A Closer Look At Oil and Gas Business Complexities
September 21, 2016
Texas is a state that is rich with natural resources. These resources give owners of oil rights and gas rights an opportunity to earn revenue by allowing energy companies to drill and hopefully harvest those resources from drilling sites. The process might seem straightforward; however, many royalties owners are surprised at the actual complexity in extracting oil and gas from the ground and actually getting paid. What owners of gas and oil royalties must realize is that despite the potential, actual production of these resources is a risky and complicated endeavor.
It All Starts With A Prospect
In the oil and gas industry, a prospect is a plan for drilling in a specific place to hopefully produce oil and natural gas. To develop a prospecting plan, energy companies put in a lot of initial effort. First they survey and research the land to determine its value as a mineral deposit, followed by researching and contacting land and mineral owners. Researching a prospect can be very involved, since sizing and valuing a deposit requires understanding the geology in that specific area, along with many other details that could affect production or the drilling process.
A Prospect Becomes A Plan
Based on the size of the deposit and the assumed worth of the minerals that could be extracted, energy companies then develop a plan to explore and drill an area. This includes determining what it will take to drill the area, any costs and liabilities that must be assumed by the energy company, and researching mineral rights owners. Only once the owners of gas and oil rights are located can an energy company negotiate their prospecting plan and contract with them so the project can begin.
Exploration and Drilling
By the time a company begins exploring a prospect, they are well invested in that project and prepared to drill if their exploration is fruitful. There is investment from the moment a company pinpoints a prospect and begins to develop a plan; however, that investment increases substantially once work at a drilling site begins.
Whether the results of exploration are positive or negative, the energy company is spending money on the potential that their research will result in a productive well. Even if the decision is made to go ahead and drill, there is never a guarantee that production from a well will be as expected.
The Economics of It All
While all of this may seem simple enough, research alone is a lengthy and expensive process, not to mention the cost of drilling and production of oil and gas. Energy companies must also determine ahead of time whether the investment will be profitable once all costs are considered and at what point a project must be abandoned because it is not profitable enough. Gas and oil royalties being paid to owners of oil and gas rights must be figured into all of this, as well as the current market, product demand, and many other details that shape the economics of the entire project.
Besides research and estimation, the real complexity in any drilling project is the uncertainty of it all. There is no one answer that fits all projects, making it impossible to know what will happen until companies actually drill and attempt to produce from their wells. Gas and oil royalties depend on the success of any drilling project. The good news in all of this complexity is that owners of oil rights and gas rights who have negotiated a successful contract with an interested energy company have little to lose and everything to gain. The risk taken by drilling companies is theirs; gas and oil rights owners can still be winners through much less effort!
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