Bluebird topic here - what happens after a completion as a producing well?

Texas Mineral Rights Reeves County, TX
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Not to get the cart before the horse, but there is at least some data saying that all the leasing and drilling activity in Reeves County is bearing fruit.

So, let's say that you have leased your property, the lessee drills, completes a producer, and then what? Obviously there needs to be a way to get the production to market (pipeline). Given that problem is also solved (well, I said "bluebird topic"), then what?

1. You as lessor sign a division order specifying your percent interest (yes, it is already in the lease contract, but the division order is customary). The division order also specifies your taxpayer id or Social Security #. I'm pretty sure that this step is correctly stated.

2. I presume that, once the division order has been signed, a royalty check will eventually show up in your mailbox. Any way to predict when? Any way to predict how much?

3. Somewhere on another discussion topic in this forum, it was mentioned that a vertical well costs about $7.5M. When does the lessee recover that money? Does it strictly come out of his working interest (his 75% or 80% as stated in the lease contract)? Or can he also withhold part of your 20% to 25% until the cost of drilling the well is recovered? If he can withhold costs from your working interest, how much can he withhold?

4. Any way to manage or forecast the revenue stream from the royalty checks once things settle down? If your first royalty check is for, say, $1000, can you assume $1000 a month forever, or for ten years, or must you assume that you may not see another check at all? This is kind of important from a tax management standpoint.

5. Once production begins from a given well, does it continue more or less constantly, or can the lessee 'shut the well down' and await better market conditions, for example?

6. Are there other issues, or steps, that I don't know about or haven't mentioned?

As a side comment, this forum, and particularly this Reeves County discussion group, has been greatly helpful as I try to understand this strange new world (to me, at least). Thanks to all on the forum for their insights, past and future.

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Hi Bob,

Our well in section 141 started production in Feb 2011. We received our first royalty check for the first 3 months of production in June after that we received one check monthly. As far as production our well started low and increased for the first few months and steadily fell off. September and October fell off dramatically and we're hoping that it was because the price per barrel also fell. I'm new to this and would appreciate any info anyone has on this subject. P.S The checks are delayed 2 months ie..we were paid in Dec. for Oct. production. Thanks,

Rodney

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1. You as lessor sign a division order specifying your percent interest (yes, it is already in the lease contract, but the division order is customary). The division order also specifies your taxpayer id or Social Security #. I'm pretty sure that this step is correctly stated.

I agree.

2. I presume that, once the division order has been signed, a royalty check will eventually show up in your mailbox. Any way to predict when? Any way to predict how much?

Possibly as long as 6 months after the well is completed. Impossible to predict... very likely would be for several months’ production. Read ‘Don’t blow that first check!’... you likely won’t see one like it again (on this first well).

3. Somewhere on another discussion topic in this forum, it was mentioned that a vertical well costs about $7.5M. When does the lessee recover that money? Does it strictly come out of his working interest (his 75% or 80% as stated in the lease contract)? Or can he also withhold part of your 20% to 25% until the cost of drilling the well is recovered? If he can withhold costs from your working interest, how much can he withhold?

From the reports I’ve seen, vertical wells in Reeves are costing more like $4-4.5m. Yes, the cost of the well comes out of leasee’s working interest. He cannot withhold well costs from royalty interest holders (i.e., lessor). There will be withheld state severance taxes and, possibly, costs for getting the oil/gas to the ‘pricing poiny’, i.e., the transportation costs. In other words, the royalty owners share may not be priced at the wellhead.

4. Any way to manage or forecast the revenue stream from the royalty checks once things settle down? If your first royalty check is for, say, $1000, can you assume $1000 a month forever, or for ten years, or must you assume that you may not see another check at all? This is kind of important from a tax management standpoint.

Things may not ‘settle down’ for years, hopefully... (you do want additional wells on your property, don’t you?). It’s very hard to generalize -- if there was only one well, it would deplete very, very quickly in the early months of production, before tapering off more slowly over several years... possibly longer than 20 years. Imagine an upside down hyperbolic curve...

5. Once production begins from a given well, does it continue more or less constantly, or can the lessee 'shut the well down' and await better market conditions, for example?

Generally, a well is produced over its lifetime at the ‘maximum efficient rate’ allowed. If you just sunk $4.5m in a well, you want to get your money back SOON so you can keep drilling wells... that’s what they do for a living.

