Tag Archive for: Energy News

SURVEY NOTES

Energy News: Impacts of the COVID-19 Pandemic on Utah’s Energy Industry

by Michael D. Vanden Berg


The COVID-19 pandemic has significantly changed everyday life around the world and in Utah. Starting in mid-March 2020, state leaders issued stay-at-home directives to try and limit the spread of the coronavirus. This lockdown had major consequences on all aspects of life, including the energy economy in Utah. At the time of this writing (late July), the economy has started to reopen, but new COVID-19 cases continue to surge, leaving doubts about the immediate and long-term economic impact of this pandemic. This article highlights some of the more important and interesting energy metrics from spring 2020 that showed dramatic changes due to COVID-19 responses

The most significant impact on the energy economy of the COVID-19-related shutdown was the massive drop in oil prices. Two events occurred in March 2020 that dramatically changed oil prices worldwide—Russia and Saudi Arabia entered into an oil price war, flooding the market with new supply, and at the same time, the world experienced a massive drop in petroleum product demand linked to COVID-19-related travel restrictions. These two events culminated on April 20, when May futures prices for West Texas Intermediate (WTI—U.S. oil price benchmark) went negative (-$37 per barrel) for the first time in history. Similarly, the price for Uinta Basin wax (UB wax) dropped to an unprecedented -$50 per barrel. Prices rebounded in late April and early May as Russia, Saudi Arabia, and other OPEC+ countries agreed to massive oil production cuts, combined with a more economically driven production decline in the United States due to reduced drilling activity.

Data sources: U.S. Energy Information Administration; Utah Division of Oil, Gas and Mining; Big West Oil price bulletin

The graph above displays monthly average oil prices for WTI and UB wax, coupled with monthly Utah oil production in thousand barrels per day (bbl/day) over the past six years. UB wax sells at a discount due to the limited Salt Lake City refinery market and the challenges of handling the waxy crude. The price crash experienced in late 2014 can help inform how the current price crash will impact oil production over the next several months. Average monthly oil prices bottomed out in April 2020 before rebounding in May, June, and July. Unfortunately, despite this price rebound, Utah’s drill rig count fell from eight rigs in early April to zero rigs in early May. Recent drilling mostly focused on horizontal wells in the unconventional Green River/Wasatch play in the Uinta Basin, Utah’s major oil-producing area. These unconventional wells experience steep production declines in the first several months and without constant new drilling, overall production declines will be significant.

After a sustained decrease in oil production over the past 12 months, mostly related to stagnating prices and operator turnover in the Uinta Basin, production plummeted by 27 percent from 93,000 bbls/day in March 2020 to 67,500 bbls/day in May, due to COVID-19-related price reductions—by far the largest two-month decrease in decades. Unfortunately, production will continue to drop, albeit at a lower rate, well into the fall. Early projections indicate that production could drop to about 55,000 bbls/day by fall 2020, the lowest rate in over ten years. These projections would translate to a total 2020 Utah production of about 25 million barrels, down 32 percent from the 2019 total of 37 million barrels.

Source: U.S. Energy Information Administration

As previously mentioned, the COVID-19-related travel restrictions and stay-at-home orders created an unprecedented drop in petroleum production demand. This dramatic decrease can be evaluated by looking at the drop in PADD 4 (Petroleum Administration for Defense Districts; PADD 4 includes Utah, Colorado, Wyoming, Idaho, and Montana) refinery utilization rates and refinery production of motor gasoline, diesel, and jet fuel. Refinery utilization rate refers to the proportion of time a refinery operates in relation to its full capacity. Typically, refineries operate at about 90 percent of their full capacity; however, this rate dropped to 63 percent in April 2020 due to reductions in demand. As states reopened their economies in May and June, demand for products returned and rates bounced back to nearly 90 percent. Motor gasoline produced at PADD 4 refineries displays a similar trend. A massive 43 percent decrease occurred in early April, followed by a sharp rebound as production returned to normal by the end of July. Diesel fuel demand only dropped 16 percent in late March and quickly rebounded to pre-COVID-19 averages, since commercial trucking never really stopped during the shutdown. Jet fuel demand dropped the most (84 percent) and has yet to fully recover as commercial air travel continues to suffer from mandated travel restrictions.

