Replies to This Discussion

Permalink Reply by Dan on June 6, 2011 at 1:14am

What Mike Williams at the Mineral Division told me a few days ago was that they were pressuring Chesapeake to provide the numbers sooner than later, and that there was a disagreement about what the date for "completion" of the well was.  The current policy is that the gas company must supply the production information no later than 60 days after completion of the well, so understandably, Chesapeake is claiming a later completion date than the Mineral Division is.  (Mr. Williams says that kind of abibuity is about to be removed when they complete the rewriting of the Ohio Administrative Code that deals with such things, and that should be any day.)  Given all that, the range of days that the information will show up could be from now to around 3 weeks from now, unless Chesapeake finds some way to delay further.

Permalink Reply by Peter Schueler on June 6, 2011 at 1:25am

Here's a good article that discusses the production profile for marcellus wells,

http://www.energybulletin.net/node/52506

An excerpt from that article reveals the rapid decline rate for the Marcellus shale,

"The biggest news of the day was the disclosure of a Marcellus production type curve based on production history from the 24 wells that have been producing for greater than 120 days and Range's internal estimates. Based on the graphical presentation, it appears production declines are around 75% in year 1, 35% in year 2, 25% in year 3, 12.5% in year 4, and 10% in year 5. Range is also assuming a 40-year average well life and a 6% terminal decline. Other data points include: initial production rates of around 5 mmcfe/d; gross recoverable reserves of 4.4 bcfe; well costs of $3.5 million, and an average royalty of 15%."

 

It would be wrong to use the marcellus profile for estimating the Utica potential but the reality is that we can expect the pattern will be similar, that is a rapid decline in initial production. If the Utica is a wet gas as currently thought, the decline rate may be somewhat lower but that's only speculation.

In calculating the royalty for a well you need to consider the unit size. Most leases will allow the producer at least 600 acres per well. For example if you have 100 acres and If your acreage is unitized into a 600 acre unit you will receive 1/6 of the total royalty. If the royalty is 18% you would receive 3% of the total production from the well. Also important is that even though a single well may be unitized on 600 acres (or more if the lease allows) a single lateral from that well may only drain the hydrocarbons from 100 to 200 acres. That fact will create the possibility for additional laterals to be drilled from the same pad.

Another reality before you count your royalty $, the fed and state tax may approach 40%. Just don't spend it until you get with a good tax accountant. I believe royalty owners are allowed the standard depletion deduction of 15%.

Permalink Reply by Dan on June 6, 2011 at 2:57am

That's a real interesting perspective in that post you linked to Pete.  It brings up the point that we really don't know how long these reserves will produce.  All we have are some initial production numbers, some rate-of-decline data over the first few months, and from that we are trying to extrapolate decades of production.  What if the fracing techniques are so potent that they are depleting the gas from the shale faster than we thought?  Maybe the higher initial production numbers just mean that the gas is draining out that much faster and will be gone that much sooner. Maybe these wells will only produce for an average of 8 years.

 

That article is over a year old now however, and there should be lots more data available by now to look at the actual production numbers over time of Marcellus wells.  One could surmise that the fact that Range and Chesapeake and all the others are still very actively going after leasing and production indicates that their geologists have scrutinized these numbers and decided that everything is good, and to some extent that must be true.  The problem is that we can't expect to get the unbiased truth from them because at the same time these gas companies' financiers are wanting to play up the value of these reserves.  The knowledge that these reserves will only produce for a few years instead of decades could put a large damper on investor excitement about these plays. As a royalty owner, that would put a damper on my excitement anyway.

 

Permalink Reply by Peter Schueler on June 6, 2011 at 3:32am

Dan, Here's another decline profile, for the Haynesville formation

http://shale.typepad.com/haynesvilleshale/decline-curve/

 

This excerpt suggests that limiting initial flow rates have  reduced the decline rates

“We now have four wells with over 360 days of production, 13 wells with over 180 days of production and 22 wells with over 120 days of production. Based on the extent of this database, we now believe that restricted rate practices support a change in the average first year decline from approximately 80% to 85% to a first year decline approximating 45% to 55%, with some wells displaying declines that could be as low as 25% and 30%.”

 

Perhaps limiting the initial flow rates reduces the tendency for the fractured formation to become plugged and/or lose proppant needed to maintain the fracture gaps.

 

Here's another article

http://info.drillinginfo.com/urb/haynesville/uncategorized/2010/03/...

Permalink Reply by Dan on June 6, 2011 at 4:43am

Pete, I understand the concept that if you slow down the flow, you might prevent proppant from being blown out of the frac gaps, but isn't the frac pressure higher than the existing pressure, so that once frac pressure is off, the frac gaps should close down on the proppant and hold it tightly in place? What seems more likely is is your first idea that if you slow down the flow you might prevent loosening of particles of shale that could plug the frac gap pathways. However, couldn't the drop in decline just be the result of restricting the flow, so the decline is simply being spread out over a longer time?

