Leasing in the shale era is the most expensive part of producing oil & gas. A well can cost $4-6 million dollars, but each well is within a unit that represents 640-1080 acres of land that costs between $4,000-20,000 dollars per acre. That means that it can cost more than $20 million to secure the rights to drill a well. This is one reason why so many operators now drill multiple wells, known as cubes, at one time. The cost of leasing land is a sunk cost prior to bringing any revenue out of the ground and it needs to be repaid quickly or a company will not be able to pay the interest on its debt. Some companies cannot drill wells quickly enough to pay off the debt from the lease of the land they are drilling on and subsequently go bankrupt.
Many thought leasing activity would wane due to COVID-19 and the collapse of oil prices. In reality, leases are an asset to a company, regardless of the financial situation, and they will continue to lease, extend, and re-lease as they see fit.
During the first half of the year, the highest leasing activity—in terms of the total amount of instruments filed—was in Texas. Many might be surprised to see that Kansas and Arkansas are within the top 10, but Kansas has been running more than 10 rigs for most of the year for shallower plays.
In terms of counties with the highest leasing, Gaines County in Texas was number one. Gaines has seen a lot of leasing due to activity from CGS Operating. CGS has been picking up a significant position along the Gaines/Dawson border and has just started drilling wells. Their registered address traces back to an old EOG location, but their registered agent on both permits and leases is a lawyer.
Figure 1: Leases January 2020 through June 2020
Operators that have been most active in the first half of 2020 can be seen in the chart below, with Continental leading. Interestingly enough several of the top 10 operators currently leasing are in the Appalachian Basin. Due to the decline in oil prices and the cancellation of various gas pipeline projects, the working theory is that gas prices will rise to nearly $3/Mcf by late 2020. Operators are shoring up leases to ensure they are ready for any increase in pricing that allows them to bring more wells to market.