How to Evaluate Oil and Gas Investment Opportunities (The Legal and Geological Aspects)
Project location plays an important part in the investment decision-making process — It can make or break a project. These are a few of the criteria that we evaluate when vetting a potential oil well investment before presenting it to our investors.
Legal Criteria for Oil and Gas Investment Opportunities
State Regulatory Commission Rules
Well placement must follow state rules. The state oil and gas regulatory commission which issues rules on where you can place an oil and gas well — how far it must be from the boundary line of the neighboring land owner and how far it must be from other wells to prevent waste.
Placing wells too close to a boundary line will drain another property owner’s reservoir without compensation, which can give cause for a lawsuit. If you place too many wells too closely together, you may damage the underground reservoir and cause the irreparable loss of hydrocarbons.
Oil and Gas Lease
The mineral owner (called a “land owner” even if he or she does not own the surface), must be under an oil and gas lease, controlled by the company that is drilling.
Ownership of the lease may be segmented by depth or by geographic area, and it is common for multiple companies to own interests in the same area of the same lease. If multiple parties own it, the company performing or overseeing the drilling and controlling the operations of the lease will be the operator.
The landman ensures that the leases are properly taken, that they cover 100% of the minerals, and that they are correctly assigned to the oil and gas company.
If a single lease is not large enough to meet the minimum area requirements set by the state regulatory commission, you have to “pool” leases together to create a drilling unit. The landowners within the unit will share in production proportionate to their ownership of the minerals in the unit.
Joint Operating Agreement (JOA)
A landman must negotiate a joint operating agreement if there are multiple working interest owners in a lease or within a drilling unit.
Basically, the JOA is a private constitution that defines the rights and responsibilities of the various working interest owners. (Mineral owners do not sign JOAs. They receive royalty payments from the working interest owners who own the lease and the oil and gas wells drilled on the land.)
Geological Considerations for an Oil Well Investment
Developing the Lease
First, we look at the location of the lease. Is this a one-well project or is there opportunity to develop the lease or buy more leases to expand your field?
Development wells can be up to 30% cheaper to drill, and since you already put in the infrastructure for the test well, those costs are minimal.
Regional Market Activity
Next, we examine regional market activity, which influences costs for the project.
Regional activity can mean better access to vendors and perhaps cheaper access to tap into pipelines, which lowers the cost to take your product to market. On the flip side, it can lead to an increase in vendor cost due to a high demand in the region and more competition and a higher drilling cost.
High activity in the region can also lead to an increase in lease acquisition costs and lease terms that are better for mineral owners.
Greenfield vs. Brownfield
Is the project location near or surrounded by offset production?
Greenfield exploration involves an undeveloped lease with little to no offset well data around the target lease.
Brownfield exploration (most of our exploration projects fall under this category) involves an undeveloped lease with offset well data to reduce drilling risk and provide well control data.
Understanding this difference is important when considering an oil and gas investment opportunities and the risks associated with them. Diving into the geoscience is part of how an oil well investment is like treasure hunting.
What Does This Mean for Investors?
If you don’t want to dig up all the research yourself, you can sign up to view our vetted oil and gas investment opportunities. We give you all the data so you can make an informed decision and feel confident in your choices.