Exploration, production AND MARKETING of oil and gas

The Prospecting Process

The process of prospecting for oil and gas can take many paths before a well is ready to be drilled. The broad order of researching and lease activities can be described as follows:

  1. Geological Idea
  2. Preliminary Research
  3. Expanded Prospect Development & Approval
  4. Acquire Leases
  5. Permit, Finance and Drill the Well

Every oil and gas operator who generates prospects will have their own myriad of sub-steps and processes they follow, but all will perform these essential steps along the way.

Geological Ideas

Every prospect starts with a geological idea. Most generating geologists have knowledge of a specific oil and gas basin or geographic region. Each takes his knowledge of the area's geological structures, faults, producing wells, dry holes, and other data to generate ideas on where to look for drilling opportunities.

Five elements must be present for an oil and gas prospect to be successful and, if any one of them fails, neither oil nor gas will be found when the well is drilled:

Source Rock - When a source rock is subjected to high pressure and temperature deep within the earth over an extended period of time, hydrocarbons form. The main types of sedimentary source rocks are:

  • Shales - Layers of clay minerals.
  • Sandstones - Particles of sand (mostly quartz grains) pressed together by the weight of sediments deposited above.
  • Carbonates - Fossilized skeletons and crystals of calcium carbonate. Limestone is a common carbonate.
  • Evaporates (Salts) - Salts left behind as a result of evaporating seawater.

Combinations of these source rocks can also occur. Sandy shales or shaley sands would represent a blend of two rocks.

Whatever the rock type, source rocks that ultimately generate commercial hydrocarbons have two key characteristics:

  • Porosity - Hydrocarbons are created in the tiny pore spaces of the rock. If the source rock does not have adequate porosity, hydrocarbons would not have been created.
  • Permeability - A measure of the level of connectivity between the source rock's pore spaces. Without adequate permeability, the hydrocarbons created within the pore spaces of the source rock cannot migrate from the source rock to a reservoir.

Migration - Hydrocarbons are expelled from the source rock. Hydrocarbons are less dense than their precursor organic sediment, so they migrate upwards over time to the earth's surface unless they are trapped.

Trap - As the hydrocarbons migrate away from the source rock they must find a structure, or trap that has the right conditions to stop the oil and gas from reaching the surface. There are two types of traps capable of capturing hydrocarbons preventing further migration:

  • Structural Traps - De-formed rock layers primarily the result of folding and/or faulting, or both. Anticlines and salt domes are common examples of structural traps.
  • Stratigraphic Traps - Formed when other rock beds seal a reservoir bed.

Reservoir - Oil and gas is trapped in the porous spaces of a reservoir rock; usually sandstone or limestone. As is the case with source rock, the reservoir rock must also be permeable so that the hydrocarbons can flow to the surface during production.

Seal Rock - An impermeable rock that prevents the hydrocarbons from escaping to the surface.

Every generating geologist is familiar with these elements and their various attributes within their basin / region. Prospect ideas come from combining regional geology with new knowledge that comes from logged successful wells and dry holes drilled in the region and technical data that the geologist may have.

Preliminary Research

Preliminary prospect research involves an investment of primarily time to make a determination whether or not a prospect is worth pursuing. Developing a prospect for potential sale can involve risking a material amount of capital. Generation companies do not want to invest capital to completely develop a prospect unless they believe further development will reasonably result in drilling and completing a successful well. Preliminary research might include:

  1. Preliminary lease checks. If the idea is on acreage under lease or held by production, there is no need to proceed further.
  2. Researching and mapping logged wells (productive and dry holes) in the prospect area.
  3. Reviewing seismic the generation company may have in its library.
  4. QC publicly available seismic.
  5. Compare notes with other geologists with experience in the prospect area.

All of these activities build the case for the geologist to drop the prospect or propose the generation company develop the prospect to drill.

Expanded Prospect Development

Completing a developed prospect usually involves utilizing multiple confirming geological, geophysical or geochemical technologies:

Seismic Surveys - Seismic surveying is based on the simple concept that sound waves will travel through different geological structures at different speeds that can be measured by time. In conducting a seismic survey, a shock or sound wave is created using a thumper truck or even explosives drilled into the ground.

The sound waves travel under the ground and are reflected back by the various rock layers. These reflections travel at different speeds depending upon the type or rock and the density of the rock layers they pass through. The seismic receiving truck reads and records these sound waves as they are detected by listening devices called geophones.

