02 Feb Our Approach to Gas Evaluation
When considering investing in E&P oil ventures, it is understood that it has global demand. The typical evaluation process goes from geology; reserve and production estimates, and cost to drill, test, complete (DTC); taxes and royalties; then lifting costs. Who picks up the oil is on the list but not critical as prices are relatively consistent between vendors.
However, natural gas prices are much more subject to regional demand and infrastructure.
For Natural Gas prospects, we start by asking these 3 questions:
Who is the buyer, and what is the contract price and terms? This is the first question we ask, therefore most important. It is extremely helpful if the local industry is a major player in the demand. We have seen leases that could net significant dollars from large production… if only there were a local market for it with a decent price in the area. We’ve also seen leases where natural gas is at premium demand in which even a nominal producer can be very viable (as low as 10 MCF). Having a contract price and terms in place assures your product has a place to go. If not in place on larger plays, it’s a “stop” for us.
How far is the closest pipe to the buyer? Natural gas is transported off a lease via pipeline, while most oil is picked up in trucks. In many cases, the distance between lease and buyer pipeline can be THE determining consideration. In Texas, it is rich in pipeline infrastructure. However, there may be only 1 gas purchaser in the area. This could drastically affect the price per MCF you can negotiate. Also, you have to build the pipeline and appliances to hook up into their pipeline. There may be right of way issues that must be addressed as well.
What’s the quality of the gas? Natural gas can be quite different in BTU and condensate percentage. Higher values of both usually make your product more valuable. Higher condensate may require external heat to keep pipes from freezing in the winter months. Another factor that can affect net revenue is whether it needs to be “scrubbed” to remove unwanted gases (hydrogen sulfide). This requires additional equipment on site.
After we have these questions answered, we go through a typical evaluation. I prefer gas leases with a mix of shut-in wells and production and most infrastructure in place. Gas re-works and re-entries are typically less risky.