Oil and Gas (1-3)

Upstream

exploration, acquisition, drilling, and development of petroleum products. (backbone of oil and gas industry)

Midstream

storage and transportation after product has been brought away from point of production

downstream

refining, marketing, and distribution of processed products (gasoline, diesel, etc)

Integrated Companies (big boys)

Shell, Exxon, Chevron. Handle all activities from upstream to downstream

Independent companies

Involved primarily in upstream activities. (acquiring leases, drilling, development) Then market to integrated companies.

Hydrocarbons

found sub-surface under rocks made from plants and animals from millions of years ago.

petroleum

hydrocarbon compounds of crude oil and natural gas found in underground formation.

Reservoir

Accumulations of hydrocarbons found in rock formations

Reservoir

accumulation of hydrocarbons in rock formations

Reserves

estimates the amount of crude oil in reservoirs.

Porosity

measure of the pore space where petroleum can exist. How much fluid can the rock hold?

Permeability

determines ability of petroleum to flow through rock space

Mineral rights interest

gives the right to explore and develop minerals that exist under the earth. the right to share proceeds from the sale of minerals produced.

fee interest:

an ownership of both surface and mineral rights

Royalty Interest (non-working interest)

interest retained by the mineral rights owner when rights are leased to another party. Receive a portion of revenue or product.

Working interest

ownership rights to develop and produce the materials. covers exploration and production costs

What is the landman’s job?

Search for and obtain leases to explore beneath the earth

Lease bonus

initial amount paid to the lessor (owner of land) to sign the lease (price per acre)

Royalty provision

specified fraction of royalty to be paid (ex. 1/8 of revenue)

Delay rental provision

allows lessee to refrain from drilling during primary period

primary term:

initial term of lease during which lessee (O&G) company must begin drilling or pay delay rental payments

shut-in royalty

lessee must pay royalty if well can produce but doesn’t.

Paid-up lease:

essentially a pre-payment, pay the initial bonus, then pay up over a period of time.

Working interest owners

responsible for 100% of E&P (exploration and production costs) their profit share is whatever remains after royalty interest and other networking interests

Joint networking interests

companies share the costs and risks of E&P. One party is designated a operator and the other is non operator but responsible for their portion or revenues and costs.

In conventional drilling operations

reservoir is very permeable, O&G flow through natural channels

vertical well (conventional drilling op)

drilled straight down with no angles

Directional well (conventional drilling op)

drilled straight down to a set depth and then curved

Non-conventional drilling ops

reservoir rock is not permeable

horizontal wells

drilled straight down then curved gradually until hole runs parallel to earth’s surface

hydraulic fracturing

The reservoir has little to no permeability (tight formation). Water, chemicals, sand are pumped into the well @ high pressures and crack the reservoir, allowing crude oil to flow into the well.

Dry hole

if revenue doesn’t cover P&E costs the well is plugged

Christmas Tree

series of valves and pipes that control the flow of oil and gas from well head

choke

allows oil to flow through from the well. Choking back stops the flow to the well.

Crude oil

after BS&W is removed, crude oil is expressed in barrels (42 gallons/barrel). Measured in API gravity and sulfur

Heavy oil vs light crude oil

• heavy oil: less than 30 degrees API, thick tar oil, from gulf of Mexico

• light oil: greater than 40 degree API, Permian basin, lighter, more expensive to produce and process

Spot market

purchase or sale of crude oil for near-term physical delivery.

Futures Market

financial market dealing with futures contracts. rarely entail physical delivery.

Total Petroleum In-Place

The total estimated amount of oil and gas believed to exist in a reservoir, regardless of recoverability

Resources

quantities of oil and gas estimated to exist in naturally occurring accumulations

Undiscovered resources

oil and gas not yet discovered, but geological evidence suggests they may exist

prospective resources

quantities of oil and gas that are not yet discovered, but where the potential for discovery exists

Discovered resources

Resources that have been identified through exploration

• commercial (economic): expected selling price of oil exceeds costs of finding, developing, and producing. Classified as reserves

• non-commercial (non-economic): discovered but not economically feasible currently.

Contingent resources

discovered but not currently economic due to

oil and gas prices

tech limitations

regulatory/ infrastructure constraints

Proved Reserve

Reserves that can be estimated with reasonable certainty to be commercially recoverable.

• production must be possible

• extraction must have already begun, be certain within reasonable time period

• contain hydrocarbons confirmed by reliable tech

Proved undeveloped

• expected to be recovered from un-drilled acreage

• existing wells requiring major capital expenditures

• must have development plan within 5 years

proved developed resreves

reserves expected to be recovered from existing wells

proved developed producing

Currently producing oil and gas

Proved developed non producing

• shut-in reserves: well capable of production but temporarily shut in due to market conditions, pipeline or infrastructure issues

• behind the pipe: reserves in zones already drilled but not need more production

Unproved Reserves

believed to be recoverable but subject to greater uncertainty.

Casing

steel pipe), glued into well and stops formation from caving in on the hole. Control pressure of the formation

OPEC

Organization of Petroleum Exporting Countries

Spud date

date rotary drilling bit touches the ground

Divided Interest

Owners of working interest receive revenue and pay for expenses based on their ownership of a specific acreage.

Acquisition Costs

costs incurred in acquiring property rights, rights for development, and production. (mineral rights, lease bonus, legal costs)

Exploration costs

any costs incurred after legal rights have been obtained. Any G&G exploration costs. Can be drilling or non-drilling.

Development costs

preparing proved reserves for production. drilling development wells, installing facilities, gathering and treating oil

production costs

incurred in lifting the oil and gas to the surface, transporting, and storing the product

Successful Efforts Method

Preferred by FASB and publicly traded companies. Only costs that lead to finding new reserves should be capitalized. All other costs are expensed.

Under SEM G&G / Exploratory dry holes are

Expensed because they’re unsuccessful efforts. Non-drilling G&G costs are associated with unproven reserves, so they are expensed.

Under the SEM are development dry holes capitalized or expensed

capitalized because they have to do with proved reserves

Under the full cost method

preferred by the SEC and smaller companies. Based on the idea that companies will drill successful and unsuccessful wells. All costs associated with oil and gas reserves are capitalized