Conducting due diligence before investing in an oil or gas project

Be sure to conduct due diligence before investing in an oil and gas investment.
There are many companies selling oil and gas investments. Many of these companies make money by marking up the costs to assure a profit, even if the drilled oil/gas well turns out dry (bad). For this reason, you should conduct due diligence on a company and the associated oil or gas project you are considering investing in.

How long have they been in business?
Find out how long the company (usually an oil developer) has been in business. What is the owner’s experience in the oil and gas business? How many projects have they successfully funded, drilled, and brought online in the past couple of years? What are the specific returns on invested funds for each of those wells?

How is the drilling rig operator selected?
Find out how the developer selects the driller and operator for each well. Some developers have their own driller and operator to assure being paid for services whether the well hits or not. Also, these developers may not have experience drilling special situation wells. You should look for developers that bring together the right driller and operator for each well who have experience and equipment to assure the highest probability of success. For example, if a well requires horizontal drilling, the developer should find a driller and operator who has drilled many successful horizontal wells.

Check for disciplinary or legal actions.
Check with the state’s department of securities and attorney general for any disciplinary or legal action against the company or its principles.

Ask for ten personal, professional, and client references.
Professional references could include the company’s banker, accountant, lawyer, or other professionals. It is easy to provide a couple of client references that always say good things. However, it is much harder to provide ten unless the company actively maintains good relationships with everyone it deals with.

Check with the Better Business Bureau on how the company stands.
Are there any negative reports against the company? Is the company a BBB member?

Continue due diligence until you are ready to make a decision.
Continue researching what you can about the company until you feel comfortable making the investment or you feel they are not worth the investment risk. If you feel pressure from the company during your investigation, this may be a red flag. They may be trying to rush your decision to invest in order to cut your research short. Don’t let them take control. It is your money at risk, not theirs. Continue your research until you find a reputable oil producer with a project that fits nicely into your investment strategy.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

Part 4 of Steps involved in a typical oil and gas drilling venture/investment – Putting a well into production

This is the fourth and final article in a four part series that provides an overview of a typical oil or gas drilling venture from beginning to end (payment of investors). The first three articles covered scouting a location for drilling through forming a partnership, funding the well using a private placement memorandum (PPM), and preparing and drilling the well. This article will cover putting a well into production and selling the resulting oil and/or gas. The first article can be read here.

Finding a buyer for oil and/or gas from a producing well:
The oil producer should now have a good oil/gas well. The producer then:
- negotiates the oil/gas purchaser’s buy contract.
- sets up the production facilities (as needed): compressor (gas wells) and pump (oil wells)
- puts the gas collection lines into the well and associated collection tanks

Doing the legal work before being able to sell the oil/gas:
Once a well starts producing oil/gas, then the producer:
- files paperwork with all government agencies involved with oil/gas wells
- begins selling the oil/gas
- Brings the “abstracts” up to date. These legal documents need updated to reflect a productive well.
- has an attorney prepare the Division Order/Title Opinion.

A division order is completed:
A division order is a legal document filed to show how revenues from the productive well are to be divided. This document must be filed before any revenues can be sent out. This mainly ensures the land and associated lease owners get their fair share of revenues. The gas company (oil/gas buyer) pays out three checks: 1) one to the land owner, 2) one to the lease owner, and 3) one to the operator/producer, who then distributes it to the associated investors in the project according to their investment’s net revenue interest (NRI) percentage of the well.

A Title Opinion is completed:
The Title Opinion is used to verify no leans exist on the property that should be paid first. Ideally, the producer should have checked for leans early in the project when considering a site for drilling. Producers usually look for clean title. The Title Opinion is forwarded to the purchaser of the well’s oil/gas. The purchaser then:
- prepares a Division Order, which sets up how the various accounts are paid (lean holder, land owner, lease owners, and operator/producer)
- sends the Division Order to the producer for signature, after when it is returned to the purchaser
- payments are scheduled and sent out accordingly as long as the well is productive

Entire process takes 60 - 90 days before you get revenues from a viable well:
Usually it can take about 60 to 90 days after a well starts producing for all of the paperwork to be complete for the purchaser to send out checks. The producer then sends checks to the investors.

