The
secret to asset appreciation is to buy in the path
of growth.
Oil is one of the most important natural
resources known to mankind. For most societies in
the world, oil is the principal natural resource
that fuels their economies.
Then
why, in this great age of communication and technology, do
we need to be concerned about a natural resource
like oil? Simple. Nearly
98% of everything you have or do is in some way
related to crude oil. Heat for your home, gas for
your car, 2 liter plastic bottles for pop, and petroleum jelly are just a few
examples of products created from crude oil.
The United States has the greatest
standard of living in the world, as well as the
largest economy. Why? Because
we have always tried to maintain control over the
supply, as well as price, of oil. Over
the last 10 years, the U.S.
economy has undergone the largest economic expansion
in history and cheap oil has fueled this unprecedented
growth. Unlike the 1970s, when the U.S. was held
at bay by OPEC withholding oil production for political
reasons, the growth of the oil industry during the
1990s, and beyond, will be more likely be determined
by the laws of supply and demand.
As democracy and capitalism are spreading
around the world, global oil consumption is at record
levels. Throughout Latin America, Russia,
India
and Asia, economic growth is accelerating at a remarkable
pace; much faster than anything we have seen in
the U.S. Recently, Forbes described the development
now exploding across Asia:
"You can almost smell the money
in Shanghai, Bangkok, Kuala Lumpau or just about any East Asian commercial center
outside Japan
these days. Traffic snarled, construction booming,
glitzy shopping malls showing the latest Hollywood
movies... These formerly traditional societies,
stagnant for centuries, are exploding into the modern
capitalist world and spawning vast new middle classes
with a taste for consumer goods and the means to
indulge that taste. Healthy economics generate great
wealth, and Asia is churning
out billionaires as though on a conveyor belt."
--Forbes
In these countries, more than two billion
people, or more than 40% of the world's population,
are suddenly entering the age of consumerism. Thanks
to American movies, TVs and VCRs, they have seen
what the rest of the world has and they want it
all. "They want McDonald's French fries. They
want Coke. They want Levi jeans. They want Caterpillar
tractors. They want cars, cameras, mouthwash, homes,
toothpaste, Tide, aspirin and ten thousand other
products we take for granted. "In vast regions
of these countries, they're starting from the raw
basics of modern life. They need electric power,
running water, sewage treatment plants, bridges,
tunnels, roads, cities -- you name it. "And
oil is the one commodity absolutely essential to
this tidal wave of global growth. It's literally
the blood supply of capitalism. If you're a developing
country, you need all the oil you can get to drive
your trucks, your cars, your planes and ships. You
need oil to run your factories, machines and power
plants so necessary to a modern industrial economy.
"What we're seeing is the first simultaneous,
worldwide economic expansion since the late 1970s.
But this time, many newly industrialized countries
are joining the party and importing an unending
procession of super-tankers laden with black gold."
-Personal Finance
The
secrets of making money investing in natural gas,
or investing in oil programs offered by private,
and independent oil & gas companies.just got
even more attractive to the private, and qualified
investor...
--Petroleum Finance
Week
Demand is increasing at a much faster
rate than supplies can be made available, and in
order to give us time to find additional reserves,
the countries who have the oil are raising prices...of
course greed is part of the reason...but there is
another important reason as well...as prices go
up because of greater and greater demand...the economics
of developing certain prospective oil & gas
fields become more attractive...
In more simple terms, the economics,
and feasibility of certain oil and gas targets are
now making sense...deeper targets, and harder to
get targets become very good discoveries when prices
support the development effort...we're there, and
its only getting better...We have always known where
are reserves are because of seismic analysis done
years ago across the US...
We now have the pricing to justify
the expenditure of the development capital, and
even more importantly the technology to make it
happen...the IRS is our partner as well...The Tax
write-offs are better than any investment I know
of in the US today...You might as well take advantage
of the facts...demand is going to increase, and
oil & gas prices are going to go up...there
shouldn't be any question that what I'm saying is
true... You must notice this when you fill-up your
gas tank these days.
Why
not be an investor, and make some money, while reducing
your taxes, instead of just remaining a consumer.
