Chesapeake to Start Deducting Some Costs from Royalty Checks

- Chesapeake to Start Deducting Some Costs from Royalty Checks

Thursday, August 11, 2011
Fort Worth Star-Telegram, Texas
by Jack Z. Smith

About 20,000 royalty owners who have Barnett Shale natural gas leases with Chesapeake Energy will likely see their royalty checks slashed by roughly 25 percent after the company deducts expenses associated with post-production, such as gas gathering, compression and transportation.

The actual percentage and dollar amount decreases in royalty checks will vary monthly based on natural gas prices, post-production costs and output from wells.

Affected royalty owners were notified of the new company policy in recent letters. The changes took effect with July royalty checks that were based on May production, according to Julie Wilson, Chesapeake vice president for urban development and the top executive in its Fort Worth regional office.

Chesapeake is the No. 2 producer in the natural gas-rich Barnett Shale, which underlies more than 20 North Texas counties.

Henry Hood, senior vice president and general counsel for Oklahoma City-based Chesapeake, said post-production costs run from 70 cents to $1 per 1,000 cubic feet of gas produced. Natural gas prices have recently been around $4 per 1,000 cubic feet.

At that price, royalty checks will be "about 25 percent lower," Hood said.

Wilson said about 75 percent of Barnett Shale royalty owners with Chesapeake leases received letters advising them of the change.

The royalty owners whose monthly checks won't be affected are those who have lease provisions precluding assessments for post-production costs, Hood said.

As a general rule, large property owners who hired attorneys to help them negotiate leases and residents who are members of neighborhood associations that negotiated carefully crafted leases appear much more likely to have provisions precluding those charges.

Roger Venables, assistant director of community development and planning for the city of Arlington, said it has lease provisions barring Chesapeake from assessing post-production costs.

Representatives for the city of Fort Worth, Tarrant County and Dallas/Fort Worth Airport were not immediately able to confirm late Wednesday whether they have such provisions.

Hood said Chesapeake did an exhaustive internal audit of all its Barnett Shale leases to determine which could be assessed the post-production costs.

The audit took about six months, he said.

The post-production costs are routinely assessed against royalty owners in Texas unless lease provisions prohibit it, he said.

Chesapeake said in its letter to royalty owners that they will not be retroactively assessed any charges for post-production costs that the company incurred before its policy change.

"Please be assured that we do not intend to recoup these charges on past production," the letter said. "However, effective with the July 2011 check, your payments will reflect those charges going forward."

Both in its letters to royalty owners and in an explanation of the new policy on its website, Chesapeake did not provide specific information about how much royalty owners' checks might be reduced as a result of the new policy.

Hood said the company's decision to begin assessing royalty owners for post-production costs was triggered by its agreement with Total, the French oil giant, which paid $2.25 billion for a 25 percent interest in Chesapeake's Barnett Shale operations.

Total was about to begin deducting post-production costs from royalty owners' checks based on its share of the Chesapeake wells' production, so Chesapeake also decided to begin assessing for the costs, Hood said.

Otherwise, payment to royalty owners would have required two separate checks, and "it didn't make any sense to have two different checks from two different companies," Hood said.

Copyright (c) 2011, Fort Worth Star-Telegram, Texas

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Upstream O&G Costs Rise Anew, IHS CERA Reports

- Upstream O&G Costs Rise Anew, IHS CERA Reports

Friday, July 01, 2011
Rigzone Staff
by Barbara Saunders

Inflation is again no stranger to the upstream petroleum sector, as the costs of building and operating upstream oil and natural gas facilities continued to increase in the past six months to the highest level since the recession began in 2008, according to two cost indices newly updated by IHS CERA.

And, there's no relief on the near horizon, the company forecasts.

The indices show that upstream construction and operating costs registered their largest increases since 2008 during the third quarter (3Q) of 2010 through the first quarter (1Q) of 2011.

