Unacceptable Consequences of Vertical Well Destruction

Guest post by Goetz Schuppan, Singer Oil Co., LLC

This shows the anatomy of losing a well; emphasizing that the operator is not a willing seller but is forced to sell for what the state says its worth Through the Corporation Commission forced pooling. This lowers values for everyone by multiple of as much as ten times.  Oklahoma is the only state that allows the state to set prices. In All other states the parties negotiate for property. Isn’t that a novel concept?

 Well Valuation (Excel spreadsheet)

If you look at the spreadsheet, a 30MCF/2bbl oil well has a valuation of $980,000.  I would never pay that for a well but that is the profit that such a well is forecast to generate over the next 20 years.

After our wells get fracked into, settlement discussions often break down because we cannot come to an agreement on valuation.  I think the most important point to consider is that we are not WILLING sellers of our wells and that traditional valuation models do not apply.  I don’t agree to being FORCED into selling a well for a 5 year payout at today’s prices. Below are our assumptions:

  • In a transaction between willing parties, there has to be room for the buyer to make a healthy profit over the remaining lifecycle of the well. We are not a willing seller. Traditional valuation models with 5 or 7 year paybacks don’t apply. Many of our wells have been around for 40 years and it is reasonable to expect another 20 years of production.  We compare profits from our wells to annuities.
    • Note: Mechanical integrity is a risk over that time period. We think it is offset by the potential for increased value due to new technology or changing environments. E.g.:
      • Refracking of old zones using coiled tubing.
      • Exponential increase in acreage value over the last 5 years
  • We use a discount rate of 5% which is the interest rate we pay to our bank for loans.  We don’t see a reason to use PV9 or PV12.
  • We use oil and gas price forecasts from the US Energy Information Administration published in the “Annual Energy Outlook”. A lot more analysis goes into creating this forecast then what goes into the price deck from the local bank that is used to protect the bank’s loan values.
  • Most of our wells are many years old and have a fairly flat decline curve.
  • Our overhead and operating expenses are a fraction of the costs of bigger companies. We are able to operate profitably year after year because we keep costs to a minimum.
    • Our operating costs are kept low by being geographically concentrated.
    • We don’t have layers of management
    • We do a lot of the repair and maintenance work ourselves, with older equipment that we own.
  • We take the long view:
    • We don’t have to answer to boards or financial investors.
    • We don’t have to meet acquisition or divestiture targets.
      • We don’t buy wells when we think prices are too high
      • We don’t willingly sell wells in a low price environment. We would not willingly sell a well in the current pricing environment

Goetz Schuppan

Singer Oil Co., LLC

 

Open Letter to OIPA by William F. Dost, Jr.

OIPA Board of Directors RE: Open Letter

 

Ladies and Gentlemen:

 

My business, like so many others, cannot single handedly take on the necessary task of protecting the interests of small producers which allows us to continue to work, employ and properly develop oil and gas in Oklahoma. In the early 1980’s I joined OIPA which provided the opportunity for companies like mine to become a unified voice of representation at the Capitol and the Oklahoma Corporation Commission. I became very involved with OIPA and sat on committees, gradually chaired committees, was elected as a member of the year and was nominated and appointed to be on the Board of Directors (“BOD”) in the early 1990s; all while running my own operating company. Sadly, over the years I watched as OIPA evolved into a flashy organization that began emphasizing dollar donations over the ability, to lead and diligently produce. Today the leadership positions of the organization are simply bought not earned, resulting in a shift of interests away from the small independent producer to isolating the focus to benefit horizontal production.

The recent pursuit of the long lateral horizontal bill (the ‘bill”) blatantly benefits only a select few producers and is a direct reflection of the concurrent change in leadership within OIPA. This bill would allow all the reserves that I have worked for as a vertical producer to be stolen by horizontal drilling without my consent or proper reimbursement. The OIPA BOD rejected the bill several times for its bias toward horizontal development. The leadership directed by horizontal interests continued to push the bill without making any efforts to compromise with the vertical producers.  The outlook of the bill caused a division of the organization between the horizontal and the vertical companies.  The demands of current chairman to push this bill through have caused more BODs to either resign or were forced out than has ever happened in the history of OIPA. The failure to simply address the prevention of theft for those that earned reserves on vertical wellbores has not only jeopardized but reversed the very fundamental code of fair practice with which OIPA was once founded. The organization has taken a whole new attitude that horizontal interests reign supreme and there is simply little to no concern expressed for the vertical producer. In my recent letter of resignation from the Board, I stated that the organization is no longer the organization I once joined and had dedicated so much of my time and energy over the past 35 years.

The bill fails to address many of the concerns of the majority of the industry.