Oil & gas prices are consistently
higher than ever before...and the latest technology
is being implemented to help investors in the oil
& gas business today make some very attractive
returns on their money...don't pass this opportunity by, because as most investors
know, timing is everything...it is particularly
so, and is very much the case with oil & gas
investments right now.
Tax advantages, and tax benefits, that
can be taken during the initial development stages
of new oil & gas drilling efforts, plus even
more tax write-offs... that can also be taken during
the completion, and production stages of oil &
gas development, can make the over-all returns that
are possible, especially when factoring-in cash
flow from successful wells, outstanding...
--Oil and Gas Investor
Consider
making an investment in the oil & gas industry...
it is just too good to pass-up right now...as usual,
as almost everyone knows...this is particularly
so, when you are investing with the right people,
and at the right time, and place...
I
believe the oil & gas business just got a lot
more interesting for you active investors...we now have much better...and
more accurate methods of finding large commercial
reserves of oil & gas than ever before...and
this is making our business even more exciting,
and profitable... than in the recent past...especially
because of the new technology, and again...much
more accurate process of verifying targets where
the biggest, and most likely recoverable reserves
of natural gas, and oil are and will be found...
Our computer power, and speed available
now, plus having access to a huge historical data
base of oil & gas data...is making the identification
process much more of a 'check-list technique' of
finding the best reservoirs of both oil & gas,
than ever before... and as a result this is where
production revenue is being established in the big
numbers...
How
big? How about establishing on line production of eight million
cubic feet of natural gas per day, and 860 barrels
of oil per day, while on a 4/64ths choke...from
a single well...for those of you with some technical
expertise...
To make a long story short...this rather
expensive and deep well in the Gulf States area will pay-out in less than six months at current pricing
in the marketplace. I see quite a few of these new
wells being brought on line these days...
You can diversify in a production package,
or participate in a number of single wells to spread-out
your risk...and take the excellent tax write-offs
as well...this is a perfect time of the year to
invest because you will have all year long to generate
cash flow, and take the big first year Intangible
Drilling Cost (IDC), write-offs...these IDC'S can
be 80% or more of your original investment in the
first year of your investment...You also take depreciation
and get a 15% or more depletion allowance on the
revenue side each year...
--Energy Markets
Through
the 1990's up to the present, natural gas has become
the preferable fuel, and demand for natural gas
has been increasing yearly, while domestic supply
has decreased because of depleting fields and a
lack of domestic drilling. These fundamentals have
caused a sustained rise in natural gas prices, and
these indicators suggest that high prices will continue
for the near future.
Tax
Benefits
With a proper election, and when monies
are considered at risk and not passive for IRS purposes,
intangible drilling and development costs may be
deducted as an expense for federal income tax purposes.
Generally, intangible costs constitute anywhere
from 75% to 95% of the total cost to drill, complete,
and equip the well. All of these "non-salvageable"
costs are deductible in the year expensed.
To be certain, this deduction can be
quite significant, and the large write-off potential
signifies the government's desire to increase domestic
drilling discoveries.
In addition, the owner of an oil and
gas interest is generally entitled to a deduction
for depletion with respect to the income received
from the productions of oil and gas. This allowance
has changed several times through the years, but
currently allows for 15% of the revenue to be tax-free.
The following is a generalized summary
of certain items in the U.S. Internal Revenue Code
relating to oil and gas exploration. It is neither
exhaustive nor detailed. Each individual should
understand how these items will impact him or her
personally. In addition, other items unique to the
individual may also be relevant. Investors should
contact their tax consultants for a complete explanation
of the benefits of investing in oil and gas.
Large Potential Financial Reward
By concentrating its efforts in proven
natural gas provinces, CORPO-PETROL can utilize existing infrastructure
to quickly develop and market its natural gas and
oil production. The company pays close attention
to the details of its operations, and controls the
costs and expenses of its operations, which ultimately
improves the economics of its projects for itself
and its investing partners.
Although
not a guarantee of future performance, investing
in an array of oil and gas prospects is an excellent
way to diversify any portfolio. Returns on successful
oil and gas investments can be expected to significantly
outperform high-yield corporate bonds and mutual
funds.
