

say that if you like, but shouldnt you wait until you see just how good the royalties will be?

a while ago some landowners were discussing whether it would be better to have higher royalty vs. a higher bonus payment.

having seen many royalty checkstubs from folks across bradford and susquehanna counties it was a no brainer for me. i'd take a few more points of royalty over thousands of dollars in bonus money.

ever wonder why the gascos wont negotiate the royalty percentage when they want folks to sign amendments?

things are not that good for the ng business right now, it's easy to get lulled into thinking that this is how it will always be. when prices return to the $5 range, it will make a world of difference in our futures as mineral owners.

of course if your well sucks, it will always suck, higher prices will have a minimal impact on a couple of hundred thousand a day production numbers. but with 8 million a day in production, a buck makes a heck of a difference.

wj

 

 

 

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Permalink Reply by wyalusing jim on April 5, 2013 at 2:35pm

it is a fact though, that less than one years royalties in bradford county in a good well (8 mmcf/d) have exceeded the 5750 bonus that was paid. that was a 20R.

regarding prices, i dont put much stock in analysts. they've been wrong quite alot.

what i do put stock in is the industry's ability to affect prices. prices go down, the rig count goes down. rig count goes down, production goes down. production goes down, price goes back up. that scenario takes time, but it's almost inevitable.

looking at the storage numbers, production numbers and trends, the rig count is having an effect. if the weather cooperates this year, we'll be in great shape around the end of this year.

those analyst predictions are based on the enormous success of the shale plays, and the misguided idea that the industry will keep drilling at marginal prices. they'll drill to hbp, but not development wells. cabot is an exception to that, they drill for cash with which to drill more.

wj

 

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Permalink Reply by Brian Day on April 5, 2013 at 3:43pm

Are many leases in Bradford County not HBP?  If so, I would want to resign those leases cheap or just have the owners re-up because they fear not being leased at all.  What if the definition of HBP was challenged and the certainty of holding those leases was in jepordy?  It seems to me if the northeast just was not panning out, the gascos would be dropping leases to save money and spend it in Ohio or NoDak.  Perhaps, as always, there is hidden information not forthcoming yet, causing this derogitory evaluation of land a company has been happily drilling for three or four years now.  Perhaps New York is about to lift the moritoreum on drilling in the Southern Tier and the speculators want to Poo-poo the results in Pa just across the border so lease prices in New York will stay down.  I wouldn't get too worried until the gascos start capping wells permanently and surrendering leases.

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Permalink Reply by paleface on April 6, 2013 at 1:39am

Matthew when you take the output of the well and divide the number of days which is right next to it,than move the decimal three digits to the left every well there is right around 8 million.

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Permalink Reply by wyalusing jim on April 6, 2013 at 2:29am

not sure where you're finding that matt, but i havent seen it at all.

everyones' results will certainly vary. some may never receive any royalties at all. it's the luck of the draw.

but any landowner in good shale will receive royalties far in excess of their bonus payments. the better the R%, the better their results.

thinking as i type...if landowners are in large units, over 1000 acres, their royalty payments will be much smaller. in those cases the payout may be smaller and will certainly take longer to exceed bonus amounts. maybe that's part of what you're seeing.

but in those cases you have to extrapolate to get the complete picture. multiply the royalties by the total number of wells expected to be drilled and you'll see what i mean. remember, those large units will eventually have twice as many wells in them.

this may sound a bit optimistic, but i figure acreage in good shale, with a good lease and a good R%, will have EUR's between $100k-$150k per acre. acreage with a minimum R% and deductions will pay about half of that.

boil that down, and i figure that 10 acres oughta get you a million over the life of the play, give or take.

wj

 

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