West Ranch CO2 Flood (EOR) - Jackson Co, TX

General Mineral Rights Discussion
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Property Description: A5059 MUSQUEZ, RAMON, ACRES 41.50, Jackson Co, TX

I bought this property several years ago from my grandfather's estate to keep it in the family. I live in Florida. I own 100% of the surface and mineral rights. I entered into a lease last year with Texas Coastal Ventures (Hilcorp is the operator). The lease provides a 20% royalty. I have three old plugged wells on the property. Hilcorp has not permitted any new or redeveloped wells yet.

I have been informed by Hilcorp that they are in the process of putting together a fieldwide unit for EOR. EOR will use CO2 from NRG's W.A. Parish coal generating station in Fort Bend County via pipeline to the West Ranch Field. The fieldwide unit will be 4000 acres, of which I own 41.5 acres (approx.1%). Reports and press releases estimate recovery at 60 - 75 MMbbl over several (20?) years.

I have a few questions to pose here and appreciate any help offered. First, with regards to unitization. I haven't seen the proposed unit agreement yet. What research I have done is quite confusing as to the basis of unit participation or share. My lease states a unit may not exceed 640 acres and will be prorated based on surface acreage of leasehold to surface acreage of the unit. Will a fieldwide unit agreement typically amend this provision? If so, what is a reasonable basis for determining unit participation? Surface acreage share, or surface acreage share and other factors? I've seen some reports describe as many as 11 or 12 factors, including porosity, pore volume, etc., but I believe these factors apply more to unit operating agreements - and not unit agreements. I'm confused and am trying to get smarter before the unit agreement arrives. Any help is appreciated.

Next...estate planning. One measly percent (1%) of a fieldwide unit that produces 60 - 75 MMbbl will generate decent royalties over time. I am contemplating the creation of a mineral trust and transferring the mineral assets, which are literally nothing right now as the lease is non-producing. It seems the best time to do this is prior to production, as the value of the minerals will rise. The mineral trust will be 'managed' by an LLC (to be created). I believe this will remove the mineral (and surface?) assets from my personal estate and avoid significant estate taxes that my children would be forced to pay at death. Am I on the right track? If anyone has ideas or suggestions regarding protection of the mineral estate I'd love to hear them.

Finally, with respect to CO2 EOR, I have a few questions. Based on what I've seen in media reports and NRG's (the owner of the power plant providing CO2...and also a JV partner in Texas Coastal Ventures...my Lessee) Environmental Impact Statement, CO2 is to be injected at a rate of 1.6 Million tons per year into the 98-A, 41-A, Glasscock and Greta sand units at the West Ranch Field. Plans include starting out with 9 injection and 16 production wells initially, growing to as many as 130 injection and 130 production wells over a 20 year span. Daily production is stated to grow from the current 500 bbl/day to 15,000 bbl/day, but I see no timeframe for the anticipated increased production. The CO2 scrubbers are currently under construction at the W.A. Parish generating station in Fort Bend County, the pipeline is also under construction, as is the CO2 processing facility at West Ranch. Assuming all of these 'pieces' were ready today, how long does it take see significant production increases? I've read they intend to inject 1.6 million tons per year for 6-7 years, followed by reinjection of separated CO2 alone. The EIS also states gas production would be sold...which is not their current practice. Is this a 'normal' CO2 flood practice? I'm assuming gas is to be sold to increase the volume of CO2 to be sequestered...maybe? Regardless, any insight on reasonable timeframes for CO2 EOR production are greatly appreciated.

I know I've covered a few topics here, but any help is appreciated.

- Howard

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A typical CO2 flood will be quite large, since the huge capital costs involved simply wouldn't be worth it for a small project. If your lease prohibits any units larger than 640 acres then they most likely will require you approval. If your wells are plugged out then this is a chance to reopen an old field and should be a benefit for you. EOR units are typically not formed on the basis of surface acreage alone, but usually take into the account the size of the reserves under the lease. That could inflate or deflate your participation from a simple acreage allocation, depending upon whether you are in a better than average geological position or not. if you are unhappy with the proposed allocation you can attempt to fight it at the RRC and possibility exclude yourself from the unit altogether, but then you wouldn't see any benefit from it. I would strongly recommend you engage a professional to guide this process.

As to timing, once injection commences increased production could start within a year or two, and peak within five or so. However, it sounds like they intend to pursue a pilot area first with just a few wells. Then if it is successful, they will expand into the entire field. So I would expect a gradual ramp-up over a long period of time.

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Steve -

Thanks for the prompt reply. I may end up hiring a pro to guide me through the unitization. The 'pilot area' is really for Hilcorp to prove their CO2 monitoring program works as advertised. The US DOE has provided $170 million to fund the CO2 sequestration.