Over 20 years later, the Deepwater Horizon explosion which was drilled on the Macondo Prospect in the Gulf of Mexico devastated the environment again with massive quantities of oil flowing into the gulf. Unfortunately, these are some of the risks associated with exploration, drilling and production of crude oil.

While it may appear that these accidents are due to the greedy oil companies, there is something much bigger at play here. What I am referring to is the risk vs. return for oil production in our country. At All Clear Energy, we are proponents of clean, renewable energy, however, as a country we cannot simply abandon our most prolific source of energy overnight due to a few unfortunate accidents. This is the cost we pay as a nation for extracting and transporting the energy sources we use.

Again, it comes to risk vs. reward.

When it comes to oil production, most people outside of the industry view oil as being produced from a small number of very large corporations. While companies such as Exxon-Mobile, BP & Shell are considered the big boys, there are also tens of thousands of smaller independent oil and gas companies which explore for and produce oil and gas in the US. When developing crude oil or natural gas properties, each company, big or small has to ensure that the risk vs. reward are balanced. This is crucial to weening the country off of crude oil and into other forms of alternative energy sources.

Take this as an hypothetical scenario example. We will assume no monthly operating expenses and 100% interest using round numbers for simplicity:

Imagine an oil company has identified an oil and gas drilling prospect and is considering an investment into the project which will require an initial cash outlay of $1 Million. At the current oil price of $100 per barrel, it would take 10,000 barrels of oil production just to reach the break-even-point. Now the determination must be made based on the rate of production. Assuming a production rate of 10 barrels per day, it would take 1,000 days to reach the break even point at $100 per barrel.

While this is simple an example, it is easy to factor the rate of return based on adjusting the variables slightly. While a 1,000 day return (just under 3 years) may be a favorable return to some, imagine the return given 100 Barrels per day – that brings it down to 100 days, just under three months. On the other hand, take our original 10 barrel a day scenario with a price of $50 per barrel. This takes the original 3 year time frame and doubles it to 6 years. At $25 per barrel, it doubles it again for a 12 year return. Obviously a greater production rate at a higher price per barrel will yield a greater return and thus lower the risk.

What few people in the outside of the industry fail to understand is that it is actually LOWER oil prices, more drilling and less regulations which will spur innovation into alternative energy and renewable energy development in the future. As the price of oil continues to rise, the higher price of crude will make oil investments more attractive to investors. Of course there is the supply and demand side to consider as well. Artificially raising the price of crude will do nothing to encourage renewable energy development. Naturally occurring, organic price increases will, however spur interest in alternative energy sources when

When the price of oil reaches a point to where it is simply not able to compete with alternative energy sources, there will be a fundamental shift towards renewable energy development which will only occur with natural market conditions. Short term government interventions will help but hurt the industry and further delay the transition process to other energy sources.

Until US citizens voluntarily decide to end the use of crude oil permanently, the price will continue to rise and oil will remain a lucrative option for independent oil companies and investors.

Of course, this is based on natural conditions and any outside factors such as increased regulation on drilling and production in an effort to spur alternative energy development will essentially cripple the economy in an effort to fundamentally change how we consume and use energy. The method of higher oil prices to encourage alternative energy development will absolutely drain US companies and individuals and destroy the economy in the process.

A operator may own its own drilling rigs or may outsource various drilling operations to third party contractors. Either way, the operator is responsible for providing estimates of the various drilling and work-over operations and putting together the AFE. Once the AFE is obtained and the working interest owners have signed off on the cost estimates for the well operations, the operator will gather any necessary drilling permits and proceed with the drilling according to its drilling plan.

While operations are underway, the operator will generally keep the working interest and all associated parties informed of the well progress through daily drilling reports. The operator is responsible for keeping all of the well records, paying invoices and ensuring smooth operators of the well.

Purchasing Producing Oil & Gas Properties

When evaluating an oil and gas lease or oil production for purchase, one of the most important factors is purchasing at the right price. Although there are a number of factors which can be used to determine the right price when buying oil production, the current and anticipated market price of oil is always of concern. Next up is the quantity of oil currently being produced in comparison to any additional work that might be needed to enhance existing production. These added work-over expenses should be factored in along with the anticipated life span of the current and existing production.

In addition to current and existing oil and gas production, know as proven oil and gas reserves, an oil or gas well may also contain additional hydrocarbon reserves behind pipe (shallower zones above current production) or deeper reserves in untapped reservoirs. With modern technology and new developments in drilling such as horizontal drilling or hydraulic fracing to name a few, these reserves could hold massive quantities of oil which should be accounted for.

In addition to oil revenues earned from producing properties, additional tax benefits may be available for the development and production of oil. Often times, these tax benefits could help to offset the initial cost of purchasing producing and existing oil and gas properties as well as offset the costs for further exploration and development of additional hydrocarbon reservoirs.

While a bit more complicated than selling gas from a producing well, oil production requires the use of additional surface equipment and downhole well equipment such as pumping units (Pump Jacks), tank batteries, oil to gas separators, flow lines and possibly even a salt water disposal system. While it is possible to transport oil via pipeline, most well head oil production requires that the oil and gas is stored in tanks near the well head. When the tanks are full, the oil gatherer (first purchaser) will bring their pump truck in to pick up the oil and transport it to the pipeline connection or refinery.

Selling Oil from a Producing Well

The oil gatherer is considered the “first purchaser” of the oil and will pay a market price based on the current market price from oil. This can fluctuate daily and has recently been over the $100 per barrel mark – a milestone that was an indication of the peak just a few years ago. There are a few primary considerations involving the sale of crude oil.

1. Who is the purchaser of the oil at the wellhead/original tanks?
2. What determines the price paid per barrel of oil at the wellhead/tanks?

There are generally two different types of purchasers of crude oil. The most common of independent oil companies in Texas are crude oil gathering companies, which purchase oil, transport it to the refineries/pipeline connection and re-sell to refineries. Major oil companies also purchase crude directly for their refinery operations.

The price of oil is determined based on a number of factors such as the specific quality known as “grade of oil” as well as the geophysical location of the actual well and pickup location itself and its proximity to the nearest pipeline or refinery. There is also a competitive aspect which is considered as well where there may be a number of oil gathering companies all competing for the purchase of the crude. These pricing considerations could be factored by the current supply vs. demand of oil in the short term as well as future projections in the long term. Additional transport costs too may vary the actual price paid at the well head.

As part of the Oil Restoration and Recycling Program, All Clear Energy is gearing up for its 2 well rework prospect in Kent County, Texas. These wells were drilled back in the late 1960′s and have a total production close to 150,000 barrels of oil. Given the current price of oil and favorable economic conditions, we will soon begin refurbishing operations out on the lease to restore one of the 2 wells back into production. Our goal is to convert one well into a salt water injection disposal well while producing from the other. To get regular updates and further detailed information on becoming an Industry Partner, please register for the site using the following link:

Click here for contact information!

For further information or to become an industry partner, please contact us using the form below.