How Can Lease Holders Benefit from the Utica Shale Play?

Jim Fracker | October 5th, 2012

Much has been written about the Utica shale development phenomena since it first arrived on the scene in eastern Ohio. The topics of discussion are numerous and include tax planning and environmental impact, just to name a few.  But, for the most part, discussion of the Utica shale involves two main parties of interest:

  • Acquisition/exploration/production companies and supporting casts
  • Landowner/mineral interest entities (“lease holders”)

Utica Lease Bonuses

Some of these articles have discussed the unique opportunity for mineral interest owners  to receive large bonus payments for oil and gas leases from the large exploration companies that are actively seeking such leases.  In the past, mineral interest leases that might have included bonus payments of $1 to $10 per acre.  Now, they’re skyrocketed to amounts exceeding $4,000 per acre. While bonus payments of $4,000 or more per acre are deserving of the fanfare they are receiving, they may be overshadowing a topic just as deserving, or maybe more deserving, of attention: royalty payments. The royalties paid from the production revenue of a horizontal drilled Utica well could be significantly higher than the bonus money received on the same mineral interest. The following example illustrates what the bonus payment versus royalty payment might look like.

Bonus payment –
213 acres @ $4,000/acre
     $852,000
Initial production year royalty payment:
Annual barrels of oil equivalent 620,500
Price per barrel equivalent               $60
Well revenue $37,230,000
Lease holder royalty percentage              15%
Lease royalty to be paid $5,584,500
Mineral interest holder acres (213/640)          33.33%
Lease holder royalty     $1,861,500

 

Utica Shale Royalties and Revenue Streams

While this illustration may not be indicative of the operating results of all Utica wells, it only speaks to the first year of production. The exploration/production companies currently plan on these wells producing beyond the initial year of production. The tremendous financial opportunity for lease holders to share in the well revenue stream (royalty) of a Utica well might suggest the lease holder focus on ways to encourage an exploration company to drill a well on the lease property rather than solely focusing on the bonus payment portion of the lease. The Utica shale play opportunities for both the lease holders and exploration/production companies is truly now and beyond.

Great Opportunities for Utica Lease Holders

In summary:

  • There are great opportunities out there.
    • Plan, plan, plan from a personal, legal and tax perspective. There is no one size fits all solution.
    • Invest wisely and reap the benefits well into the future.
    • To quote Mr. Gerald Benson, owner of Mattmark Drilling Company “Don’t be greedy. Ask a lot of questions. If the people you talk to – legal advisors, accountants or investment bankers – are not card carrying members, don’t waste your time talking to them.”

 Contact our Ohio Oil & Gas CPAs

Getting the best deal for your mineral rights isn’t always a straightforward proposition.  Yes, you need to think about the lease bonus, but you also need to consider the long-term royalties.  Structuring a deal requires professional planning.  If you own land in the Utica Shale Play region and are considering entering into a lease agreement, contact Rea & Associates.  Our team of oil & gas accountants and tax professionals will help you structure the best possible deal, one that keeps you compliant, limits your taxes and provides income for your family for years to come.

Need more information for landowners?  Read What to do if You Strike Oil or Gas, tips for landowners by David Shallenberger, a member of Rea’s Oil & Gas tax team.

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