How the Proceeds of a $70 barrel may be divided

Excellent blog from RBN Energy

This is an excellent diagram to explain what happens to the money received from a $70 barrel of oil.


Yes, that was a very clear explanation of the low cost of owning minerals and the high profit margins.

And you were wondering why there are so many mineral buyers out there?

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Thanks for the link.

Picking nits.

The mineral buyer likely has a cost basis that is more than half of that $12.50 margin. For a barrel that is definitely getting produced. Less for a barrel that might not get produced.

IMO there is no way that all in an operator is running $31 margin on a $70 barrel of oil unless that well is making a million barrels and you are just punting any sort of DD&A/Acq burden. Or say you are CVX Permian and land was free. Nobody’s breakeven is sub $25/bbl.

So @NMoilboy could you lay out what you view as a more realistic scenario to illustrate? Better yet, your view of the split at $70, $50, and $100/bbl? And while you’re at it, where would you’re hurdle price be as a mineral buyer (if you don’t mind saying).

Thx. Just looking to expand the conversation here and appreciate the original post and your thoughts

I won’t pretend to know everything. (maybe a lie :wink:) But nobody has any margin to develop oil at $25/bbl in the domestic US. That is implausible. I mean people will produce what they have because the costs are largely sunk…but…

Taxes are pretty much linear with oil price. F&D costs vary a little bit with oil price but not the oil price when you sell a barrel so will call that one fixed. Same for opex and transpo. Fixed. You also need some bucket for acquisition costs…fixed. You spend $50k/acre for land and that adds up. And then some of this revenue needs to cover your G&A.

So I would guess the fixed costs are around $35-40/bbl and the variable are around $5-9/bbl. So at $50 bbl the operator margins aren’t great. $10 to the operator. Slightly less to the 20% mineral owner after taxes.

At $70. Maybe $20 margin to operator. $12.5 to royalty owner

At $100. Well then variable costs a bit higher but still $45 to the operator and $18 (after tax) to the royalty owner.

I agree with the general idea, the no risk, no cost ownership of being a mineral owner is pretty attractive. Especially for peeps with zero cost basis. Most places this stuff gets nationalized and you get eff all.

Thx for your thoughts. Yea, inherited minerals has a feel of no capital cost, but in reality there is the opportunity cost of investing elsewhere, offset by the hassle of managing your mineral interests. The market doesn’t seem to pay a lot for mineral interests, so holding, in general, is the right answer. But that implies that you can acquire cheap, which requires more info to hedge your bet, particularly in these days of shale. My fam has inherited interests that we’re cleaning up (administratively speaking) and holding. My interest will be to look for acquistions in the area that could make sense. So trying to start thinking about that as I spend the next year cleaning up for the last 50 years :slight_smile: . THX for your thoughts

I was rather amused by the simplicity of the diagram, but think it is great for a starting discussion! On the mineral owner side, they are missing the federal/state income tax payments which can eat up a significant bit. If one has post production charges in your lease, then that eats up some more.

I have been to several webinars where a certain service company lists the breakeven point for operator, reservoir and basin, so it does vary widely-one example was a $35 spread.

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