Utica/Marcellus Insight For Mineral Owners

Appalachia has been hit especially hard with lower commodity prices. Many RI/ORRI owners have seen their checks cut to almost zero in the past few months with little explanation. Some have also probably seen large costs associated with post-production (another issue all together). Many don't know all of the reasons why this has occurred.

On top of lower commodity pricing pipelines have been adding many costs to transportation of hydrocarbons. This can occur in marketing, tariffs, etc. making the realized price per MCF around $1. This has also hit NGL and Oil prices as the same fees apply. All of this leads many operators to shutting in wells that are older or newer in order to preserve reserves. If a well is older the costs associated with producing might be higher than the revenue received from selling the produced hydrocarbons. On the flip side many new wells will not be turned on because shale wells make the most money in the first months due to flash/flush production, etc. Personally, I have seen revenue checks in the Marcellus wells we are involved in go from six figures to less than three in the past months, I can only assume RI/ORRI have seen the same.

Many operators including Stone Energy, Gastar, etc. have cut their Marcellus drilling budgets and released rigs. Many owners who had received notice of a permit on their property will now not be having wells drilled which is a disappointment. However, do not forget the Utica. Utica test wells in the region have been phenomenal. With operator slashing budgets however, this gain of a new formation and revenue source will not be recognized for awhile. The question is for how long?

Stone Energy, Antero and Gastar are the two prominent players in Wetzel County and North and South of Wetzel. Gastar is in financial trouble and has cut their drilling budget. Antero has acreage within the Utica in Ohio and due to lower costs will probably continue to drill those wells over WV. Stone has released their Marcellus rig as of a few weeks ago and is taking a 6-month hiatus from drilling. They will be coming back however to drill Utica wells exclusively on previous Marcellus pads.

It will be 1 YEAR OR MORE before royalty owners will benefit from these wells but is worth the wait. The test wells came in as the second highest reported Utica well per thousand feet, ever. Many owners will start to feel the pinch over the next year because their royalty checks will basically be nothing. Mineral and RI/ORRI purchasers will be circling like vultures on people who have extended themselves or think that it will never recover. Do not buy into this, it will recover and will continue as it is profitable to drill regardless of pricing at the production coming off from these wells (Marcellus is indefinitely shut down). Find someone who will loan against current production if you need a holdover for life's events but do not sell out if you do not have to.

It is impossible to value what the Utica will be able to pay out for mineral owners as these test wells have only been online for 6 months or less but from the production data we receive from these wells it is far better to hold onto your rights than to sell and lose out on future income.

Would love to hear some thoughts from mineral owners in WV and Ohio about this issue and am happy to answer any questions on where the Utica and Marcellus is going. For reference I am involved in over 25,000 acres of producing Marcellus/Utica and consult for many Utica owners and am always happy to help mineral owners in any way!

Phillip D, my take on the situation is positive, but not quite as positive as yours. I'm not expecting to see great royalties from gas production until we get a little more demand for natural gas built up. I think a few power plants, some pipelines, and some cracker plants will do a lot of good for gas prices, but all the projects I know of won't be completed for a few years yet.

I wish I had an interest in 25,000 mineral acres, though. Hot dang, you're in a good position.

It is a clients acreage, not mine unfortunately and they are having the same issues as everyone else in terms of reduced royalties, etc. Pipelines will definitely take time and will need some plants to process or LNG transport coming out of NE. Any uplift in pricing from increased takeaway capacity would be nice.

Ah. Well, at least your client has a good position. With that large of an interest it's worth it to hire people to audit books, research, investigate, etc. Have fun with that!

I'm looking forward to project completion. I'm also hoping to do some work for landowners on pipelines. Once the projects are completed, though, the drilling will probably pick up again, which means leasing will pick up again.

Great report and comments....im currently dealing with entities wanting ROWs that cross each other....

Our Stone Energy check for Marcellus has dropped to ~ 20% of what it was a year ago and seems to be decreasing every month. Does the 6 month hiatus mentioned mean we should expect them to dwindle to zero? And then what? Thank you for the detailed report.

No the six month hiatus is on new drilling. They just completed a couple of pads but are not spudding any new wells. They are going to switch over to Utica drilling for economics. Those pads have already been permitted (existing Marcellus pads first will get new Utica wells). The checks for stone specifically will stay low with pricing and with production decline. Which pad are you in?

Is one of them the Rover pipeline?

Hi Kyle...thanks for your query...its not Rover...but CNX 24" Shirley compressor station to mark west fyi...crossing Antero row and wellpad proposal...any good references for negotiating?

The sites are in 'Mary Wilson'

No permit on Wilson yet for Utica; but the erlewine pad next to you has Utica permits.

Well, give me a call and we can discuss the situation. I won't charge you for an initial consultation and I've seen you on here quite a bit so it would be nice to put a voice to a name. A lot of what you can negotiate for depends on the property and what you're using it for, and how quickly they want to get things going. Bats mate in the fall, so they've got a little time to work with you right now.

I'm sure you know the old rule of thumb for payment was $1 per inch per foot, but that's definitely an old standard. $2 per inch per foot is pretty much the minimum I think people should expect at this point.

I encourage everybody to ask for a periodic payment, whether it's yearly, quarterly, monthly or whatever works. It's not standard in the industry, but it should be. The more people that ask for it the more likely it is to become a thing. I'm going to put together a group for the Atlantic Coast Pipeline and I'll push hard for a periodic payment on that.

Other than that, make sure you know exactly where they want to put the pipe and how they're going to maintain the right of way, whether by mowing or by spraying, and how often.

Read the agreement carefully because they'll often include the right to put additional pipes in the ground at their choosing, warranties of title, indemnification, all kinds of random things that you wouldn't expect.

One other thing, I've noticed that the Rover and the Mountain Valley Pipeline are both asking for easements instead of rights of way. The legal difference probably isn't important to them. I think they're asking for easements because they're asking for a number of acres instead of linear feet. That allows them to offer a lower payment than they would have to for linear feet because people haven't figured out how many acres equals a certain number of linear feet. Just something to look out for.

I signed a 5yr lease with EQT back in Feb 2012, That lease will expire this coming Feb. My question(s) are this;

When the lease is up, do they start paying royalties? and how can I find out which well is (mine) so to speak? The description of the location is rather vague.