Why is my Bonus Check Smaller than It Was Supposed to Be?

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We’ve gotten several phone calls and emails from clients over the years about the size of the bonus check that the oil and gas company sent them.  It’s always the same story: the landman made promises of big money, and the big money never came.  As you can imagine, this makes people angry.  It feels very bait-and-switchy.
Side Note: This happens often enough that the companies should train their landmen to warn people that it could happen.
To understand why this happens you’ll need some background.
When a company first decides it is interested in developing any given tract of land it will request a title search on that tract.  That title search will be done by a landman, not a lawyer.
The landman will tell the company who they think owns the mineral rights, and the company will then buy leases from those people.
Once the company gets a signed lease back from those people, it will usually have some time (90 days, for example) to check the title work the first landman did.  More than once we’ve seen the company change its mind about how much our clients own based off this second title search.  Usually it’s for the worse.
Later, usually much later (sometimes never, but we’re hopeful), the company will drill a well and produce natural gas.  Once they do, they owe royalties.  But before they go paying royalties, the company will ask a lawyer to provide them with certified title.  The lawyer will go out and do all the same work the first two landmen did, but sometimes with different results.  We’ve seen the company change its mind about how much our clients own based off this certified title.  Again, usually it’s for the worse.
When the company changes its mind, it has the right to pay only for what you own, not for what it promised to pay.  Why?

There’s a little-noticed clause in almost every lease called the Lesser Interest clause.  It says that if you own less than the entire tract, the company will pay you accordingly.  There is usually also an Order for Pay or an Order of Payment that the company has you sign at the same time you sign the lease, and it includes similar language.

So when the company discovers that you own less than they originally said you did they pay you accordingly.
The opposite is actually true, too.  If the company discovers that you own more than they originally said you did they pay you accordingly.  We’ve seen clients get more than they expected.  Oddly, that happens far less often than getting less.
Now, it’s quite possible that the landman/lawyer got it wrong.  It wouldn’t be the first time and won’t be the last that a human being makes a mistake.  The trouble is that it will often take quite a bit of time and effort to prove the landman/lawyer wrong, or in other words it will take quite a bit of money.
If you want to do something about it, you should start by getting a copy of the run sheet that the landman/lawyer made.  Most companies will provide it to you if you’re persistent and nice.  It’s a list of all the documents the landman/lawyer used to determine ownership.  It might not make any sense at all to you, but we can help with that part.
If the company won’t provide you with the run sheet, you will at least be able to get a copy of the document that changed your ownership.  Sometimes the change in ownership will be based on an interpretation of a vague clause in that document.  If so, we might be able to help you change the company’s interpretation of that clause.
As always, good luck!

The State of Oil and Gas: June 5, 2017

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Whew!  Five days later than usual.  I’ll stick with the “business is booming” story for now.

Libya says it has exceeded 800,000 barrels of oil per day recently, with the possibility of hitting 1MM in the near future if they can get some contractual issues ironed out.

The EIA expects the U.S. to produce more gas this year than it previously thought.

A new study suggests that re-fracking can bring so much new production online from an old well that it’s just like drilling a new well.  It doesn’t mention whether re-fracking makes it possible to extract gas that otherwise would remain trapped in the formation, or just speeds up the extraction of gas that would come out anyways.

Sabine Pass continues to increase exports of LNGs.  The plant took in 2.3 Bcf per day in the second week of May, up from 2.1 Bcf per day in the first week.

A recent trade deal will make it possible for the U.S. to export LNGs to China.  Nice.

Some think that OPEC can’t just extend their production cuts, they need to double down on them.  There’s no other way to chew through the surplus.

Mexico has been increasing its reliance on natural gas.  Interestingly, it has a shockingly small number or drilling rigs running.  Good for the U.S., weirdly bad for Mexico.

This article discusses what OPEC is trying to accomplish by cutting production.  It’s pretty interesting, but even more interesting is the fact provided in the article that U.S. oil production is expected to hit 9.3 million barrels per day this year, and 10 million barrels per day next year.  That’s a lot of new production, and all thanks to OPEC and Russia cutting production.  They’re playing a dangerous game, and at some point they’ll probably have to start producing at full speed or they’ll just create a behemoth in the U.S.

