Readers Wells: Decimal Unit

The decimal unit for each well is based on three numbers:

Size of the drilling unit:

the standard size in the Bakken is now 1280 acres
in the early days, the standard unit was 640 acres
in addition, there are now huge drilling units, commonly 1920 acres, 2560 acres, 3840 acres, and, occasionally, 5120 acres
for this discussion this does not matter, but a section is 640 acres, and the standard Bakken drilling unit is now two sections, or 640 acres x 2 = 1280 acres

Number of acres owned by a mom-and-pop mineral owner:

a farmer who kept all his acres might still have 160 acres (a quarter section), even as many as 320 acres,
a small mom-and-pop non-farmer mineral owner who picked up an acre here and there might have 10 acres in a drilling unit or as little as one acre

Mineral override:

the oil company is going to spend a lot of money drilling a well and marketing the oil;
therefore, the oil company wants part of the oil that the mom-and-pop mineral owner own;
the oil company and the mineral owner agree to a mineral / royalty override in the lease;
in the old days, it was common for the oil company to get 7/8ths and the mineral owner would get 1/8th;
then, it quickly went to 3/8th in the Bakken and anything in between
folks often used to talk about 1/8th mineral override which works out to 1/8 = 12.5%
now, it's common to talk about 3/8ths mineral override, the percent that a small mineral owner retains
when calculating the decimal unit, one can use either the fraction (e.g., 1/8) or the percent (e.g., 12.5%)

So, first example:

if a mom-and-pop mineral owner owned 10 acres in a 1280 acre drilling unit and they signed a lease for a royalty override of 1/8 the decimal unit is calculated this way

That's all one needs to know about calculating decimal units.

Rule: this is the most important rule to remember --

every well stands alone.

just because two wells are sitting right next to each other on the same pad only thirty feet apart, that doesn't mean they will have the same decimal unit.
in addition, wells on the same pad can "go in completely different directions" with horizontal drilling; some wells can go to the north, some to the south, some to the west, some to the east, etc, and they could all have different drilling unit sizes
over time, as drilling units get larger in the Bakken, decimal units will get smaller, all other things remaining the same;

Two wells on the same pad can be drilled in different drilling unit sizes.

in the early days, an oil company drilled the first well on a 640-acre drilling unit; that was the standard size in the early days
then, to save money, etc., they would drill a second well right next to the first well (to use the same "pad") but it would be on a 1280-acre unit
the first well:

and, a section line well, the newest drilling units to capture oil along section lines:

Why wells sitting right next to each other can have different decimal units:

those three wells could be sitting right next to each other on the same pad and all three would have a different decimal number.

however, if the second well drilled into a second section where mom-and-pop owned 10 acres, then the equation would change:

the first well would determine the royalty override, 1/8th (0.125) in this example.
but if mom-and-pop signed two different leases for two different sections in the 1280-acre drilling unit, then the second and third wells would have royalty overrides different than the first well.
so, it can get complicated very, very quickly.

Working backwards:

if one knows the royalty override, let's say 1/8, and the decimal unit, one can determine the number of acres owned in a specific drilling unit. One also needs to know the size of the drilling unit, which the NDCI scout ticket provides for every well in the Bakken.the formula:
decimal unit = (acres owned / size of drilling unit in acres ) * royalty override

Things change but once changed will not change again:

the number of acres owned will not change
the size of the drilling units for two wells next to each other may be different, but over time, the size of the drilling unit does not change for that well, even if a third well goes it which may have a completely different size drilling unit
the royalty override was determined at the time the lease was signed and affects the location of the acres that are owned; it does not reflect the wells themselves (if that makes sense) -- this gets very complicated but there is an example up above
the early leases often had a 1/8th override; the newer leases may have as much as 3/8th override; the oil companies were able to be 3x more generous because the Bakken was so incredibly "rich"

A reminder:

with Bakken horizontal wells, a well sited two miles north of the acres owned by the mom-and-pop mineral owner will still pay royalties to the mineral owner if the ten acres are in the same drilling unit as the well about which we are talking
some farmers can't even see the well from their house from which they are getting minerals
wells targeting other formations, such as the Red River formation or the Madison formation have very different drilling unit sizes but the calculations are the same

Example, using real dollars:

a newly drilled well with 1280-acre spacing in the Bakken might produce 30,000 bbls the first month
at $70 / bbl, that's worth $2.1 million
that's just the oil; there is also natural gas and other non-crude-oil liquid products
the company retains 5/8th of that and allocates 3/8th of the total oil to other mineral owners, often small mom-and-pop mineral owners
the 30,000 bbls of oil came from the entire drilling unit:

so, if a small mom-and-pop mineral owner owned 10 acres in that 1280-acre unit, they would get the oil produced in only those ten acres, or 10 / 1280 = 0.0078125
so, how much oil is that? 30,000 x 0.0078125 = 234.375 bbls of oil

but it cost the oil company a lot of money to drill that well, so they retained 5/8ths and allocated 3/8ths fo the mineral owner

at $70 / bbl = $6,152 for one month, but some miscellaneous fees would be withheld from that check, in addition to federal taxes and state taxes that might or might not be withheld, but will have to be paid at some time.

Typographical and content errors likely in the above note.

Readers Wells