In the last newsletter, we learned that one of the formulas for calculating interests in an allocation well is:
Lateral length of horizontal well bore on lessor’s tract
Total horizontal wellbore length
This month, I thought it would be beneficial to apply the allocation tract factor and do an actual calculation based on hypothetical.
Let’s assume that there is a horizontal well that traverses three separate tracts. The horizontal well is 10,130’ of total lateral.
Tract 1: 320 acres, 2,310’ of horizontal wellbore – *Owner (A) signed lease with a 3/16 royalty
Tract 2: 80 acres, 2,640’ of horizontal wellbore – Owner (B) signed lease with 1/8 royalty
Tract 3: 320 acres, 2,640’ of horizontal wellbore – Owner (C) signed a lease with ¼ royalty
Tract 4: 80 acres, 2,540’ of horizontal wellbore – Owner (D) signed a lease with 3/16 Royalty
*Assume all owners own 100% mineral interest in the tract.
How are the interests of the parties calculated.
Step 1: First, let’s calculate each owner’s Allocation Factor:
Tract 1: 2,310’ of wellbore on lessor’s tract/10,130 Total Horizontal Wellbore Length = 0.22803554
Tract 2: 2,640/10,130 = 0.26061204
Tract 3: 2,640/10,130 =0.26061204
Tract 4: 2,540/10,130 = 0.25074038
Step 2: Now, let’s include the owner’s royalty interest into the calculation:
Tract 1: .1875 * 0.22803554 = 0.04275666 (Owner A’s Net Revenue Interest)
Tract 2: .0125 * 0.26061204 = 0.00325765 (Owner B’s NRI)
Tract 3: .25 * 0.26061204 = 0.06515301 (Owner C’s NRI)
Tract 4: .1875 * 0.25074038 = 0.04701382 (Owner D’s NRI)
Why didn’t we include the acres in the Owner’s tract into consideration? Because the horizontal wellbore may not traverse the entire tract. So, even if it’s a 320 acre tract of land, the wellbore may only traverse a part of the 320 acres.
For the hypothetical above, this is what it would look like:
Why do Tract 1 and Tract 4 have less of the lateral wellbore than tracts 2 and 3?
Tract 1 has fewer lateral feet of wellbore because the well was drilled on that tract and measurements for the horizontal length don’t begin until the first “take point.” The take point is where the horizontal wellbore begins. This is the part that is going to be perforated for fracking.
Tract 3 has fewer lateral feet because, under Texas law, a wellbore can be no closer than 467’ from a lease or property line. This is also known as the last take point.
Stay tuned for next month’s article on Allocation Wells where we’ll compare the interests and determine which is more profitable for the mineral owner – a horizontal well or a vertical well.