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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.
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Wednesday, April 23, 2008
Wednesday, April 16, 2008
Part 2 of Steps involved in a typical oil and gas drilling venture/investment – Structuring and funding the partnership
This is the second article in a series that will provide an overview of a typical oil or gas drilling venture from beginning to end (payment of investors). In the last article, we covered scouting a location for drilling through paying off the mineral rights lease holders and the land owner to drill a prospective well. The last article can be read here. The next article can be read here.
Setting up the oil and gas "investment" for investors to participate:
At this point the oil producer has secured rights to drill a specific location. At some point in the process, the producer usually hires a lawyer to set up a general partnership for selling ownership shares to investors. The producer also has the lawyer draft a private placement memorandum (PPM) for prospective investors. The PPM is required by the Securities and Exchange Commission (SEC) when selling partnership interest to new investors. The PPM is required to provide as much information to prospective investors as possible about the viability of the well, the track record of the producer and its principle associates, how the invested funds will be spent, and other details needed to make an informed decision. Information supporting the viability of the well can include information about where it is, how well nearby wells are producing, and other data used to support this as being a good prospective well such as a geologists report, seismic data, logs from nearby wells, etc. The SEC usually restricts these types of investments to accredited investors under the assumption they are more capable of making a sound investment decision than the general public.
As mentioned, these projects are usually structured as a general partnership with each partner having both a working interest and net revenue interest in the well. These relate to your associated tax advantages and net income from the well.
Let’s look at an example to better illustrate working interest and net revenue interest.
In this example, we have a $1M total cost to drill a well that is expected to generate gross partnership income of $100k per month. The partnership sells a 1% working interest in the project for $10,000, which is 1% of the $1M total cost. For this example, this 1% working interest will provide a 0.75% net revenue interest which means you would receive 0.75% of the total partnership $100,000 monthly income or $750 per month. Over twelve months, your total income for the first year will be $9,000 for your $10,000 investment. That translates into a 90% return on your investment in the first year. In reality, there are usually other costs taken out of your income to pay your share of the management fees, oil pump related costs, and other costs. Also, the other 0.25% NRI is paid out to the lease owners, land owners, developer, and possibly others.
Considering liability exposure:
One concern about investing in a general partnership is the spread liability exposure of all general partners. In the case of oil drilling ventures, the only period of any real liability exposure is during the drilling of the well. The partnership usually contacts with the driller to take liability during this period. The driller usually covers this liability exposure with insurance. Once the well is completed and online, the liability exposure is almost nonexistent through the production life of the well.
Next article in the series:
In the next article, we’ll cover details about drilling the well.
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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
Setting up the oil and gas "investment" for investors to participate:
At this point the oil producer has secured rights to drill a specific location. At some point in the process, the producer usually hires a lawyer to set up a general partnership for selling ownership shares to investors. The producer also has the lawyer draft a private placement memorandum (PPM) for prospective investors. The PPM is required by the Securities and Exchange Commission (SEC) when selling partnership interest to new investors. The PPM is required to provide as much information to prospective investors as possible about the viability of the well, the track record of the producer and its principle associates, how the invested funds will be spent, and other details needed to make an informed decision. Information supporting the viability of the well can include information about where it is, how well nearby wells are producing, and other data used to support this as being a good prospective well such as a geologists report, seismic data, logs from nearby wells, etc. The SEC usually restricts these types of investments to accredited investors under the assumption they are more capable of making a sound investment decision than the general public.
As mentioned, these projects are usually structured as a general partnership with each partner having both a working interest and net revenue interest in the well. These relate to your associated tax advantages and net income from the well.
Let’s look at an example to better illustrate working interest and net revenue interest.
In this example, we have a $1M total cost to drill a well that is expected to generate gross partnership income of $100k per month. The partnership sells a 1% working interest in the project for $10,000, which is 1% of the $1M total cost. For this example, this 1% working interest will provide a 0.75% net revenue interest which means you would receive 0.75% of the total partnership $100,000 monthly income or $750 per month. Over twelve months, your total income for the first year will be $9,000 for your $10,000 investment. That translates into a 90% return on your investment in the first year. In reality, there are usually other costs taken out of your income to pay your share of the management fees, oil pump related costs, and other costs. Also, the other 0.25% NRI is paid out to the lease owners, land owners, developer, and possibly others.
Considering liability exposure:
One concern about investing in a general partnership is the spread liability exposure of all general partners. In the case of oil drilling ventures, the only period of any real liability exposure is during the drilling of the well. The partnership usually contacts with the driller to take liability during this period. The driller usually covers this liability exposure with insurance. Once the well is completed and online, the liability exposure is almost nonexistent through the production life of the well.
Next article in the series:
In the next article, we’ll cover details about drilling the well.
- - - - - - - - - -
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
Wednesday, April 9, 2008
Steps involved in a typical oil and gas drilling venture/investment – Part 1 finding the best drilling location
Ever wonder how a typical oil or gas drilling venture happens from beginning to end? As investors in oil and gas, we don’t all see the things that have to happen before a successful well can start paying out. This is the first article in a series that will provide an overview from beginning to end (payment of investors). The next article can be read here.
The oil producer is responsible for everything:
Usually an oil producer is responsible for an oil/gas well from start to finish. The producer acts like the project manager assuring all resources are lined up and paperwork is filed. Since there are significant costs involved with drilling a well, good reputable producers work to maximize the probability of a successful well.
Finding the best location to drill:
Initially the producer scouts out the best available land for drilling. Ideally, there will be producing wells in the nearby area that give some indication of the expected production from the land being evaluated. The producer may secure rights to look at log data from these wells, which give additional indications whether the underground formation of the prospective land is promising for producing oil/gas. The producer should also secure seismic data of the land and a geologist to interpret the data for locating the best candidate spot to drill for hydrocarbons (oil or gas).
