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Royalty » Decline of Natural Gas Well Production and Royalties Over Time
Production Decline of a Natural Gas Well Over Time
Hypothetical Decline Curve for a Horizontal Well
| This graph shows how the yield of a hypothetical natural gas well has declined over time. It shows a rapid drop in production during the first year and a slowing decline rate in subsequent years. Eventually the well will yield so little gas that it will be uneconomical to operate and will be abandoned. The rate of decline varies from well to well and even from basin to basin. There is not enough long-term experience to accurately predict the productive life of wells in the shale gas formations of the United States. |
Declining Royalty Payments are Normal
Lots of property owners who signed a lease in one of the natural gas shale plays such as the Marcellus, Barnett, Haynesville, Fayetteville, Bakken, Utica and Eagle Ford are now receiving monthly or quarterly royalty payments. Many of these people were pleasantly surprised with the amount paid in their first monthly check but then they were shocked when the amounts of subsequent payments rapidly declined.
There was nothing wrong with their well. Sharp declines are normal.
Royalty Calculator: Estimate your royalty payments!
Why Do Royalty Payments Decline?
Royalty payment declines occur because the amount of natural gas produced from nearly every continuously-produced shale gas well decreases steadily over time. When a new well is drilled it penetrates a rock unit with abundant gas,sometimes under pressure. These new wells can yield at a very high rate, but over time - as gas escapes from the well - the pressure in the formation goes down. The result is a well with a lower rate of yield. A graph illustrating the production decline for a hypothetical well is shown at the top of this page.
Notice how the decline was very rapid during the first year and then followed a slower but continuous decrease. The well illustrated in this graph had an initial yield of about five million cubic feet per day but twelve months later the yield had dropped nearly 80% - to a little over one million cubic feet per day.
The result was a huge income drop for the property owner!
Expect Declining Royalties
Production declines this severe are common in unconventional natural gas wells drilled in shale. If you have a new well or have recently leased your property it might be a good idea to be very conservative with your long-term royalty expectations.
Your income from that well is going to fall rapidly at first and eventually decline to zero.
Some wells do not show the same sharp decline as this example. Other wells decline more rapidly. Information from the decline curve above is summarized in Table 1 in the right column.
Other Variables that Change Royalties
Other variables can cause a change in the amount of royalties paid on a well. The price of natural gas has taken wild swings over the past several years, moving from a high monthly average of $11.00 down to a low approaching $2.00 (see graph in the right column). Changes in the price of gas will significantly modify royalty payments.
The United States currently has a glut of natural gas as a result of new technologies that extract gas from shale. This abundance of natural gas has kept prices low and has some companies willing to invest billions of dollars to build liquefied natural gas export facilities that will allow United States natural gas to be shipped to Asian markets where prices are higher.
As more and more wells are drilled the only thing that can remove the downward pressure on natural gas prices is an enormous increase in natural gas use. This could happen. Natural gas currently has a cost advantage over oil and oil-derived fuels for electricity generation and as a vehicle fuel. Utilities are starting to convert power plants to natural gas and some companies that own vehicle fleets are starting to invest in natural gas vehicles and fueling stations.
However, these new uses of natural gas are not spreading rapidly.
Well Depletion and Closure
Eventually the yield of the well will decline so much that the income from the gas is less than the expenses required to maintain the well. At that point the well will be closed. Sometimes depleted wells are sealed and other times they are turned over to the property owner who may have a use for the small amount of gas that still flows.
The Useful Life of a Well
Horizontal drilling and hydraulic fracturing have been used to produce natural gas from shale for less than a decade in most parts of the United States. However, some general statements can be made about the productive life of a typical well. As described above, these wells will yield at a rapid rate immediately after drilling and the yield will decline rapidly during the first year and then more slowly over time.
The yield during the first month after completion will reveal how valuable the well will be. Lower yield wells produce one to two million cubic feet per day. Many wells yield between three and five million cubic feet per day, but gigantic wells could produce as much as twenty million cubic feet per day. The more the well yields in the first month the more valuable it will be over time.
Because the yield declines rapidly as much as 50% of the total gas that will flow from the well could be produced in the first five to ten years. Wells might then continue to produce for a total of twenty to thirty years but at lower and lower production rates. Caution with production and royalty expectations is recommended because long-term experience from shale formations in the United States is not available.
New Gas from Future Technologies?
Current technologies are recovering a very small percentage of the natural gas that is held in the rocks. During the next twenty to thirty years new methods for extracting gas from the Earth could be developed. It is possible that these new methods could be used to rework existing wells and renew their productivity. Only time will tell.
Contributor: Hobart King |
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| The wellhead price of natural gas can change rapidly over time. In the past few years the monthly average price has been as high as $11 and as low as $3. Data from the Energy Information Administration. |
| Year |
Initial Production |
Closing Production |
Decline from Previous Year |
Annual Royalties $4/mcf Gas 12.5% Share |
| First |
5.0 Mmcf/d |
1.1 Mmcf/d |
78% |
$328,500 |
| Second |
1.1 Mmcf/d |
0.79 Mmcf/d |
28% |
$164,250 |
| Third |
0.79 Mmcf/d |
0.62 Mmcf/d |
22% |
$127.750 |
| Forth |
0.62 Mmcf/d |
0.52 Mmcf/d |
17% |
$107,675 |
| Fifth |
0.52 Mmcf/d |
0.48 Mmcf/d |
8% |
$93,075 |
| Sixth |
0.48 Mmcf/d |
0.43 Mmcf/d |
11% |
$85,775 |
| TABLE 1: Production decline statistics from a hypothetical natural gas well in shale. The results from your well could be significantly different from what is shown here. |
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