Future royalties/decline rate....something to ponder

I've heard it all, but what's the truth. Does anyone really know how fast and how much royalties will decline? I have seen the decline (with mine) within the first year, but will they eventually stabilize? When I first signed, I was told the royalties would stay high for 4 years before a drop occurred. People are being told the wells will produce for 20 years or more. What would royalties be in 20 years? This is going to be very interesting.

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0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on April 27, 2015 at 1:27pm

Zack,

      Here is the typical decline curve (hypothetical example) that you'll see in well production which will match royalties if your produce doesn't get greedy.

http://geology.com/royalty/production-decline.shtml

Permalink Reply by Jeffrey Beunier on April 28, 2015 at 7:14am

Everyone previously mentioned decline rates, and that's going to be the main culprit impacting your check - obviously, an operator can manipulate this to a degree.  Look at Rice Energy, or Gulport's restricted choke program, your initial rates are much lower than what the well is capable of delivering (infrastructure may not be capable to handle an open flow on some of these wells) - but think of how long it takes a can of soda (or beer) to fizz out after being shaken if you only slightly crack the opening, then think of how long it takes for it to fizz out if you rip the entire tab open.

The good news is that outside of the primary or initial production, there has been alot of positive news on refrac's - in the Marcellus, Haynesville, Barnett, etc - Refrac's go back 20+years in teh Wattenberg field in CO.  The question I always wonder about, is if the initial decline curves off and this is just gas that was left behind b/c the formation plugged up, or they over estimated performance for some reason from the get go.  I always think about frac's as highways to the well bore, and just like all highways, they get pot holes and eventually need replaced or retired. 

At the end of the day, there are many factors impacting the decline rate and size of the royalty check, goals of the operator (pump stock, or maximize production), infrastructure, well design, refrac opportunities, choke settings, but at the end of the day, its not likely to hold flat for years and years unless the well is significantly choked from day 1, usually its a downhill ride, but there's always some unexpected bumps along the way, and occasionally a whole new path can open up (think about the Point Plesant under the Marcellus in PA/WV - nice surprise for alot of mineral owners). 

Permalink Reply by Tim Tarr on April 28, 2015 at 6:26pm

Price decline is much worse in my case. Production decline rate low (Wet Gas Marcellus, RRC)

22 months and only decline is Condensate. NGL and Gas up. Production was low to start.

  If a "normal" decline was in effect I figured RRC would lose plenty on the 3 Marcellus wells. In the last few presentations seem to be saying they are taking the slow and steady approach for maximum EUR. Now this would also help for a HBP strategy along with current pipeline capacity issues.

  Than add in those stacked pay plays and you get a much bigger HBP strategy (>3X).

  The Appalachian Basin is regaining its rightful position. ; ))

  If we can keep the tax and spend politicians out of this we will have a renaissance in our area.

Permalink Reply by Joseph-Ohio on April 29, 2015 at 12:08am
Tim,

On the surface it's looking to me like your well was being 'flow managed' / 'choked back' from the get-go (and still is).

What do you think is attributable ?

BTW, aren't 'Condensate' and NGLs the same thing ?
Permalink Reply by Jeffrey Beunier on April 29, 2015 at 3:07pm
NGL's aka Natural gas liquids are in a gaseous state at normal temperature and pressure - you have to run the gas stream through a gas plant to knock them out. Condensate is in a liquid state, it's sometimes referred to as natural gasoline. Usually easier to separate without having to resort to pressure, or temperature modifications.
Permalink Reply by Joseph-Ohio on April 29, 2015 at 9:54pm
Pretty much of a misnomer then to me - calling a 'gas' @ atmospheric pressure a 'liquid'.

A 'colloquial' term then it seems to me.

At atmospheric pressure it would be more accurate to call them 'Natural Gas Fluids' to me.

Oh well - such as it is - guess I'm up to speed.

Thanks all.

J-O
Permalink Reply by Joseph-Ohio on April 29, 2015 at 10:24pm
Actually, calling a 'gas' (at any pressure) a 'liquid' would be a misnomer to me - as I've learned the definition - any 'gas' ' can be described as'fluid' (but not 'liquid').

There's a 'gaseous' state and a 'liquid' state for certain substances.
Permalink Reply by Jeffrey Beunier on April 30, 2015 at 1:18am
Again, fair point - and with enough pressure or reduced temperature you get LNG. I guess it's just easier to say NGL instead of C3+, or list off ethane, butane, propane, etc.

As someone pointed out, as these fractionators/gas plants come online - the amount of NGL's should really start to pop. Problem is that there is so much of the stuff, that finding end users may become a challenge - look at ethane pricing - we flooded the gulf coast with the stuff.
Permalink Reply by Jeffrey Beunier on April 30, 2015 at 1:15am
Fair point, but then again, when is anything what it seems.
Permalink Reply by Tim Tarr on April 29, 2015 at 10:18am
Joe,
Yes, I thought they were "choked" from the start. Today on the RRC conference call the answers to the last question confirmed my thoughts. Getting max value from all assets. #1 to me is a max EUR and not max IRR as some operators do.
NGL's are Propane, Ethane and others. Condensate is ultra light oil. Removed by truck from tanks at the pad. Some condensate even still is removed downstream at compressor stations and even processing plant where the NGL are removed by Cryogenic processing.
Seems some operator's like to call Condensate "Nuisance Oil". For about 1st year that was about 50% of production on a dollar basis. Now only about 25%. But the NGL's have moved up to ~40%. By next year I expect NGL's will increase to +50% as access is added to foreign export by Mariner East full start up.
Permalink Reply by Joseph-Ohio on April 29, 2015 at 10:35am
Thanks for your reply Tim.
Permalink Reply by Tim Tarr on April 29, 2015 at 10:28am
Forgot to say that first NGL increase was when Mariner West went on line. Much Better pricing then Gulf Coast.

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