Originally published on finance.yahoo.com
Adam Ferrari comments on a recent article discussing fracking and a landowner's mineral rights royalty payments.
If landowners receive a new lease that promises royalty payments for their mineral rights, it could be a great revelation. However, landowners should be aware that not all oil and gas companies are looking out for their best interest.
Fracking Company Goals
Landowners have to know what to look out for in the small print. They should find out how many wells the oil company is planning to drill. For royalty purposes, the more the company drills, the better it is for the landowner's bottom line. With more wells comes more oil, which serves to maximize a landowner's payout on their mineral deposits.
Some Operators will secure leases and then "drill to prove," meaning that they are using the landowner's mineral rights as a roll of the dice. These Operators are likely to cut corners and not drill the first well with particular care in order to get away with as little capital investment as possible. These Operators' long-term goal is selling to a big oil player, such as ExxonMobil, once the well has "proven itself."
Allowing an oil Operator to drill to prove leaves mineral rights in a state of uncertainty. Even if their well does get picked up by a big player in the oil industry, landowners end up just as another digitized entry in a corporate spreadsheet. Their well will be in competition with hundreds of thousands of others, and the oil company doesn't care how well their particular well performs.
To be blunt, landowners are unlikely to personally influence whether their well will go to a "proof of concept" company. However, they can bring an industry expert who has a much bigger stake in the game to get them a much better deal.
Landowners should be aware that their well is going to produce far greater quantities of oil when it is first tapped. Their royalty payments will be high in the first year and then will trend significantly downward over time. Be prepared that after the first initial boom, things are bound to taper out.
There are two types of wells: vertical and horizontal. Vertical wells go straight down and don't require as much pressure or volume, while horizontal wells typically go much deeper than vertical wells and require high pressure and volume. Landowners should understand what methods and proppants the Operator will use when drilling their well. There are constant innovations in fracking technologies, and landowners should ensure that they are getting the latest and greatest, if possible.
When it comes to mineral rights, there is an opportunity for huge payoffs. Landowners should get to know the Operator working on their land and consult with an expert to ensure that they are getting the most out of their mineral rights.
About Adam Ferrari
Adam Ferrari is the founder of the mineral acquisitions company Ferrari Energy. He is a chemical engineer by degree and is an accomplished petroleum engineer by profession. He also has experience in the financial sector through his work at an investment banking firm. Under his leadership, his company has supported numerous charitable organizations, including St. Jude Children's Hospital, Freedom Service Dogs, Denver Rescue Mission, Coats for Colorado, and Next Steps of Chicago.