 

How is flow restriction regulated? Can flow be restricted for any reason? Couldn't a substantial flow restriction become effectively a version of shutting in a well?

Permalink Reply by Peter Schueler on June 6, 2011 at 11:27am

Dan, I agree with your thought that loose shale may be the most likely cause of fracture pluggage. Flow from the well can be controlled by fixed orifice and/or variable  restrictions (valves).

I have no idea what may evolve for an optimum well production plan.  For the producer there is an incentive to get rapid payback of their investment to fund additional well drilling. On the other hand there is a longer term incentive to maximize the EUR ( estimated ultimate reserve) for each well if in fact their is a benefit from restricting initial flow rates. The producer's financial analysis needs to evaluate the tradeoff of slower revenue recovery vs a larger and longer revenue stream. This analysis will require an interest rate discount of future revenues.

As a royalty owner I would prefer the controlled/slow draw production to provide a longer and less drastically declining  revenue stream. Also to reduce the tax consequences of exceptionally high first year income.

Permalink Reply by Josh on June 6, 2011 at 4:22am

http://www.hydrocarbonprocessing.com/Article/2843163/Latest-News/Sh...

 

Interesting news from Shell!!  ("near marcellus?")

Permalink Reply by Stan Glover on June 8, 2011 at 6:46am

Great News out of Plastics News - It looks like Shell is coming to Appalachia! The Plastics Industry is a huge consumer of Nat. Gas for feedstock to produce various resins and it appears that at least one of the "Biggies" feels that our Marcellus/Utica gas is significant enough to bring an Ethylene cracker to the neigborhood. This is just the sort of macroeconomic growth this region needs. Selfishly, I hope we see it in Harrison County!  See below.

 

Ethylene cracker coming to Appalachia

By Frank Esposito | PLASTICS NEWS STAFF

Posted June 7, 2011

HOUSTON (June 7, 4 p.m. ET) -- In a move that would have been extremely unlikely even five years ago, Shell Oil Co. has announced plans to develop a cracker making the plastic feedstock ethylene — and possibly downstream polyethylene units — at an undisclosed location in Appalachia, which includes parts of Pennsylvania, West Virginia and Ohio.

The decision is being prompted by discoveries of massive amounts of natural gas in a geological formation known as Marcellus Shale. Natural gas can be used to make ethane, which is then converted into ethylene. The new discoveries are leading the industry’s top firms to reconsider their approach to ethylene and related plastic products in the region.

In a June 6 news release, officials with Houston-based Shell said PE is “the leading option” for downstream derivative choices. They described PE as “an important raw material for countless everyday items” and added that most of the resulting PE production will be used by Northeastern industries.

Officials added that North American PE demand is expected to grow, so the economic and efficiency benefits of a regional cracker “make this configuration attractive.”

“U.S. natural gas is abundant and affordable,” Shell Oil President Marvin Odum said in the release. “With this investment, we would use feedstock from Marcellus to locally produce chemicals for the region and create more American jobs.

“As an integrated oil and gas company, we are best-placed in the area to do this.”

Other companies such as Dow Chemical Co. and Westlake Chemical Corp. recently have announced ethylene expansions to take advantage of the new natural gas, but Shell is the first to place such a project in the Northeast.

Shell owns or leases the natural gas rights for 700,000 gross acres in the Marcellus. The firm operates an office in Warrendale, Pa., and employs almost 250 in natural-gas-related businesses across Pennsylvania. In July 2010, Shell acquired East Resources Inc., a Warrendale-based oil and gas supplier.

Shell currently produces ethylene and related feedstocks at U.S. plants in Deer Park, Texas, and Norco, La.

Permalink Reply by william on June 8, 2011 at 3:06pm

I'm hoping Harrison county as well but I imagine a location closer to the Ohio river.

Permalink Reply by Buckeye Fan on June 13, 2011 at 8:40am

COTULLA, Texas – Bill Cotulla's hand rests on the handle of his great-grandfather's cane, his gravelly voice recounting the changes in the small town his ancestor founded and named for himself some 130 years ago. Almost overnight, it has transformed from a South Texas backwater to the hub of a major oil boom.

"You can't be choosy," the 75-year-old muses, considering the expanse of new RV parks, hotels and restaurants. "The oil companies that are putting up buildings are keeping nice yards."

For generations, Cotulla has been a town where even the paved roads had the aura of the dusty, saloon-lined paths from old Western movies. Cowboys, ranchers and shop owners tied their livelihood to the hunting season. Young people left to escape double-digit unemployment and poverty rates.

Now, the challenge is all the people pouring in. Cotulla, about 90 miles south of San Antonio, and nearby towns are rushing to house hundreds of workers and approve plans for apartment complexes and industrial parks to keep up with the development of the Eagle Ford shale formation, one of the most plentiful new oil fields in the country. After several years of preliminary work, the project is fully under way and sales tax revenues are soaring. Municipalities are paving roads, laying water lines and creating parks while trying to avoid being overextended when the boom tapers off.