The petroleum industry was not the only energy sector affected by the COVID-19 stay-at-home guidelines; electricity demand in Utah was also impacted. Residential electricity usage increased by 9 percent in April 2020 and 21 percent in May, compared with the average of the past five years. This increase was expected as many Utahns transitioned to working from home and schools shut down. In contrast, commercial electricity usage dropped 13 percent in April and 11 percent in May as most businesses had to shut down, at least temporarily. Industrial electricity demand remained steady as factories and other industrial complexes mostly continued to operate. Electricity demand should generally return to normal in summer 2020 (data only currently available through May) as the economy begins to reopen, but a resurgence in COVID-19 infections could change this scenario.

Source: U.S. Energy Information Administration

The COVID-19 pandemic has dramatically impacted all aspects of life in Utah and beyond. These impacts have rippled through our economy, affecting some industries more than others. Utah’s upstream petroleum industry was severely impacted, and the effects of reductions in price, production, and related jobs to Utah’s rural economy will be difficult to manage for many months, if not years. In contrast, demand for petroleum products in Utah has already mostly rebounded and impacts on electricity demand have been minimal and short-lived. As new virus infections continue to surge in July, impacts and restrictions might endure well into the fall, further impacting Utah’s energy economy. The Utah Geological Survey will continue to monitor the effects of COVID-19 on Utah’s energy industry.

SURVEY NOTES

Energy News: The Benefits of Oil and Gas Production to the State of Utah and Its Citizens—How Things Work!

By Thomas C. Chidsey, Jr.


Over the past decade, Utah has consistently ranked about 10th and 13th in domestic oil and gas production, respectively, in spite of the price collapses that began in 2014. In 2018, over 36 million barrels of oil and 295 billion cubic feet of gas was produced from more than 11,000 wells in Utah. Revenue to Utah and its citizens from oil and gas production varies depending on market prices, land ownership, and the amount produced. A decrease in prices results in less drilling activity and thus a decrease in production. In addition, as oil and gas fields mature, production naturally decreases along with revenue.

Land Ownership

About two-thirds (67 percent) of the lands in Utah are owned by the federal government including National Parks, National Monuments, National Recreation Areas, National Historical Sites, National Forests, Military Reservations, and the Bureau of Land Management (BLM). Other lands in Utah are owned by Native American tribes, the State (including State Parks, Sovereign Lands [the beds of major waterways and lakes, for example the Green and Colorado Rivers, and Great Salt Lake], and School Trust Lands), and private entities (ranches, farms, etc.). The School and Institutional Trust Lands Administration (SITLA) is an independent state agency that manages 4.5 million acres of Utah lands, of which over 1 million acres are currently leased for oil and gas exploration for the exclusive benefit of Utah’s schools and 11 other beneficiaries. Most of Utah’s oil and gas production comes from BLM and tribal lands in the Uinta and Paradox Basins of eastern and southeastern Utah, respectively.



Oil and Gas Royalties

Oil and gas royalties are the cash value paid by a lessee (usually an oil company) to a lessor (the landowner or whoever has acquired possession of the royalty rights) based on a percentage of gross production from the property, free and clear of all costs. Currently, the federal government charges a royalty of 12.5 to 19.6 percent for oil and 9.2 to 12.5 percent for gas extracted from public lands (based on the composition, quality, etc. of the produced crude oil and gas); some royalty agreements with other landowners may be as high as 25 percent. After an oil company discovers oil or gas on federal (or state or private) lands, subsequent wells are drilled to develop and produce the resource. Once production starts, royalties begin to be paid to the landowner(s). For example, if a new well produces 100 barrels of oil per day, and the current market price is $50 per barrel that particular month, then the cash flow would be 100 x $50 or $5,000 per day. The landowner (such as the BLM), who requires a 12.5 percent royalty payment on that production, would receive $625 per day ($5,000 x 0.125).

