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Tricky Terminology That Can Make Or Break Your Bottom Line
Junior Companies: These are E&P companies with Integrated companies are the large and supermajor oil and
production ranging from 0 to 10,000 boepd gas companies that have their hands in every aspect of the
industry, combining (integrating) upstream, midstream and
Intermediate Companies: These are E&Ps with pro-
downstream. For individual investors, attempting to deter-
duction ranging from 10,001 to 100,000 boepd
mine the primary driver of protability for these companies
Senior Companies: These are E&Ps with 100,000+ is paramount, and valuation requires examining multiple
boepd of production business segments.
Pipelines
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Tricky Terminology That Can Make Or Break Your Bottom Line
often contains rich sources of oil and gas. Shale gas is hydrogen sulde..
natural gas that is trapped within shale formations. Tight gas - Natural gas produced from relatively
Shale oil is unconventional oil found in shale forma- impermeable rock. Getting tight gas out usually
tions. This is not to be confused with 'Oil Shale'also requires enhanced technology applications like
known as kerogenwhich is a substitute for conven- hydraulic fracturing. The term is generally used for
tional crude oil. The last decade has ushered in new reservoirs other than shale.
technology such as advances in horizontal drilling and
Wet gas - Produced gas that contains natural gas
hydraulic fracturing that have made extraction of oil
liquids.
and gas from shale a revolutionary reality.
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Tricky Terminology That Can Make Or Break Your Bottom Line
Conventional Oil & Gas drilling and production technology unlocking massive
Oil contained in rocks with relatively high matrix permeability, reserves of hydrocarbons buried tightly within shale forma-
and typically having a high recovery rate. Unlike bitumen, tions. As such, unconventional oil and gas has been all the
conventional oil ows through a well without stimulation and rage, while the tried and true conventional hydrocarbons
through a pipeline without processing or dilution. suddenly became less attractive. The shale boomspurred
along by the revolution in hydraulic fracturingwas highly
Unconventional Oil & Gas
attractive to new investors who saw others making money
Reservoirs with permeability so low that the only way to hand over foot.
extract oil or gas is to employ a horizontal and hydraulic
The shale boom put paid to theories that Peak Oil was
fracturing or other advanced techniques. North Americas
upon us and it was game over for the industry. Seemingly
shale reservoirs fall under this category.
overnight, horizontal drilling combined with hydraulic fractur-
What it means for an investor ing to get oil and gas out of shale and changed global
energy dynamics forever.
The playing eld has changed dramatically over the past
decade, with revolutionary advancements in exploration, What investors have been looking for then, is whether the
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Tricky Terminology That Can Make Or Break Your Bottom Line
companies they are interested in are in the top shale-pro- Investors also make the mistake of focusing strictly on geog-
ducing region. This means understanding the dynamics of raphy. Its not just about whether a company is operating in
the key shale plays. Not all shale plays are equalnor is one of the hot US shale plays; its about their strategy going
every part of a shale play as promising. And now the boom forward and their future potential. Investors must examine
is all about improving further on the revolutionary technolo- what a companys potential is beyond proved reserves (see
gies that made it happenimprovements that hope to get more below). New technology allows E&P companies to get
even more oil and gas out of shale. oil and gas out of the shale quickly, but depletion of the well
is also faster.
In the meantime, however, investors would do well to
remember that conventional oil and gas has its lure, and in The investor must also ask what a companys re-
trying times of slumping oil prices, producing conventional serves-to-production ratio is. Knowing how much oil and
oil and gas is cheaper. gas they have access to is not enough; How much are
they actually producing in proportion to what they have
The trick for the investor is to nd the best t for the prevailing
access to?
market. Unconventional drilling is highly productivebut
very expensive. Many US shale projects are unprotable Finally, while no one has come close to the US in getting a
unless oil prices are at $80 per barrel at least. At the same shale boom off the ground, investors should consider
time, there are some conventional drillers out there who can looking to places like Argentina which has become a particu-
produce oil at $20 per barrel. Even with oil prices at under larly attractive prospect since oil prices began to plummet.
$50/per barrel, investors can make great returns. Why? Because Argentinas prices are pegged at $76/$77, a
fact which has prompted a urry of drilling activity and a
From June 2014 to February 2015, the collapse of oil prices
number of massive discoveries of late.
cost North American investors an estimated $390 billion.
What is API Gravity? Not All Oils Are Equal API Gravity
This is the specic gravity of a crude oil expressed in terms of API degrees, and it
45.4
is estimated with the following ratio: API = Sg 141.5 131.5.