Summarizing this series on steps in a typical oil and gas drilling venture:
So there you have it, four articles that cover most of what happens in a typical oil and gas investment project. I have not covered all of the various technologies available and used by the industry all along the way. This is a very interesting business and you can never learn enough. Each oil or gas well is unique and presents the opportunity to learn something new. I hope you have been able to get a better feel for all of the things involved in getting a well online and producing income to you.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. decision. Feel free to email any questions or thoughts to MarcobeInvestmentsinc@gmail.com. Sphere: Related Content

Part 3 of Steps involved in a typical oil and gas drilling venture/investment – Preparing and drilling the well

This is the third article in a series that will provide an overview of a typical oil or gas drilling venture from beginning to end (payment of investors). The first two articles covered scouting a location for drilling through forming a partnership and funding the well using a private placement memorandum (PPM). This article will cover steps involved with preparing and drilling a well. The first article can be read here. The next article can be read here.

Selecting the drilling rig operator:
The oil producer now has a partnership established and funding from investors to start drilling the well. The producer should have established a relationship will a drill operator. The operator is usually responsible for securing resources to drill the well including a drill rig, rig workers, and all supplies needed. These resources vary with the depth and type of well being drilled.

Chosing the appropriate drilling rig for the oil/gas project being presented:
A simple shallow well may only need a small drilling rig that is positioned on the back of a special truck. The truck parks over the drill spot, raises the drill structure to a vertical position from the horizontal resting position, secures the rig with cables in the ground, and starts drilling fairly quickly once supplies and workers are in place. For deeper wells, off-shore wells, wells requiring horizontal drilling, these challenges require different types of rigs. The rigs can become substantial in size costing hundreds of millions of dollars. A good operator will select the right rig for the right job at the right cost.

Preparing the land before drilling:
The oil producer will pay to have the grounds cleared and roads put in for the rig and supporting equipment and supplies to have easy access for setting up. Initially they will spud the well, meaning start the drilling.

Understanding how an oil/gas well is drilled:
Drilling a well usually requires a drill bit that rotates through the ground with many teeth (usually diamond or other very hard material). The cut rocks and materials need a way to move out of the hole while being drilled. This is accomplished by having the drill bit sit on the end of a hollow drilling pipe. A special fluid (nick named mud), mixed with special chemicals, is pumped down the pipe - exiting through the drill bit. This lubricates the drill bit and carries out the cut rocks and dirt to the surface. On the surface, the dirt and rocks are separated from the fluid and the fluid reused again down the pipe. The mud serves another purpose of counteracting any pressures encountered while drilling such as gas or oil wanting to come to the surface. The weight is increased to counter the pressure and keep the well stable.

After drilling is complete, log the well to see if it is viable or not:
When the final depth is reached, the well will be logged. Usually a radioactive device is lowered through the mud to the bottom of the well. While the device moves through the total depth of the well, sensors read the reflections through the surrounding grounds. A trained geologist can usually tell what type of materials are present at each depth and how porous the ground is for letting oil or gas flow. Many times, there may be indications of oil or gas, but the ground may not be porous enough to support a good flow of the oil and gas through the well. These wells can be very frustrating for investors since the oil and gas may be present, but there may be no commercially viable/profitable way to extract it. Therefore, investors and other stakeholders in the well usually wait on pins and needles for the results of the log to know if the well is going to be a good producer or not.

Putting a viable well into production:
Viable wells will have casing placed around the wall of the well to stabilize the well, helping prevent damage or cave-in. The log determines underground layers/depths that look most promising for producing oil or gas. These areas are perforated (holes blown through the casing for the flow of oil or gas). Sometimes the well is not porous enough to support a good flow of oil or gas. The oil producer and operator may then decide to frac the well. In this case, special fluids or other materials are forced at very high pressure through the perforated holes well into the ground to open up fissures conducive to the flow of oil and gas. A frac job may not always work, but often does tremendously increase the flow of oil or gas. There are other methods used to stimulate the flow of oil or gas. The oil industry has many tools and methodologies developed over years to handle most situations encountered in wells. The goal is to get an optimal flow of oil or gas from the well that keeps the well stable and provides a good return for the investors.

Next article in this series:
In the next article, we’ll cover details about putting a well into production and selling the resulting oil and/or gas.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content