A question often asked: “Does Utah and its citizens get anything out of oil and gas production on federal lands?” The answer is an emphatic yes! Forty-two to forty-five percent of the royalty payment from oil and gas production (as well as coal, industrial minerals, gilsonite, geothermal, etc.) on federal lands comprise what are called Mineral Lease disbursements and are divided up among several state agencies and counties. For example, the Utah Department of Transportation receives 40 percent of the royalty, a number of counties split 32 percent, and the rest goes to other state entities including the

Utah Geological Survey (UGS). In the example discussed above, Utah would receive $262.50 (42 percent) per day from that one hypothetical well. As total oil and gas production and prices fluctuate, so does the royalty revenue to Utah, ranging from as much as $155 million when oil was over $112 per barrel in 2011 to $64 million when oil dropped to a low of $29 per barrel in 2016. The UGS receives 2.25 percent of the state’s part of this payment, which amounts to one-fifth (20 percent) of the UGS’s annual budget and thus is a critical source of funding that is often difficult to predict. Utah schools received about $28.7 million from oil and gas activities on SITLA lands for the 2018 fiscal year. Like many states, Utah also charges a severance tax (3 to 5 percent; $9 million in 2017) and a conservation fee (0.2 percent; $3.3 million in 2017) based on the value of the oil and gas produced and saved, sold, or transported from the field where it is produced. Finally, Utah charges property taxes on oil and gas facilities; this amounted to $47 million in 2017.

Tax collections on oil and gas production and activities in Utah, and total Mineral Lease disbursements, 2000-2017. Data from Utah State Tax Commission.

Tax collections on oil and gas production and activities in Utah, and total Mineral Lease disbursements, 2000-2017. Data from Utah State Tax Commission.

Some may remember the old 1960s TV comedy The Beverly Hillbillies. Royalty payments turned the poor mountaineer, Jed Clampett, into a millionaire when “black gold” was discovered on his land! In reality, royalty payments to private landowners can be very large or very small and especially complicated. The mineral rights under a ranch or farm, for example, may be divided up (and not always equally) among multiple family members or heirs several generations removed from the property; all are entitled to monthly royalty checks. Wells may produce for 30 years or longer. In addition, many old oil wells are often classified as stripper wells, producing 15 barrels or less per day. Yet royalty payments will continue to be paid to those owners as long as the wells produce. Ten barrels per day x $50 per barrel x 12.5 percent royalty = $62.50 per day. Divide that up among perhaps dozens of people entitled to a share of the royalty and few will be moving to Beverly Hills. Throw in the variations in oil and gas prices as well as changes in production, and oil companies often have to employ large numbers of accountants to handle the monthly royalty payments from hundreds of wells.

Leasing and Subsurface Mineral Rights

Before an oil company drills a well, it must first lease the land from the owner of the subsurface mineral rights. Leasing is usually done after extensive geologic, geophysical, and economic evaluations of an area—subsurface mapping, acquiring seismic data, analyzing cores and well logs, determining the hydrocarbon source and reservoir rocks, estimating dry hole risks and resource potential, and the costs associated with its development (exploration programs, drilling, production wells, and infrastructure such as pipelines). Acquired leases owned by the federal and state government are often obtained through a bidding process. The price per acre varies from less than $10 to $1,000s depending on whether or not the land is within a relatively inactive area, a “hot” new exploration play, or if oil and gas prices are high or low; these monies are also a source of revenue for the federal and state governments. The company may hold on to the lease anywhere from three to ten years after which it goes back to the landowner and can be offered again to interested companies. If production is achieved, the company retains the lease as long as their wells produce (referred to as a lease “held by production,” i.e., HBP). Companies usually try to acquire large blocks of leased acreage to cover their drilling prospects although some pick up small leases just to be “part of the action.” Finally, companies sometimes reduce their risk by forming units or “farming out” a share of their leases and drilling costs with other companies while retaining an interest in any production that may occur.

Covenant oil field, east of Richfield, Sevier County, Utah. The subsurface mineral rights in the field are owned by the BLM, SITLA, and a private entity.

Covenant oil field, east of Richfield, Sevier County, Utah. The subsurface mineral rights in the field are owned by the BLM, SITLA, and a private entity.