This is the standard used by the American Petroleum LIGHT OIL
31.1
Institute (API), from which it derives its name., to express the weight of oil. It is a
30.2
statistic used to compare a petroleum liquid's density to water. Typically, the upper
MEDIUM
limit for heavy oil is 22 API gravity with a viscosity of 100 cp (centipoise). This is a 22.3
statistic 21.5
Heavy oil are usually not recoverable in their natural state through a well and require HEAVY
heat or dilution to ow into a well or through a pipeline. As such, API Gravity is 10.0
something an investor needs to understand and consider in terms of economics. 6.5
EXTRA-HEAVY
0.1
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Tricky Terminology That Can Make Or Break Your Bottom Line
Europe's North Sea, Africa and the Asia Pacic region. not recoverable currently due to geological/technological
because it requires less processing to remove impuri- Under this classication system, the least risk for investors is
ties. Sour, heavy crude trades at a bigger discount. associated with Reserves, which carry some degree of
certainty regarding future commercial extraction; while
THE THREE Ps: PROVED, PROBABLE, POSSIBLE Contingent Reserves are discovered but considered
sub-commercial, and Prospective Reserves are a pure
The three Ps are probably some of the most misunderstood
gamble and as yet undiscovered.
terms in the industry. They have changed and evolved, and
they can often be the downfall of a new investor. Oil and gas Under the category of Reserves, 3Ps are dened as
reserves and resources are volumes of oil and gas that can follows:
be commercially recovered in the FUTURE. For potential
Proved Reserves: Reserves with 90% certainty of com-
investors attempting to determine the present and future
mercial extraction
value of an oil and gas companys reserves, the 3Ps are the
pieces to the puzzle; and quite simply, they categorize the Probable Reserves: Reserves with 50% certainty of com-
merely estimates based on the evaluation of data showing Possible Reserves: Reserves with 10% certainty of com-
evidence of the amount of oil and gas present in under- mercial extraction
ground reservoirs.
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Tricky Terminology That Can Make Or Break Your Bottom Line
When companies attempt to dene their reserves as 1P, they ble reserves. For these smaller companies, 3P reserves are
are referring to the highest category of certainty: Proved a much easier way to denote potential for investors. But
Reserves. When companies dene their reserves as 2P, they investors must be aware that this means we are talking
are combining the sum of Proved and Probable Reserves. about Possible Reserves, with only a 10% certainty of com-
Thus, when companies dene their reserves as 3P, they are mercial extraction in the future. Many companies reporting
denoting Proved + Probable + Possible. According to the 3P reserves are found on the AIM (London) and TSX-V (Can-
SPE, the best estimate of recovery from committed projects ada) exchange.
is generally considered to be the 2P sum of proved and
probable reserves.
Proved, probable and possible reserves, farming-in and What is the difference between
farming-out ... this is all just the tip of the iceberg for oil & gas 'reserves' & 'resources'?
investors. Stick with us because our next report takes you The difference between 'reserves' and 'resources' is
deeper into the complicated world of oil and gas recovery. largely a question of commercial viability plus time
We detail the three phases of recovery--primary, secondary
and reality. While there is some certainty the reserves
and tertiary--what they mean and where investors tend to
can be commercially recovered in the present time,
make their rst, major mistake. This is a game-changing
resources are less mature: They are potentially recov-
report for your bottom line, so be sure not to miss it.
erable, but not ready for commercial development.
Copyright 2015, all rights reserved by Oilprice.com. No Resources exist, but for now they are staying in the
portion of this report may be published or reused in any way ground, either because of political, social or market
without the explicit consent of Oilprice.com. reasons, or because the technology to recover them
The 3P Conundrum is not yet fully developed.
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Tricky Terminology That Can Make Or Break Your Bottom Line
Exploration & Production: The Drilling Ins and Outs WHY and what the COST difference is. There are basically
two types of drillingDirectional and Vertical, with Horizon-
Massive reserves of oil and gas locked deep beneath the
tal drilling, which helped spawn the shale boom, is a type of
rock surfaces are accessible for the rst time in American
Directional drilling.
history, ushering in a shale revolution on the back of
tremendous advances in drilling and extraction technology. Directional Drilling
A combination of new horizontal drilling and hydraulic
Around since the 1920s but signicantly advanced over the
fracturing, or fracking, has rendered the United States the
past decade, directional drilling is the process of drilling oil
worlds biggest oil producer, overtaking Saudi Arabia and
and gas wells at an angle. This enables producers to more
Russia. But its not quite as black and white as this.
