Expert: Carl Alexander - 6/7/2007

Question
How can you drill a gas well without signing a lease with a gas company, so that you get 100% of the royalties
I have 70 acres in Tarrant county (Texas) and would like to know if it is even possible to drill a well with out signing a lease. I am fairly knowledgeable about the drilling process and would like to put the deal together myself so that I get 100% of the royalties and not the typical 15-20%. Any good articles about putting the deal together? Or other advice?  

Answer
Thomas,
Thanks for the question. DIY drilling has gotten tougher in
the past 40 or 50 years!

You would have to organize your own gas production company drilling only on
land that you own both the surface and mineral rights. I suspect you already know
this.

You would need to organize a company, find a geologist, drilling engineer/well site
supervisor and what would be your biggest problem, finding a rig to drill it.
After the well is drilled you will need to find a company to fracture the Barnett
Shale then install the manifolds and gathering systems to put the gas into the
pipeline you would need to lay. Before any gas could move through that pipeline
you will need to find someone to sell it to. The median rate of return for a
production company is 12 to 15%. Many Barnett Shale operators are paying more
in royalties than they are getting themselves! If your royalties were $1,000/month
you would be increasing your taxable income on that well to $1,800/$1,900/month.


As far as a lease is concerned if you have enough money to do this COD all you
need is a drilling permit and a rig. A lender would require a lease. I am not
sure that 70 acres would be enough to interest a bank or venture capitalist
without finding other acreage to combine with it. The last wells I drilled between
Ft.Worth and Denton are: Drilling; $2,800,000,Fracture stimulation & Completion;
$773,000.

Can you get enough insurance to protect adjoining land, not yours, in case of
a blow out? A lender would require this.

You also must have a permit from the Texas Railroad Commission and in order to
get that you
must have a planned well with the description of the casing sizes and depths and
they must cover any potable water sands in order to receive a water board permit.
These permit applications must be submitted by a Registered Professional Engineer.
If you are not one you will have to hire one.

I don't know why anyone would want to do this. You can now receive 15 - 20% return
for 0% investment. That is a pretty good rate of return.

I have worked on a 2800 ranch north of Ft. Worth that is owned by a family that
is pretty astute on money matters. They are stock brokers, investors and venture
capitalists and they have chosen NOT to drill on their own or to participate but
only to draw royalties. The Perot interests own several thousand acres nearby
and they have done the same even though I am sure Ross Perot can afford to drill
his own wells.

I know two people that were very knowledgeable about the drilling process that
started up "shoestring" operations and both business failed because knowledge
of the drilling process does not translate into knowledge of deal making and
contract negotiations. I cannot advise anyone to do this on the basis of 70
acres. I would recommend offering your acreage to someone that does these
deals all the time. By doing that you could end up with 1 or 2% more.
If you are determined, pick out almost anyone in the phone book listed
as Petroleum Consultants or Venture Capitalist and call several, alternately,
visit a bank. If you want some names, re-contact me privately. I will call
them first and, only if they are interested, give you their name & number in
the answer.