Another stupid Idea proving Trump doesn't understand oil

[wrs + 893]

This has to be one of the more stupid ideas they have floated.  It's not going to fly because operators can only sell oil at the wellhead.

https://finance.yahoo.com/news/u-weighs-paying-drillers-leave-193607108.html

 

The Energy Department has drafted a plan to compensate companies for sitting on as much as 365 million barrels worth of oil reserves by effectively making that untapped crude part of the U.S. government’s emergency stockpile, said senior administration officials, who asked not to be identified describing deliberations prior to a decision and announcement.

The drillers DON'T OWN THE OIL IN THE GROUND. THE MINERAL OWNERS DO.

At today’s low prices, the U.S. government could fare well on the deal. Buying 365 million barrels at the current price of $19.87 a barrel -- and selling at the 2019 average price of $57.04 would yield more than $13 billion profit. Even selling at just $30 a barrel could net nearly $4 billion, minus any transport and holding costs.

This would be IMO, stealing the oil from the owners at an unfairly low price. Either the driller pumps or he loses the lease. The driller is not getting a lease that allows him to sell oil in the ground, only oil at the wellhead. That's specifically stated in every lease. It's illegal.

[BillKidd + 139]

Almost all shale wells are drilling on production units of pooled leases. Usually, 640 acres or larger. If just one horizontal well is drilled in that unit, the entire lease becomes HBP -- held by production. The terms and conditions of almost every lease are that the operator is under no obligation to drill additional infill wells at any point in time. (Lots of gotchas within that but it's generally true; it's very much in favor of the Lessee/operator.) If the operators in the area have established that, say, six laterals per mile will efficiently drain the unit, he's got room to drill five more after the first one, and on its own timetable. Could be next month, could be 20 years from now.

I will not comment on whether this proposal carries any risks regarding the Lessee's duties and responsibilities for the minerals owner's oil/gas. The mineral owner owns it, but he leased it. This proposal might carry some problems; that's up the oil and gas attorneys to debate.

Edited April 16, 2020 by BillKidd

[wrs + 893]

47 minutes ago, BillKidd said:

Almost all shale wells are drilling on production units of pooled leases. Usually, 640 acres or larger. If just one horizontal well is drilled in that unit, the entire lease becomes HBP -- held by production. The terms and conditions of almost every lease are that the operator is under no obligation to drill additional infill wells at any point in time. (Lots of gotchas within that but it's generally true; it's very much in favor of the Lessee/operator.) If the operators in the area have established that, say, six laterals per mile will efficiently drain the unit, he's got room to drill five more after the first one, and on its own timetable. Could be next month, could be 20 years from now.

I will not comment on whether this proposal carries any risks regarding the Lessee's duties and responsibilities for the minerals owner's oil/gas. The mineral owner owns it, but he leased it. This proposal might carry some problems; that's up the oil and gas attorneys to debate.

I have to correct some of what you have stated here because it's mostly inaccurate. The 640 acre number is a section in West Texas, one square mile.  Only on the old leases can one well HBP a whole lease.  In modern leases you have the idea of production spacing units with specified unit spacing.  The lessee is required to maintain production on all spacing units or give back the acreage in any spacing unit that isn't being produced outside the primary term.  Then there is the pugh clause which limits the vertical extent of the lease after the primary term to 100 ft below the deepest penetration point or sometimes the stratigraphic equivalent thereof. 

Shale is layered and if the operator doesn't produce from the deeper layers in the primary term, the deeper ones are released and available for future developement by another operator.  In no case does the lessee have any option to sell what is underground before it's been produced.  I am not an oil and gas attorney but I have executed probably 50-100 leases over the last 20 years and I know that the lease only allows the lessee to sell what is produced.  The landowner is paid according to the market price at the time of production.  If the lessee sells oil forward, it doesn't change what the mineral owner is paid unless that is written into the contract but generally the leases don't have such stipulations.  Hedging is not done in the physical market, it is a financial arrangement between the producer and a financial intermediary.

Edited April 16, 2020 by wrs

[Gerry Maddoux + 3,627]

53 minutes ago, BillKidd said:

If the operators in the area have established that, say, six laterals per mile will efficiently drain the unit, he's got room to drill five more after the first one, and on its own timetable. Could be next month, could be 20 years from now.

I don't know how far out it would stretch but it's not likely 20 years . . . because most of those wells won't last beyond ten. 

Either way, WRS has a point--the only oil the operator owns is as it comes through the wellhead. Anything in the ground still belongs to the mineral owner. Might be a good lawsuit or two but this would shake out in favor of the royalty-owner.

And in Texas, multiple layers are owned by multiple people, in many cases. You can't sell what you don't have. 

[BradleyPNW + 282]

This is a good thread because the shale oil people are talking about what they know, the details of shale oil production.  

[Pivy 0]

What the feds could do is buy futures from drillers.

[Prometheus1354 + 178]

@wrs  "This has to be one of the more stupid ideas they have floated.  It's not going to fly because operators can only sell oil at the wellhead"

The WH/Energy Dept. Said they would Buy the oil and have is 'stored' in the gov't salt cavern oil repository. Having Already deposited 365 Million barrels to date.  With an eye towards adding similar amount going forward in an attempt at helping the industry and averting an issue of where to put it as existing holding capacity is nearing full lid.

Sorry, but Not stupid...

[wrs + 893]

8 hours ago, Prometheus1354 said:

@wrs  "This has to be one of the more stupid ideas they have floated.  It's not going to fly because operators can only sell oil at the wellhead"

The WH/Energy Dept. Said they would Buy the oil and have is 'stored' in the gov't salt cavern oil repository. Having Already deposited 365 Million barrels to date.  With an eye towards adding similar amount going forward in an attempt at helping the industry and averting an issue of where to put it as existing holding capacity is nearing full lid.

Sorry, but Not stupid...

That's a different proposal.  This one specifically has the govt buying the oil and leaving it in the ground.  The operator doesn't own the oil until it reaches the surface.  As a mineral owner I don't like that one either, I prefer the wells be shut in for prices under $35.

Edited April 18, 2020 by wrs