Private landowners lease the mineral right under their lands differently than the federal and state governments. Typically, landowners are approached by the oil company or its hired representative, called a landman, who may make a monetary offer, called a “Bonus,” to lease the mineral rights. The price per acre and duration of the lease are usually similar to those owned by the state and federal government; however, small leases may receive smaller offers because companies usually try to tie up larger lease blocks of acreage. As is most often the case, oil and gas are not found under a property, and the only money that the landowner receives will be that from leasing the mineral rights. If oil or gas is discovered under a lease, even a small one, the mineral owner is still entitled to their proportional share (royalty) of the estimated resource being “drained” under the land no matter if a well is actually on the surface of the property or not. Finally, some landowners may not be aware of what mineral rights they own or do not own. They may own all or a portion of the subsurface mineral rights, or if they only own the surface rights, then they get nothing from leasing or production. This situation may occur if previous landowners sold the surface property (a farm or ranch, for example) but retained the subsurface mineral rights, or sold a percentage of the rights to a third party—all independently of how many times the surface ownership changes hands over the years. For example, a farmer may own a 640-acre section (1 square mile) of land but they own the mineral rights to only 320 acres at 100 percent and 40 acres under another part at 50 percent with all remaining mineral rights owned by someone else. However, the surface landowner still has rights even if they do not own the subsurface mineral rights, especially if the oil company conducts exploration or development activities on their land, such as shooting seismic lines, drilling, or building pipelines. The landowner can negotiate reasonable “damage” fees for these activities. For instance, when shooting a seismic line, shallow-depth shot holes may be drilled in an area of interest. Explosive charges are set off in shot holes that create seismic waves, which bounce off the subsurface layers of rock to give a better picture of the geologic structure below. The landowner may receive $300 to $500 in damage fees per hole.

If a landowner is unsure of the mineral rights, the local county clerk’s office can usually help. When contacted by a landman representing an oil company about leasing the mineral rights, a landowner should consider hiring an attorney who specializes in oil and gas leasing. In addition, numerous websites are available with helpful information, advice, and negotiating guidance on leasing. Landowners may also want to know about the geology of their land especially pertaining to oil and gas. Although the UGS cannot specifically evaluate individual properties (hired geologic consultants can, however), we can answer general questions and recommend our numerous publications on oil and gas resources, plays, etc. (see Public Information Series 71, “Utah Oil and Gas,” and Bulletin 137, “Major Oil Plays in Utah and Vicinity,” for example) that are available for free from our website.

Oil and Gas Revenue—The Bottom Line

Revenue from oil and gas production and leasing can be a double-edged sword to Utah and its citizens. When prices are high, the state has more funds for education, roads, and other services. At the same time, high oil prices affect the gas pump. When prices are low, the revenue and its benefits to the state consequentially fall but it becomes cheaper to fill up our vehicles. Ultimately, however, the fact that Utah is rich in oil and gas resources is of great benefit to the state and its citizens, now and well into the future.

Current Issue Contents:

  • Microbial Carbonate Reservoirs and the Utah Geological Survey’s “Invasion” of London
  • Utah Still Supplying Gilsonite to the World After 125 Years
  • Frack Sand in Utah?
  • Energy News
  • GeoSights: St. George Dinosaur Discovery Site at Johnson’s Farm, Washington County
  • Glad You Asked: How can sedimentary rocks tell you about Utah’s history?
  • Teacher’s Corner
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Current Issue Contents:

  • Damaging Debris Flows Prompt Landslide Inventory Mapping for the 2012 Seely Fire, Carbon and Emery Counties, Utah
  • Rock Fall: An Increasing Hazard in Urbanizing Southwestern Utah
  • New Geologic Data Resources for Utah
  • Energy News
  • Teacher’s Corner
  • Glad You Asked: Where is the Coolest Spot in Utah?
  • GeoSights: The Goosenecks of the San Juan River, San Juan County, Utah
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This Issue Contains:

  • Land Subsidence and Earth Fissures in Cedar Valley
  • Updated Landslide Maps of Utah
  • GPS Monitoring of Slow-Moving Landslides
  • Liquefaction in the April 15, 2010, M 4.5 Randolph Earthquake
  • Glad You Asked: What are the Roots of Geobotany?
  • Teacher’s Corner
  • GeoSights: Devils Kitchen, Juab County, Utah
  • Survey News
  • Energy News: Energy Office in Transition
  • New Publications

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This Issue Contains:

