Thursday, May 1, 2008

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 with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: Past articles can easily be found at 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 Sphere: Related Content

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