By: Jillian Berge (jberge@mobiusriskgroup.com) 

Wellhead Gas Balancing is the balancing of gas produced from the wellhead between all Working Interest Owners. There are several key components to focus on when looking at your company’s wellhead gas balancing position whether you are an operator, a non-operator, or a combination of both. A few of those key components include:

  • Review and tracking of current wellhead balance position 
  • Mitigation of current and future imbalances
  • Settlement of all wellhead gas balancing positions for plugged and abandoned wells

The first step in determining your gas balancing position is to establish which wells have balances and which do not. Wells that generally do not have gas balances include, but are not limited to, wells that are 100% owned and operated by the producer and wells that have working interest owners but no owners have ever elected to take their gas in kind (TIK). Take-In-Kind in this case means a working interest owner has elected to market their own interest. In general, anytime you have a working interest owner elect to TIK you will have a wellhead gas balancing position.

After determining which wells have a wellhead gas balance position it is time to review what your company’s position is in each well that is operated and non-operated. Please note that in the Acquisitions and divestitures (A&D) process this paper trail is often lost, forgotten, or incomplete. It is important to gather this information and know at the time of acquisition or divestment where each well and each owner’s position stands. In the process of ongoing operations, if your company is drilling a well with owners that have elected to TIK then it is imperative to start the tracking process from the first month of production.

Once the well-by-well review is complete, the next step is establishing an efficient system to track and monitor wellhead balance positions through monthly statements. This step is critical whether your company is the operator or a working interest owner. Complexity in the tracking and monitoring process increases when an operator has multiple wells and non-congruent owners. This increase in complexity occurs because it is the operator’s responsibility to produce statements which show each of the working interest owners current balance position at the conclusion of each production month. System and process are vital concepts to employ in order to streamline what can become an arduous task.

At this point there is a comprehensive list of wells that have wellhead gas balancing positions, a complete review of your current position plus the position of any working interest owners (if you are the operator), and a system to track monthly wellhead gas imbalances. From here the next step is to begin mitigating any wellhead imbalances. This is when a Joint Operating Agreement (JOA), Pooling Agreement, or other similar agreement will come in handy. Generally, these agreements will specify what an operator or a working interest owner can do to mitigate a wellhead balance. As an example, a JOA could say that in order to makeup/payback an imbalance position written notice of the request must be provided, and that you can elect no more than +/- 25% of your interest to correct the imbalance.

Mitigating wellhead balances is the step in the gas balancing process where we tend to see most issues arise. Often, companies will take the steps to review and monitor but do not actively or efficiently mitigate imbalances. A few questions to ask when trying to determine if you are effectively mitigating wellhead balance positions:

  • As a working interest owner have you requested maximum makeup or payback?
  • As an operator are you continually adjusting (monthly/weekly/annually) working interest owners that are underproduced or overproduced?
  • Have you reviewed your Joint Operating Agreement, Pooling Agreement, etc to see if there are other remedies that can be invoked to reduce or eliminate an imbalance?

In regards to actively mitigating the wellhead balance positions, marketers may often ask the question how do I optimize the balance, should I invoke makeup in months in which prices are high or invoke payback in months in which prices are low? In its entirety, the concept of Wellhead Gas Balancing is not intended to be a revenue generator, which is easily understood after reading a Joint Operating Agreement and the language set in place. The intent of Wellhead Gas Balancing is to ensure each owner receives their proportionate share of every molecule produced from the well, so it is best to save the optimization conversation for whether or not you should elect to Take-in-Kind.

The final key component of the wellhead gas balancing process is completing a review of all wells that have been plugged and abandoned to ensure all outstanding balance positions have been cash settled. This step is often forgotten or incomplete as acquisitions, divestments, staff adjustments, etc. leave final volumetric true-ups unaddressed.  This is an important step as this could be real cash outstanding, and in a time of “every dollar counts” it is imperative to collect all monies owed. Please note that at the conclusion of a wells life cycle an operator or working interest owner could be in a position in which monies are due, which again drives home the importance of actively mitigating balances positions.

In general, producers often find the process of wellhead gas balancing cumbersome and irrelevant, but in fact there is great value in the process. A good system can not only reduce the overwhelming nature of the process, but it can also eliminate the need for future projects and research that take time and resources. A best-in-class process can ensure each dollar the company is owed is accounted for each month.