Oil & Gas

ACC 380K.35

fossil fuels

oil, gas, coal

are finite

what is a renewable?

energy source is replenished by nature at about the same rate as consumption

oil and gas demand is projected to ..

stay strong because total energy demand will outpace renewables growth

oil and gas products are

extensively and intricately woven into modern life

• bedding, manufacturing, carpet, personal care

sources of renewable energy cannot

they cant substitute for all existing uses of oil and gas

• plastic issues — no suitable substitutes

what are the four hydrocarbon gases

Methane (lightest)

Ethane

Propane

Butane (heaviest)

(mice eat peanut butter)

characteristics of heavier gases

• higher energy content (mcf)

• higher market value if sold as a purity product

what can a produced gas stream contain

• methane

• heavier gases

• suspended hydrocarbon liquids

• contaminants

what is liquid condensate

A portion of any suspended liquids may condense out of the gas stream at the production site as the gas cools and expands as it passes through processing equipment

what has to be processed PRIOR to entering a long haul pipeline

wet/rich and/or contaminated gas

what are natural gas liquids (NGL)

suspended liquid molecules and liquefied gas molecules removed from the gas

pipeline gas is almost pure …

pure methane, with small amounts of heavier hydrocarbons and some contaminants

what is liquified natural gas (LNG)

almost pure methane cooled to its liquefaction temperature, which shrinks its volume to 1/600th.

• economically shipped by ocean carriers

• expensive process and shipping costs

biggest markets in Asia and Europe

US goal with LNG

profit by selling cheap U.S. gas into international LNG markets.

what is the composition of crude oil

diverse mix of liquid and solid molecules that has some entrapped gas molecules.

• Overall it has liquid characteristics.

can range from light and thin to heavy and viscous

Crude oil gravity

the gravity is expressed in degrees using an API gravity scale

• counter intuitive with heavier crudes having lower number

Crude A is 20° API and Crude B is 40° API,” then B is lighter.

light crude value

• Light crudes tend to sell for a higher price.

• Why: they contain more of the light-liquid molecules that make high-value products like gasoline, jet fuel and diesel.

Sulfur in crude oil

High sulfur content lowers the value of crude because sulfur is restricted in refined products so removing is adds to the refining costs

• low sulfur = sweet

• high sulfur = sour

gas plants primary use is

use chilling to separate chilling

refineries use heat driven

heat driven distillation process to sort ranges of molecules

refineries use cracking for?

to break some of the heavier molecules into lighter, higher value molecules

what is coking

Breaks up the heaviest molecules and removes some carbon (coke) ONLY at the most sophisticated refineries

what is oil measured and priced in

42 gallon “barrel” unit

gas volumes measured in

cubic food multiples (Mcf)

pipeline-quality gas is priced in

million British thermal units (BTUs)

6 Mcf of gas =

1 barrel of Oil Equivalent (Boe)

upstream sector

exploration and production

• (finding it, drilling it, producing it)

midstream sector

Begins when production leaves the production site

• gathering, further processing, trade, transport and storage

few companies focus on this

downstream sector

Begins with crude oil refining,

• distribution and retail marketing

integrated companies

produce oil and gas AND refine crude oil

independent producers

produce oil and gas but do NOT refine crude oil.

Contractors and Suppliers

• industry is supported by a wide range of contractors and suppliers

• serve the industry

• Schlumberger and Halliburton

National Oil Companies (NOCs)

Most producing nations claim government ownership of oil and gas resources.

• Mostly or entirely government-owned

US, canada, uk, austrailia do NOT have a NOC

OPEC

many oil expoertinf nations are members of the OPEC

NOT russia

• The U.S. used to be a large oil importer but is now almost self-sufficient.

why is the US almost self sufficient

unconventional oil production, meaning horizontal drilling and hydraulic fracturing.

US based publicaly listed oil and gas companies MUST

must follow rules established by both FASB and SEC

• SEC is in charge

• Some rules apply to all companies, and some apply specifically to oil and gas producing (upstream) activities.

SEC

heavily involved in public company reporting 1934

• securities acts passed because of financial failure of the stock market crash

• ultimate authority

relies on FASB to lead on GAAP matters

successful efforts (FASB)

FASB

• expenses exploration costs except for successful explorational wells

full cost (SEC)

SEC

• Capitalized and amortized exploration costs as part of an overall development effort

SEC was directed to get more involved in OG accounting

By the Energy Policy and Conservation Act of 1975

• Following the Arab oil embargo

• Solidified the use of the full-cost method

• Collected OG data that led to disclosure requirements

SEC regulation S-K

requirements for info that must be included in a 10-K.

S-K Part 1200 — specifically for OG producing companies

SEC regulation S-X

addresses the preparation and presentation of financial statements and footnotes

• S-X Part 4-10 — specifically for OG producing companies & rules for full cost method

ASC (932)

FASB’s GAAP rules — Entities Engaged in Oil and Gas Producing Activities.

1. Treatment of oil-and-gas-related costs under the Successful Efforts method

2. Supplemental Disclosures,

FS, FN, & supplemental disclosures

what is a sedimentary basin

A large accumulation of sediments and the resulting sedimentary rock

• oil and gas can be found here

• most commonly found in basins originally formed in an offshore (marine) environment.

  • organic debris mixes with sediments, providing carbon- and hydrogen-rich organic source.

what is Shale

• most common type of source rock for oil and gas.

• It’s made from fine sediments like silt and clay, which are best at preserving organic debris.

