03 Jul How to understand oil and gas… we’re all treasure hunters
How to explore for oil and gas can be a tough concept to visualize while sitting in a cubicle of an office building. Finding petroleum miles beneath the Earth can be extremely challenging both technically and physically. Within the Earth, you face temperature, pressure, heat, friction, and other forces that are not the same as we experience at the surface. I’d like to use a more terrestrial example – oil and gas investing is like treasure hunters that are searching for buried treasure –
On the whole, oil & gas is a gold rush. First to put the stake in the ground gets it. Once the well is in the ground, it’s a finders/keepers industry. Think of oil in the ground as buried treasure that you might have an idea is in the area but you’re just not sure exactly where it’s trapped.
Here are 5.5 Steps to better help you understand how oil and gas work.
Step 1: Explore Oil and Gas
This is your treasure map that geoscientists create using seismic (soundwave behavior measured at the surface as it travels through subsurface rock). The geoscientists create maps showing places on the map with the highest chance of finding oil and gas reservoirs. Think of it as “X marks the spot” – drill a well here.
Step 2: Capture Oil and Gas
This idea centers around the concept of land ownership. A landman takes the treasure map and tries to secure rights for an oil and gas operator to drill wells. The landowner will be compensated with a 1 time fee and a cut of all production that is extracted from his lease/land Royalty. Leases have a term (usually 3-5 years), which incentivizes companies to drill wells and find oil or else lose the lease.
Step 3: Test/Pilot/Assess Oil and Gas
Engineers design the tools and strategic plan necessary to find the oil and gas. Here let’s think that engineers create the plan for the first hole to find the treasure and decide what types of shovels and picks will be necessary for the job. Their estimations for creating a well (drilling), improving the recovery of oil (completion), how much it will cost (design), and how much oil could be produced (reservoir engineering) are all important factors when making the economic designs of the well. These factors are reported to management who then decides how to procure the money (e.g. debt or equity) needed to develop these wells. They also work with finance team members to strategize the budget and timing of the wells.
Step 3.5: Success
Finding oil and/or gas in commercial quantities is extremely exciting, much like finding buried treasure. You discovered resources that have been trapped for millions of years and distributing them on the surface. The next steps are to monitor
Finding oil and/or gas in commercial quantities is extremely exciting, much like finding buried treasure. You discovered resources that have been trapped for millions of years and distributing them on the surface. The next steps are to monitor the production of the well and begin assessing the next steps.
Step 4: Development
After finding the best treasure or drilling locations. It’s time to look at the big picture of the development. The geoscientist, engineer, and land teams will determine the total amount of wells needed to optimally drain the reservoir. The strategy involves starting with the highest chance of success locations and working toward the edge of the acreage or formation. During this time, oil production is happening, revenue is generated, and partners are paid!
Step 5: Divest Oil and Gas
Explorers of oil and gas are different sizes, possess different expertise, and have different strategies but the ultimate goal is all the same – generate revenue and value. There are only a finite amount of oil and gas reserves in the ground. So every reservoir depletes over time (some slower than others). When the well is at the end of its useful life to an operator – it’s time to divest the wells to another operator or plug and abandon the well.