  • Utah’s Glacial Geology
  • Utah’s Pleistocene Fossils: Keys for Assessing Climate and Environmental Change
  • Glad You Asked: Ice Ages – What are they and what causes them?
  • Survey News
  • Teacher’s Corner: Teaching Kits Available for Loan
  • GeoSights: Glacial Landforms in Big and Little Cottonwood Canyons, Salt Lake County, Utah
  • Energy News: Uranium – Fuel for the 21st Century?
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This Issue Contains:

  • Modeling Ground-Water Flow in Cedar Valley
  • Bringing Earth’s Ancient Past to Life
  • Ground-Water Monitoring Network
  • Energy News: Saline Water Disposal in the Uinta Basin, Utah
  • Glad You Asked: How many islands are in Great Salt Lake?
  • GeoSights: Fremont Indian State Park, Sevier County, Utah
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This issue contains:

*Utah Potash
*Major Oil
*The Mercur District
*Survey News
*Teacher’s Corner
*Energy News: Legislative Directives to the Utah State Energy Program 2009
*Glad You Asked:  What are Those Lines on the Mountain? From Bread Lines to Erosion-Control Lines
*GeoSights: Cascade Falls, Kane County
*New Publications

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snt41-3GEOLOGIC HAZARDS IN UTAH

This issue contains:

    New Geologic Hazards Mapping in Utah

*Landslide Inventory Mapping in Twelvemile
Canyon, Central Utah
*Second Damaging Y Mountain Rock Fall in
Four Years
*Large Rock Fall Closes Highway Near
Cedar City, Utah
*Logan Landslide
*Teacher’s Corner
*GeoSights: Utah’s belly button, Upheaval Dome
*Glad You Asked: What should you do if you find a fossil?
Can you keep it? Should you report it?
*Energy News: Carbon Dioxide Sequestration Demonstration
Project Underway in Utah!
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Tag Archive for: Energy News

SURVEY NOTES

Energy News: Impacts of the COVID-19 Pandemic on Utah’s Energy Industry

by Michael D. Vanden Berg


The COVID-19 pandemic has significantly changed everyday life around the world and in Utah. Starting in mid-March 2020, state leaders issued stay-at-home directives to try and limit the spread of the coronavirus. This lockdown had major consequences on all aspects of life, including the energy economy in Utah. At the time of this writing (late July), the economy has started to reopen, but new COVID-19 cases continue to surge, leaving doubts about the immediate and long-term economic impact of this pandemic. This article highlights some of the more important and interesting energy metrics from spring 2020 that showed dramatic changes due to COVID-19 responses

The most significant impact on the energy economy of the COVID-19-related shutdown was the massive drop in oil prices. Two events occurred in March 2020 that dramatically changed oil prices worldwide—Russia and Saudi Arabia entered into an oil price war, flooding the market with new supply, and at the same time, the world experienced a massive drop in petroleum product demand linked to COVID-19-related travel restrictions. These two events culminated on April 20, when May futures prices for West Texas Intermediate (WTI—U.S. oil price benchmark) went negative (-$37 per barrel) for the first time in history. Similarly, the price for Uinta Basin wax (UB wax) dropped to an unprecedented -$50 per barrel. Prices rebounded in late April and early May as Russia, Saudi Arabia, and other OPEC+ countries agreed to massive oil production cuts, combined with a more economically driven production decline in the United States due to reduced drilling activity.

Data sources: U.S. Energy Information Administration; Utah Division of Oil, Gas and Mining; Big West Oil price bulletin

The graph above displays monthly average oil prices for WTI and UB wax, coupled with monthly Utah oil production in thousand barrels per day (bbl/day) over the past six years. UB wax sells at a discount due to the limited Salt Lake City refinery market and the challenges of handling the waxy crude. The price crash experienced in late 2014 can help inform how the current price crash will impact oil production over the next several months. Average monthly oil prices bottomed out in April 2020 before rebounding in May, June, and July. Unfortunately, despite this price rebound, Utah’s drill rig count fell from eight rigs in early April to zero rigs in early May. Recent drilling mostly focused on horizontal wells in the unconventional Green River/Wasatch play in the Uinta Basin, Utah’s major oil-producing area. These unconventional wells experience steep production declines in the first several months and without constant new drilling, overall production declines will be significant.