The IHS CERA Upstream Capital Costs Index (UCCI) tracks costs associated with the construction of new oil and gas facilities. Between 3Q 2010 and 1Q 2011, the UCCI rose five percent to a score of 218, the company said. Meanwhile, the UCCI's counterpart, the IHS CERA Upstream Operating Costs Index (UOCI), rose two percent over the same period to register an index score of 178, the company reported.

The indices are proprietary measures of cost changes similar in concept to the Consumer Price Index (CPI) and draw upon proprietary IHS tools to provide a benchmark for comparing costs around the world. Values are indexed to the year 2000, meaning that capital costs of $1 billion in 2000 would now be $218 billion. Likewise, the annual operating costs of a field would now be up from $100 million in 2000 to $178 million.

Costs recently began trending upwards during the period studied after falling steadily for a year after their peak in the 3Q of 2008, IHS CERA noted. The strength of the latest increases adds momentum as costs continue their march to pre-recession levels, the company continued.

"The steady rise of upstream costs is a product of confidence changing outlook," said Daniel Yergin, IHS CERA chairman and author of the Pulitzer Prize-winning book, The Prize. "That perspective—reflecting expectations for stronger oil and gas demand—is taking the form of an increased rate of new project construction."

Steel Costs Paramount Factor

The five percent increase in upstream capital costs was driven especially by rising costs of steel, equipment and labor.

Among the indices' highlights:

• Upstream steel costs rose 13 percent, continuing its year-long rise after falling nearly 34 percent from the 3Q of 2008 through the same quarter of 2009. Costs for all steel-making raw materials rose and steel manufacturers took advantage of low inventories to pass through aggressive price increases, the company reported.

• Rising steel costs also helped drive the increase (three percent) in equipment costs as suppliers passed those costs along to operators, IHS CERA said. The company added that rising oil prices also led to increased demand as activity levels increase to take advantage of higher prices.
• Costs for construction labor and engineering and project management posted strong gains, nine percent and six percent, respectively. However, the rise in costs was mostly driven by South America and Asia, IHS CERA noted. Demand was especially strong in Brazil, where the country's aggressive development plans for ultra deepwater pre-salt fields and need to import talent drove rates upward. Growth in North America continues to be slow, IHS CERA said, as the continent deals with the after-effects of the recession and the 2010 Deepwater Horizon oil spill in the Gulf of Mexico.
• Offshore rig and offshore installation costs were once again the only two of the UCCI's 10 markets to register declines. This was driven by lower activity in the Gulf of Mexico, coupled with increased supply entering the market. However, both of these markets began to show upward movement in the latter half of the six-month period, suggesting a possible change in momentum, IHS CERA said.

CERA noted: "The Upstream Operating Costs Index rose two percent during the 3Q of 2010 through the 1Q of 2011 and is now just two index points below its 2008 peak level. The increase was driven by market fundamentals, personnel costs and markets that are impacted by high oil prices such as chemicals and transportation. Maintenance costs, which were flat, reflected the only market tracked by the UOCI not to register an increase during the six-month period."

Operating costs rose eight percent, driving the UOCI's overall rise. Sustained high oil prices that resulted in higher gasoline and diesel costs were a major factor. Petroleum-derived products, such as cleaning solvents and feedstocks, also rose significantly. Manpower costs also climbed due to increased production levels and the extension of the life of existing fields in an attempt to take advantage of higher crude prices.

Talent Crunch = Retention Costs

"Companies have had to draw from an ever-tightening pool of talent and this has made retaining personnel more difficult," said Jeff Kelly, a director in IHS CERA's cost consulting group. "Compensation is usually frozen during the year, but businesses are now granting more adjustments out of cycle, among other things, in an attempt to retain talent."

Among the other costs that rose were for logistics and wells, which rose two percent and one percent, respectively. Logistics costs rose despite an oversupply of larger platform supply vehicles (PSVs) in some regions, in the face of rising food and fuel costs. "High demand for PSVs and the departure of some vehicles to other regions kept day rates up," IHS CERA said. "Also, service companies in the U.S. Gulf of Mexico (GOM) have been hesitant to pass along rising food and fuel prices to operators due to competitive pressures. Emergency response and recovery vehicle (ERRV) costs have also held steady despite reduced activity in the U.S. GOM as operators used to the time to send ships to dry dock for routine maintenance.