6. Are there other issues, or steps, that I don't know about or haven't mentioned?

Yes. Of course. I guess. You’ll just have to keep coming back to this forum – HA!

(Good questions, IMO.)

Another observation... the more successful production becomes, the more likelihood it will outstrip takeaway capacity and be curtailed until the new infrastructure is in place... to wit, the two new pipelines in the area.

Hope this helps – Later -- Buzz

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I might add that there are certain areas that are "sweeter" than others. On this site a few days ago, we heard of a well about 6-8 miles WNW from Pecos and drilled by PetroHawk may have initially produced around 1100 barrels of oil on a test. This is probably on the high end. I hope we get to hear of more wells like this, but I suspect that initial production (IP's) levels of 300-500 barrels may be more common....but who knows at this point?

Still, production levels decline relatively quickly normally so as someone suggested, bank the first check and enjoy it!

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Swank,

I'll be in Pecos for a couple days later this week and will check around, see what I can find out about pipeline construction. We're about 13 miles S of Pecos, the "Christopher Columbus" pipeline being built by CWEI is the golden hope for us. Where are you located and who is thought to be building in your area?

Thanks.

Bob

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I am in Sec 258, ten miles south (as well as another small tract in Sec 300, way south). I have been wondering if the pipeline was going to be anywhere near us????

J.Cleo Thompson operates 258 and Clayton Williams 300, FYI.

Still wondering about the horizontal versus the vertical philosophies. Clearly hz to the north of town and vertical south. Who knows, maybe they will eventually go to 40 acre spacings with the vert. wells, like the Wolfberry play?

Nothing drilled yet........

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Swank -- the pipeline in your area northwest of Pecos is being laid by a subsidiary of Petrohawk, Hawk Field Services. The line is called 'Celero' whatever.

Later -- Buzz

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Bob – on your trip to Pecos did you hear anything about Hoover Energy’s recently announced Pecos Crossing Pipeline from southern Reeves to Barstow? Here’s the 1-12-12 news release:

http://www.businesswire.com/news/home/20120112005395/en/Hoover-Energy-Partners-LP-Acquires-Midstream-Assets

Later -- Buzz

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I was in Pecos for a couple days last week (Jan 11 and 12). Research on the web prior to my visit indicated that the Clayton Williams announced "Christopher Columbus" pipeline has been permitted (RRC web site, T4 numbers 08493 and 08494) and is intended to run one mile east of and parallel to Highway 17 for perhaps 12 miles beginning a few miles S of Pecos. It will have one E-W lateral, roughly six miles long, about halfway down. All this is on the RRC map server (click "Identify Pipeline" and select a green pipeline trace in this general area to see the pipeline id). There has been extensive pipeline excavation recently along that route (the N-S main portion only), and that pipeline may be functional sometime this summer.

While in Pecos I was hampered by rain and snowfall the day prior to my visit (good timing) - it was advisible to stay on the paved roads. In talking to people, the 'tight hole policy' is still very much in place making it difficult to get much info from oil and gas folks, and the local people without mineral interests tend to view all the drilling and pipeline activity as an interesting nuisance.

A few specific observations:

Stephen Long - this CWEI pipeline routing appears to pass within a mile or so of BLK 13 SEC 258 which is, I believe, one of the sections you mentioned? So perhaps there is some help for you there - but I am completely in the dark as to whether a CWEI pipeline might benefit other drillers such as Cleo Thompson. Further south, you mentioned Sec 300 (I assume BLK 13 Sec 300) - while that would appear to be East of this particular pipeline, it seems that as additional wells are completed, the route of this line (and all other pipelines being planned as opposed to being in the ground) is being adjusted to reflect actual conditions. Since CWEI has a lot of activity in and around BLK 13 SEC 300 perhaps this will benefit your SEC 300 property.

Buzz - I didn't hear anything at all about the Hoover line - even though it was announced while I was there. Must have been talking to the wrong people.

Swank, I talked to local folks who have property South and West of Pecos - they agree that there is pipeline construction in both areas but didn't offer much detail (reference my 'interesting nuisance' comment above).

That's about it - if you are going to Pecos, best make hotel reservations early - there were apparently few or no rooms available while I was there. Also the restaurants are full at dinnertime. So the boom is still doing well.

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Hey Bob -- you do good work!

Thanks -- Later -- Buzz