Operating Gas Well Value

I own the royalty interest to two old WV gas wells, drilled in 1980 and now each well is producing about 100 Mcf per month. A coal company wants to buy my 1/8 interest in the wells so they can be plugged before underground mining starts.

My limited research indicates a fair sale price for a mature well is in the vicinity of the sum of the last 24 royalty payments. I recognize the coal company may be willing to pay more than a reasonable market value for an operating well to serve their own interests, but first I need to determine reasonable market value.

I would appreciate comments from those more knowledgeable than me. Thanks,

Richard

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Permalink Reply by Sylvester Deal on May 26, 2011 at 6:29pm

Richard,

In the multiplier method you describe, the value is set by the negotiated multiplier.  Two years is a rock bottom multiplier, 3-5 years is typical.  Start higher, in your case they expect to make money from coal, not oil and gas, unless they really want the deeper oil & gas plays (most are below coal in Appalachia) for themselves, the Marcellus is way below the coal. 

 

The method is used for simplicity because reserve estimates (values) by engineering/geological methods can be difficult without proper data (gas, oil, and water production rates; well shut-in pressures; well geophysical logs; cores) which may not be available or in a compatible format and comes at a high cost.  This method does not include the future potential of other plays that may develop.

Long-lived production history of wells in the Appalachian Basis led to production decline curves (plots of production versus time) as the normal reserve estimate method in mature wells (low production rates, low annual declines, nearly stable production).  Results easily matched by the multiplier method.

 

Where is the lease located?  In most of the eastern coal states, Coal is King.  Most oil and gas activity in coal areas are subject to the approval of the coal operators.  I would question the stated reason for the company's interest in purchasing your royalty interest.  Mineral ownership is a property right, a royalty interest is established by a lease and can be bought and sold, but when the wells are plugged and production ceases the lease expires as does the royalty interest.  But the mineral estate is still yours to lease again.  So, be sure of what is being sold.  Regardless, neither mineral or royalty interests have a say in the abandoning of a lease, the operating company makes the decision.  If the coal company has the working interest in the leases, they can plug the wells without your approval.  Going after coal they don't want new wells, they don't want to plug and give you a chance at a high dollar bonus for Marcellus lease, they don't want to pay a lease bonus to tie up the lease themselves.  They're things un-said, they're low-balling the deal.

 

A popular clause in leases of that era was giving the mineral owner the right of first refusal to buy the well for personal use at some value if the decision to plug was made.  Generally, landowners would buy a well to maintain 'free house gas' to their homes.  West Virginia and Ohio made it fairly easy to accomplish, but with a caveats brochure that explained the liability being assumed and environmental responsibility to maintain a safe well.  Check your lease.

 

Good negotiating.

SD

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 27, 2011 at 4:19am

what wisdom you have shared Sylvester....I just happened to stop by and read this interesting discussion...and thank you for sharing with us at gomarcellusshale...this is the reason we all like this forum cause people are helping people in making decisions that are real important and somewhat uncomfortable due to the level of a lack of knowledge of the O & G field and other mineral mining practices and tactics.

thank you Richard for introducing this topic...

Permalink Reply by Richard Fanelly on May 27, 2011 at 6:48am

SD: Thanks for the info. My situation is rather complex because I am also negotiating the coal lease (Sewell metallurgical coal seam) under my land and negotiating an amendment to my O&G lease to allow the gas well operator to unitize my lease for Marcellus drilling. I strongly suspect the well operator will never cease production in order to avoid current lease termination, which raises the interesting question of what "so long as gas or oil is produced in merchantable quantities" (O&G Lease) legally means. 

Another complication is that both wells were drilled to the Elk sands at about 5000'. I was advised after the wells were completed that the logs indicated two good gas shows at shallower depths. Most of the wells around me produce from the Benson sands at around 2000'. The shallower potential plays from my existing wells greatly complicate well valuation. Moreover, I fear that if I execute an amendment to the current lease to allow unitizing, the operator will plug the existing the wells thereby abandoning the shallower sand plays because the operator is dedicating all of his capital to Marcellus drilling. Additionally, since the wells have changed hands several time after the wells were drilled, the current O&G leaseholder and well operator may not even be aware of the shallower sand play potentials, from which I would receive all of the royalty.

My lease does not give me the option of a buy-out; the land has been unoccupied for over 70 years.

My situation is a complex puzzle that I will mull over until either the coal company or the gas company starts pounding on my door yelling "I need a lease NOW"!

Thanks greatly for the info to one piece of the puzzle. Any other comments would be appreciated

Richard

 

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 27, 2011 at 7:58am

Hi Richard,   just reading your reply...you said,

"My lease does not give me the option of a buy-out"    Are you speaking of a right of first refusal clause or what does 'the buy-out' term mean for a lessor?   Just for info.   thanks.

Permalink Reply by Richard Fanelly on May 27, 2011 at 2:06pm

VG: No right of first refusal clause in the Lease.

Richard

Permalink Reply by Sylvester Deal on May 27, 2011 at 12:41pm

Richard,

It's capitalism, paying quantities are determined by the operator.  The current lease is more attractive to the operator than a new one with a bonus payment and probable higher royalty.  The existing wells won't be plugged until another well is drilled to hold the lease by production.  As for the shallow pays, they are probably of a lower potential than the Marcellus presents and can wait for future development.  It takes several Benson, Elk, Riley wells to match a successful horizontal Marcellus well.  If you don't modified the lease to allow unitization, you have what you have.

The coal company interest in the mineral rights is probably an effort to flog the O&G operator with a bigger stick to get the wells removed to simplify mining.  Regardless, if surface strip, underground continuous, or longwall mining, wells are a headache for coal operators.

 

Good Luck

SD

Permalink Reply by Richard Fanelly on May 28, 2011 at 2:09am

SD: Thanks again for the info. Do you know how large of a pillar must be unmined around the the pipe of an operating gas well - radius from the pipe? Secondly, do you know how large of a pillar must be unmined around the pipe of a properly plugged, non-producing old gas well pipe as required by WV law and regulations?

My coal seam is very valuable - currently selling for about $150 per ton. I have one of very few "windows" not already owned by the coal company for miles around me.

Richard

Permalink Reply by Sylvester Deal on May 28, 2011 at 5:04pm

Richard,

A coal pillar size is selected for load capacity to control subsidence, so the substrate, coal, and overburden properties have an impact.  There doesn't appear to be a stated minimum size for support or for well protection (see WV Code Chap22C Art8 Shallow Gas Well Review Board).  WV Code states that more than one well can penetrate a pillar as long as surface topography allows.  A coal operator is not required to increase the planned size of a pillar to allow for drilling .  An experienced miner may be able to give you a range seen in your area.  I understand your concern on the coal, I'm familiar with a coal deal in Barbour County several years ago with reserves of 1700ton/ac-ft.

 

As for valuing the behind pipe zones, find nearest wells completed in those zones to get an idea of the potential value.  The WVGES website (http://www.wvgs.wvnet.edu/oginfo/pipeline/pipeline2.asp) gives production if you know the API permit number.  If you don't have that number, use WVDEP-GIS website (http://gis.dep.wv.gov/mapping/oog/oog.html) to find well permits if you know the operator in the county.  Production data may not include the earlier years.

 

SD

Permalink Reply by Richard Fanelly on May 29, 2011 at 1:40am

SD: Thanks again.

Richard

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