Royalty amounts

So I know this has been beat to death, and I'm aware of the variables involved, and also the resulting variations in royalties...........BUT......... A person I know who is in a unit currently being drilled was told by someone with the drilling company that he could see $50,000 per MONTH in royalties.  He owns 60 acres.   Is this even possible for a Utica well??   Even if it was a great producer, and the well had several laterals, and it was a small unit, it just doesn't seem likely to me.  They told us when we signed leases that the signing bonus was "chump change" compared to royalties, but that amount just doesn't seem possible.  By that I mean I can't wrap my head around a gas well making so much $$ to where they could afford to pay one landowner that amount.   I asked again if he meant that amount is what HE could see, or what the whole UNIT would see, and he said again he was told this is what he could be getting.   Oh and the kicker?   His property was HBP by an old Atlas well, so he's at the 12.5% rate also!!

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Permalink Reply by bungalow_steve on January 8, 2014 at 12:57pm

Josh, They resell them quickly, they are not holding on to the minerals for 30 years.They want lots of turnover. If you buy for 10K, and sell for 12K next month, thats 20% profit. Do that several times a year and your getting 100% annual profit on your cash. They buy the minerals, put them on a list,distribute the list to accredited investors (net worth >1 million), usually Doctors who have more money then they know what to do with buy them. Doctors tend to be terrible investors, but when your making 500K/year you can recoup quickly.

Permalink Reply by Mark McGrail on January 8, 2014 at 1:10pm

excited,

Calm down and don't worry (be happy).

Could your friend see this amount of royalty ? There are many variables, for instance the size of the drilling unit, and then how many laterals are drilled on the unit.

A friend of mine has property in a 138 acre drilling unit, all of the acreage in the unit is his ( makes this easy for making an example). The initial production (IP) from the well is 2,300 bbl oil equivalent per day , so about $216,000 per day or $6.5 million a month. At 12,5% royalty the royalty to the land owner would be approximately $ 810,750.00 per month. 60 acres would receive $352,500 a month.

If this was a 640 acre unit the math would be $1,270 X 60 acres = $76,000 +/-.

So technically it is possible for your friend to realize $50,000 per month (IP). I have seen less I have seen more. I emphasis "technically". Look at it this way, who ever told your friend that the royalty was more than the bonus money was correct, the real money is in the royalty. The way I look at it, this is found money so no matter what the amount paid it is more than your friend was receiving before the well began producing.

One caveat, remember a landowner could lose up to 30% to post production costs (PPC). This is why I always caution when negotiating a lease that the landowner not focus too much on the bonus money. Since the real money is in the royalty the real monetary items to be negotiated are the royalty percentage and solid wording to assure a true gross royalty. 

Permalink Reply by Kevin in Belmont County on January 9, 2014 at 2:28am

Please take into account that these wells at least the wells in the wet gas window are being choked back drastically. I was told this by a Mark West line inspector first hand. He said that the infrastructure will be lucky to be in place in the next six years to handle the volumes of wet gas. The unit that I am in, the initial well tested at 20Mmcf per day and is being choked back to 7Mmcf per day, at least that's the number I was last given by O&G company. He explained to me there are a lot of reasons the wells are choked back, but the main one was just the inability to handle all the gas. He told me to do the math on all of the O&G wells have tested at, and then compare them to what the facilities are able to handle. I did and he's right at current levels the math just doesn't add up. I guess my point is don't pay a lot of attention to what a well test at, it may indicate the strength and quality of a well. But the technology is not in place yet to process it at that rate. And from what I was told you do not want to pull on a new well that hard any way because it can lower the production in the long term.

Permalink Reply by Booger on January 9, 2014 at 5:19am

what kevin in Belmont says about choking is a very good point.........we see these huge IP's and dont seem to jive with the (limited) production reports.......it's either choking - or massive and speedy decline.

....those folks offering big bucks to buy your minerals can't be extremely foolish.........they may never get any returns on a significant portion of the acres they are buying.........they have to be expecting huge returns on the rest.

Permalink Reply by Philip Brutz on January 9, 2014 at 5:27am

Does choking the well back to 7Mmcf per day increase the lifespan of the well?

Permalink Reply by Kevin in Belmont County on January 9, 2014 at 6:06am

Philip,

The way it was explained to me it does in couple ways. First and obviously the gas isn't removed from the shale as quickly. The second way that was explained to me by the Markwest line inspector, was that if you pull on these wells to quickly before they stabilize, you will also pull a lot more of the sand and other materials out that are meant to be there to hold open the cracks for the gas and oil to be released from the shale. I do not claim to be an expert on drilling or developing a gas well and I have no experience in doing so. I am only repeating exactly what was told to me. I know the guy was legit because I was speaking with him on the Markwest pipeline while they were purging them after completion. He said he had about 25 years experience in helping to develop O&G fields across the country. He also stated to me and my fiancé that they have more pressure coming from these wells than they know what to do with. His words not mine.

Permalink Reply by Philip Brutz on January 12, 2014 at 2:20am

Kevin, that MarkWest pipeline runs across my property.  Did the inspector have a guess as to when it will reach capacity and they install another one?

Permalink Reply by Kevin in Belmont County on January 12, 2014 at 5:13am
Philip,
The evening that I spoke with him they were purging the lines going to the north. He told me the next day they were going to purge the lines going to the south toward Noble county. He didn't mention any other lines being added specifically, but did say in the future they were going to have to add more, bigger and thicker walled lines to handle the pressure.
Permalink Reply by Philip Brutz on January 12, 2014 at 6:43am

I hope that the current line is up to handling the pressure.  I made MarkWest put the line in on the other side of the hill from my cabin site.  I witnessed a gas line explosion up here in Cleveland.  Flames shot about 100' in the air and melted the vinyl siding off of the houses a block away.  The telephone poles turned into charcoal.  Fortunately no was hurt.

Permalink Reply by jnm on January 8, 2014 at 3:47pm

Carroll county    12.5% gross lease   I have 6.7% of unit; 2 wells; I received average of $95.30 per acre per month for 2013

Permalink Reply by Todd on January 8, 2014 at 5:22pm

Thanks jnm.  I also have a 12.5% gross royalty lease and am waiting on pipeline.  How many acres in your unit?

Permalink Reply by J. Kinney LandRights on January 13, 2014 at 10:33am

Thanks JNM for sharing ACTUAL numbers.

  I don't think people should be talking about "I have a friend who heard from a bother that his cousin knows a guy who knows a guy" that got $50,000 per month.

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