Oil and Gas - Pricing Flashcards
What tends to be overlooked when looking at the large profits of an oil and gas company?
- These profits come after great cost
2. There is a lot of risk. Many companies can, and do go bankrupt.
Which sector of the oil industry has the highest risk?
The upstream / exploration sector
What is the success rate of wildcat wells?
Around 60- 70% in the past 2 decades
What is the casing point?
A point in the drilling after the well has reached the target reservoir, but before the production casing has been installed and cemented in place.
Correct assessment of the production of the well is critical.
If the well is abandoned, the company must eat their losses.
If the well is continued but turns out to be unsuccessful, the losses will be even greater.
What are the costs associated with drilling before the casing point?
- Prospecting
- The cost of obtaining the lease
- Drilling permits
- Cost of preparing the well
- Cost of drilling the well to the casing point
- Cost of data logging the well
What are the costs associated with drilling after the casing point?
Very significant costs:
- Production casing and perforating the well
- Completing the well
- Hooking the well to a flow line where the oil and gas can be shipped for sale
- Production equipment
- Any remedial work
- Water treatment costs
What are the costs associated with drilling after payout?
1, Operation and maintenance
- Any remedial work
- Water treatment costs
- Well abandonment
Why is the royalty that the mineral rights owner receives considered ‘cost-free’?
The owner does not have to contribute any costs into prospecting and exploring
What are lease burdens??
Additional revenue obligations to parties involved in the lease structure.
For example, when the first lease owner passes it on to a second lease owner. The second lease owner will also have to pay a royalty to the first lease owner.
Why are lease structures complicated?
There tends to be multiple mineral rights leases involved.
There tends to be multiple overriding royalty interest owners
There tends to be multiple working interest owners (multiple investors into a prospect)
Who is the working interest owner?
The company/person who buys the lease from a mineral rights owner
What are the revenue burdens that must be considered?
- Landowner royalty
- Overriding royalties paid to the first or second lease owners
- Taxes
Describe the cumulative revenue of operating a well?
Year -1 and Year 0: Negative revenue. This is the initial investment required to prospect and drill the well.
(Assuming the well is successful)
Year 1 onwards: Positive revenue which increases but gradually tapers off as oil and gas in the reservoir is depleted and the well loses reservoir pressure.
