How it Works in the Oil Patch – Step 2 & 3


How to: Full field development of an oilfield

  • Explore(OOIP map from geo)
  • Capture (Landman all 5 townships, leasing it up)
  • Assess (3 or 4 months of production, Pilot program, science, core, logs)
  • Hold and Test (HBP, land & strategy)
  • Pitch/Develop (You know sweet spot, drill best spots first, Drill with 20 rigs, spacing & Complete),
    • Optimize (Frac testing, spacing, EOR, completion pilots)
  • Divest (Production&optimization)

Step 2: Capture – Oil and gas is a treasure hunt. The first to put the stake in the ground and extract the oil, gets the valuables. And much like sports teams “acquire rights” for a new teammate, oil and gas companies acquire the rights to drill, test, and (hopefully) produce valuable resources of oil and gas from landowners. Most companies that explore and production oil and gas are “leasing” or borrowing the land that they use. After the well is finished producing. Operators (link) seal off the well, remove the equipment from the site, and return the land to its original state.

(man with hardhat & net capturing an oil derrick or “lease paper”) Landman (link) is a job in the oil and gas industry where a person negotiates, researches, and completes land use and leasing deals. Land in the United States can be owned privately by citizens and there are many different types of ownership. The most commonly leased types of land:

  1. Fee acreage = Privately owned land by citizens negotiated privately between land owner and operator
  2. State acreage = land owned by the state and leased in public auctions
  3. Federal acreage = land owned by the federal government, managed by the Bureau of Land Management (BLM) and leased in public auctions

Want to know how to calculate your NRI (LINK?)

The negotiation of a lease involves giving owners a one-time payment (lease bonus) and a piece of the production, called a royalty (link), in exchange for a set of time (usually 3-5 years) to explore for oil . In most instances (exception: “continuous drilling clause”), as long as there is 1 well producing hydrocarbons, then that 1 well will hold larger amounts of acreage and leases. This is called “held by production” or HBP (Link). So the goal when exploring for petroleum-bearing reservoirs is to acquire the rights to land, drill a well, and hold the acreage while you plan your full development or master plan.

Remember, these companies are often taking big risks (money and time) to acquire and test for oil. In order to reduce the risk of drilling wells that do not payback, there is a systematic approach before deciding to drill many wells in an unknown area. And that’s step 3. (LINK)

Step 3. Test. (Explore, Capture, Drill, Success) After the lease is secured an oil and gas operating company (link) will have typically 2-5 years to begin production on the lease. This includes drilling new wells, working over old wells, and installing facilities on the surface for processing the production. All of these activities require upfront funds or capital months (sometimes years) before the first oil will be brought to market. Remember these operating companies are often taking big risks (money and time) to acquire and test for oil. In order to reduce the risk of drilling wells that do not payback for investors, there is a systematic approach to testing prospects before deciding to drill many wells and to install expensive facilities in an unproven area.

Engineers (Link to article on jobs in the Oilfield) design the tools and processes necessary to drill the first oil and gas well. The engineers are responsible for working with management and geoscientists to form strategic plans necessary to find and produce oil and gas. Geoscientists help pick the pick the location to drill for the highest chance of success and the engineers will create the plan for drilling, completing, producing, and testing the first well. Remember from Step 1 (LINK) that we are searching for oil that was formed millions of years ago and is now thousands of feet below the surface.

There are several key terms that are important to understanding drilling and producing new oil and gas reserves. See the links provided for greater detail.

  1. Drilling (link) = physically drilling a hole to a certain depth to facilitate the movement of oil and gas fluids to the surface.


How it Works in the Oil Patch - Step 2 & 3

  1. Completion (link) = making a well ready for production (or injection). This includes running casing, cement, perforating the casing, stimulating the formation (see hydraulic fracturing LINK), production tubing, wellhead.
  2. Facilities (link) = surface equipment used to collect, measure, transport, store, and separate oil, gas, water, and solids. This includes flowlines on the surface, tanks, separators, compressors, et al.

How it Works in the Oil Patch - Step 2 & 3

  1. Production/Operation optimization (Link) = maintaining, measuring, and monitoring the produced oil, gas, and water. Fixing and tweaking production equipment in the wellbore and on the surface to optimize and maximize efficient production from the well. The work done is typically associated with recurring expenses (LOE LINK) rather than capital expenditures (initial fund raise).

Deeper: periodic capital projects for major repairs and installations (workovers)

Deeper:  periodically something big breaks and you need to replace the water pump (capex)

All of these parts of the development process need to have their costs, design parameters, and implementation timelines estimated before drilling begins. Engineers and contractors create the estimations for drilling, completion, surface facilities, artificial lift and production for the first well(s). Reservoir engineers and geologists estimate how much oil could be produced from the reservoir. The amount of petroleum fluids (oil, gas, and water) is a key factor 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 or to strategize the budget and timing of the wells. And after all of that planning is complete, it’s time to raise money from investors or internally to develop and test the well(s). Step 3.5 involves the results of the test/pilot program.

How it Works in the Oil Patch - Step 2 & 3

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