FINDING OIL & GAS
Hydrocarbons - crude oil and natural
gas - are found in certain layers of rock that are
usually buried deep beneath the surface of the earth.
In order for a rock layer to qualify as a good source
of hydrocarbons, it must meet several criteria.
Characteristics of Reservoir Rock
For one thing, good reservoir rocks
(a reservoir is a formation that contains hydrocarbons)
have porosity. Porosity is a measure of the openings
in a rock, openings in which petroleum can exist.
Even though a reservoir rock looks solid to the
naked eye, a microscopic examination reveals the
existence of tiny openings in the rock. These openings
are called pores. Thus a rock with pores is said
to be porous and is said to have porosity (Figure
1).
Figure 1: Porosity
Another characteristic of reservoir
rock is that it must be permeable. That is, the
pores of the rock must be connected together so
that hydrocarbons can move from one pore to another
(Figure 2). Unless hydrocarbons can move and flow
from pore to pore, the hydrocarbons remain locked
in place and cannot flow into a well. In addition
to porosity and permeability reservoir rocks must
also exist in a very special way. To understand
how, it is necessary to cross the time barrier and
take an imaginary trip back into the very ancient
past.
Figure 2: Permeability
Imagine standing on the shore of an
ancient sea, millions of years ago. A small distance
from the shore, perhaps a dinosaur crashes through
a jungle of leafy tree ferns, while in the air,
flying reptiles dive and soar after giant dragonflies.
In contrast to the hustle and bustle on land and
in the air, the surface of the sea appears very
quiet. Yet, the quiet surface condition is deceptive.
A look below the surface reveals that life and death
occur constantly in the blue depths of the sea.
Countless millions of tiny microscopic organisms
eat, are eaten and die. As they die, their small
remains fall as a constant rain of organic matter
that accumulates in enormous quantities on the sea
floor. There, the remains are mixed in with the
ooze and sand that form the ocean bottom.
As the countless millennia march inexorably
by, layer upon layer of sediments build up. Those
buried the deepest undergo a transition; they are
transformed into rock. Also, another transition
occurs: changed by heat, by the tremendous weight
and pressure of the overlying sediments, and by
forces that even today are not fully understood,
the organic material in the rock becomes petroleum.
But the story is not over.
For, while petroleum was being formed,
cataclysmic events were occurring elsewhere. Great
earthquakes opened huge cracks, or faults, in the
earth's crust. Layers of rock were folded upward
and downward. Molten rock thrust its way upward,
displacing surrounding solid beds into a variety
of shapes. Vast blocks of earth were shoved upward,
dropped downward or moved laterally. Some formations
were exposed to wind and water erosion and then
once again buried. Gulfs and inlets were surrounded
by land, and the resulting inland seas were left
to evaporate in the relentless sun. Earth's very
shape had been changed.
Meanwhile, the newly born hydrocarbons
lay cradled in their source rocks. But as the great
weight of the overlying rocks and sediments pushed
downward, the petroleum was forced out of its birthplace.
It began to migrate. Seeping through cracks and
fissures, oozing through minute connections between
the rock grains, petroleum began a journey upward.
Indeed, some of it eventually reached the surface
where it collected in large pools of tar, there
to lie in wait for unsuspecting beasts to stumble
into its sticky trap. However, some petroleum did
not reach the surface. Instead, its upward migration
was stopped by an impervious or impermeable layer
of rock. It lay trapped far beneath the surface.
It is this petroleum that today's oilmen seek.
Types
of Petroleum Traps
Geologists have classified petroleum
traps into two basic types: structural traps and
Stratigraphic traps. Structural traps are traps
that are formed because of a deformation in the
rock layer that contains the hydrocarbons. Two common
examples of structural traps are fault traps and
anticlines.
An anticline is an upward fold in the
layers of rock, much like an arch in a building.
Petroleum migrates into the highest part of the
fold, and its escape is prevented by an overlying
bed of impermeable rock (A).
A fault trap occurs when the formations
on either side of the fault have been moved into
a position that prevents further migration of petroleum.
For example, an impermeable formation on one side
of the fault may have moved opposite the petroleum-bearing
formation on the other side of the fault. Further
migration of petroleum is prevented by the impermeable
layer (B).