Using the appropriate seismic technology for the oil/gas drilling project:
There are many types of seismic technology with 3D seismic being a widely used advanced technology. With 3D seismic, you get a three dimensional view of the underground formations and can see where oil or gas is most likely to be before drilling, thus increasing your odds tremendously. This type of data is not cheap and some producers may save on costs by only using 2D seismic or other less accurate means of determining a drilling location. One problem with 2D is that a pocket of water can look like a hot zone for oil or gas. You won’t really find that out until you drill into the prospective zone and run a well log. The decision to use 2D alone or 3D depends on many factors. The key is to have an experienced producer who knows the strengths and weaknesses of each to know which is best for a prospective well.
Final checks before beginning to drill the oil/gas well:
At some point a decision is made concerning which land to drill. The producer should have checked with the courthouse on available acreage for drilling at some time in the scouting process to find out which land does or does not already have a mineral rights lease. If there is no lease, then the producer negotiates with the mineral owner for a lease. If there is a lease, the producer will check title on the lease for the holders. The producer then usually gives an up front cash payment to the lease holders for the right to drill one or more wells on the land, as well as some type of percentage of oil/gas eventually sold from a good well.
Next article in this series:
In the next article, we will continue with the producer creating a private placement memorandum and locating investors to participate in the oil and gas drilling venture/ investment.
- - - - - - - - - -
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
The oil producer is responsible for everything:
Usually an oil producer is responsible for an oil/gas well from start to finish. The producer acts like the project manager assuring all resources are lined up and paperwork is filed. Since there are significant costs involved with drilling a well, good reputable producers work to maximize the probability of a successful well.
Finding the best location to drill:
Initially the producer scouts out the best available land for drilling. Ideally, there will be producing wells in the nearby area that give some indication of the expected production from the land being evaluated. The producer may secure rights to look at log data from these wells, which give additional indications whether the underground formation of the prospective land is promising for producing oil/gas. The producer should also secure seismic data of the land and a geologist to interpret the data for locating the best candidate spot to drill for hydrocarbons (oil or gas).
Using the appropriate seismic technology for the oil/gas drilling project:
There are many types of seismic technology with 3D seismic being a widely used advanced technology. With 3D seismic, you get a three dimensional view of the underground formations and can see where oil or gas is most likely to be before drilling, thus increasing your odds tremendously. This type of data is not cheap and some producers may save on costs by only using 2D seismic or other less accurate means of determining a drilling location. One problem with 2D is that a pocket of water can look like a hot zone for oil or gas. You won’t really find that out until you drill into the prospective zone and run a well log. The decision to use 2D alone or 3D depends on many factors. The key is to have an experienced producer who knows the strengths and weaknesses of each to know which is best for a prospective well.
Final checks before beginning to drill the oil/gas well:
At some point a decision is made concerning which land to drill. The producer should have checked with the courthouse on available acreage for drilling at some time in the scouting process to find out which land does or does not already have a mineral rights lease. If there is no lease, then the producer negotiates with the mineral owner for a lease. If there is a lease, the producer will check title on the lease for the holders. The producer then usually gives an up front cash payment to the lease holders for the right to drill one or more wells on the land, as well as some type of percentage of oil/gas eventually sold from a good well.
Next article in this series:
In the next article, we will continue with the producer creating a private placement memorandum and locating investors to participate in the oil and gas drilling venture/ investment.
- - - - - - - - - -
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
Wednesday, April 2, 2008
What to watch out for when considering specific oil and gas investment opportunities.
Be careful of the many oil and gas investment scams presented to accredited investors. There are many oil and gas investment opportunities being offered to accredited investors. Many of these are scams designed to play upon your fear of missing out on big returns on your investment if you don’t invest. You need to be on the lookout for red flags. The Securities and Exchange has posted thoughts on common red flags to look out for to spot these scams. The North American Securities Administrators Association has also published an article on identifying and avoiding these scams. The U.S. Postal Inspection Service also has a good article on these scams as well.
Here are some additional thoughts, based on my personal experiences. 1.) Watch out for unscrupulous groups who take your money and run. 2.) Try to find out if the offering company has marked up the cost of the project by some large amount to assure making money no matter how the well performs. 3.) Find out what research the developer did on the potential oil or gas well site to determine how viable the project will be. Did they use 3-D or 4-D seismic data and “log” data from nearby wells? Some unscrupulous developers take a guess where to drill, put a hole in the ground, and take a chance on it being productive or not. It really doesn’t matter to them since they made money from the markup paid for by investors funding the oil or gas drilling partnership. 4.) Find out how long it took to get full funding for recent wells that they drilled. Ask if you can contact some of the participants in these wells. 5.) Look out for high pressure sales people trying to get you to buy into their wells. They may promise big returns and have some type of hook such as this particular well is next to a big oil producing well and we only have a few shares left that are going very fast. If they have such a great deal, why are they desperate for you? Also, if their shares are almost all gone, why do they still call a few weeks later and tell you “an investor just dropped out for personal reasons and I just happen to have his shares available for you to get in”? 6.) Try to find out how healthy the relationship is between the developer and the drilling rig supplier. If the supplier is not happy with them, they may not be eager to make a rig available. Understand, though, that there are legitimate reasons for rig delays given today’s high demand for them.
Bottom line, it is your money, not theirs. Before handing over hard earned investment funds, be sure to take your time and research as much as possible about the investment opportunity. Don’t let anyone pressure you into making an investment decision without allowing you time to conduct a thorough review of the opportunity before you invest.
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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.
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