Efficiency Leads to Profits, and Should Lead to Higher Bonuses and Royalties

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DocumentWell now, this is an interesting take on things.  It appears that oil and gas companies that are working in the shale formations are actually doing pretty well still, in spite of the decrease in energy prices.  This article from Bloomberg says that improvements in efficiency have probably made up for the decreases in prices.

The most interesting number that the article quotes, at least for my clients, is that Antero has costs of less $18/bbl of oil produced from Appalachia.  That’s pretty impressive.  It also means that they can afford to pay a bit more in bonus and royalty amounts.

When you’re negotiating your lease, make sure to ask for more than you think you can get.  In most cases, you will be pleasantly surprised.

Lone Gunman in West Virginia Oil Field

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A foreman for HG Energy was checking on a leak at a well site in Lincoln County, WV on Monday when he was shot by someone who apparently is an anti-fracker/driller.  The gunman was dressed in camouflage and he had “black stuff rubbed all over his face”.  For those of you not from West Virginia, camouflage is so commonplace that you sometimes see people wearing it in court.  The black would have been to camouflage his face.  He would have just looked like any other hunter.

He was walking along the road leading to the well site as the foreman was leaving.  The foreman stopped to see if the man needed help, as apparently vehicles get stuck in the area often.  When he did, the man held up a tape recorder and then a gun.  The tape recorder was hard to hear, but the foreman said it sounded like “stopping the drilling or no more drilling”.

When the recording stopped, the gunman pointed the gun at the foreman’s head.  The foreman grabbed the gun, the gunman pulled the trigger, and the bullet tore through the foreman’s hand, shattering a bone.  The foreman had left his truck in gear, so he hit the gas and drove off.

Police tracked a scent from the area with dogs for about four miles to a four wheeler track, where the scent was lost.  Police aren’t confident that the scent they tracked was that of the gunman.

Local environmental groups have quickly denounced the attack.

 

PA Production Down

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noise-maker-colorThis is big news.  (If that link doesn’t take you to the full article at MDN, do a Google search for the article’s title.)  PA’s DEP released production numbers for February, and total production as well as production across the board is down from January.  EQT’s production data is absent, but even if EQT’s production doubles from January (which it won’t), production will still be down.  I expect that the same thing is happening in other natural gas producing areas.

A reduction in production means a reduction in storage levels and a reduction in supply overall.  This is a direct result of the dwindling rig count everyone has been talking about for months.  This is also a direct result of low natural gas prices.  I’ve heard talk that some companies have been cutting back production from currently producing wells because of said prices.  Decreased production/supply should lead to an increase in price.

If and when prices start to go back up, we’ll see producers start to turn the spigots back on, and bring already drilled wells into production.  I don’t expect a huge jump in prices.  I also don’t expect to see many, if any, new rigs brought back to work.  There is just too much supply from currently producing wells and potential supply from completed but non-producing wells to justify firing up those idled rigs.  I expect that to happen about the beginning of 2016.

This isn’t the end of low gas prices, but it may be the beginning of the end.

Natural Gas Prices Could Rally this Year

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According to this MarketWatch article, natural gas prices could go up in the near future.

There are a couple of key factors to look at.  First, gas storage is 11% lower than the five year average.  That number alone is not enough to drive prices up as it’s likely that continued production will fill the gap easily.  There are, after all, quite a few wells which have been drilled but haven’t been brought online, and I was reading some posts on Go Marcellus Shale by mineral owners who think that Chesapeake has been closing valves on wells just because it doesn’t want to produce lots of gas in a low market.

Second, drilling rig numbers have dropped off.  We’re down 46% from last year.  That’s a lot of drilling rigs idled in one year.  That means we’re not drilling as many new wells, regardless of increases in drilling efficiency.  As old wells’ production numbers drop, new wells will be brought online to replace them, but wells won’t be drilled to replace the wells that have been waiting to be brought online.

Natural gas demand is going up.  This is a long-term trend, not a short-term blip.  Coal fired power plants are being shuttered, and will be replaced by natural gas fired plants.  Pipelines are being built, and demand for natural gas to heat homes is going to increase.

Oil prices are also likely to start going up again, as a lot of the same factors are going to affect oil stockpiles and production in the U.S.

The future for natural gas prices may not be all shiny and rose-tinted yet, but it’s certainly not bleak.

