Wednesday, September 22, 2010

Drilling for Tea Leaves

Today's factoid of note...  when it comes to drilling for oil and gas of course, Seeking Alpha points out that the overall rig count is increasing.  No surprise there right?  Pennsylvania is being overrun with new drilling rigs all around.  But find the line:
The number of vertical drilling rigs was up 15 to 527. On the other hand, horizontal/directional rig count (encompassing new drilling technology that has the ability to drill and extract gas from dense rock formations, also known as shale formations) fell by 8 to 1,134. (emphasis added)
What's up with that?


Blogger Jim Russell said...

Another factor to consider, PA tax breaks for the drilling companies:

Wednesday, September 22, 2010 9:11:00 PM  
Anonymous The Wiz said...

I have a hard time believing that there are that many horizontal drilling rigs, way more than I had known about. But I am certainly not an expert.

As for the small decrease, some may have moved to Ohio or WV. Some may be just down for repairs/modernization or idled while the price of gas is down.

But the increase in vertical rigs is because there are thousands of leases that were signed before the Marcellus became the Big Kahuna of Pa. These leases were signed dirt cheap, maybe $10/acre or $50/acre instead of the several thousand/acre that people are currently getting and they are about expire in the next year or two. And few of these old leases had a vertical Pugh clause as that wasn't a concern in those ancient days.

What is happening is that companies are quickly drilling inexpensive shallow vertical wells so that land under lease can be "Held By Production" for twenty or thirty years with no additional bonus payments and even a small profit for the lease holders. Then the company can resell the leases or produce them when the market is prime.

Wednesday, September 22, 2010 10:17:00 PM  
Anonymous Joe said...

More vertical rigs do not necessarily mean we'll see more conventional vertical wells. Vertical rigs can be used to drill the vertical portion of what will eventually become a horizontal well. See e.g.
this link.

That said, I think Wiz is right, these numbers indicate drillers are biding their time and preserving their leases until prices improve. A modestly-productive vertical well drilled now can be converted into a horizontal well when market conditions improve.

Wednesday, September 22, 2010 11:06:00 PM  
Blogger C. Briem said...

Wiz. you should write a book titled "How not to be taken advantage of by the natural gas drillers"... Sounds like lots of folks are being taken advantage of from what you describe.

Thursday, September 23, 2010 7:04:00 AM  
Anonymous The Wiz said...

lol; I've been reading up on this for over two years. Learned lots of dirty tricks. The contract language is way more important than the bonus payment.

People need to get an experienced agent to represent them. A lawyer will just tell ya what is legal and what is not. There are clauses that sound very reasonable but they open a Pandora's box of problems.

Never, ever sign a standard lease!

Thursday, September 23, 2010 9:02:00 AM  

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