Falling Oil and Gas Prices: What It Means For Royalty Owners

What does falling oil and gas prices mean for oil and gas royalty owners?  Well firstly, it means we get a long awaited break at the gas pump next time we fill up our car and our heating bills will be lower this winter as we run heaters and light up the gas logs.  As for royalty checks, unfortunately those have been on a steady decline over the last few months, some as much as 40%.  How long will prices stay down?  Everyone has their own opinion.  Just look at how many articles on the subject are on your Yahoo! or AOL homepage.

What we do know is analysts have been calling for a major decrease in the price of oil for some time.  U.S. shale plays have been much of the reasoning behind the calls as oil production has soared over the past few years in areas like the Bakken and Eagle Ford.  Many analysts speculated we would see a drop in oil to around $80/bbl.  Today, crude oil is at $55.91, a five year low.  Though many of the majors declared they would stay on course with their drilling programs in the face of OPEC members’ recent decision to not make cuts to production quotas, most of them are now rethinking and making adjustments to their budgets for 2015.

The pull back on domestic drilling programs directly affects mineral rights and royalty owners a few different ways.  On the front end, leasing will slow and we may not see the lease rates we have seen being offered over the last couple years.  Primary terms might also begin getting stretched from three years to five.  Areas where drilling costs are higher, such as North Dakota, will likely see more leases expire than in other areas.  And, as already mentioned, royalties will decrease, especially those tied to oil producing wells, and may continue on a downward trend as oil contracts at higher hedged prices expire.