How to Invest in Oil

Wells & Gas Investment

Opportunities
Michael Bowen Oil and Gas
consultancy gives a review with
respect to oil and gas penetrating
investments.Oil and gas offerings,
nevertheless, can be particularly
risky. While many oil and gas wander
openings are true blue, there are a
considerable measure of fake
promoters endeavoring to misuse
growing eagerness for
 Before making any
money related interests
in oil boring or gas.
(1)Fraudulent Sales Techniques
(2)E-mail Promotions and Other
Unsolicited Materials
(3)Once-In-A-Lifetime
Opportunities
(4)High Rate of Return
(5)oil Sales Pitches Focused on
Highly Publicized News
(6)Cant-Miss Wells
Acreage Position
Sponsor submits project for due
diligence review
Identify type of project
Drilling project
Producing property acquisition
Mineral rights acquisition

Identify acreage position and

ownership rights of Sponsor
Review acreage position
Identify producing and prospective
formations from offset wells
Determine if oil, natural gas or both

Ownership details

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Acreage Position
Ownership
Surface ownership
Leasehold (subject to terms of OGL)
Working Interest (expense bearing interest)
Revenue Interest (Working Interest less
royalty)
Overriding Royalty Interest (non-expense
bearing interest)
Mineral rights (minerals owned
directly)
Royalty Interest

Examples Property Level

Leasehold
Working Interest 100% Expense
Royalty (20%)
ORRI ( 5%)
Revenue Interest 75% Revenue

Mineral rights
Royalty 20%

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Reserves & Economic Cash Flow
Projection
Property Level Economics
Input Parameters
Revenues
Oil, Gas, NGL volumes
(adjusted from production to sales volumes)
Oil, Gas, NGL prices
(adjusted from reference prices to wellhead realized prices)

Expenses
Operating expenses
Production/ad valorem taxes
Capital investment
D&C , facilities, pipeline, leasehold
Ownership
Interests to be evaluated
Working interest (expense bearing)
Revenue interest
Overriding royalty interest
Changes in ownership due to deal
terms

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 Develop Production Profile for Well(s)
Type Curve Development - Offset Wells
Typically used in unconventional and
repeatable conventional reservoirs
Evaluate reserves and production profile
for offset producing wells to determine
range of expected results for future
drilling
Select offset wells producing in target
reservoir
Review drilling and completion
operations for analogy to planned
development
Consider impact of multiple factors:
Type of reservoir
Type of reservoir fluid
Type, vintage of offset wells drilled
Location and orientation of wells
drilled
Distance from planned development

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Develop Production Profile for Well(s)
Decline Curve Analysis

Normalize production
from offset wells to
time zero
Calculate average
production based on
composite volume
and no. of wells vs.
time
Use decline curve
analysis on
normalized average
production to
generate type curve
Compare type curve
IP, decline profile,
EUR to min/max offset
performing wells for
reasonableness

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Type Curve Projection

Type curve projection

represents estimated
production profile and
reserves for single
well
Modify application of
type curve for
development plan
May have multiple
type curves and
applications
Production profile
developed from type
curve on undeveloped
acreage or from
decline analysis of
historical production
for producing wells

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Oil and Gas Price Environment
Reference Nymex Oil Nymex Oil Prices
Prices Historically high oil price environment
Actual I Projected Market in backwardation with long term
average prices ~$80-85 per barrel
Supported in near-term by oil
supply/demand, fiscal policy and geopolitical
issues
Potential upside/downside risk will track
economic conditions with continued volatility
in market prices

