Although the break-even price for natural gas development in the Barnett Shale varies from company to company, the general consensus seems to be $5 is the minimum for larger operators to hope to make a profit. Some smaller operators with less overhead can achieve profitability at a lower price point.
Based on sworn testimony and submitted exhibits at recent Railroad Commission hearings in Austin, it is possible at current levels, Titan’s 1H well on the Hilliard South Unit may not be profitable. Click here to see calculations and assumptions. At $3.50/mcf, the well loses roughly $460,000.
8 comments:
This is of course an assumption but a pretty damn good one. Even highly productive wells are barely breaking even.
Flower Mound's lucky day!
Let's hope this "assumption" is true. It would be such poetic justice for those living near Hilliard and haven't signed leases!!
Plenty of large land owners in the Eagle Ford would welcome you. Large land owners happy, Titan profitable, and the homeow...oh wait, there are no homeowners to make mad down there. See, it's a win-win-win! Now take your drillbit and leave.
It's great to see the gas prices so low -- it has a lot of ramifications for our community. Personally, it will help those on a variable electric rate plan (like us), so this rocks that way, too.
However, before we feel too bad for Titan and think they are having to suck up all of these losses, I really would like to ask some questions based on my personal observations, such as:
Many standard gas leases are written such that the mineral owner's royalty is calculated after expenses and/or is subject to deductions for expenses.
If that's how these Titan leases are written, then the royalty figure would be much, much lower and the loss to the driller would become a profit even @ the $3.50mcf price because they would get 75% of the net income plus any of their administrative costs/salaries that they can bill to the job/wellhole.
So, does anyone know if the HOA guided the lease process or educated their members to get a better lease?
The mineral owners have no oversight or input over expenses do they?
What keeps them from putting huge administrative expenses in there on top of their lion's share of the royalty?
I've always wondered what keeps the operators/drillers honest.
I'm not even sure if the operator's 75% has to bear 75% or even any of the expenses.
I'd like to see a Titan/Cherokee Horn lease.
I hope someone can clarify and/or correct my thinking for us.
Why would anyone in their right mind want to lease their minerals right now?
Why should LISD be forced to lease their minerals right now?
If the market is so bad and profits so low then who would want to bid on LISD's gas leases?
Have they received any bids, yet?
"Many standard gas leases are written such that the mineral owner's royalty is calculated after expenses and/or is subject to deductions for expenses."
That was not how it was presented as evidence so we did not calculate
it in a different manner. It depends on the leases, we have no way to know which leases (or how many) were negotiated pre vs. post-cost.
"If that's how these Titan leases are written, then the royalty figure would be much, much lower and the loss to the driller would become a profit even @ the $3.50mcf price because they would get 75% of the net income plus any of their administrative costs/salaries that they can bill to the job/wellhole."
That would be true if ALL of the leases were that way, however, the well would still not meet Titan's self-imposed IROR of 10% or greater.
"So, does anyone know if the HOA guided the lease process or educated their members to get a better lease?"
We cannot speak for what individual HOA's did or did not do, you would need
to contact those boards to get accurate information.
"The mineral owners have no oversight or input over expenses do they?"
Generally speaking no unless it was written into the lease or unless they have a JOA (Joint Operating Agreement- which to our knowledge, there are none at this location)
"What keeps them from putting huge administrative expenses in there on top of their lion's share of the royalty?"
This depends on language in the lease.
For the wells already drilled the investment money has been spent. Leaving now is not likely since they would lose ALL the invested money. Now is the part where they recover their investment. So they may recover less than they expected. Only if the money coming in were less than their operating cost, would they consider leaving. Low gas prices really only impact future investments ....
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