How to Invest in Crude Oil: Questions to Identify Top-Tier Oil and Gas Operators
If you are considering how to invest in crude oil, our first tip is to get as much information about the operator and his or her track record and team. Regardless of the return potential, don’t consider an oil project if the operator lacks a team of industry experts to support the well’s drilling, completion and extraction.
Why Only Work With Top-Tier Operators?
Unsophisticated operators can cause overspending, delays in execution, or worse, negligence that leads to dry holes or operational failure.
Here are a few considerations (and questions we ask) when reviewing the team members of an oil or gas project.
Questions for Operators
- How long has the company been in business?
- Do they participate alongside their investors in the well?
- Do they have relationships with other operators and form join ventures (JVs) to participate in each other’s projects? This can be a positive sign if other operators are trusting the integrity of the team and project of another exploration company.
- How long have they been active in the basin where the project is located?
- What are the operators’ means of communication? (Calls, texts, emails, automated updates, etc.)
- How many wells do they currently operate on a day-to-day basis?
- Can the operator provide data for you to compare past authority for expenditure (AFE) estimates for projects compared with the actual costs?
- What is their overall track record of finding hydrocarbons?
- What is their track record of finding commercially viable wells?
Questions for Geoscientists
- Who is the geologist who originated the project?
- How long has he or she been active in the basin the project is located?
- How is this team member paid? Is it a contractor fee, a salary or a carry in the well?
- Was he or she hired just to give an opinion to the operator/project generator or will he or she be active in the study of the test well and any developmental wells?
- What is his/her overall track record of finding hydrocarbons?
- What is his/her track record of finding commercially viable wells? (This is different than someone’s record of finding hydrocarbons. Just because you were able to locate hydrocarbons does not mean the well is commercially viable and will make money.)
Questions About Engineering/Operations
Equally as critical as the geologist is the engineer or engineering team. There are five main types of petroleum engineers: drilling, completions, facilities, production/operations and reservoir engineers. All are knowledgeable in each department, but most are specialists in one.
While finding hydrocarbons is critical, you need a team of experts to drill and extract hydrocarbons from the ground. Engineers study the data before and during the drilling to ensure the operations are safe, economical and maximize the potential of the reservoir through various drilling and completion techniques.
Similar to evaluating the geoscience team, you should ask yourself some questions about the engineering team controlling the project.
- How long have they been active in the basin the project is located?
- Are they reputable? Do they have a degree in petroleum engineering or are they field engineers? (I am not knocking field engineers; they are critical to the operations at the drill site, but when a crisis pops up when drilling 10,000 feet below the surface, make sure you are comfortable with the engineering team in charge.)
- Are the engineers sophisticated with the newest technology and software? (There are many software options available. Just remember when working with modeling and estimations – garbage in; garbage out.)
- Was the engineer hired just to give an opinion to the operator/project generator or will he or she be active in the study of the test well and any developmental wells?
- Is the engineering team a contract hire or are they employees of the operator?
Questions About Land
You can find all the hydrocarbons in the world, but you can’t drill a single hole in the ground if you don’t have the rights to drill. Land plays a critical part in acquiring the rights to drill. A quality land team ensures there are no issues with ownership of the lease, land and project partners.
- Does the operator have a landman on their team?
- Does the landman have an AAPL (American Association and Petroleum Landmen) designation? (Registered Professional Landman [RPL] or Certified Professional Landman [CPL]) Not only are there four-year degrees in land management, the majority of in-house landmen obtain their RPL and then their CPL designations through continuing education programs. All are important factors when qualifying an operator’s land department.
Questions About Investor Center Communications
- During the drilling process, do you feel the operator will keep up a good communication line with investors?
- Do they explain why they make their decisions in the field? (There are nonconsent clauses in most joint operating agreements. sometimes an investor or investment group should elect to no longer participate in certain situations. A good operator will always be open with their processes, so you can make educated decisions with your investment allocations.)
- Does the operator have a system in place to ensure timely payment of production?
- How do they handle joint interest billing (JIB)?
How to Invest in Crude Oil
If you’re considering investing in crude oil, first ask questions about the operator’s team and expertise and then consider where they are drilling and the legal side of the drilling project. Oil drilling is a complex process that requires a team of experts in various disciplines.
To learn more, explore our strategy for how to invest in oil throughout the life of a well.