[ROCKMAN]

P – The initial period is the “primary term”. That’s usually 3 to 5 years. Once a lease has passed thru its primary term it expires if there is not commercial production established. Make a well and that would put it in the HBP category: Held By Production. The rest of the details vary by the specifics of the lease agreement. There are no fixed rules. I might be able to hold a 10,000 ac lease as HBP by drilling one well. I might only hold 160 ac of that 10,000 ac lease as HBP. All those details are negotiated points.

As far as booking reserves the SEC sets those rules for a public company. They’ve loosened those rules up a good bit the last few years. Search SEC oil regs for details. But as far as a bank goes they don’t give a crap what the SEC says. They have their own engineers and geologists and they decide how much credit to give an operator based on what they’ve drilled and their leasehold position.

Infield drilling is tricky with fractured reservoirs as you suspect. OTOH a well may only be draining 60 acs of a 160 ac lease so there could be room for another well if the economics are correct. OTOOH if you drill that second well and connect to the same fracture system as the first well you’ll probably lose money. Even worse when you frac that second well you might damage the productivity of the first well. I’ve seen wells 2 miles apart connect to the same fractures. In the end it’s a crap shoot. One advantage of the infield wells is that you might be able to utilize some of the infrastructure put in for the initial drilling.

You save some money by pad drilling especially if you have a very efficient rig movement. I’ve paid $45k once just to move a rig 40’. Saving money is always good but the amount typically saved by pad drilling doesn’t create an increased number of wells you can drill but eases the pain a bit. There’s also a bit more cost from the directional drilling side of the equation: you might have to drill more hole to get to the landing area for the hz leg. Remember if the wells end up too close together they could compete for the same reserves.

Ask some more specifics if this didn’t cover it all

[pwallmann]

Thanks Rockman, that clears up alot. It's funny when us non-industry type folks discuss the industry we tend to fit standard variances to a very imcomplete set of variables we barely understand. I had assumed these lease terms would be relatively standardized across a jurisdiction like ND. I then assumed the profit motive would create a relatively standardized approach to exploiting these lease terms in the most logical way. This logic fits Rune's projections, but then I was trying to factor in these other considerations (re: the infield drilling and HBP incentives) which I believe Rock's summary would be something akin to: "we don't know enough about all of the factors to generalize the impact they'll have to the overall production of the play"

Haha, can you guess which 'soft science' background I have?

[ROCKMAN]

p - That's one reason I cringe a little when folks start making generalized assumptions about any portion of the dynamic. I don't want to tell them they're wrong because in some circumstances they aren't too far off the mark. But the problem develops when they try to extrapolate future activities in an entire trend, like the Bakken, based on those generalities. There is one constant factor in petroleum geology: there are no constant factors. I do try to keep my speculations as broad as possible otherwise I have to get into more complex details which are difficult for the general public to absorb and thus makes the water muddier.

Mineral leases are a good example. In truth I barely scratched the surface with the variability I described above. I have degreed landmen and lawyers handle such matters for me...way to complex for a geologist to cope with. And beyond the complexity of the initial lease there are joint venture requirements that layer on top of the lease requirements. Such as if another company begins producing a well too close to another company's lease they may be a require from either the company's partners and/or the mineral owner to offset that other company's well or lose their rights in the lease.