Posted on: Sep , 2022

In this third and final installment on allocation wells, we are going to examine the difference to the mineral owner in terms of which is better for them – an allocation well or a single well?

Let’s assume we have a mineral owner with a 100% interest in a 320-acre tract of land and he leases to an oil and gas company for a ¼ royalty. If the tract is pooled, assume 100% of the tract is included in the unit and the total unit acres is 1200 acres.

The calculation is .25 * 320/1200 = 0.066666667

Now, assume the same facts but this time it’s a horizontal well and 2,300’ of lateral is on the tract and the total lateral wellbore is 10,050’.

The calculation is .25 * 2300/10,050 = 0.057213930

Of course, the numbers vary based on the length of lateral but at first glance, it would appear that the mineral owner is better off with the pooled NRI than the allocation NRI. But looks can be deceiving.

According to Certified Mineral Manager and CPL Jimmy Wright, that’s because a horizontal well can produce exponentially more oil than a vertical well can. So, even though the NRI of a vertical well may be larger, in actuality, the mineral owner is likely to have more production, and therefore more revenue from a horizontal/allocation well than from a vertical well in a pooled unit.

Think about it this way: if you have a vertical well with 100’ of payzone, you will be able to retrieve oil from 100’. If, on the other hand, you have a 2 mile horizontal well, you will be able to retrieve oil from 2 miles, instead of just 100’.

The technology we have today with fracking is vastly better at producing more oil than a single vertical well.

And, if you missed the first two blogs in the series, click below to read those:
What Is An Allocation Well?
Calculating Interests in an Allocation Well