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Permalink Reply by Sam Douglass on July 19, 2010 at 11:53am

I have not read the proposed law which is likely to change, knowing how lawmakers go about things. One thing it might provide is that in establishing a unit, the company can not leave a small property owner out so that the gas is not taken by drilling on and under neighboring property. This is less likely to happen, of course, with a tight formation like the Marcellus that does not allow drawing of gas from great distances.

The proposal does provide for 3 methods of compensation as I understand it for the property owner who is forced into the pool:

1. The same thing the neighbors got in negotiated deals - which might not be all bad if the neighbors were astute.

2. If the forced party has the cash to invest, in his/her share of the operating costs, the forced party gets the same thing that the operator gets which is likely to be a lot more than what the neighbors got.

3. If s/he does nothing, he will get the same thing as 2, except that instead of just paying his share of costs the operator would earn back 4 times that amount before participation in the profits begins. This is not an unusual provision in voluntary operating agreements in which several parties agree to share in the proceeds after paying the appropriate share of the costs. In such cases, if the participant fails to come up with his/her share of costs in a timely manner and the operator has to advance his/her share, the operator is able to earn back a multiple of those costs, before the laggard participates in the profit. Typically it is times the costs rather than 4.

The good thing is that these Marcellus wells are not particularly speculative. Has anyone heard of any Marcellus well that failed to produce? And the first day's production averages over 4000 mcf times say $5 price etc. It may not take long to pay off the share of costs or a multiple of it.

If the party has say 20 acres in an 800 acre unit, his share of costs would be 1/40th etc.

1.

Permalink Reply by Ann Ticopa on July 19, 2010 at 7:14pm

True, we do not know what the final legislation might be, but we do have the draft as an indication of what's planned for PA.

"1. The same thing the neighbors got in negotiated deals ..."
I would expect the lease included with the pooling application would be the standard boilerplate (unnegotiated) lease offered by the OG company, with the standard payments. For example, East would offer $1,500/15% in most of Tioga Co..

"3. If s/he does nothing, he will get the same thing as 2, except that instead of just paying his share of costs the operator would earn back 4 times that amount before participation in the profits begins."

Imo, the 400% risk penalty is unreasonably punitive. As you indicate, what's the risk of a Marcellus "dry hole"? At least be frank and call it what it is, a "non-consent penalty".

I'm not as confident as you are that the penalty would be "paid off" in a timely manner. Some ballpark arithmetic:
2,000 (MCF avg 1st yr) X 365 (days) X $5 (per MCF) = $3,650.000 (1st yr revenue)
That is, the first year's production would approximate the first 100% of the cost of the well. The gotcha is the steep decline of shale wells; they go off a cliff in the first year, down to 30% of initial production. By the end of the third year, an initial 4MMCF well would be down to 0.63MMCF. I realize this "analysis" is simplistic and likely flawed, but I couldn't find an online risk penalty calculator. Ideal would be one that included a life expectancy table ... call it a "Likelihood of you ever seeing a dime" calculator.

Permalink Reply by Lynn Wigglesworth on July 20, 2010 at 1:28am

The way it's currently written, the forced pooling lease is whatever the O&G Co. wants it to be, no negotiation. That would be a boilerplate lease, 12.5% royalty, and no bonus.

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