Curious About Economics of Fields/Wells

Hello all, I’m a small operator in Wyoming and trying to gather some information on some things I’ve been curious about when it comes to the economics of Fields/Wells.

For background information I just purchased this operating company a few months ago and have no prior experience. I just have the help of my grandfather who has been in the industry for a while however he doesn’t have much knowledge of the industry from the ownership/management/economics side.

My questions might be broad but I appreciate any and all information.

To start,

How do oil and gas companies evaluate future leases/wells/fields?

What do the costs for things like surface from landowners use generally run? Ballpark numbers are fine as I understand areas have specific costs depending on where they are, possible production, etc.

How does a split estate with federal minerals and private surface generally look and work? As well as cost? (Maybe a similar question/answer as above)

How can a small operator gain funding to compete for larger fields/leases? (Thinking reserve based lending or similar)

Similar question, can reserve based lending be used for acquisition of lands/leases all the way down to legal/title/surface use/drilling/completion/facilites etc.?

Is it possible to do all this as basically a one man show if I rely on outsourcing the work of certain things to my attorney and accountant?

Thanks and appreciate responses and discussions

Oh wow! What in the world lead you to doing that with no experience? Good luck sir. Not to be to blunt nor rude, but theres no possible way that you, your attorney and accountant can do this on your own since none of you know what you are doing. 1st thing I would do is hire an engineer, geologist and landman specific to that area with experience. They will pay for themselves and save you a lot of money in the long run.

A very interesting situation. OK, I’ll bite, and will take a “glass half full” approach.

First, you need to absolutely make sure your field crew is well incentivized to maintain those wells, optimize that production, and reduce costs in a safe and environmentally compliant way. They are the key to having good returns on your investment. You need people who know those wells history off the top of their head, who know all the vendors in the area and have them on speed dial (and who to avoid), and who can put eyes on each producing well at least once a week (even if there’s automation/SCADA) and each shut-in well at least once a month.

Second, read the above paragraph one more time. I can’t stress this enough.

RBLs are typically run through the larger banks who have an engineer on staff to review the reserves for accuracy and due diligence. Expect to get ~90% credit for producing well value and near nothing for anything non-producing. (You’d need to have more in place for drilling and workover plans to get credit beyond that)

Private equity is the other method, but you’re unlikely to get that as a one man show with no prior success history. There’s a lot of competition there. Unless you’re a frat guy, went to TCU, or have family money. Then the sky is the limit!

Federal minerals are leased to the operator and work roughly similar to privately owned minerals. You just pay different people. Either way, you need to make sure you know the lease terms for each owner you’re paying, because each one can be (and usually is) unique. Fed leases are usually pretty forgiving for non-production but private ones can vary wildly.

Surface owners are important to keep happy just because they can really be allies for the operator and a massive headache when they’re unhappy. I’m not sure Wyoming specific prices, but damages for a typical new well pad is usually $100k-300k and depends on what’s happening on the surface and how much you need that specific piece of land. Yes, they have to give you access to your minerals, but they don’t have to help you save money.

But it doesn’t sound like you’re drilling, so your surface costs should just be things like road maintenance and site reclamation. That part will all depend on the state of the current locations. Many areas are going to make you clean a site to the point that grass will grow over where the well site was, so consider that as a hurdle for cleanliness.

I think your RBL can be used for all of that? But will depend on your bank’s terms. Using RBLs for drilling is common, and everything else is usually required when drilling.

Final words of wisdom: Drilling a well is [relatively] easy. Not screwing up the reservoir once you get the drill bit to the right place (aka, the completion) is the hard part. That’s where all the disciplines intersect. It’s incredibly hard to fix a well that was completed poorly. A lot of wells produce economically despite a poor completion, but wells with that much potential are harder and harder to come by. A small operator will be scraping the bottom of the barrel for prospects, so the completion will matter more.

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Quite the challenge. This business has become even more focused on talent, technology and capital in order to achieve the critical mass for success. Lending/Capital will be reluctant if these three are not well developed in your company and business plan. Follow @tracy_lenz advice and optimize your current operation and establish a track record of success. Bolt on acquisitions (those that fit well with current operations) will be your best area to raise funding. A one man show was possible, to a degree, at one time, but the economic success is doubtful today. Good luck.

Thanks for the reply, and the thoughtful insight.

My grandpa has many years experience in the field and runs a very successful water drilling business and drilled about half of the shallow wells in the field back in the 80s. The field was also sold with an old rig to complete work overs. He also has many connections to geologists. Our attorney is a landman. May not be the way a major company would operate, but I believe we can bootstrap it and grow it. The previous owner also stayed on initially to teach me about the inner workings of the day to day operations.

I run the day to day with help from my grandpa when needed. This current lease also has some great benefits as a county road runs straight through the middle of the leased acreage and all of the acreage I believe is federal lands, so no issues that front currently. As I mentioned it came with a small rig to capable of doing work overs for our wells so no need to pay for that other than new pump parts when needed.

As I’ve talked to a few more people, when banks start using the reserve based lending phrase it triggers some SEC requirements and more red tape apparently?

This is currently more of a 5-10 year outlook, but I’m obviously ambitious to grow this thing, which is why I’m looking for resources and asking questions to gain as much knowledge as possible.

My grandpa has many years experience in the field and runs a very successful water drilling business and drilled about half of the shallow wells in the field back in the 80s. He also has many connections to geologists. Our attorney is a landman. May not be the way a major company would operate, but I believe we can bootstrap it and grow it. The previous owner also stayed on initially to teach me about the inner workings of the day to day operations.