This article goes into just how much money OPEC has “lost” since their announcement in November of 2014 that they would flood the market with cheap oil.  It also briefly mentions that Saudi Arabia has explored using fracking in its own oil fields, with little success.

There aren’t enough frack crews.  This was one of the factors that I thought might slow down the growth of the oil and gas industry when the price of oil and gas started to recover.

On top of that, somebody crunched the numbers and decided that the Marcellus/Utica region needs an additional 45 drilling rigs (and corresponding frack crews, of course) to fill the new pipelines that are going to be completed in this area.  There are only about 50 rigs running in this area right now.  There used to be a lot more than those two number combined, back in the boom before 2014, so if the crews could be found the rigs could be run and the gas produced.

Both oil and gas prices are down again.  Oil is down in spite of OPEC and Russia extending the production cuts for another nine months.  This article says the extension is going to have the desired effect and oil prices will go higher again.

Natural gas prices have gone down in part because some power producers are switching back to coal.  This leads me to think that we’ll probably be pushing the limits of natural gas storage at the end of injection season this year, just like last year, with the associated low price of natural gas.

Marcellus drillers aren’t drilling a lot of new wells compared to other oil or natural gas plays.  They’re completing DUCs.  There’s a lot of drilling that needs to be done in the near future, and they’ll have to bring on some new rigs soon.

Drilling in West Virginia is Likely to Pick Up

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Somebody who’s a lot better with a calculator than we are did some number crunching and came up with a truly astounding result.

The new pipelines being built in the area will require 45 new drilling rigs to fill them to capacity.  We’re currently running at about 50.

Historically, the Marcellus/Utica play has hosted around 130 rigs or so at any given time, with the highest numbers being between 2010 and 2014.  Since 2014, of course, rig counts have been dropping like mad.

Since it’s becoming hard to find frack crews, it seems like it may be a little difficult to find enough drilling rig crews.  Frack crews and drilling rig crews went through the same downturn, got fired, and went a long time waiting for the call to come back to work.  A lot of them have gone to find more reliable work in other industries.

However, for West Virginia mineral and royalty owners, the important thing to think about is how this is going to affect leasing.  It seems that in the next few months there is probably going to be an increase in leasing which is going to continue for a couple years.  When that happens, prices typically go up and the terms that you can request get much better.

It looks like boom times may be coming again.

Of course, this is us looking through a crystal ball.  Don’t go betting the farm on the accuracy of this prediction.  All kinds of things affect leasing activity, from local geology to international geopolitics.  We sure like the way things look right now, though.

Natural Gas Storage: Explanation Video

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The following is a good, short video that explains some of the basics of natural gas storage.  The narrators talks briefly about some stock trading strategies, but does an excellent job of explaining what gas storage is, the different types of storage facilities, when the different types are used, when injection season and withdrawal season take place, and a couple other odds and ends.  It’s under three minutes, so it’s well worth the time.

For oil and gas lease purposes, natural gas storage rights should always be removed from a lease.  Oil and gas leases should be for the production of oil and gas from the leased premises only.  If a company must have gas storage rights, those rights can be given in a separate agreement, and paid for separately.

Pipeline Pigs: The Alyeska Pipeline

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The Alyeska Pipeline, otherwise known as the trans-Alaska pipeline, the one that runs from Alaska’s North Slope to Valdez, Alaska, has something fascinating happening.

There will be four robots crawling through parts of the pipeline this summer, inspecting those parts for corrosion.

This kind of inspection work is usually done by “pigs”.  Pigs are basically a plug which has sensors attached to it that is pushed through the pipeline.

These are not exactly pigs.  They will move under their own power, and be able to back up and go over parts of the pipe if needed.  They are specifically designed to go places that a pig can’t go.  That’s exactly what they will be doing on the Alyesaka Pipeline.