Nymex Gas Prices

Reference Nymex Gas Lowest gas price environment since early
Prices 2000s
Actual I Projected Excess supply with large inventory and
deliverability due to shale gas development
suppressing natural gas prices
Expect near-term prices in $4.00/MMBtu
range with seasonal or weather related
spikes at times
No significant near-term increase in pricing
due to fundamentals
Price Realization
Oil: Adjust for gravity, quality, transportation
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Gas: Adjust for BTU, gathering,
 Reserves & Economic Cash Flow
Projection
Expenses
Operating expenses direct costs to produce wells (vary by type, depth and operating
environment)
Pumper $ 500
Utilities 1,000
Chemicals 750
Field and well expenses 750
Repair and maintenance expenses 500
Salt water disposal 2,000
Operator administrative charge fixed cost per well/month 900
Total Operating Expense (per month) $6,400 Range <$1,000 to >$25,000

Production/ad valorem taxes

Oil production/severance tax Varies by State, percentage of revenue or unit of production
Gas/NGL production/severance tax Varies by State, percentage of revenue or unit of production
Ad Valorem property taxes Varies by State, County, tax jurisdictions

Capital investment direct costs to drill wells (vary by type, depth and operating environment)
Drilling and completion cost
Production facilities
Pipeline
Leasehold
Authority for Expenditure (AFE) Operators pre-drill cost proposal for working interest owners
participation election

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Reserves & Economic Cash Flow
Projection
Property Level Economics
(Pre-Tax)

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 Reserves & Economic Cash Flow
Projection
Fully Loaded, Net to Investor Economics

Property level economics LESS Sponsor deal structure

Sponsor deal structures vary depending on
Type of oil and gas investment drilling, acquisition, other parameters

Sponsor cost structure (administrative costs and third-party expenses)

Investment mark-up Sponsor mark-up on leasehold, D&C AFE, acquisition or capital
costs
Administrative Costs Annual fee of ~1% of capital contributions
Third-party Expenses Annual costs of ~0.25-0.5% of capital contributions

Sponsor return (sharing arrangement)

Partnership sharing arrangement
BPO APO1 APO2
Sponsor 10% 20% 30%
Investor 90% 80% 70%
Carried working interest Investor pays disproportionate amount of capital costs for
development

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Reserves & Economic Cash Flow
Projection
Fully Loaded, Net to Investor Economics
(Pre-Tax)

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 Oil & Gas Underwriting
Analyzing the Return Potential
Net Cash Flow Projection
LOE Fees Net Revenues Revenues

2,500

2,000
Economic life of Net to Investor
cash flow impacted by level of
1,500 fees and expenses

EL
Net to Investor

EL
Property Level
1,000

500

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20142015201620172018201920202021202220232024202520262027202820292030203120322033

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 Reserves & Economic Cash Flow Projection
Reserve Reports and Reserve Definitions

Reserve Reports

Typically prepared by Sponsor or third-party independent petroleum engineers

Independent Firms
Large international Netherland, Sewell; Ryder Scott; Cawley Gillespie; others
Mid-size domestic many
Small domestic many

Reserve Categories
PROVED RESERVES Reasonable certainty to be commercially recoverable from known reservoirs, defined economic conditions
Proved Developed 90% probability actual quantities > 1P estimate
Producing
Non-Producing Developed: Quantities expected to be recovered from existing wells and facilities
Proved Undeveloped Undeveloped: Quantities expected to be recovered from through future investments
Total Proved (1P)
PROBABLE RESERVES Geoscience and engineering data indicate to be probably recoverable from reservoirs (mid case)
Probable Developed 50% probability actual quantities > 2P estimate
Probable Undeveloped
Proved + Probable (2P)
POSSIBLE RESERVES Geoscience and engineering data indicate may be possible to recover from reservoirs (high case)
Possible Developed 10% probability actual quantities > 3P estimate
Possible Undeveloped
Proved + Probable + Possible (3P)
RESOURCES
Contingent Discovered, sub-commercial
Prospective Undiscovered
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Reserves & Economic Cash Flow
Projection
Generalized Risk Assessment

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 Oil & Gas Underwriting
Analyzing the Return Potential

Understand the relationship between:

Cost of investment
Expected return
Risk assessment

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