After a sustained decrease in oil production over the past 12 months, mostly related to stagnating prices and operator turnover in the Uinta Basin, production plummeted by 27 percent from 93,000 bbls/day in March 2020 to 67,500 bbls/day in May, due to COVID-19-related price reductions—by far the largest two-month decrease in decades. Unfortunately, production will continue to drop, albeit at a lower rate, well into the fall. Early projections indicate that production could drop to about 55,000 bbls/day by fall 2020, the lowest rate in over ten years. These projections would translate to a total 2020 Utah production of about 25 million barrels, down 32 percent from the 2019 total of 37 million barrels.

Source: U.S. Energy Information Administration

As previously mentioned, the COVID-19-related travel restrictions and stay-at-home orders created an unprecedented drop in petroleum production demand. This dramatic decrease can be evaluated by looking at the drop in PADD 4 (Petroleum Administration for Defense Districts; PADD 4 includes Utah, Colorado, Wyoming, Idaho, and Montana) refinery utilization rates and refinery production of motor gasoline, diesel, and jet fuel. Refinery utilization rate refers to the proportion of time a refinery operates in relation to its full capacity. Typically, refineries operate at about 90 percent of their full capacity; however, this rate dropped to 63 percent in April 2020 due to reductions in demand. As states reopened their economies in May and June, demand for products returned and rates bounced back to nearly 90 percent. Motor gasoline produced at PADD 4 refineries displays a similar trend. A massive 43 percent decrease occurred in early April, followed by a sharp rebound as production returned to normal by the end of July. Diesel fuel demand only dropped 16 percent in late March and quickly rebounded to pre-COVID-19 averages, since commercial trucking never really stopped during the shutdown. Jet fuel demand dropped the most (84 percent) and has yet to fully recover as commercial air travel continues to suffer from mandated travel restrictions.

The petroleum industry was not the only energy sector affected by the COVID-19 stay-at-home guidelines; electricity demand in Utah was also impacted. Residential electricity usage increased by 9 percent in April 2020 and 21 percent in May, compared with the average of the past five years. This increase was expected as many Utahns transitioned to working from home and schools shut down. In contrast, commercial electricity usage dropped 13 percent in April and 11 percent in May as most businesses had to shut down, at least temporarily. Industrial electricity demand remained steady as factories and other industrial complexes mostly continued to operate. Electricity demand should generally return to normal in summer 2020 (data only currently available through May) as the economy begins to reopen, but a resurgence in COVID-19 infections could change this scenario.

Source: U.S. Energy Information Administration

The COVID-19 pandemic has dramatically impacted all aspects of life in Utah and beyond. These impacts have rippled through our economy, affecting some industries more than others. Utah’s upstream petroleum industry was severely impacted, and the effects of reductions in price, production, and related jobs to Utah’s rural economy will be difficult to manage for many months, if not years. In contrast, demand for petroleum products in Utah has already mostly rebounded and impacts on electricity demand have been minimal and short-lived. As new virus infections continue to surge in July, impacts and restrictions might endure well into the fall, further impacting Utah’s energy economy. The Utah Geological Survey will continue to monitor the effects of COVID-19 on Utah’s energy industry.

SURVEY NOTES

Energy News: The Benefits of Oil and Gas Production to the State of Utah and Its Citizens—How Things Work!

By Thomas C. Chidsey, Jr.


Over the past decade, Utah has consistently ranked about 10th and 13th in domestic oil and gas production, respectively, in spite of the price collapses that began in 2014. In 2018, over 36 million barrels of oil and 295 billion cubic feet of gas was produced from more than 11,000 wells in Utah. Revenue to Utah and its citizens from oil and gas production varies depending on market prices, land ownership, and the amount produced. A decrease in prices results in less drilling activity and thus a decrease in production. In addition, as oil and gas fields mature, production naturally decreases along with revenue.

Land Ownership

About two-thirds (67 percent) of the lands in Utah are owned by the federal government including National Parks, National Monuments, National Recreation Areas, National Historical Sites, National Forests, Military Reservations, and the Bureau of Land Management (BLM). Other lands in Utah are owned by Native American tribes, the State (including State Parks, Sovereign Lands [the beds of major waterways and lakes, for example the Green and Colorado Rivers, and Great Salt Lake], and School Trust Lands), and private entities (ranches, farms, etc.). The School and Institutional Trust Lands Administration (SITLA) is an independent state agency that manages 4.5 million acres of Utah lands, of which over 1 million acres are currently leased for oil and gas exploration for the exclusive benefit of Utah’s schools and 11 other beneficiaries. Most of Utah’s oil and gas production comes from BLM and tribal lands in the Uinta and Paradox Basins of eastern and southeastern Utah, respectively.