easily reach oil and gas deposits under the surface. At the
In order to understand what you should be investing in same time, production from directional drilling has been
under current market conditions, you need to understand massively popular because it also allows for the drilling of
not only WHAT is being drilled, but HOW it is being drilled, multiple wells from the same well bore, reducing expenses
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Tricky Terminology That Can Make Or Break Your Bottom Line
for producers and resulting in less surface destruction and bending at a certain depth, thus enabling it to reach a wider
thus a lower environmental impact. area of rock and tap the resources within. The point at
which the vertical well bends to become horizontal is the
The technology enabling directional drilling has seen some
kickoff point. Unconventional oil and gas reserves are
very important advancements in the past decade; speci-
extracted using directional drilling techniques. It is also
cally, real-time technologies (sensors and global position-
important to note that 10% of the world's crude oil and 32%
ing technology) that allow for high-accuracy targeting of the
of natural gas comes from shale formationsunconven-
drill bit. With this technology, reserves that are miles away
tional oil and gas.
from the well bore or even a mile below the surface can be
tapped into. Directional drilling allows for not only drilling at Vertical Drilling
an angle, but at an angle that can be continually re-direct-
Traditional vertical drilling is used to tap into conventional oil
ed, or bent.
and gas. Vertical drilling is much less complicated and less
expensive than horizontal drilling, but the range is limited so
this process is generally less productive. Vertical wells can
only access the oil and gas that is directly below. However,
it is important to keep in mind that there are plenty of
conventional oil and gas plays that do not require horizontal
drilling to be productive. This also means that these plays
are less expensive to produce and that when oil prices are
too low to support the massive costs of extracting from the
prolic shale plays, conventional plays that need only verti-
cal drilling can still promise investors attractive returns.
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Tricky Terminology That Can Make Or Break Your Bottom Line
Hydraulic Fracturing
Casing - A casing is a thick-walled steel pipe the drillers place in wells in order to isolate the uids that form during drilling
and to prevent the borehole from collapsing in on itself.
Completion - Completion denotes the process of rendering an oil or gas well ready to begin production. During this
time, operators install permanent equipment, including the wellhead. Hydraulic fracturing may also be considered part of
the completion process.
Development well - Development wells are wells drilled within an area of proved oil or gas. These wells are drilled to
productive depth.
Dry hole - Dry holes are wells that cannot economically produce commercially viable volumes of oil or gas.
Exploratory well - A well drilled to nd a new eld or to nd a new reservoir in a eld previously found to be productive
of oil or gas in another reservoir.
Flaring - The burning of natural gas for safety reasons or when there is no way to transport the gas to market or use the
gas for other benecial purposes (such as FOR or reservoir pressure maintenance). The practice of aring is being steadily
reduced as pipelines are completed and in response to environmental concerns.
Hydraulic fracturing uids - Mixture of water and proppants along with minor amounts of chemical additives used to
hydraulically fracture low permeability formations. sufcient quantities to justify commercial exploitation.
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Tricky Terminology That Can Make Or Break Your Bottom Line
Productive well - A well that is capable of producing hydrocarbons in sufcient quantities to justify commercial
exploitation.
Proppant - Sand or man-made, sand-sized particles pumped into a formation during a hydraulic fracturing treatment to
keep fractures open so that oil and natural gas can ow through the fractures to the wellbore.
Recompletion - The process of entering an existing wellbore and performing work designed to establish production
from a new zone.
Spacing - The distance between wells producing from the same reservoir; generally expressed in terms of acres.
Getting Into The Game: Farm-In, Farm-Out What motivates sellers and buyers
What it really means While the most common reason for farming-out acreage is
as an alternative means of nancing, there may be other
A farm-in is a process of one company joining another
motivational factors for the seller here:
company or joint venture in a specic oil and gas license
area. The company that is farming in to the business The sellerthe party farming-outmay want to divest
purchases a working interest in the license with cash, acreage that is peripheral to its main exploration or
through exploration or other commitments. Most common- production area. This is particularly common after a
ly, the company farming-in to the lease is required to drill company change in management, which often produces
wells in order to earn its interest in the acreage. The differ- a change in strategy. New management may seek to
ence between Farm-in and Farm-out is this: The interest consolidate a diverse portfolio;
received by the assignee is the farm-in, while the interest
The seller may also have only a small equity holding in
transferred by the assignor is the farm-out.
the acreage in question, and deem it not worth the man-
More to the point, a farm-in is really an alternative means of agement time.
nancing exploration activities, typically when the company
Farm-in agreements are extremely popular among junior oil
that owns the lease cannot raise enough capital to fund
and gas players, who look for bigger companies to come
exploration through corporate lending due to high interest
on board as partners and then handle production while the
rates or due to the higher-risk associated with the endeav-
smaller company focuses on new exploration projects.
or. This risk may be associated with the geology of the land
or the political stability of the host country. Regardless, Where to nd farm-in/farm-out opportunities
farm-ins have become an extremely popular tool for nanc- Short of googling farm-out opportunities, there are really
ing exploration activities and managing risk in the oil and only two ways nd whats out there.
gas industry. At the end of the day, this is one of the most
1) The Petroleum Listing Service (PLS), launched in 1987,
prevalent forms of oil and gas agreements.
