Comment

Comment by Dan on September 10, 2011 at 8:10pm

Scott, I've been wanting to answer that question too. The problem with the Penn State royalty calculator is that it is for a dry gas play so it has nowhere to enter in the liquid component of a wet gas play like we have.  We can convert the liquids to effective cu. ft of gas to include it, but that doesn't take into consideration the higher price being paid for oil per btu. I went in and modified the calculator to handle a wet gas situation. You can get a copy of it here. (Wet_Gas_Royalty_Calculator.xls). Now using that, if I put in the 177.4-acre unit, and $4.20/Mcf @ 6.1MMcfd, and $91.86/Bbl @ 59 Bpd, and the 12.5% royalty, I get the first day production royalty as $3879.97, or $21.87/acre. However as I said below, this is not realistic for production, so to answer your question, the actual revenue is predicted to be around $200/month/acre for the first year of production, $150/month/acre for the second year, etc.

So the North American Coal Royalty Company, who owns 100% of the minerals in that unit, if they do have 12.5% royalty interest, could average 200 x 177 = $35,400/month over this first year, and Chesapeake, who would get the other 87.5%, would average $247,800/month over the year.

Comment by Dan on September 10, 2011 at 6:48pm

AT, you are right that a larger drilling unit that is fully developed will have higher total revenue than a smaller fully developed drilling uint.

Every new leg will be a new well. They will all be drilled from the same pad, just moving over a few feet to drill the next one.  For this current well, they sized the drilling unit to match the drainage area, so the 177 acres is a long rectangle shape that lies right on top of the leg. In doing this, the royalty is not diluted.  If they continue this practice with the other legs, then each one will be a new drilling unit not overlapping the others, each with a new acreage over a new drainage area, so the production should be something similar.

However that is not how people are expecting drilling units to be formed as developers rush to hold acreage by production.  More likely they will form the drilling unit to be the eventual size of the 6-8 wells/legs that they intend to drill from the pad, like the 640-acre (or 1280-acre) numbers we are seeing in our leases.  In that case, when they drill the first well, the entire unit is held by production indefinitely and they can go off to drill somewhere else for a while.  Meanwhile even though maybe only 177 acres is physically being drained, the royalties are being diluted among the whole 640 acres of mineral owners.  The bad part about that is that the people actually being drilled on don't make as much money intially because all their neighbors in the unit are getting some of it, but the good part is that it all works out in the end, because when they do come back to develop the rest of the unit, they will share the royalties of that well too, even though it's not under them this time, because the whole 640-acre unit shares the royalty each time a new well is drilled on the unit.

The real way to figure the per acre per day number is to divide the daily production by the actual area being drained by that well. Conveniently with the Buell well, the drilling unit is sized to match the drainage area at 177 acres, so we can divide the daily production by the unit size.

Comment by Dan on September 10, 2011 at 6:37pm

AT's calculation is for "day one" using intitial production numbers, and is including the liquids but converting them to the equivalent btu value of gas.  But it also assumes that this production is divided up over a 640-acre drilling unit, which would give the value of $7.45 per acre per day. However the drilling unit for the Buell Well is sized to match the drainage area from the well at 177 acres.  So using the 17.5% royalty, the $4.19/Mcfe price, and the published 6.5MMcfed initial production, the  revenue is $26.93 per day per acre!  This an interesting number, and useful for comparision with other wells' initial production values, but is going to not be realistic. This is partly because while it does count the btu's from the liquids it doesn't figure in the higher price/btu paid for the liquids. Mostly though it is unrealistic because intitial production is a lot higher than actual production.  The good royalty calculators try to extrapolate off of the initial production numbers to show what the daily values will probably be, based on past well production of similar non-conventional wells.  Using MS Excel Royalty Calculator that $26.93 is predicted to be more like $8.08/acre/day during year one of production, $6.06/acre/day in year two, etc.  Still this is a significant revenue!

Comment by scott jackovitch on September 10, 2011 at 11:44am

Could someone calculate what the Buell well is paying in royalties ?  With the numbers we have from the report and for calculation purposes lets plug in the minimum 12.5% royalty. Can anyone out there in the shale gas world tell us what the monthly royalty payment would be for one month ? Please include the dry gas , the wet gas , the oil and whatever else there is that should be figured in.  

Comment by AT on September 10, 2011 at 10:48am

Dan,   2 additional 177 acre or so wells on that pad in a theoretical 640 acre drilling unit would make the daily production 3 wells x 6.50 MMcfe = 19.50 MMcfe per day.

Comment by AT on September 10, 2011 at 10:38am

Dan,  So as far as total royalty dollars using the Penn State royalty calculator and the production numbers from the 177 acre Buell well, a landowner in a 640 acre drilling unit should reasonably expect approximately 3 times the dollar amounts generated by Penn State royalty calculator (2 more wells drilled on that pad at a later time that produced the same). Hence, the numbers you had plugged in to the Penn State royalty calculator only represent 1/3 of what should be expected from a 640 acre drilling unit. Do you agree?

Comment by AT on September 10, 2011 at 9:27am

Dan, Wouldn't another very important factor be that the Buell well currently only has one horizontal leg that is draining 177 acres rather than multiple horizontal legs draining 6 times that amount of acreage? Theoretically, shouldn't that well be producting 6 times those numbers? Your thoughts?

Comment by Dan on September 10, 2011 at 8:43am

Randy, yes, that's what I would deduce from that report.  That's a little thicker than is predicted for that spot on the ODNR Marcellus Thickness Map, which shows it to be just under 40' thick.  Still it's in the ballpark of what they expected to find.

Comment by Shower Bath on September 10, 2011 at 7:21am

A short article on Consol's sharp moves.

http://www.philly.com/philly/business/129568673.html

Randy

Comment by Shower Bath on September 10, 2011 at 7:18am

Dan, Looking at the completion report, can you tell how thick the Marcellus was? Is it 54' thick?

Randy

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