Oil and Gas Royalties

Oil and gas royalties are the cash value paid by a lessee (usually an oil company) to a lessor (the landowner or whoever has acquired possession of the royalty rights) based on a percentage of gross production from the property, free and clear of all costs. Currently, the federal government charges a royalty of 12.5 to 19.6 percent for oil and 9.2 to 12.5 percent for gas extracted from public lands (based on the composition, quality, etc. of the produced crude oil and gas); some royalty agreements with other landowners may be as high as 25 percent. After an oil company discovers oil or gas on federal (or state or private) lands, subsequent wells are drilled to develop and produce the resource. Once production starts, royalties begin to be paid to the landowner(s). For example, if a new well produces 100 barrels of oil per day, and the current market price is $50 per barrel that particular month, then the cash flow would be 100 x $50 or $5,000 per day. The landowner (such as the BLM), who requires a 12.5 percent royalty payment on that production, would receive $625 per day ($5,000 x 0.125).

A question often asked: “Does Utah and its citizens get anything out of oil and gas production on federal lands?” The answer is an emphatic yes! Forty-two to forty-five percent of the royalty payment from oil and gas production (as well as coal, industrial minerals, gilsonite, geothermal, etc.) on federal lands comprise what are called Mineral Lease disbursements and are divided up among several state agencies and counties. For example, the Utah Department of Transportation receives 40 percent of the royalty, a number of counties split 32 percent, and the rest goes to other state entities including the

Utah Geological Survey (UGS). In the example discussed above, Utah would receive $262.50 (42 percent) per day from that one hypothetical well. As total oil and gas production and prices fluctuate, so does the royalty revenue to Utah, ranging from as much as $155 million when oil was over $112 per barrel in 2011 to $64 million when oil dropped to a low of $29 per barrel in 2016. The UGS receives 2.25 percent of the state’s part of this payment, which amounts to one-fifth (20 percent) of the UGS’s annual budget and thus is a critical source of funding that is often difficult to predict. Utah schools received about $28.7 million from oil and gas activities on SITLA lands for the 2018 fiscal year. Like many states, Utah also charges a severance tax (3 to 5 percent; $9 million in 2017) and a conservation fee (0.2 percent; $3.3 million in 2017) based on the value of the oil and gas produced and saved, sold, or transported from the field where it is produced. Finally, Utah charges property taxes on oil and gas facilities; this amounted to $47 million in 2017.

Tax collections on oil and gas production and activities in Utah, and total Mineral Lease disbursements, 2000-2017. Data from Utah State Tax Commission.

Tax collections on oil and gas production and activities in Utah, and total Mineral Lease disbursements, 2000-2017. Data from Utah State Tax Commission.

Some may remember the old 1960s TV comedy The Beverly Hillbillies. Royalty payments turned the poor mountaineer, Jed Clampett, into a millionaire when “black gold” was discovered on his land! In reality, royalty payments to private landowners can be very large or very small and especially complicated. The mineral rights under a ranch or farm, for example, may be divided up (and not always equally) among multiple family members or heirs several generations removed from the property; all are entitled to monthly royalty checks. Wells may produce for 30 years or longer. In addition, many old oil wells are often classified as stripper wells, producing 15 barrels or less per day. Yet royalty payments will continue to be paid to those owners as long as the wells produce. Ten barrels per day x $50 per barrel x 12.5 percent royalty = $62.50 per day. Divide that up among perhaps dozens of people entitled to a share of the royalty and few will be moving to Beverly Hills. Throw in the variations in oil and gas prices as well as changes in production, and oil companies often have to employ large numbers of accountants to handle the monthly royalty payments from hundreds of wells.