Rising onshore well services costs, due to higher activity levels in North America, Russia and the Middle East helped generate the increase in overall well costs. An uptick in materials costs also contributed to the overall rise. Demand for proppant and steel tubular was particularly strong, driven by higher per-ton prices from mills in North America, China, Russia and Latin America. Fracturing activity in North America as well as overseas seems to be pulling the weight of this market, IHS CERA observed.

IHS CERA expects costs to continue rising in 2011, driven by competition for labor and the rising costs of steel and consumables such as chemicals, food and fuels.

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Petrobras Trims Pre-Salt Breakeven Costs

Petrobras Trims Pre-Salt Breakeven Costs

Wednesday, May 04, 2011
Rigzone Staff
by Karen Boman

Petrobras has increased productivity of its pre-salt wells and improved its knowledge of pre-salt reserve portfolio, enabling it to reduce investment costs by 45 percent. As result of these efforts, Petrobras CEO Jose Sergio Gabrielli now estimates its breakeven costs for developing pre-salt reserves offshore Brazil at $35-$40 per barrel.

This estimate is down from previous estimates of $40-$45 per barrel.

Petrobras will go ahead with plans for offshore hubs for drilling fluids to reduce transportation costs and improve operational efficiency, as pre-salt fields are located between 186 miles and 217 miles offshore Brazil. The company is studying logistical hubs for other supplies to determine what makes the most economic sense, Gabrielli said.

The Brazilian state energy company hopes to disclose later this month its new strategic plan for 2011 through 2015. Gabrielli described the company's information to date on Santos Basin reserves as "important data" that could improve results.

Petrobras also will forge ahead with plans to bring a new drillship to the Gulf of Mexico in early June to drill the second well at the Cascade field. Drilling is expected to begin in late June or early July.

The company has no plans at this point to acquire more blocks in the Gulf of Mexico. The company is studying its foreign investment portfolio right now to determine which blocks will provide the best cash flow.

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Commodity Corner: Crude Climbs on Weaker Dollar

Commodity Corner: Crude Climbs on Weaker Dollar

Tuesday, April 19, 2011
Rigzone Staff
by Saaniya Bangee

Crude futures retreated Tuesday's earlier losses as the dollar weakened against foreign currencies.

Light, sweet crude gained $1.03 to settle at $108.15 a barrel. Tuesday marks the last trading session for the May contract.

Reaching as low as $105.50 a barrel, oil prices reversed course soaring in afternoon trading. As the dollar weakened, the euro gained strength on speculation that the European Central Bank will further increase interest rates. Additionally, strong economic data from France and Germany outweighed fears of Greece restructuring its debt. A weaker greenback increases crude's appeal amongst foreign buyers, making it cheaper.

Prices also bounced back from Monday's lows after Treasury Secretary Timothy Geithner assured there was "no risk" that the U.S. government debt would lose its top-tier rating.

Meanwhile in the Middle East, OPEC Secretary General Abdullah Al-Badri said there isn't a shortage of oil in the global market, even after the supply disruptions in Libya. OPEC believes an increase in crude production will not decrease oil prices worldwide.

Likewise, natural gas futures for May delivery rose to two-week highs settling at $4.26 per thousand cubic feet. The 12.4-cent increase came on a surprising surge in the Midwest's heating demand Tuesday. An unusual drop in weather across most of the Northwest and upper-Midwest and unexpected warmth in the south has increased demand for fuel. The intraday range for natural gas was $4.13 to $4.28 Tuesday.

As retail gasoline rose, May gasoline continued to decline, trading down 1.97 cents Tuesday. Futures settled at $3.23 a gallon increasing concerns that fuel costs will hinder economic recovery and decrease demand for motor fuel in the U.S. Gasoline prices peaked at $3.259 a gallon, before bottoming out at $3.198 Tuesday.

