The 3rd in a series of short monthly essays
BUYING IN TO "PRODUCING PROPERTIES"
Producing properties, in the oil patch, are leases upon which are wells producing oil and/or gas. If you're presented with the opportunity to participate in the purchase of one of these leases, you should review it as carefully as accessible information allows.
For the probable future production from the active wells, have a reservoir engineer or a geologist with production experience analyze the past production histories of the reservoirs to predict the future. For a history of steady depletion, this can be done by drawing graphs. For relatively new completions with short producing
histories, volumetric calculations can be used to estimate future production.
It's best to consider properties with at least several producing wells. If only one or two are producing, there's a risk that all or half of the revenue stream will shut down if one well ceases. Production can end for "mechanical" reasons (pipe
dropped into the hole, casing leaks and etc.).
And consider that there is always a cost to produce wells. In old fields, pumps, water or gas injection, and compressors are production enhancers that you'll be paying for.
Many sellers of producing properties tout "additional potential" which often refers to "behind pipe" reservoirs that have not yet been produced.
Be sure to require analyses confirming that these reservoirs have not already been
depleted by other, nearby wells in the Field.
It's worthwhile to inquire about the surface condition of the lease. If it's replete with rusting well-heads, old pipe, oil blackened test pits and the like, what will cleanup costs be at abandonment? How many wells will have to be plugged and at what cost? Does the landowner's
lease have onerous requirements as to how the place has to be left before the operators can leave?
Make realistic estimates of oil and gas future prices. Then reduce this by 20%, or maybe more, to cover your bet. Many buyers simply buy on the basis of the number of years it will take at the current revenue stream to recover
All the data needed may be hard to get - particularly in old fields. But I think a little checking can uncover at least some of the more uncoverable info.
Let me know what you'd like to hear about.