Monthly Archives: July 2016

Why Your Royalties are Low Right Now

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There are actually a couple of reasons why your royalty checks are pretty small (relative to a couple years ago) right now.  First, production from wells always decreases over time, second, the price of gas is down, third, the producer is probably taking post-production costs out of your check, and fourth, the producer is probably throttling back production from the well.

Side Note: if you think your producer is taking out post-production costs you should call the office and talk with us about it.  We can probably force them to stop.

We’re going to focus on the second reason in this post, the price of gas.  Prices are down for a couple of reasons.  One is that there’s just way more gas available across the nation than there ever has been.  A second reason is that the gas here in the Appalachian basin is…..stuck.  It’s backed up.  It’s constrained.  Whatever you want to say, there’s just not enough transportation capacity for it all.

Because there’s not enough transportation capacity, you aren’t getting paid top dollar for the gas coming out of your property.

It’s not just that we can’t transport all the Appalachian basin gas to someone who will buy it, either.

The price of gas is set at the Henry Hub in Louisiana.  The Henry Hub is a place where a bunch of pipelines come together and there’s a bunch of storage.  Whatever gas is selling for at the Henry Hub is the benchmark price for gas in the United States.  It changes constantly based on a huge number of factors.

Here in the Appalachian basin there are a couple of local hubs.  Prices for gas are set at these hubs.  They are based on the Henry Hub price, and then changed either up or down depending on local market conditions.  Once upon a time we could sell gas for more than Henry Hub prices.  It hasn’t been that way in a long time.

Because we’re producing so much gas we don’t have enough space for it all in the local hubs and other pipelines in the area.  Because of that, gas sells at a discount to the Henry Hub price.

So not only can we not get all our gas into a pipeline in the first place, we also can’t get full price for it.

And that is one of the reasons why royalty checks have been relatively small lately.

Is there any hope for the future?  Well, RBN Energy is doing a two-part series on pipeline buildout in the Appalachian basin.  Here’s the first part, and the second part will be coming in the near future.

On top of getting a better price for our gas compared to the Henry Hub, we also need to start shipping gas out of the country for foreign markets to buy.  Right now, 99% of the gas produced in the United States is consumed in the United States.  That is changing rapidly, with the Sabine Pass LNG plant shipping its first cargo of LNG back in February of 2016, and with other plants coming online in the next couple of years.  Once natural gas has become a world commodity we should be able to sell at a better price than we can get right now.

Upper Devonian Drilling

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Upper Devonian

EQT has announced that it will start drilling Upper Devonian formations along with the Marcellus shale.  This is a great move, and while I don’t like EQTs stance on post-production costs or know anybody that really likes working with them, I have to applaud it.  Here’s why.

The Upper Devonian lies just a few hundred feet above the Marcellus shale.  It produces gas, sometimes wet gas that is rich in ethane, propane, butane and the like.  It doesn’t produce as much gas as the Marcellus, though, so a lot of companies have ignored it.

If memory serves, you can improve production from any acre by about 50% if you can produce from both the Marcellus and the Upper Devonian.

However, if you develop the Marcellus without developing the Upper Devonian formations you are unlikely to be able to develop the Upper Devonian.  This is because the fractures you make in the Marcellus migrate upwards for hundreds of feet, right up to the Upper Devonian formations.  When you go back later to fracture the Upper Devonian you lose a lot of, if not all of, your fracking pressure into the existing fractures.

In order to take advantage of the Upper Devonian formations you have to frack them at the same time you do the Marcellus formations.

Anybody out there negotiating their own lease should ask the company whether they are planning to develop the Upper Devonian, and find out why they are not.  They may have good reasons, such as it simply won’t produce much gas in your area.

You probably won’t be able to convince them to change their plans unless you control all of hundreds of acres, but you could always tell them you won’t sign a lease unless there’s something in there saying they will develop the Devonian with the Marcellus.  It’s worth a shot.

 

Cracker Plant on the Gulf Coast

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So Exxon and SABIC are thinking about building a cracker plant on the Gulf Coast in Texas or Louisiana.  That’s good, since that cracker plant will use gas that will come, at least in part, from the Marcellus/Utica area.  It’s frustrating as a West Virginian (transplanted, sure, but this is my home) to see plans for a cracker plant clear down there when we can’t get one built here.  It would be great for the State, and great for my clients, but pretty much all we’ve heard about it is bad news.  Lately we haven’t even heard bad news.  It makes one think that it’s just not going to happen.  I sure hope that’s not the case.  West Virginia will once again miss out on a great opportunity to put it’s natural resources to good use.