Stratigraphic traps are traps that
result when the reservoir bed is sealed by other
beds or by a change in porosity or permeability
within the reservoir bed itself. There are many
different kinds of Stratigraphic traps. In one type,
a tilted or inclined layer of petroleum-bearing
rock is cutoff or truncated by an essentially horizontal,
impermeable rock layer (C).
Or sometimes a petroleum-bearing formation
pinches out; that is, the formation is gradually
cut off by an overlying layer. Another Stratigraphic
trap occurs when a porous and permeable reservoir
bed is surrounded by impermeable rock. Still another
type occurs when there is a change in porosity and
permeability in the reservoir itself. The upper
reaches of the reservoir may be impermeable and
nonporous, while the lower part is permeable and
porous and contains hydrocarbons.
SECURING
LEASES
Once a likely area has been selected,
the right to drill must be secured before drilling
can begin. Securing the right to drill usually involves
leasing the mineral rights of the desired property
from the owner. The owner may be the owner of all
interest in the land, or just the mineral rights.
As payment for the right to drill for and extract
the oil and gas, the owner will usually be paid
a sum call a "lease bonus" or a "hole
bonus" for every well drilled on the leased
land. He will also retain a royalty on the production,
if any, of the leased property. The royalty is the
right to receive a certain portion of the production
of property, without sharing in the costs incurred
in producing the oil, such as drilling, completion,
equipping and operating or production costs. The
costs are borne by the holder of the right to drill
and extract the mineral, which right is usually
referred to as the working interest.
In many cases the procurement of the
lease from the land owner is accomplished by a lease
broker who will, in turn, offer and then assign
the lease to an operator such as CORPO-PETROL. CORPO-PETROL is very selective in choosing leases
for drilling. The lease broker usually retains an
overriding royalty on the working interest as compensation
for his services. In the case of CORPO-PETROL's leases, there generally is a retained
land owner's royalty of 1/8 of all production and
a 1/16 overriding royalty on the working interest,
retained or granted to one or more persons who may
have acted as lease brokers.
DRILLING
Once an area has been selected and
the right to drill thereon has been obtained, actual
drilling may begin. The most common method of drilling
in use today is rotary drilling. Rotary drilling
operates on the principle of boring a hole by continuous
turning of a bit. The bit is the most important
tool. The rest of the rig (a derrick and attendant
machinery) is designed to make it effective. While
bits vary in design and purpose, one common type
consists of a housing and three interlocking movable wheels with sharp
teeth, looking something like a cluster of gears.
The bit, which is hollow and very heavy, is attached
to the drill stem, composed of hollow lengths of
pipe leading to the surface. As the hole gets deeper,
more lengths of pipe can be added at the top. Almost
as important as the bit is the drilling fluid.
Although known in the industry as mud,
it is actually a repaired chemical compound. The
drilling mud is circulated continuously down the
drill pipe, through the bit, into the hole and upwards
between the hole and the pipe to a surface pit,
where it is purified and recycled. The flow of mud
removes the cuttings from the hole without removal
of the bit, lubricates and cools the bit in the
hole, and prevents a blow out which could result
if the bit punctured a high pressure formation.
The cuttings, which are carried up
by the drilling mud, are usually continuously tested
by the petroleum geologist in order to determine
the presence of oil.
DRILLING
TO TOTAL DEPTH
The final part of the hole is what
the operating company hopes will be the production
hole. But before long, the formation of interest
(the pay zone, the oil sand, or the formation that
is supposed to contain hydrocarbons) is penetrated
by the hole. It is now time for a big decision.
The question is, "Does this well contain enough
oil or gas to make it worthwhile to run the final
production string of casing and complete the well?"
EVALUATING
FORMATIONS
Examining Cuttings
To help the operator make his decision,
several techniques have been developed. One thing
that helps indicate whether hydrocarbons have been
trapped is a thorough examination of the cuttings
brought up by the bit. The mud logger or geologist
(Remember him? He's been there all along, monitoring
down hole conditions at
the location.) Catches cuttings at the flow ditch
and by using a microscope or ultraviolet light can
see whether oil is in the cuttings. Or he may use
a gas-detection instrument.