GM on schedule to cut costs of next-generation Volt

GM on schedule to cut costs of next-generation Volt



Apr 14, 2011


Alan Taub, GM (GM) vice president for global research and development, says the automaker is "on track" to reduce the cost of the second- and third-generation extended range Chevrolet Volt. Taub says the company has a plan to reduce costs "all the way through 2020 and Generation 3". GM has sold about 1,200 Volts so far this year.

Mainland Notes Program Costs for Burkley-Phillips Well

Mainland Notes Program Costs for Burkley-Phillips Well

Thursday, April 07, 2011

Mainland Resources Inc.

Mainland has finalized the Authorization For Expenditure cost estimate (the "AFE") for the completion program for the Burkley-Phillips #1 well drilled in Jefferson County, Mississippi.

The forecasted costs for the completion program are approximately $8 million to be shared on a 90/10 percent basis between Mainland and joint venture partner, Guggenheim Energy Opportunities LLC. The completion will allow the Company to flow test the well and further determine its resource potential.

The Company is in the process of obtaining and evaluating bids from several industry leading companies to execute the frac stimulation and will select a provider from bids received. Additionally, Mainland is selecting other service providers for the completion program along with ordering longer lead equipment as previously announced.

Mainland expects to commence completion operations during the third quarter of 2011 and anticipates a timeline of approximately three to five weeks.

Mainland and its working interest partners control in excess of 17,800 net acres or 28 sections on the Buena Vista prospect area where the Burkley-Phillips #1 well was drilled to 22,000 feet, cored and logged. Upon successful completion of its proposed merger with American Exploration, Mainland would own 92% of the 28 sections in the Buena Vista prospect. As recently announced, core analysis has determined that gas in place in the Buena Vista prospect could be up to 500 BCF/section based on the cored interval.

Increasing volume of legislation costs businesses £2bn

23 March 2011 Last updated at 06:33 GMT

By Eddie O'Gorman BBC NI business reporter

Businesses have lost out on more than £2bn in the last decade due to an increasing volume of legislation, according to business lobby group the CBI.

Nigel Smyth's comments come ahead of the Chancellor, George Osborne's first annual Budget statement on Wednesday.

Mr Smyth said additional support for growth and job creation, and less red tape, particularly relating to employment were the main preoccupations for Northern Ireland business.

Nigel Smyth of the CBI says businesses are having to deal with an increase in legislation

He said that business organisations had been lobbying hard to encourage government to reduce barriers to high-growth companies in order to create employment.

"This includes doing something to relieve the regulatory burden," he said.

"But they are also having to cope with increasing costs such as the carbon reduction commitment, which from being an incentive, has now turned into a carbon tax."

Mr Smyth said that Northern Ireland companies were competing in global markets now, and many of their competitors were not having to deal with the same level of regulation.

As a result they had a lower cost base than companies based in the UK, he said

He said: "The danger is that some of these highly successful, highly productive companies will simply move to locations where the cost base is not so high."

Dr Esmond Birnie, the chief economist for PricewaterhouseCoopers in Northern Ireland, believes that any tax increases in the Budget would have a serious effect on the local economy.

"February's unemployment is up 6.3% year-on-year," Dr Birnie said.

"That is the highest increase of all 12 UK regions, and we are forecasting that local economic growth will not exceed one per cent in 2011.

"It means that further tax increases could have a disproportionate impact on economic growth and business confidence."

On the bright side, it is thought that the 1p rise in fuel duty due on 1st April might be postponed because of the recent steep increase in oil prices, while personal tax allowances are set to go up by £1,000 to £7,475 for 2011/12.

It is estimated that this should reduce the tax liability of 23 million taxpayers by an average of £200 a year.
The Chancellor has already promised to increase personal allowances to £10,000 by 2015.

An announcement is also expected on the subject of corporation tax, or company profits.

Many economists and Northern Ireland business people have been arguing strongly that a reduction from the current rate of 28% closer to the rate of 12.5% which exists in the Republic, would do much to encourage inward investment.

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