Here is a timeline breakdown for the revenue path for a 12,000 ft. well:
- Site prep, drilling, logging & testing: 2 – 4 months, occasionally more if complications are encountered
- Completion & sales line hookup: 1 – 2 months, occasionally longer if extensive work is required
- Production flow is measured: 1 month
- Product is marketed & revenue processed: 2 months
It can take anywhere from six (6) to nine (9) months from well spud (start of drilling) to actual receipt of the first revenue check by the well owners of a typical 12,000 ft. MVD (Mean Vertical Depth) well. Deeper wells, wells that run into difficulties, and extensive completion and pipeline installations will extend the time to cash flow.
How Small Producer Well Owners Are Paid
One must first understand that wells are treated as individual business units and as such are funded or purchased as Working Interests (WI) that represent a percentage of ownership. Therefore, 100% of WI pays for all well costs including the costs to bring a well into production and additionally all costs of continuing well operations or Lease Operating Expenses (LOE) and Federal Taxes. Costs and taxes are assessed proportionately among the Small Producer business owners, or WI owners according to the amount of Working Interest owned.
Likewise, revenue from well production, which is distributed monthly, is paid to the business owners proportionately according to the Working Interest owned. However, there is a significant caveat. Royalties to the property owner(s), including sometimes a much smaller percentage going to the generating geologist, are paid out of the gross production revenue, i.e. before operating expenses are subtracted. Royalties usually amount to a 20–30% reduction in the income received by the Working Interest owners. Thus, for purposes of income distribution, Working Interests are converted to Net Return Interests (NRI). For most wells the NRI will fall between 70% to 80%.
BASIC WELL REVENUE CALCULATION FORMULA:
Gross Revenue = [(monthly natural gas production) Xs (price per mcf) + (monthly oil’Revenue Path’ and ‘How Small Producer production) Xs (price per barrel)]
Net Revenue for 1% WI = 100 [(Gross Revenue – Taxes) Xs (NRI)] – [Operating Expenses]
Example: Doberman Offset Well – June 2007 Production ▼Less TX Taxes▼
Gas Production = 272,253mcf @ $7.90/mcf = $2,150,799 $1,989,489
Gas Production = 2,195mcf @ $9.47/mcf = $20,784 $19,225
Oil Production = 5,727bbls @ $68.25/bbl = $390,887 $372,906
Total Gross Revenue for June 2007 ► $2,562,470 $2,381,620
June 2007 8/8ths LOE = $175,819
Net Revenue for 1.0% WI = [( $2,381,620 Xs .725NRI) – $175,819] = $15,509/1.0% WI 100
Total Well Cost = $9,333,223 ► 1.0% WI Cost = $93,332
% Net Return = 16.6% payback from 1 month of production!