Saturday, March 17, 2012
Oil & Gas Operators Took Advantage Of Eagle Ford Landowners
In case you haven't noticed it the price of crude oil has been on a tear lately, trading steady well above the $100 a barrel mark. That's both good news and bad news for Eagle Ford landowners. The good news is that when wells are produced landowners will receive nice royalty checks. The bad news is that the Eagle Ford Shale requires such intensive drilling on such tight spacing to extract all the oil in place that it will require many decades to drill and produce it all. Experts predict that it will take perhaps 40 to 50 years. A little know fact is that most oil and gas leases do NOT provide any shut in royalties or delay rentals for oil wells. With rare exception, "Delay Rentals" are for the most part reserved for gas wells only. Few in the oil industry talk about the fact that there are so many thousands of wells to be drilled that the majority of those wells won't be developed for decades into the future. Equally depressing from a landowners point of view is the fact that as the Eagle Ford is developed many wells will be shut in for ages due to lack of pipeline capacity. Despite the growing number of pipelines being constructed there will not be enough capacity to carry the vast quantities of Eagle Ford crude oil to refineries in quick order. There will be hundreds of thousands of acres simply held by production with very few wells drilled on many production units for the foreseeable future. There quite simply are over 30,000 additional Eagle Ford wells to be drilled and that will take many decades. This predicament will inevitably lead to the dilemma that many landowners, wishing to to monetize their acreage, will have to either sell their royalty interest at huge discounts to the vultures who trade in these financial transactions or see their future production go to their heirs. In any event, there is little chance that the majority of wells drilled to date, or that will be drilled in the near future, will be flowed and produced at capacity any time soon. The oil companies strategy is quite simply to use the enormous Eagle Ford reserves being developed as a hedge against currency debasement. If the experts are right and crude oil continues to rise, the Eagle Ford Shale will turn out to be the "steal of the century." The technology to exploit shale is relatively new. When it was developed and proved capable to crack the code of tight oil and gas shale’s that opened up enormous previously known areas with excellent source rock hydrocarbons. Like a thief in the night, big oil and gas operators moved into the Eagle Ford Shale and leased up acreage on the cheap. They knew it was rich in hydrocarbons and too big to be developed by a single company. They then set out to carve out their areas of interest and then proceeded to lease that acreage for practically nothing. Collectively they now own the premiere oil reserve in the US with the lowest finding and development cost. To deflect criticism that they took advantage of landowners, operators bemoan that there is much risk in developing a new play such as the Eagle Ford. That contention is just PR intended to hide the fact that they took advantage of landowners.