"There's still more people coming," said Jerry Cox, owner of JJ's Country Store, a restaurant and convenience store on the main highway that runs through the town. "It's like Davy Crockett at the Alamo. You gotta think, are they ever going to stop coming?" he added, referring to the onslaught of Mexican soldiers who overwhelmed the fort.

The economic transformation is the result of a new drilling method, hydraulic fracturing, combined with horizontal drilling, that allows companies to extract oil and gas from impermeable layers of shale. Major industry players have joined the Eagle Ford project, including Anadarko, Range Resources and Shell. Chesapeake Energy of Oklahoma City signed a multi-billion dollar deal with the Chinese state-owned oil company to raise cash to drill in the shale.

No solid estimate of likely production has been made, but the American Petroleum Institute said the field should yield billions of barrels of oil. The project already supports 12,600 fulltime jobs, and by 2020 could account for $11.6 billion and nearly 68,000 jobs in a 24-county area, according to study in February by the University of Texas' Center for Community and Business Research.

Initially, some residents were skeptical about the windfall. In this barren land of mesquite trees, cactus bushes, rattlesnakes, feral hogs, coyotes and bobcats, oil booms_ the real ones_ always happened elsewhere. But the fat bonus checks and royalties rolling in to mineral rights' owners have changed attitudes.

Cox renovated the kitchen in his restaurant and put down new flooring. He desperately wants to hire at least six people. A friend who began building a Best Western on the Cotulla highway had all the rooms booked before construction was complete. People are driving around town in new cars.

Larry Dovalina, interim city administrator of Cotulla, home to barely 3,500 people, said new requests for water and sewer services are coming in daily. The power system is overburdened. Sales tax revenue rose from $445,000 in 2009 to more than $600,000 last year.

Some residents, like Mariane Hall, manager of the Cotulla Chamber of Commerce, are worried about possible side effects from the boom, especially ground water contamination. The development uses a technique known as fracking, which injects chemical-laced water into the shale to push out the minerals. Environmental groups and the Environmental Protection Agency have expressed concerns about the method. But the industry insists it is safe, and residents generally say they'll rely on federal and state agencies to enforce environmental regulations and provide oversight.

Similar booms have happened in other shale regions — most notably Pennsylvania, North Dakota, Wyoming and Montana. In the places with mostly natural gas, however, production is slowing as the price of natural gas drops.

In South Texas, oil courses through the Eagle Ford's geologic layers — just as the price per barrel lingers at or above $100.

The area, home to barely a half-million people in some three dozen counties, has been one of the nation's poorest. Several counties have poverty rates over 30 percent — three times the national average.

"We've gone through a long dry spell," said Jill Martin, owner of Ben's Western Wear shop in downtown Cotulla.

At times, Martin thought she might have to close. The store relied on online sales and the hunting season, when hundreds descend on the area for its white-tailed deer.

Now she knows she should stay open later and on weekends but can't find enough employees. "It's just been amazing from no activity to ...," Martin says, gesturing at the commotion in the small shop packed with cowboy boots and plaid shirts, along with the steel-toed boots and flame resistant clothing coveted by the oilfield workers.

Sixteen miles north, Dilley, sits just off the shale. Yet plans for a 60- to 90-room hotel have been approved, city administrator Melissa Gonzalez said. Three RV parks are going up. Recently, a man offered to buy the town's airport.

Forty miles away in Carrizo Springs, 72-year-old Doris Jackson's RV park has grown from 42 units to 125 in the past two years. The supermarket is packed and runs out of food. She has one well and is getting thousands of dollars in royalties every month. And she's about to get a second well on her property.

"What are we gonna do with all that money?" Jackson says shaking her head. "I'll still buy my clothes in the second-hand shop like I've always done."

Permalink Reply by Rod Dietrich on June 17, 2011 at 1:39am

4Th Meeting Scheduled for the Franklin Township Land Owners, and neighbors on OIL &  GAS Lease Information.

Rod Dietrich, Bill Garner, Jim Milleson,, Robert, Mark, and Nick, Personally invite you to join our group meeting scheduled for Saturday June 25th, 2011 from 7:00 to 9:00 PM, at the Twin City Sportsman Club on Garner Road, ( 1 mile off of Moravian Trail Road )  Bring friends and neighbors, or both. All are invited. 

Theme for the meeting, UNITED WE STAND, DIVIDED WE FALL.

Bring all land information, deeds, plots/maps, surveys, ect.  Interest has really peaked from the major oil and gas companies in Harrison County, over the past several months, and out timing yo get a GREAT offer couldn't be better.

If you need directions either call 888-843-3677 or 330-987-1252

Permalink Reply by william on June 19, 2011 at 6:39am

 I have been informed by a friend and landowner in Jefferson county that an offer was made by Mason-Dixon now bought out by Marquette for their 100 plus acres. The offer included a pugh clause both horizontal and vertical. $3000/acre with a 17.5% royalty for a 3-year lease.

Also, I have been hearing that a rumor is circulating that the results on the Buell well will be released soon(within 2 weeks). If the numbers are good I think things will get very interesting.

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