Leasing and Subsurface Mineral Rights

Before an oil company drills a well, it must first lease the land from the owner of the subsurface mineral rights. Leasing is usually done after extensive geologic, geophysical, and economic evaluations of an area—subsurface mapping, acquiring seismic data, analyzing cores and well logs, determining the hydrocarbon source and reservoir rocks, estimating dry hole risks and resource potential, and the costs associated with its development (exploration programs, drilling, production wells, and infrastructure such as pipelines). Acquired leases owned by the federal and state government are often obtained through a bidding process. The price per acre varies from less than $10 to $1,000s depending on whether or not the land is within a relatively inactive area, a “hot” new exploration play, or if oil and gas prices are high or low; these monies are also a source of revenue for the federal and state governments. The company may hold on to the lease anywhere from three to ten years after which it goes back to the landowner and can be offered again to interested companies. If production is achieved, the company retains the lease as long as their wells produce (referred to as a lease “held by production,” i.e., HBP). Companies usually try to acquire large blocks of leased acreage to cover their drilling prospects although some pick up small leases just to be “part of the action.” Finally, companies sometimes reduce their risk by forming units or “farming out” a share of their leases and drilling costs with other companies while retaining an interest in any production that may occur.

Covenant oil field, east of Richfield, Sevier County, Utah. The subsurface mineral rights in the field are owned by the BLM, SITLA, and a private entity.

Covenant oil field, east of Richfield, Sevier County, Utah. The subsurface mineral rights in the field are owned by the BLM, SITLA, and a private entity.

Private landowners lease the mineral right under their lands differently than the federal and state governments. Typically, landowners are approached by the oil company or its hired representative, called a landman, who may make a monetary offer, called a “Bonus,” to lease the mineral rights. The price per acre and duration of the lease are usually similar to those owned by the state and federal government; however, small leases may receive smaller offers because companies usually try to tie up larger lease blocks of acreage. As is most often the case, oil and gas are not found under a property, and the only money that the landowner receives will be that from leasing the mineral rights. If oil or gas is discovered under a lease, even a small one, the mineral owner is still entitled to their proportional share (royalty) of the estimated resource being “drained” under the land no matter if a well is actually on the surface of the property or not. Finally, some landowners may not be aware of what mineral rights they own or do not own. They may own all or a portion of the subsurface mineral rights, or if they only own the surface rights, then they get nothing from leasing or production. This situation may occur if previous landowners sold the surface property (a farm or ranch, for example) but retained the subsurface mineral rights, or sold a percentage of the rights to a third party—all independently of how many times the surface ownership changes hands over the years. For example, a farmer may own a 640-acre section (1 square mile) of land but they own the mineral rights to only 320 acres at 100 percent and 40 acres under another part at 50 percent with all remaining mineral rights owned by someone else. However, the surface landowner still has rights even if they do not own the subsurface mineral rights, especially if the oil company conducts exploration or development activities on their land, such as shooting seismic lines, drilling, or building pipelines. The landowner can negotiate reasonable “damage” fees for these activities. For instance, when shooting a seismic line, shallow-depth shot holes may be drilled in an area of interest. Explosive charges are set off in shot holes that create seismic waves, which bounce off the subsurface layers of rock to give a better picture of the geologic structure below. The landowner may receive $300 to $500 in damage fees per hole.

If a landowner is unsure of the mineral rights, the local county clerk’s office can usually help. When contacted by a landman representing an oil company about leasing the mineral rights, a landowner should consider hiring an attorney who specializes in oil and gas leasing. In addition, numerous websites are available with helpful information, advice, and negotiating guidance on leasing. Landowners may also want to know about the geology of their land especially pertaining to oil and gas. Although the UGS cannot specifically evaluate individual properties (hired geologic consultants can, however), we can answer general questions and recommend our numerous publications on oil and gas resources, plays, etc. (see Public Information Series 71, “Utah Oil and Gas,” and Bulletin 137, “Major Oil Plays in Utah and Vicinity,” for example) that are available for free from our website.

Oil and Gas Revenue—The Bottom Line

Revenue from oil and gas production and leasing can be a double-edged sword to Utah and its citizens. When prices are high, the state has more funds for education, roads, and other services. At the same time, high oil prices affect the gas pump. When prices are low, the revenue and its benefits to the state consequentially fall but it becomes cheaper to fill up our vehicles. Ultimately, however, the fact that Utah is rich in oil and gas resources is of great benefit to the state and its citizens, now and well into the future.

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