5 Misconceptions About Natural Gas Development
Posted November 3, 2020
Most of us understand the basic fundamentals of natural gas:
- Like crude oil, it’s found deep below the surface of the earth.
- It’s used for things like heating our homes and businesses, and fueling our stoves and other appliances.
- It’s also used by some power plants to generate electricity.
What most people don’t fully understand (unless they work in the oil and gas industry) is the process by which natural gas gets from underground rock formations to our homes and businesses. While it seems like it should be a fairly simple and straightforward process, it’s often more complex than meets the eye.
Here are some of the most common misconceptions landowners have about natural gas development—and what often really happens in these situations.
Five Common Myths about Royalties from Natural Gas Production
As a company that purchases oil and gas royalties, we spend a lot of time talking to people who have leased their minerals to oil and gas companies. Below are some typical landowner expectations when it comes to development, production or royalties that don’t always prove to be true:
1. “I can see the well from my house, so my minerals will be developed soon.”
While it makes perfect common sense that your minerals would be extracted from the well closest to your property, that’s not always the case. A pad site may be a mile away, but your minerals may not be developed from that pad site. Instead your minerals may be diverted to a site several miles away because of the operator’s setup or strategy, or because you’re part of a pooled unit.
The other misconception at play here is that something will happen “soon” in the oil and gas industry. No matter how good things may look, delays happen all the time for a variety of reasons—from lack of infrastructure to low natural gas prices to budgetary issues with specific operators. Any of these things can quickly make “soon” seem like a distant memory.
2. “I’m in a pooled unit, so I’ll be paid for all my minerals”
What happens in a pooled unit is your lease is combined with other landowner leases from your area to create one large piece of property where oil and gas will be extracted from the same well. Pooled units are increasingly common today, especially with the type of horizontal drilling used in the shale plays.
Pooled units can be a mixed blessing for royalty owners. While pooled units do increase the likelihood a company will drill in an area, they don’t guarantee it. Even landowners in pooled units have been left waiting months or years for development to begin. It’s also important to note one well working on multiple properties may not fully develop your mineral interest. Owning to a pooled unit can, in essence, dilute your interest—so you may not be getting the most out of your minerals.
3. “I’m set for life based on my royalty checks”
Early royalty checks can definitely be deceiving. One thing we’ve found from looking at the data of natural gas wells in eastern Ohio over the past decade is that after the first two years there is typically a sharp decline in production. This is because operators turn the wells on very strong in the beginning but eventually the well can’t keep up that level of production and the output drops off.
Many landowners see those first couple royalty payments and think it’s going to go on like that forever. It’s not—and it can be shocking to see those royalty checks fall. Those first checks are based on the highest output the well is going to have, so that’s usually the best those royalties are going to be. After the two-year mark, landowners can expect their royalties to decline significantly and then continue to decrease slowly from there.
4. “I have four wells on my property, I’m going to make more money”
Many landowners look out, see three or four wells drilling around their property versus only one on a neighbor’s property and think that must mean more royalties heading into their wallet than their neighbor. But with oil and gas development, what you see on the surface doesn’t always tell the full story. In fact, your neighbor may actually be better positioned to earn royalties than you in this scenario.
What matters more than the number of wells on or around your property is your number of fully developed mineral acres. Those four wells on your property are likely not just extracting minerals from your property, but extracting minerals from multiple properties in the area. Whereas your neighbor’s well may just be extracting minerals from their property and, as a result, he may have more fully developed mineral acres than you.
5. “I can sell my minerals any time…”
Minerals are an asset, and that asset has value. But like any asset—from gold to the home you live in—the value of that asset is based on a market. When there’s a high demand for houses, your house might sell quickly at a high price. When there’s a low demand for houses, your house might sell for a lower price or not sell at all. The same thing can happen with your minerals.
As a company that purchases mineral rights and royalties from landowners, sometimes we have to explain to people the value of their minerals is just not there right now because operators have limited interest in developing in that area. Of course, as with any market, that can always change. That’s why we keep the information of every landowner we consult with so we can reassess the situation and revisit the potential for purchase at a future date.
Have questions about your oil and gas lease or selling your oil and gas royalties? We can help you answer them! Talk to the experts at Gateway Royalty today.