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Hypothetical O&G lease question
Posted on 1/5/17 at 8:53 am
Posted on 1/5/17 at 8:53 am
If an Oil & Gas company gave a land owner a generous payment as a lease bonus on a parcel he owns (assume 6 figures), what is the probability of the O&G company drilling on the subject property during the term of the lease? Is it reasonable to assume that the bigger the bonus, the higher the drilling probability?
Reference: "An oil and gas lease bonus is a payment made to you for the right to drill on your property for the term of the lease. When you sign a lease, the oil and gas company (operator) pays the lease bonus as a way to compensate you for the time they are allowed to drill. During the term of the lease, the operator has the right to drill at any time, or they may elect not to drill at all. You can think of a lease bonus payment the same as you would rent on a rental property. The lease bonus is paid up front for the entire term of the lease."
Reference: "An oil and gas lease bonus is a payment made to you for the right to drill on your property for the term of the lease. When you sign a lease, the oil and gas company (operator) pays the lease bonus as a way to compensate you for the time they are allowed to drill. During the term of the lease, the operator has the right to drill at any time, or they may elect not to drill at all. You can think of a lease bonus payment the same as you would rent on a rental property. The lease bonus is paid up front for the entire term of the lease."
5
Posted on 1/5/17 at 9:01 am to tigerpawl
Bonus amount is based on the # of acres you have. More acres bigger bonus.
Posted on 1/5/17 at 9:11 am to tigerpawl
It doesn't mean the drilling will be on the property leased. The drilling companies, or third parties obtaining the leases, will lease hundreds / thousands of acres in the area where drilling is taking place. It was over two years before drilling initiated that affected my property. The property is only 1.6 acres in the middle of a small town. I sure do miss $100 bbl oil.
Posted on 1/5/17 at 9:14 am to tigerpawl
quote:
Is it reasonable to assume that the bigger the bonus, the higher the drilling probability?
I would assume that you have a decent spot and they paid you a high per acre bonus amount, they would drill. They did that in some parts of the Haynesville after paying people $20K an acre. Drill 1 well in the section and cap it or cut back the well so they wouldn't have to re-lease. On the other hand, with prices so low with Oil and NG, you never know what any one will do.
Posted on 1/5/17 at 11:59 am to tigerpawl
quote:
Is it reasonable to assume that the bigger the bonus, the higher the drilling probability?
Generally yes, a higher bonus means they have high expectations for the property, and high expectations mean more likely to drill.
It may mean that it is a competitive leasing area and higher bonuses are necessary to keep a competitor from leasing up the property, and again highly competitive areas generally mean more likely to drill in the area. However if they drill nearby and are disappointed, the high bonus won't affect the decision on whether to continue drilling.
Also, this is assuming that the royalties are equal in the higher bonus - lower bonus scenarios.
If a company thinks it can net more with a $200K bonus and a 20% royalty vs. a $50K bonus and 25% royalty, paying the higher bonus might have no effect at all on the likelihood of drilling.
Posted on 1/5/17 at 12:12 pm to tigerpawl
quote:
If an Oil & Gas company gave a land owner a generous payment as a lease bonus on a parcel he owns (assume 6 figures)
Does that mean $200/acre on 500 acres or $10,000/ac on 10 acres?
Sorry, couldn't resist.
There are too many variables at play to give you an answer to the question. The drilling costs, formation specifics, whether the company has better acreage under lease, and the whims of the market/executives all affect drilling programs.
Posted on 1/5/17 at 12:57 pm to GaryMyMan
quote:I'm trying to establish a total lease amount at which it would be reasonable to assume the probability of drilling is greater than 50/50. To your point, you would have to somehow relate the total lease amount on your property to the total cash resources of that specific operator. Does it represent a relatively major outlay for the operator to the extent that he's now obligated to follow through with drilling plans - or is it just a drop in the bucket for him - and he won't lose sleep if the afore mention executive whims kick in and they decide to move on without drilling? If he's a small operator, does it necessarily tip his hand when he plunks down major cash to one major landowner? Is he all in, or is this a "just looking" lease?
There are too many variables at play to give you an answer to the question.
All this is assuming that the price of oil makes economic sense to drill.
Posted on 1/5/17 at 3:45 pm to tigerpawl
quote:
I'm trying to establish a total lease amount at which it would be reasonable to assume the probability of drilling is greater than 50/50. To your point, you would have to somehow relate the total lease amount on your property to the total cash resources of that specific operator. Does it represent a relatively major outlay for the operator to the extent that he's now obligated to follow through with drilling plans - or is it just a drop in the bucket for him - and he won't lose sleep if the afore mention executive whims kick in and they decide to move on without drilling? If he's a small operator, does it necessarily tip his hand when he plunks down major cash to one major landowner? Is he all in, or is this a "just looking" lease?
All this is assuming that the price of oil makes economic sense to drill.
You aren't providing enough context for what makes the bonus in your scenario "generous".
All other things being equal, if a company offers one property a "generous bonus" and another "a non-generous bonus", the generous bonus property is more likely to be drilled...but it isn't because that company has more money invested into it, its because that property was more highly valued to the company and properties that a company values more highly are more likely to be drilled.
If you are comparing the bonus to leases in different plays or leases with different royalty rates or taken at a different time then you aren't going to able to gain any meaningful information based on the bonus size.
This post was edited on 1/5/17 at 3:47 pm
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