Subsurface Mineral Rights: That’s the issue at hand.
Every year the Federal Government and State Land Boards put up acreage at auction that is available for subsurface mineral extraction. This includes oil and gas.
Are these acres pre-disposed or surveyed for their oil and gas potential? No. They are plots of land. Period. Eighty-eight percent of acreage put up for auction will never be permitted or drilled.
That’s where geologists like R. C. Michael come in. With 45 years of experience in the oil fields of Colorado and Wyoming, as a geologist for the U.S. Department of the Interior evaluating hard-rock mining claims, oil and gas and geothermal lease administration—including staff well site geologist with Texaco and others.
S. Buzzi has had a fifteen year relationship with the R. C. Michael Company in the position of risk analysis and the development of risk mitigated leases based on geological data and a "follow the money" practicality that observes and benefits from how oil companies are addressing current market conditions.
This risk management approach ignores the "get rich quick" lottery of wildcatting and grabbing territory just in case it might have value. Buzzico is not just looking for geological potential acreage. It is prioritizing by:
1. Proximity to successful production…
When a Government lease becomes available near successful producing horizontal wells, it immediately becomes more valuable. This is due to the fact that the probability of drilling additional new wells automatically increases. In addition, the higher the production of adjacent horizontal wells, the greater the potential for profit on your lease.
2. Successful horizontal production on any new lease…
If there is successful production on more than one side of a new available lease (North/South/East/West), then there is a greater potential for high-grade production and multiple well sites.
3. Pending horizontal drilling permits…
This is perhaps the most important. Horizontal drilling is incredibly expensive and oil companies don’t move forward with the permitting process unless they are very serious. The advantage of purchasing a lease next to an adjacent already permitted horizontal drilling project immediately increases the value of the lease as well as making it more attractive to the adjacent drilling company or its competitor. There is also the time factor. When oil companies have reached the "permitting" state—it means they are serious—and things are moving quickly—adding months—not years—to the value of your lease.
Let’s look at some numbers.
Horizontal vs. Vertical Drilling
A good vertical well traditionally produces from 200 to 500 barrels of oil per day.
Horizontally drilled wells can initially produce from over 500 to over 1,000 barrels per day. Multiple wells can be drilled from the same drilling pad, reducing cost and environmental "footprint" while increasing production.
A vertically drilled well can only produce from the vertical thickness of the pay zone. A horizontal well can set over a horizontal mile of production casing inside the oil-bearing layer.
[Link] An excellent video on Horizontal Drilling.
How Royalties Work For You
In the past 50 years oil prices per barrel have fluctuated from $19.49 to $144.78. Oil is a very volatile commodity influenced not only by supply and demand but geopolitical pressures, technology and market speculation. Current low oil prices have created a unique opportunity for Buzzico clients in Colorado and Wyoming where established infrastructure and higher quality oil make our leases highly attractive. Additionally, oil companies are reducing their risk and increasing their profits by acquiring high grade leases directly adjacent to established production zones. A successful high-grade vertically drilled well with direct offsetting production can initially yield up to 500 barrels of oil a day per well. Successful high-grade horizontally drilled wells can initially produce from 500 to over 1,000 barrels of oil per day, per well. Obviously, these figures may vary depending on the quality of the well.
Oil And Gas Royalties Simplified
The following chart is based upon:
1. A typical 4% overriding royalty on all hydrocarbons produced on your lease. This includes oil and natural gas. This chart displays oil only. Some wells produce mostly or all gas which of course has a different pricing structure. Marketable gas produced along with oil in a well on your lease will only increase your royalty revenue.
2. Annual production is based on 48 weeks a year. Four weeks are put aside for maintenance and other issues.
3. Minor taxes of approximately 3% will be taken out of your royalty. (Not deducted on the chart but figure $3.00 per $100 revenue).
Example: 200 barrels/day production x $40 oil price=$8,000 day gross. $8,000 x 4% royalty = $320 per day.
Vertically Drilled Lease
(based on 200/500 barrels per day—life expectancy and decline rate may vary)
Price of Oil Annual Royalty
$20 .................................. $53,600/ $134,000
$30 ................................... $80,640/$201,600
$40 ................................. $107,560/$268,800
$50 .................................. $134,598/$336,450
$60 ................................. $161,280/$403,200
$70 ................................. $188,160/$470,400
$80 ................................. $215,040/$537,600
$90 ................................. $268,800/$604,800
Horizontally Drilled Lease
(based on 500/1000 barrels per day—life expectancy and decline rate may vary)
Price of Oil Annual Royalty
$20 ................................. $134,000/$268,000
$30 ................................. $201,600/$403,200
$40 ................................. $268,800/$537,600
$50 ................................. $336,450/$672,990
$60 ................................ $403,200/$806,400
$70 ................................ $470,400/$940,800
$80 .............................. $537,600/$1,075,200
$90 .............................. $604,800/$1,209,600
Pooled Royalties:
If you purchase a 40 acre lease and it becomes incorporated into a 320/640/960/1280 acre horizontal drilling project, you may be subject to pooled royalties. This is nothing to be alarmed at. Your 40 acre plot does not have to be drilled on—or even have oil and gas beneath it. It will get an equal share of the royalties of the oil and gas productions.
Moreover, a 320/640/960/1280 acre lease can typically accommodate from 8/16/24/32 horizontal wells. This could mean minimum initial production of 4,000/8,000/12,000/16,000 barrels of oil per day as the lease is fully developed. Your 40 acre lease would receive 1/8th/1/16th/1/24th/1/32nd royalty on total mineral extraction.