Do Oil and Gas Upstream Issues Affect Selling Oil Royalties?
April 2, 2018
The business of selling oil and gas royalties can be complex. Selling royalties first means finding an energy company interested in producing oil or gas from certain property, then working out a viable sales contract. If you are selling oil royalties and want to be successful, you must understand the process of oil production and how oil and gas upstream issues can affect a sale.
What Is the Upstream Stage?
There are three stages in the process of producing, refining, and selling hydrocarbons like oil and gas that you must understand if you are selling royalties:
- Upstream - First stage and deals with exploring for and producing hydrocarbons.
- Midstream - Second stage which deals with transporting and storing the minerals produced.
- Downstream - Third and final stage that involves the refining and sale of hydrocarbons.
If you are selling oil and gas royalties, this should technically be done at the upstream stage by contracting with energy companies that are interested in E&P or exploring and producing from the land on which they wish to drill. Despite this, conditions and concerns further down in the production process can still affect you when selling oil royalties.
Upstream Process - An Explanation
The upstream part of oil and gas production is costly and carries a high risk. During this phase, energy companies that are interested in producing hydrocarbons must first invest in the land exploration to determine whether it is worth drilling. This comes at a considerable cost to them in time, labor, and equipment. It also often means that not every site that is explored will be drilled.
Exploration also includes establishing whether there are any specific challenges the company is likely to encounter while drilling. This stage involves learning the various processes that must be used to successfully produce minerals from this area. Once a site has been determined, drilling and well production along with plans for plugging the well when it no longer produces further increase operational costs.
Upstream Issues And Selling Oil Royalties
The goal of exploring land and drilling to produce from it is a big goal. It is to have mineral deposits that yield enough to make the initial investment financially worthwhile to investing companies as well as those selling oil and gas royalties. In fact, there are several factors that can affect an energy company’s ability to sell the hydrocarbons produced from a well which indirectly affects owners selling royalties.
- The prime factor influencing your ability to sell oil royalties is the current supply and demand of these resources and their potential selling price.
- Weaker markets caused by lower prices cause many companies to think twice about whether they should invest in E&P on a particular property.
- Reductions in value can also threaten operations that have already begun, putting these companies in financial distress.
In these situations, some companies resort to creative means to keep funds coming in such as joint operating agreements, farmout agreements, and other overriding agreements that could affect any royalties to be earned. In the worst circumstances, some investment companies may be forced to abandon operations, creating other concerns if you are the mineral rights owner who has contracted with them.
When selling oil and gas royalties, you need to know that a good sale can depend on a number of external factors. The current price of and demand for resources, the geological presentation of the land, the cost of production, and even the financial stability of the energy company each play a part when selling royalties.
If you are truly interested in selling oil royalties, you must work with industry experts who have relationships with the companies most likely to be successful in their drilling and production efforts so that everyone will benefit in the long run!
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