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Tricky Terminology That Can Make Or Break Your Bottom Line
provides operators and investors with various listings and 2) Engage an independent industry expert to hunt for
proprietary databases, and also hosts property expos and farm-in opportunities, vet opportunities through high-level
brokers while directly marketing properties, prospects, reviews and facilitate introductions and negotiations for
overrides and midstream assets for sellers. Because over you. This option, while more expensive, is generally more
2,000 independent companies subscribe to this service, it likely to produce positive results as it is an all-inclusive
is a good place to start the search for farm-ins. service that is managed from start to nish by experts. (See
OP Tactical for more information about these services).
A working interest, on the other hand, means you pay a percentage of the bills but also receive a proportional percent-
age of the prots. It's higher risk, with higher reward. If you acquire a 50% working interest in an oil and gas project, you
will also be responsible for paying 50% of the costs. But you will also be entitled to net revenue interesta percentage
of the income generated from the project. In this case it is best to view the 'working interest' as the expenses and the
net revenue interest as the prot.
One Comparative Scenario: Let us say that a landowner owns the mineral rights to a certain oil and gas property and
signs a lease with an E&P company that gives him a 20% royalty. What this means is that the E&P company owns 100%
interest in the project, while the landowner owns 20% net revenue interest. The E&P company has to foot the bill for
100% of the costs, while it earns 80% of the net revenue interest when it produces. If another investor buys a 50% inter-
est in this project, then they will be buying into a 40% net revenue interest.
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Tricky Terminology That Can Make Or Break Your Bottom Line
Net acres - The percentage that a company owns in an acreage position with multiple owners. For example, a compa-
ny that has a 50% interest in a lease covering 10,000 acres owns 5,000 net acres.
Joint operating agreement (JOA) - An agreement governing the rights and obligations of co-owners in a eld or
undeveloped acreage, which denes, amongst other things, how costs and revenues are to be shared among the
parties and who is the operator.
Lease - A legal document executed between a mineral owner and a company or individual that conveys the right to
explore for and develop hydrocarbons and/or other products for a specied period of time over a given area.
Operator - This is the entity responsible for managing all operations in an oil or gas eld or within undeveloped acreage.
More specically, the Operator is responsible for the exploration, development and production of an oil or gas well or
lease, and is usually the company who has engaged the drilling contractor.
Production sharing contract (PSC) - An agreement between a host government and the owners (or co-owners) of
a well or eld regarding the percentage of production each party will receive after the parties have recovered a specied
amount of capital and operational expenses
Undeveloped acreage - Acreage on which wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas regardless of whether or not the acreage contains proved reserves.
Unit - The joining of interests in a reservoir or eld to provide for development and operations without regard to separate
property interests. Also, the area covered by a unitization agreement.
Working interest - The right granted to the lessee of a property to explore for, produce and own oil, gas or other miner-
als. The working interest owners share the costs of exploration, development and operating. The share of production to
which a working interest is entitled will be smaller than the share of costs that the working interest owner is required to
bear to the extent of any royalty burden.
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Tricky Terminology That Can Make Or Break Your Bottom Line
Units of Measurement
BBL = Barrel of oil; approximately 42 US gallons.
BBL/D (also BPD, BD, B/D) = Barrels per day; to measure daily production and consumption.
BOE = Barrel of oil equivalent; a unit of energy based on burning one barrel (or 42 gallons US) of crude oil. For gas
companies, this combines all reserves and production into one unit of measurement.
BOEPD or BOE/D = Barrels of oil equivalent per day; with one barrel equally 6,000 cubic feet of natural gas.
BTU = British thermal unit, a unit of energy used to determine the quality of the resource when burned; the heat
required to raise the temperature of a one-pound mass of water by one degree Fahrenheit.
MBBL = One thousand barrels of crude oil, bitumen, condensate or natural gas liquids
MMBBL = One million barrels of crude oil, bitumen, condensate or natural gas liquids
MTPA = Millions of tons per annum TCF = One trillion cubic feet of natural gas
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Copyright 2015, all rights reserved by Oilprice.com. No portion of this report may be published or reused in any way
without the explicit consent of Oilprice.com.
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