• Heat and pressure from deep burial over millions of years can turn the organic debris in shale into oil and gas.

• extremely low permeability, so it’s difficult to extract the oil and gas.

what is porosity

Amount of void space in rock capable of holding fluid

• space between grains

• high porosity is capable of holding more OG

what is permeability

Ability of fluid to flow through rock by moving from pore space to pore space

• flow more easlity in a high permeability

Conventional

(traditional) vertical wells

Some oil and gas formed in shale escape and migrate into other porous and permeable formations such as sandstone and limestone.

• Trap-like structures there can form accumulations.

• 
  

unconventional

horizontal drilling and hydraulic fracturing

• Producing directly from organic shale and other tight rock

which development currently dominates in the US

unconventional

onshore activity

who has ownership of OG rights outside the US

the government claims ownership of OG rights

who has ownership of OG rights in the US

majority of onshore mineral rights are privately owned

however the US government has ownership on both on and offshore rights, both federal and states

what is fee simple absolute

it is full, unlimited ownership in land

rights and privileges come with land ownership

some of the rights can be separated/severed and owned by different parties

how can mineral rights be severed from surface rights

through conveyance or reservation

it is not uncommon that mineral estate is severed from the surface estate

what is a mineral estate

considered to be “dominant” estate

• right to use the surface as reasonably necessary to explore for, extract and transport minerals

OG companies own what kind of rights and do they buy or lease

ONLY mineral rights

• NO surface

CAN buy but like to LEASE since less up front and shared risks and benefits

Key elements of an OG lease

…

what is negotiated within a OG lease

• bonus amount

• royalty %

• delay rentals

• length of primary term

• possibly surface use provisions

who is the Lessor

mineral estate owner

• retains a royalty interest in production

who is the lessee

the OG company

• has working interest

state requires payment of what

• production taxes

• royalty owners share of taxes is deducted from the royalty payment and paid to the state

what is an undivided interest

% of a whole tract

what is net mineral acres

….

what is net revenue interest

…

what does the Bureau of Land Management (BLM) manage

it manages leasing of all onshore federal lands even though other agencies may manage surface activities

federal leasing

is done by auction based on bonus bid amounts.

• the royalty, primary term, and delay rentals are set by federal policy

types of royalties

• lease royalty interests

• overriding royalty

• non-participating royalty interest

non-participating royalty interest

• permanent interest

• carved out of mineral estate and never expires

overriding royalty interest

paid out of working interest share of production

farmout

another party earns of WI by doing work, such as drilling a well

Rule of Capture

you own what you produce from your own property unless part of pooling or unitization because it migrates

• applies to production in the US

states have implemented conservation laws to

• limit waste

• protect the environment

• ensure fairness

what is the regulatory agency in Texas called

Railroad commission

what is pooling

used when small tracts are combined to meet statutory minimums for drilling permit

what is unitization

is it used for the kind of large working areas established for horizonal drilling projects

where is production from a pooled or unitized area allocated to?

individual tracts and each lessor in a tract is paid royalty depending on their % of ownership in the tract and royalty % agreed in their lease

what is the formula for net revenue interest

a. what % of the unit acreage is attributable to their tract (tract acreage/ unit acreage)

b. what is their ownership % in the tract?

c. what is the royalty rate in their lease?

a x b x c = net revenue interest

net revenue interest example

Alonso when

when is a joint operating agreement signed

when there is mor than one WI owner in the pooling/unitization to be able to

• designate one party as operator

• define the method for sharing production and costs

• the operator will conduct all work and bill the costs to nonoperators

RESERVES

conventional OG reservoirs

• drilled with vertical wells

• lie in isolated portions of porous and permeable formations

what does seismic use to identify

“prospects” but they may not contain oil and gas so dry hole risk is HIGH

unconventional reservoirs

Extends through wide portions of low-permeability formations, so dry hole risk is LOW

• Horizontal drilling and hydraulic fracturing due to low permeability

what are development wells

well drilled on proved acreage even if it is turns out nonproductive

what are exploration wells

well drilled on unproved acreage even if the chance of success is highly likely.

ASC 932

only to oil and gas producing activities, generally called the “upstream” sector.

Geological and geophysical (g&g)

Costs of area analysis such as seismic. This can include purchasing and reprocessing old seismic and conducting a new survey, including permitting.

exploration overhead

Costs of the exploration staff and related expenses

undeveeoped prop maintainence

Costs of maintaining leases, such as delay rentals

Exploration wells

Wells drilled on acreage with no proved reserves. It’s called a dry hole if no proved reserves are discovered.

what exploration costs are expensed as incurred under successful efforts

• G&G

• exploration overhead

• undeveloped property maintantence

what are cost of seismic programs used for

to evaluate unproved properties are expensed as incurred

• eismic programs conducted in areas with proved reserves to aid the development program may be fully or partially capitalized.

property acquisiton cost

costs of acquiring mineral interests through:

• Purchase

• Lease (the bonus payment)

• Other contracts, such as a foreign concession

related costs of acquisition: brokers, landmen, attorneys and recording fees.

initially capitalized when incurred, whether proved or unproved

cost of a lease option

it is capitalized

individually significant properties

reviewed individually for impairment.

Individually insignificant properties

reviewed and impaired in groups, usually in common geographical units such as a single prospect, field or unconventional formation.

Exploration well costs are capitalized during

• drilling, pending the determination of whether proved reserves have been discovered.

what is a casing

steel pipe used to line the wellbore

what is tubing

inside the casing, and production flows to the surface through the tubing.