  • Well bore damage by fracking
  • Theft of reserves from existing vertical wells
  • Loss of up-hole rights in the vertical well bores
  • Damage of fresh water resources from breaking down old well bores from fracking
  • The damage to Banking lending laws by challenging the rights and ownership of reserves by the vertical drillers and their leases. This one act alone affects the majority of all small town banks found in the oil patch. Individuals who own wells need capital for emergency or their day to day lives depend on the banks to lend on those wells and their up-hole reserves. The current bill as it is written will prevent that from ever happening

The science of horizontal drilling has been a plus to our industry. The utilization of this science by companies who can identify new untapped reservoirs and drill and produce those reserves economically, without the issues listed previously makes our industry more efficient and much stronger.  I cannot imagine those individuals who work for the horizontal companies justifying the theft with a clear conscience. Our industry has always used its science and talent to find new reserves for the state and the country. These actions are the reason Oklahoma wrote spacing laws to prevent the issue of  one company taking assets of other companies by drilling under their leasehold.

Please do not tarnish our industry any more than it is by forcing these bills, as written, down the throats of vertical producers and thousands of families in the vertical oil patch that depend on their wells for livelihood. I know it has taken time but address and correct these issues. If that can be done then the entire industry will join you and fight with you.

 

Respectfully,

William F. Dost, Jr. President

WFD Oil Corporation

Possible solutions for vertical well producers

Oklahoma Energy Producers Alliance regulatory affairs chairman Tom Dunlap discusses The need for data to help at the Oklahoma Corporation Commission find remedies for the destruction of their 40 vertical wells.

 

 

 

The Vertical Wells Were Here First

Every horizontal and vertical well drilled in Kingfisher County…

All the yellow lines represent horizontal wells drilled right through them and fracked with millions of pounds of sand and millions of barrels of water. No wonder the vertical wells are destroyed! This should never been allowed to happen, at least not without willing sellers or deal makers.

And … horizontal wells with the vertical taken out:

 

Newfield’s rate of return

Newfield’s rate of return is higher in both the Scoop and the Stack plays(with a 2% tax rate) in Oklahoma than either the Bakken (10% tax rate) or the Eagle Ford (8.5% tax rate) Oklahoma is subsidizing their drilling in other states.

 

 

Open Letter to the OIPA membership (Oklahoma Independent Petroleum Association)

Dear OIPA,

I think it’s time to explain why after nearly 40 years serving on the OIPA board and holding many positions including the office of President I chose to relinquish my position as a “lifetime” member of the board. I still consider OIPA a fine organization and an excellent networking group. But they have fallen short of advocating for the small producers across the state and have become a horizontal drilling association. Nothing wrong with horizontal technology; it is a game changer. But when it trespasses on the rights of vertical producers and the OIPA board refuses even the slightest measure to give them some protections that for me that is unacceptable.

Most of my time on the board we did our best to represent a broad spectrum of a very diverse industry.

There are differences between oil producers and gas producers.

There are differences between big and small companies and between privately held and public companies.

But for most of the time we got in a room and worked out something that allowed us to speak as one voice; even though sometimes the issue was so compellingly difficult that individual board members went a different path. They were always allowed to do so and without criticism.

In 1992 the board took a position on Natural gas pro-rationing to limit gas production from the biggest wells. The vote was split down the middle. The late Sam Cerny was our President and he disclosed to us all that his company would not let him support our position. Everyone understood. I could name Chairman after Chairman that spoke on behalf of the industry against their own interest.

That tradition of unity with freedom and with honor I held in high esteem.

That tradition along with many others is gone. Of course, change is the only constant in the world and we all have to embrace it one way or the other. However, some change requires a course correction or in pilot terms a 180 – going in the opposite direction.

At the end of the day, the change that required me to resign and work toward having a voice for small producers had very little to do with one issue. It was a cultural change.

The cultural change was many faceted.

There was greatly diminished effort to work out differences in a way that protected all producers. Individual board members, most of whom dedicated decades of service on a non-profit board for the benefit of all, were castigated publicly for disagreeing with leadership.

The tradition of what was required to be selected to be on the board was a back breaking change. Being selected to be on the OIPA board was historically an honor bestowed on individuals of good standing in the industry that had demonstrated a willingness to work, give of their wealth and their wisdom to the good of the entire industry. (Panas’s three Ws of requirements of a board member) That criteria changed to one of one W of the three- wealth. Big companies were given board positions not because an individual had worked for the industry or had acquired any wisdom thru years of hard knocks but because their company gave enough money. At the same time small, politically active and knowledgeable producers were told to “work your way” on to the board thru the many years of serving on committees.

At the end, this was the practice that left the small producers without a voice in OIPA. The big company members of the board are likely very good people. It’s just a different dynamic when a board shifts from a majority of those who run their own companies to those who work for someone else with little or no experience working in the public arena.