2D Seismic - Two-dimensional seismic lines are created by laying the geophones out in a single line.

3D Seismic - A 3-D seismic survey is basically a dense grid of 2-D lines.

4D Seismic - Adds a time lapse variable to 3D seismic, performing repeated 3D seismic surveys over a producing hydrocarbon field over time.

Reprocessing Seismic Data - Using computer models to clean up and enhance seismic data.

Geochemical Techniques
- The modern day version of Dingmans Ferry seeps detection described above. Analysis of soil samples at the surface is correlated to petroleum accumulation at depth.

Radar Gas Imaging - The underlying assumption of this technology is that hydrocarbons are generated and/or trapped at depth and leak in varying but detectable quantities to the surface. Gas sensing instruments are flown over an area to look for hydrocarbons seeping from the earth.

Magnetic Surveys - Most oil occurs in sedimentary rocks that are nonmagnetic. Igneous and metamorphic rocks rarely contain oil and are highly magnetized. By conducting a magnetic survey over a given area, a prospector can determine where oil-bearing sedimentary rock is more likely to be found.

These are but a few of the many technologies employed today in the quest to find oil and gas reserves. The acquisition and analysis of these technological surveys is quite capital intensive. Purchased 3D seismic surveys, as an example, can cost in the range of $15,000 to more than $40,000 per square mile. Conducting a proprietary seismic shoot is even more costly.

The cost of these technologies, however, pale in comparison to leasing acreage and drilling a well. Relatively small dollars invested in confirming technologies improves an operator's chance of success and preserves capital that would otherwise be wasted prospecting with a drill bit.

Acquiring Leases

As an oil and gas prospect is being defined geologically, a landman works to stake out, in detail the land area whose mineral rights are necessary to drill the prospect. Preliminary lease checks are completed early in the process. These checks ensure that the necessary land is available for lease.

Lease negotiations will begin in earnest once the prospect generator has approved the project from a geological perspective.

Mineral rights leases can contain a myriad of terms. They will vary depending on geographical location and, like all binding contracts, will vary based on the land, land (surface rights) owner, and mineral owner circumstances as well as the local leasing "market". In "hot" areas, terms and compensation are more in the landowners favor. Common lease terms include:

Lease or Cash Bonus - The up-front per acre payment made to the mineral owner for signing the lease. The lease bonus is considered to be the first year's rent.

Delay Rental - Rental payments paid annually to the mineral owner after the first year of the primary term until the completed well is produced.

Primary Term - The initial period of time during which the lease will be in effect, in the absence of drilling, production, or other operations as specified in the lease. The primary term can be from one to 10 years or more.

Secondary Term - The term of the lease in which the lease is held in force after expiration of the primary term. Generally, shut-in payments, continuous drilling, and production operations are the only means to extend a lease into its secondary term.

Royalty - A percentage share of the production or equivalent cash value derived from the production, which is granted to the mineral owner in the lease. The royalty is free from the cost of drilling or production. Royalty rates vary depending on how prolific the area's hydrocarbon discoveries have been. They can be as small as an eighth to well over a quarter. The mineral owner owns the rights to the minerals in place under the ground. It can be, but is not always the landowner.

Shut-In Royalty - A payment made to the mineral owner in lieu of actual production. This occurs when a producing well is shut-in due to problems with the well that cannot be resolved within a period specified in the lease, an unattractive or suitable oil or gas market, a lack of facilities to produce the product, or other cases defined within the shut-in provisions contained in the lease.

Pooling - If a portion of the land required to drill a prospect is currently under lease, the landman will approach the party holding that lease to see if a pooling is possible. Pooling is simply combining adjoining tracts of leased land into a single unit. This would generally be done once the prospector has already secured the remaining leases necessary to drill the prospect.

After the leases have been secured, the prospect is nearly ready to be drilled. The royalty owner owns the rights to the minerals in place under the ground. It can be, but is not always, the landowner.

Permitting & Financing Wells

Permitting - All drilling permit applications generally include the lease and well numbers, county, legal description, location, field, proposed depth, type of well and other pertinent information. Approved permits-to-drill issued by each state and federal authority are effective on the same day they're approved by the regulatory agency.

Financing - Financing a well is a function of the prospect generator's access to capital and risk appetite. While some will drill wells they generate "heads up" or 100% self-financed, most will syndicate out a portion of the well to industry partners, accredited and non-accredited investors.