Why Do Royalties From Natural Gas Decrease Over Time?
February 26, 2016
Selling gas royalties is a great way for mineral rights owners to make an income off the natural gas their land holds. Before doing this, it is important for rights owners to understand a few important details about any potential income, especially concerning declines in royalties. Many owners who sell their royalties are pleased with their first few payments, then become concerned after a few years, as the payments gradually decrease. By understanding how natural gas deposits typically function, mineral rights owners can also understand why their gas royalties payments may fluctuate.
Why Natural Gas Royalties Reduce Over Time
Much to the disappointment of some royalty owners who are unaware of this ahead of time, royalty payments decline drastically from that first big check received right after the natural gas on their property is drilled. The most drastic declines typically happen within the first 10 to 12 years that a well is productive. After this, for the most part royalty payments level off. Following are some of the reasons this happens:
- New Wells Produce More - When a gas well is first dug, natural gas is released in huge volumes, at high pressure. This is why during the first few months, a new well can pay off greatly since it is producing so much. Then as the pressure beneath the ground reduces, so does the rate at which gas is expelled from a well, resulting in a lower yield.
- Natural Reduction in Gas Production Over Time - It is estimated that the more a well produces in its first month, the longer the productive life expectancy is for that well. Natural gas wells see the most drastic reduction in production during their first 5 years. Then the reduction tends to continue for twice as long, to a point where these wells are only producing 20 to 30 percent of what they produced initially. This is normal and is based upon the continual reduction in pressure as well as reduction in natural gas at that specific location. Some wells will continue to expel lower amounts of gas for as long as 30 years, or even more. Some will stop producing altogether, if the natural gas deposit has been depleted.
- Current Natural Gas Prices and Demand - Along with reducing gas production from wells, the continued reduction in the cost of natural gas affects prices as well. Currently, the United States is producing more than enough natural gas, so prices are lower. Of course, this is good for the consumer, but not for the rights and royalties owners.
What To Expect from Royalty Sales
When new wells are being dug on a property, it is important for natural gas rights owners to realize that their payoff may be big at first; however, their quarterly payments are going to decrease continually and significantly until the well levels off. This is completely normal and should be expected. Where wells have been producing for a while, the amount of reduction in gas royalties to be expected will depend upon what point in its production life the well is at. Wells still within that initial 10 to 12 year decline will see considerable reductions in production. Those that are beyond this point will likely produce more regular amounts, although at much lower amounts.
Since the amount and length of time that any natural gas well produces is impossible to exactly determine, royalties owners must understand the many existing variables when they decide to sell their gas royalties. New wells will always produce more and earn more money in royalty payments; however, even slower-producing wells can be reasonably productive each quarter. Still, it is important for mineral rights owners to understand the reasons for these declines, so they are not disappointed when they happen!
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