The biggest break in tradition for me was the shift in our culture as an organization that always tried to never ask for anything that was not in the best interest of our state. I know that sounds a bit altruistic for a business trade association. But it was the tradition of which I was most proud.

While many will disagree, I believe we broke with that tradition when the association supported and helped a few companies get a 2%permanent tax rate for new wells drilled.

I am embarrassed to watch teachers in my community have to take second and third jobs to make ends meet. The Gross Production Tax has gone from over 1 billion per year to 165 million affecting all our state’s vital services. Don’t get me wrong the position of trying to do what’s best for Oklahoma is not totally one of altruism. It’s also the best way to be a part of the Oklahoma community and has produced good outcomes for us as an industry. There is a reason Oklahoma is the friendliest state in the country to do oil and gas business. That is beginning to change. We are dropping in the public perception of our industry.

OIPA’s soon to be President Tim Wiggly said it best “vertical wells are our history, Horizontal drilling is our future”. That may be so, but that is no justification to disregard the 3000 Vertical producers in the process, which is what OIPA has done.

As traditional producers who run our own companies, live in communities all across Oklahoma, and as members not only of the oil and gas community but the community including our fellow men and women we can restore that voice. The Oklahoma Energy Producers Alliance was formed to give us that voice. I urge you to join us to make a difference for us and for our state by going to okenergyproducers.org and joining today.

 

Respectfully,

 

Mike “Bubba” Cantrell

Talk with horizontal frac victim Mitchel Turner

It’s just not right to ever take someone else’s property. The big horizontal Fracking companies just do it because they can; then they say “sue us” knowing that small business men and women cannot afford lawsuits.

Call your state legislator today and tell them to vote no on SB867. Don’t expand horizontal fracking!

 

Mike Harris, another horizontal fracking victim

Mike Harris has worked hard his entire life. He is well respected in the oil and gas community for his knowledge and work ethic. He has managed to accumulate some working interest and a few properties of his own over the years. Now he is watching those that he has depended upon for retirement destroyed by horizontal fracking! Call your state legislator and tell them to vote no on SB 867.

 

Horizontal frac victim Tony Weaver

Tony gives a fair and balanced accounting of what’s happening. None of these guys are willing sellers. It’s shameful that they can be forced to give up property, by the state.

 

Gross Production Tax Resolution

We ask every school board in Oklahoma to take this same action – then follow it up by having those that care about education call their state legislators with one simple message ” restore the gross production tax to 7% for everyone, which is lower than any other state and pay our teachers”

RESOLUTION 

Whereas, Oklahoma has led the nation in cuts to per pupil state aid expenditures since 2008; and

Whereas, Oklahoma teacher salaries rank in the bottom three lowest teacher salaries in the nation; and

Whereas, the State of Oklahoma has experienced repeated revenue failures during the last two years; and

Whereas, for the current 2016-2017 school year education appropriations provided by the Oklahoma State Legislature are $84 million less than what was promised in the common education budget due to revenue failures; and

Whereas, Tulsa Public Schools has received over $30 million in cuts in state aid since 2008; and

Whereas, midyear reductions and shortfalls resulted in an additional $4.5 million dollars less in education funding for the 2016-2017 school year; and

Whereas, further funding reductions are anticipated before the end of this school year; and

Whereas, sustainable and appropriate funding from the State of Oklahoma is crucial to the Tulsa Public Schools Board of Education’s mission to ignite the joy of learning and prepare every student for the greatest success in college, careers and life; and

Whereas, over $1 billion dollars in unnecessary tax breaks to oil and gas companies in the last three years alone have been a contributing factor to the decreased education budget and recurring revenue failures; and

Whereas, eliminating these tax breaks and returning the Gross Production Tax to the historic levels of 7% would yield approximately $500 million in 2018; and

Whereas, the 7% rate would ensure all oil and gas companies are taxed at the same rate and will not decrease oil and gas drilling in Oklahoma because the rate will still be equal or less than all other states in the nation where oil and gas drilling occurs; and

Whereas, immediately returning the Gross Production Tax rate to 7% is the most direct route to avoiding both the impending cuts and to putting the state budget on a sustainable path forward

Now, therefore, be it resolved that we, the members of the Tulsa Public Schools Board of Education, joining with voices from all sectors and throughout the State, hereby do call on members of the legislature of the State of Oklahoma to immediately pass legislation to return the Gross Production Tax to the historic rate of 7% to be effective for all wells on July 1, 2017 and thereby put on us the path for an adequately funded public education system with the resources to pay our teachers an honorable wage and support the most important of our work as a State: preparing every student for the greatest success in college, careers and life.

 

 

Dated this 1st day of May, 2017.

_____________________________________                           ______________________________________

President, Board of Education                                                         Superintendent of Schools

 

Print copy: Gross Production Tax Resolution