WVU Research Says Fracking Waste is Not Very Radioactive

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WVU Test Wells

WVU Test Wells, Morgantown in the background

West Virginia University has been drilling and fracking two research wells.  They are using the same techniques that the industry uses and doing science on it all.

One conclusion they reached is that the cuttings (crushed rock brought to the surface) are not very radioactive at all.  They believe this was influenced at least in part by using a particular drilling mud.  The conclusion about radioactivity is interesting in light of the recent Kentucky investigation into the radioactivity levels of West Virginia fracking waste.

Another conclusion they reached was that produced water is not safe to drink or discharge into streams.  No surprise there.

The nice thing about this project is that it’s not funded by either the industry or environmentalists.  It’s paid for by the University.  That doesn’t mean that someone on the team isn’t biased, but hopefully the science will be done with a minimum of bias.  We’re looking forward to seeing more of their work reported in the future.

The State of Oil and Gas: July 2016

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A study by Deloitte is saying that oil and gas companies have underspent over the last couple of years.  They haven’t put enough money into developing new resources.  That means that sometime in the next few years we’re going to see a shortage of new oil and gas reserves coming online, which will lead to a shortage of oil and gas on the market, which will lead to high prices for oil and gas.  When will the producers learn to manage themselves properly?

Natural gas prices are still near $2.75/MCF.  Injection into storage was a little higher than expected for last week, but below last year’s number for the week and below the five year average for the week.

$50/bbl oil seems to be the point where at least some producers want to start bringing on new drilling rigs.  Whether that’s going to last is up to the Saudis and Iran.  The Saudis can increase oil production by 1 million barrels per day practically overnight, and by another 1 million barrels per day in about six months.  That would drive prices down.  Iran is halfway to the 4 million barrel mark, which is the amount it was producing before sanctions and which is its goal for future production.  Between Saudi Arabia, Iran, and American companies, it’s unlikely that we’ll see prices much over $50/bbl for a little while.  Higher prices are coming, though.

Because of Brexit the dollar is up, the markets are in turmoil, and oil prices are dropping.  Natural gas prices, however, are still around $2.70/MCF.  Decreased production is the reason.  It’s all about the fundamental supply/demand balance.

David Einhorn sees gas prices going up, essentially because of a lack of supply.  This Seeking Alpha article sums up his five points, but “lack of supply” sums up the article.

Stone Energy has re-opened it’s Mary field here in West Virginia.  Gas prices have risen enough, and Stone obviously expects them to stay high.

Here in West Virginia we’re more interested in what happens with natural gas prices, and the market forces are different enough for natural gas from oil that what affects oil won’t directly affect natural gas.  However, when oil prices drop a lot natural gas prices often drop a lot too.  Consequently we keep tabs on oil.  Also, people in general want to know what’s going on with oil prices because that affects the price at the gas pump.  So, here’s a good summary of what’s affecting oil prices right now.  It’s short enough that it doesn’t warrant our own summary.  The last paragraph is the most interesting to me.

Oil prices have moved up, and the oil industry thinks things have stabilized.  If I were an oil driller, I’d be doing everything I could to keep the good people in my business on board.  Not that prices are going through the roof any time soon; they’ll probably stay below $60 until the second half of next year.  I’d be figuring out how to produce oil (same goes for natural gas) in the current market at a profit, and the only way to do that is with good people.

July 1, 2016, and gas prices hit $3.00/MCF.

Here we are on July 21, 2016, and gas has dropped to $2.69/MCF and has spent some time below that price.  I suppose that investors took a look at gas production, gas storage rates, and the amount of gas in storage, and realized that (spoiler!) we still have a ton of gas!  Paying $3.00/MCF just didn’t make sense.  Maybe we’ll hit that this winter when we start using more gas than we produce.  Of course, this weekend is supposed to be a scorcher across a good chunk of the country, so maybe prices will bump up when next week’s storage report comes in lower than expected.  Who knows?  It’s sure fun to speculate, isn’t it?

I can say one thing for sure, leasing seems to be picking up.  We picked up two new clients in the last week or so, and have a couple more who we expect to come on board in the next few days.  We have at least one call a day from someone who needs to know what an oil and gas lease is all about.  The drilling companies seem to think that higher gas prices are here to stay.