Oil & Gas royalties
PART I OF OIL & GAS OUTLINE
Do you own oil & gas interest? Many people in Texas have some sort of mineral interest. When you deal with the landman or operator, do you understand all the nuances of the oil & gas world? Many people have a basic understanding, but do not usually have enough information to feel truly knowledgeable. Therefore, I am providing a great outline in two separate blogs for your reading pleasure.
The author of this outline is Derek Fletcher a Managing Director and Wealth Strategist at U.S. Trust, Bank of America Private Wealth Management. I have not altered the context of Mr. Fletcher’s work, however, I have reduced it down to include only the basic information and broken the outline into two separate blogs.
The mineral estate is a tract of land that is distinct from the surface. It includes five primary attributes: (i) the right to explore (ingress & egress), (ii) the right to develop (executive right), (iii) the right to receive bonus payments, (iv) the right to receive delay rentals and (v) the right to receive royalty payments. Accordingly, in the estate planning context, a client may own or be willing to transfer one or more of these various “sticks.”
Steps in the Exploration and Production Process. In order to appreciate oil and gas as an asset, it is important to understand the general activities involved in the exploration and production process.
Step One: The Survey
a. Geological Maps – identifies sedimentary basins and favorable geological locations.
b. Aerial Photography – identifies promising land formations such as faults or anticlines.
c. Magnetic, Gravimetric or Seismic Studies – provides information regarding the various rock strata below the surface.
(1) Magnetic Survey – measures the intensity of the magnetic character of the rock strata.
(2) Gravimetric Survey – measures the variations in gravitational fields.
(3) Seismic Survey – measures the various reflective properties of the rock strata as sound waves are transmitted below the surface. The seismic survey is the most common assessment method.
2. Step Two: Exploratory Drilling
a. Exploratory boreholes are drilled on a promising geological area in order to determine whether, in fact, hydrocarbons exist.
b. Once drilling begins, “mud” is circulated down the borehole and back to the surface. Casing is run into the completed sections of the borehole and cemented into place.
c. When a hydrocarbon formation is found, initial testing is performed to determine the rate flow rates, thickness and internal pressure of the reservoir.
3. Step Three: Appraisal
a. If exploratory drilling produces favorable results, additional wells will be drilled in order to ascertain the size and extent of the field.
b. The economic feasibility of development and production IS determined during the appraisal process.
4. Step Four: Development and Production
a. If commercial quantities of hydrocarbon are discovered, the next step involves development and production from the reservoir.
b. If the field is small, the appraisal wells may simply be used to develop the field.
c. If the field is large, additional production wells may be drilled.
5. Step Five: Enhanced Recovery
a. Many wells are free-flowing – meaning that the underground pressures are sufficient to carry hydrocarbons up the wellbore to the surface.
b. If the underground pressures are insufficient, some fonn of additional lift may be required – such as a pumping mechanism or the injection of gas, water or steam to maintain the necessary pressure.
c. It may also be necessary to stimulate production by fracturing the formation referred to as “fracking.”
6. Step Six: Processing
a. This is the process whereby the fluids produced (oil, gas and water) are separated.
b. Oil must generally be free of dissolved gas.
c. Gas must be stabilized and free of liquids and other elements such as hydrogen sulphide and carbon dioxide.
d. Water must be treated before disposal.