Oil and natural resource acquisition and exploration

Industry Resources

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Industry Terms

Production Decline Curve

One of the primary determinants of value for a producing well is its decline curve. A production decline curve illustrates the production history of a particular well and is also used to predict future performance. When applicable, this curve shows gas, oil and water production. A logarithmic (vertical axis), linear (horizontal axis) format is used in this type of plot in order to fit the wide range of producing rates onto one graph. Generally, wells produce at much higher rates for the first few months than they do during the rest of their productive lifespan.

Hydrocarbon Reservoirs

Oil and gas is produced from what is commonly known as reservoirs. Production rates generally decline more rapidly in the early stages of a well’s producing life. Generally, the deeper the well, the higher the pressures encountered. There are typically three types of natural drive mechanisms from which hydrocarbons flow through reservoirs: water drive, depletion drive and solution drive.

Artificial Lift

When a reservoir’s natural drive mechanism becomes too weak to push hydrocarbons to the surface (i.e. not enough pressure), artificial lift is usually employed. The most common types of artificial lift are: rod pumping (pump jacks), gas lift and hydraulic lift submersible pumping. In many cases, wells are artificially lifted from their initial start of production.

Oil & Gas Marketing

General

In the vast majority of cases, a royalty owner's share of production is marketed and sold along with the working interest owner's portion of production. The industry term First Purchaser is used to describe the company that purchases the production at the well site (as opposed to any transaction that may occur downstream of the well site). A First Purchaser may be a pipeline or trucking company, or a marketing company who resells to another entity. Revenue accounting and funds distribution is performed by either the First Purchaser or by the Operator. The quality of producer hydrocarbons varies and has direct impact on its value. Oil gravity and sulphur content are the two most important characteristics of crude oil affecting price. With natural gas, the MMBTU content and the amount of impurities have the most impact on the value per MCF.

Measurement

Produced oil and gas is measured prior to leaving the well site, as required by law. The gross volume from which a royalty share is calculated is based on this measurement. Customary industry standard is that the Operator verifies the measurements of the First Purchaser through a check meter for gas, or by rechecking (behind the First Purchaser) the levels in the oil storage tanks. Gas meters are routinely calibrated every 30 days. Today's measurement technology is generally accurate to within 1 ½ percent. In a properly calibrated meter, random over measurements and under measurements will tend to cancel each other out over time.

With respect to the risk of being shorted properly due production, it is important to keep in mind that it is in an Operator's best interest to insure proper product measurement. While there are recorded cases of theft, it is uncommon to find systematic theft of hydrocarbons through measurement manipulation.

Marketing Expenses (aka Deductions)

Marketing expenses are governed by language in an Oil and Gas Lease and are reflected in the column on a royalty check stub denoting deductions for making production ready for sale. Common charges are for compression, dehydration and removing impurities from gas, the applicability of which has caused ongoing debate for years. The basic argument from the Operator/ First Purchaser is that the product that flows from the wellhead is not saleable in its raw form (which is true in many cases), and thus the royalty owner should bear his share of costs to make the product marketable. As a practical matter, it makes no sense for the Operator to install (and pay for) any equipment that is not necessary on the well site.

Oil & Gas Pricing

General

Crude oil and natural gas are commodities and are subject to daily swings in their marketplace value. The New York Mercantile Exchange (www.nymex.com) is the primary market maker for pricing these commodities. However, the actual cash (or physical) price that royalty owners and oil companies receive is usually based upon a contracted price set each month.

Oil Prices

Oil pricing depends heavily upon worldwide influences and is cyclic in nature. Given that 70 percent of the world's oil reserves lie outside the United States, oil is considerably more influenced by world events than is natural gas.

The price earned on production from a given well is influenced by its geographic location, its quality, and, to a lesser extent, by the volume produced. Operators with large volumes to sell may be able to negotiate more favorable pricing.

Natural Gas Prices

Natural gas pricing is influenced more by domestic demand and supply than is crude oil. The sales price for a particular gas well is also subject to increased variables due to well location (i.e. its proximity to demand centers) than is crude oil. For example, gas is more valuable in the Appalachian region, simply due to its proximity to large east coast cities, than is gas in South Texas, where it must travel a long distance to major markets. Since gas is used for space heating, weather variations play a large part in the daily swing in U. S. natural gas prices. An additional influence on the price of gas received at the wellhead is whether or not the well has one or more outlets at the well site. Unlike oil wells where production can be trucked, a gas well must have a pipeline outlet literally at the well site.

Field Rules

Oil and gas wells are contained within a field, even if it is a single-well field. The rules regulating a field are set state-by-state and pertain to well spacing and other factors governing the extraction of hydrocarbons from the field. Statewide rules are effective in the absence of any special field rules. The term “field” can be applied to different formations even though they cover the same geographic footprint. There can be, and in fact usually are, different rules for oil wells versus gas wells within the same field.

Location of Land & Legal Documentation

Publicly available legal records concerning oil and gas well ownership are on file at the county courthouse in which the well is located. Generally, this office will research, photocopy and mail/fax to you documents regarding your well. Leases, memorandums of Leases, Assignments, and Deeds are examples of items on file here. We appreciate your patience.

Severance & Ad Valorum Taxes

State governments levy a monthly severance tax when natural resources such as oil and gas are removed from the earth. Generally, the First Purchaser is responsible for collecting and accounting for this tax. This should be easily calculable, and match the deduction shown on a royalty check stub.

County governments render and collect a yearly ad valorum tax on producing minerals in most states. Royalty Owners are usually billed annually.

Regulatory Oversight

State governments are responsible for overseeing the regulatory affairs of oil and gas production within their respective states in the United States.

The API # and the State ID#- Keys for each wellbore

The American Petroleum Institute (API), an industry lobbying organization, assigns a 10-digit API # to every oil and gas well drilled in the United States. The first two digits indicate the state, the next two indicate the county and the remaining digits are unique to this particular well bore. The State ID# is also a unique number assigned by this state regulatory agency. These two numbers are the unique keys to locating information concerning your well. Should you ever need to contact any government agency concerning a particular well, use these numbers for identification purposes. These numbers will remain associated with the well even after it is plugged and abandoned (P&A'd).

Operator Relationship with the Mineral Owner

To bring oil and gas reserves to market, minerals are leased by oil companies through a legally binding contract known as an Oil and Gas Lease. Contracts between individual mineral owners and oil companies date back to prior to 1900 and continue to be used today. In exchange for an up-front bonus payment plus a percentage of the value of ongoing production, the mineral owner grants the oil company the right to drill and produce. Texas, Oklahoma, Louisiana, Kansas and California are the top five oil and gas producing states in the lower 48 states.

Glossary of Oil & Gas Terms

These general terms will aid newcomers as well as experienced royalty owners in understanding terminology used in the Oil and Gas business. Please click below for definitions.