30 Aug “So, What are the Risks?
“What are the Risks?”
OK, we get this question from new and even seasoned investors. And it’s a good question. Every deal can have a unique set of risk, but the 2 big ones that pop into my mind are
A drilled or re-entered well is simply not economical to produce in any formation after testing
A drilled or re-entered well fails during completion efforts.
Let’s break these down into categories to explain further…
Formation
This mostly refers to geology and structure. Some formations are well defined where others are not (whether viable candidates for completion or not).
These days, there is considerably less risk than in the past due to historical data and geophysics. Blanket formations, proven fields or even leases (producing or non-producing) can be found quite easily, but even these have risk if there’s faulting or other localized geological phenomenon.
You’ve may have heard the term “wildcat”. This pertains to a formation or localized anomaly that has been untested (though researched at a minimum) through traditional means. Risk of being non-productive is high, but they are fun (for some) and can give you bragging rights for decades if they hit big!
Completion
You may have read a previous opinion explaining that completion is where the “rubber hits the road”. Even the most prolific and seasoned operators run the risk of the following:
- Mechanical well failure (rods & tubing, casing, pumps)
- Unwanted water intrusion (pulling too hard or too low in a formation)
- Blowout – (too much bottomhole pressure)
- Lost or broken tools downhole
- Wrong drill mud
- Fracking misreads (both mechanical and chemical)
So, how to mitigate risk in these 2 categories?
- Find prospects with multiple payzone candidates and/or leases with existing or historical production.
- Administer field proven completion methods with reputable operators familiar with the formations
There are other risks and but there’s other ways to prevent a total loss of investment, but that will be another post.
Your best bet? Call us and we’d be happy to explain the pro’s and con’s as we see them per deal and, as always must be stated, DO YOUR OWN DUE DILIGENCE.