It’s important to inspect pipelines because pipelines corrode over time.  There are anti-corrosion devices attached to the pipelines, but they slow down corrosion, they don’t stop it.  The parts of the Alyeska Pipeline that are being inspected haven’t been inspected since it was built — forty years ago!  We’ll be keeping an eye on the results.

This kind of technology could be used on the pipelines that are being built here in West Virginia.  Hopefully they won’t have to wait forty years between inspections.

 

The State of Oil and Gas: May 15, 2017

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The EPA issued a report last year that said the natural gas industry was leaking methane (natural gas) like crazy.  However, it was based off spreadsheets, algorithms, and estimates.  This year, the EPA has done a field test and found that last year’s report overestimated methane leakage by 97%.  Think about that for a minute.  Now, it’s just one test, and science needs to be repeatable to be reliable.  But when the numbers are that different it’s extremely likely that last year’s report is wildly incorrect.

It’s been quite a while since anything has been said about the possible cracker plant in Parkersburg, WV.  The Parkersburg News and Sentinel has a very short editorial which we link to here because we’d like to see more people talking about it.  A cracker plant would help West Virginia avoid the problem that it’s had for over 150 years of pulling natural resources out of the ground and shipping them out of the State as raw materials.

The price of oil has taken a real dip lately, today’s bump up in price notwithstanding.  The reason for that dip?  American frackers have been ramping up production like mad.

Rig counts dropped by one each in West Virginia and Pennsyvlania in the first week of May.  Hopefully that means drillers are slowing down a bit on purpose, which means they think that we’re producing as much gas as we can get out of the region and into storage for this year.  That’s healthy, smart thinking, if it’s on purpose.  If.

We’re on course to put record amounts of gas into storage again this year.  If you’ll remember, we did this same dance last year.  In the end, producers cut back and we ended up with less storage (still record highs) than what most experts predicted.  I imagine the same thing will happen this year.

Saudi Arabia is saying it will do whatever it takes to rebalance the oil market.  There’s dancing in the streets in Texas.

OPEC has been reduced to begging–begging American frackers to slow down production, that is.  If there was any question left as to who controls oil’s top end, it has been settled.

OPEC and Russia have reached a deal to extend the production cuts they agreed to six months ago.  Oil prices are pushing $50/bbl again for the first time in almost a month.

The FERC has a new date for review of the Atlantic Coast Pipeline EIS.  The final EIS will be made available on July 21, 2017.  After that, there will be 90 days for other federal agencies to make comments on the project.  The final approval will be on October 19, 2017.

FERC Soon to be Back in Business

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The FERC has been operating without a quorum, unable to make major decisions regarding major pipeline projects.  That’s created some uncertainty around the Mountain Valley Pipeline and the Atlantic Coast Pipeline, both of which are up for approval in the very near future.

That will soon change.  The Trump Administration has nominated two people to fill some of the vacancies at the FERC.

Once they are approved by the Senate, the FERC will be able to make decisions such as approving the aforementioned pipelines.

It’s expected that approval hearings will take place in early June, about a month away.  However, Democrats could decide to slow things down.  Having FERC non-operational would make the environmental wing of the Democrat party very happy.

It will be interesting to see what political wranglings take place over these nominations.

UPDATE: May 17, 2017 — Like clockwork, opposition to the nominations has begun.  Some want to keep the FERC hamstrung for environmental reasons, and some want a Democrat nominated along with the Republicans.  We’ll see how long it takes to go through the Washington political machine.

Ohio EPA Not Happy with Rover Pipeline

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The Rover Pipeline has been under construction in Ohio for about two months at this point.  It’s not making a lot of friends.

The Ohio EPA has fined Rover $431,000 for 18 separate violations.

That’s a big number, but for a project that’s going to cost an estimated $4,200,000,000, it’s kind of small.

What’s really interesting is that the head of the EPA is frustrated with Rover’s attitude.  In the Columbus Dispatch article linked above, he says, “All told, our frustration is really high. We don’t think they’re taking Ohio seriously.  Normally when we have … a series of events like this, companies respond with a whole lot of contrition and whole lot of commitment. We haven’t seen that. It’s pretty shocking.”