 

CNG doesn’t make sense for Long-Haul Truckers

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The reason that compressed natural gas isn’t a good idea for truckers lies in the trucker’s contract with the company they work for, not in the actual price of CNG.  This article over at Seeking Alpha explains it pretty well.  What it boils down to is this: trucking contracts are written in such a way that they protect the trucker from variations in gas prices, so a cheaper fuel isn’t going to help the trucker, and in some cases actually hurts.

It’s too bad, because if truckers would convert over to CNG there would be a huge demand for it.

What is Nuisance Oil?

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Question MarkWhat is nuisance oil?  To be honest, I don’t know.  I don’t have any problem admitting that, because I don’t think anybody knows what nuisance oil is.

I just read an article about a landowner in Ohio who received a lease from XTO which said that the landowner would receive royalties on material removed from his property, except for “non-commercial nuisance oil”.

I have never heard the term “nuisance oil” before, so I decided to do a little research to figure out what it could be.  First I checked my law school text on oil and gas.  It doesn’t have the term “nuisance oil” in the index.  Next I checked my Oil and Gas Law in a Nutshell.  It also doesn’t have the term in the index.  (Full disclosure, both books are in their 6th edition, and I have the 4th edition.)

Legal tomes failing me, I checked Google.  The only reference to oil as a nuisance was referring to those folks who were drilling for salt water and drinking water in the area where “Colonel” Drake dug his first oil well.  Before he started developing oil, they would hit oil all the time, but they considered it a nuisance because there wasn’t any use for it.  That was in the 1850s.  My how times have changed.

Google having failed me, I checked Fastcase.  There were no results for West Virginia.  There were two results for all jurisdictions.  Both had to do with nuisances resulting from oil and gas development.  There was nothing that indicated that there is any type of oil coming out of the ground and into a producer’s pipe that is considered a nuisance to the producer.

Nuisance oil is not defined in XTOs lease, it’s not defined in oil and gas law, and it’s not defined by the oil and gas industry.  That means that it’s up to XTO to define what “nuisance oil” is.  I guarantee that XTO will define “nuisance oil” in a way that will increase profits to XTO.  That will, unquestionably, reduce profits to the landowner.

Lesson: read your lease before you sign it, and make sure you understand what it says.  This landowner did, and has saved himself a lot of money, if he can get XTO to agree to a reasonable lease.

Cabot and the Rogersville Shale in West Virginia

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Rogersville Shale

The Charleston Gazette ran an article about possible development of the Rogersville shale in the western part of West Virginia.  Cabot Oil and Gas has been drilling the Cabot 50 in Putnam County for some time, and speculation is that it’s a good well.  Unfortunately, due to the downturn in the price of oil and gas, it’s unlikely that we’ll see any serious development of the Rogersville shale before the end of 2015.  As prices start to rise, I expect interest in the Rogersville shale to also rise.

Interestingly, there are at least two other formations that could turn out to be producible in that part of West Virginia.  They are the Trenton-Black River formation and the Loysburg formation.  They’re located in the Rome Trough, which seems to run pretty much in the same area where the maps we’ve seen are showing the Rogersville shale.  There’s a pretty good, if short, discussion from 2013 on the Go Marcellus Shale website about development of those formations over in New York.

Gas Power Plant Planned for Follansbee

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Brooke County, WV will hopefully be home to a gas powered electricity generator in a few years.  The City of Follansbee has approved a PILOT (payment in lieu of taxes) agreement with Energy Solutions Consortium, the company which will build and run the plant.  A PILOT agreement says that the city will own the plant and the company will lease it from the city.  This cuts down on the tax burden for the company, making the plant financially possible.  This is just one step in many yet to come.

The article also talks about the Marshall County plant which is further along in the development process, and says it is expected to come on line in June of 2018.

More Pipelines Break

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Broken Pipe

Heavy rains caused slips, which broke gas pipelines in Marshall County, West Virginia.  The Intelligencer out of Wheeling, WV carried a couple of stories about it, the most recent of which you can find here.

Anybody who’s read much of this blog knows I am pro-development.  But I also think that if you’re considering signing a lease or a right of way agreement, you need to know what you’re getting into.  The fact is, there are dangers and downsides.  The more you know, the more you can mitigate, and the better you’ll negotiate.  When you’re talking with a landman and you can say, “I’m concerned about the dangers to my property and my family because I know that heavy rains caused two broken pipelines back in April of 2015 and there were five pipeline accidents in January of 2015, and don’t forget about the Sissonville explosion,” you’re more likely to get a favorable response than if you say, “I think pipelines are dangerous and scary.”