If Rover doesn’t get its act together, they may find themselves facing a stop work order from the State of Ohio.  They were able railroad landowners using federal law, but they are up against an entirely different animal when they tick off the head of a State agency that has the power to stop them in their tracks.

This also doesn’t inspire confidence that the end product is going to be well built.  Management problems trickle down to workers, and quality suffers.  It’s the natural way of all organizations.

UPDATE:  May 11, 2017 — The FERC has halted drilling by the Rover Pipeline at eight locations in Ohio.  Drilling already in progress is going to continue, as stopping the drilling increases the risk of collapse and spills.  The Tuscarawas River location will have independent third-party oversight.  Rover also has to double the number of environmental inspectors per construction spread.

UPDATE: May 16, 2017 — It turns out that the fine was not a fine, but a penalty that it will have to pay and that can be negotiated.  A spokesman for the Ohio EPA seems to have made that comment that’s quoted above, not the head of the Ohio EPA, and everything about the situation is pretty fluid.  It’s more than a little disappointing when facts get distorted by the news outlets.  Who do you trust?

The State of Oil and Gas: May 1, 2017

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The EIA expects natural gas to produce more electricity this summer by way of burning natural gas than by any other means.

North Sea oil output is expected to begin to fall in 2018.  This is probably one of those factors that the Saudis have been saying would happen because of decreased capital expenditures in traditional oil drilling project.

Iran is ready to join OPEC’s production cut.  This news ought to drive oil prices up.  Iran had previously expressed interest in producing well over 4 million barrels per day, but has not reached that point.  Perhaps Iran has more infrastructure issues than it had previously realized, and is willing to take a higher price for its oil in exchange for a larger share of the market.

Speaking of production cuts, Russia reduced its daily oil production by 1.6% by mid-April.

The scuttlebutt is that OPEC will extend production cuts and even cut more in an effort to offset U.S. production increases.

Citi expects OPEC to extend production cuts and predicts that consequently oil prices will push $65/bbl by the end of the year.

The U.S. Geological Survey has “discovered” the latest largest continuous natural gas deposit in the country.  It stretches across Texas and Louisiana.  It includes the Haynesville and Bossier shale formations.  The word discovered is in quotes above because this reserve was already known, it’s just that new technologies have made a lot more of it recoverable.  It’s also just the most recent; as continued exploration and technological innovation occur, others will be “found”.  Not meaning to downplay it–it’s still an awful lot of natural gas.  Here’s to being energy independent!

Energy demand will grow in 2017, but not as much as it has previously.  That will probably keep the price of oil down a bit.

The Washington Post sees a murky future for oil prices.  However, the murkiness is focused on a way up to $60/bbl oil, not doom and gloom.

India’s economy is growing like mad, and India’s government wants to make natural gas a larger percentage of the energy used in the country.  Most of that gas will be imported.  Most of that gas will come from the U.S.

Production of both oil and gas is expected to increase in May due to healthy prices for both products.  That will drive the price of both products down.

A survey of oil and gas borrowers and lenders shows that there’s going to be more money flowing around the oil patch this year.  Confidence in oil and gas is back.  Lets just hope it’s not over-confidence.  Too much spending will lead to too much drilling will lead to too much gas/oil will lead to low prices again.

The 2016-17 heating season is over and we have almost 15% more gas in storage than the five year average.  This cold snap we’ve had the last few days will not be enough to make a big dent in that number.  We still have quite a bit less gas in storage than last year so we should see reasonable natural gas prices through the rest of the year.  Those prices will hopefully not be reasonable enough to encourage over-drilling.

Coal executives have warned the natural gas industry that it’s next on the environmentalist’s hit list.   As long as natural gas is ridiculously inexpensive compared to renewables, it’s safe.  But once renewables become competitive with natural gas we’ll see a shift to renewables.  That could be a long way down the line.

May 1, 2017: Oil prices are at $48.74 per barrel, and natural gas prices are at $3.23/MMBtu.  Not bad for natural gas, not great for oil.  Those are good prices to keep us out of a boom but in reasonable drilling activity.

And some people are saying that OPEC will extend its agreement to cut production.  The next meeting is May 25th.