Well
Logging
Another valuable technique is well
logging. A logging company is called to the well
while the crew trips out all the drill string. Using
a portable laboratory, truck-mounted for land rigs,
the well loggers lower
devices called logging tools into the well on wire
line. The tools are lowered all the way to bottom
and then reeled slowly back up. As the tools come
back up the hole, they are able to measure the properties
of the formations they pass. Electric logs measure
and record natural and induced electricity in formations.
Some logs ping formations with sound and measure
and record sound reactions. Radioactivity logs measure
and records the effects of natural and induced radiation
in the formations. These are only a few of many
types of logs available. Since all the logging tools
make a record, which resembles a graph or an electrocardiogram
(EKG), the records, or logs can be studied and interpreted
by an experienced geologist or engineer to indicate
not only the existence of oil or gas, but also how
much may be there. Computers have made the interpretation
of logs much easier.
Coring
In addition to these tests, formation
core samples are sometimes taken. Two methods of
obtaining cores are frequently used. In one, an
assembly called a "core barrel" is made
up on the drill string and run to the bottom of
the hole. As the core barrel is rotated, it cuts
a cylindrical core a few inches in diameter that
is received in a tube above the core-cutting bit.
A complete round trip is required for each core
taken. The second is a sidewall sampler in which
a small explosive charge is fired to ram a small
cylinder into the wall of the hole. When the tool
is pulled out of the hole, the small core samples
come out with the tool. Up to thirty of the small
samples can be taken at any desired depth. Either
type of core can be examined in a laboratory and
may reveal much about the nature of the reservoir.
COMPLETING
THE WELL
After the operating company carefully
considers all the data obtained from the various
tests it has ordered to be run on the formation
or formations of interest, a decision is made on
whether to set production casing and complete the
well or plug and abandon it. If the decision is
to abandon it, the hole is considered to be dry,
that is, not capable of producing oil or gas in
commercial quantities. In other words, some oil
or gas may be present but not in amounts great enough
to justify the expense of completing the well. Therefore,
several cement plugs will be set in the well to
seal it off more or less permanently.
However, sometimes wells those were
plugged and abandoned as dry at one time in the
past may be reopened and produced if the price of
oil or gas has become more favorable. The cost of
plugging and abandoning a well may only be a few
thousand dollars. Contrast that cost with the price
of setting a production string of casing - $50,000
or more. Therefore, the operator's decision is not
always easy.
Setting Production Casing
If the operating company decides to
set casing, casing will be brought to the well and
for one final time, the casing and cementing crew
run and cement a string of casing. Usually, the
production casing is set and cemented through the
pay zone; that is, the hole is drilled to a depth
beyond the producing formation, and the casing is
set to a point near the bottom of the hole. As a
result, the casing and cement actually seal off
the producing zone-but only temporarily. After the
production string is cemented, the drilling contractor
has almost finished his job except for a few final
touches.
CEMENTING
After
the casing string is run, the next task is cementing
the casing in place. An oil-well cementing service
company is usually called in for this job although,
as when casing is run, the rig crew is available
to lend assistance. Cementing service companies
stock various types of cement and have special transport
equipment to handle this material in bulk. Bulk-cement
storage and handling equipment is moved out to the
rig, making it possible to mix large quantities
of cement at the site. The cementing crew mixes
the dry cement with water, using a device called
a jet-mixing hopper. The dry cement is gradually
added to the hopper, and a jet of water thoroughly
mixes with the cement to make a
slurry (very thin water cement).
Special
pumps pick up the cement slurry and send it up to
a valve called a cementing head (also called a plug
container) mounted on the topmost joint of casing
that is hanging in the mast or derrick a little
above the rig floor. Just before the cement slurry
arrives, a rubber plug (called the bottom plug)
is released from the cementing head and precedes
the slurry down the inside of the casing. The bottom
plug stops or "seats" in the float collar,
but continued pressure from the cement pumps open
a passageway through the bottom plug. Thus, the
cement slurry passes through the bottom plug and
continues on down the casing. The slurry then flows
out through the opening in the guide shoe and starts
up the annular space between the outside of the
casing and wall of the hole. Pumping continues and
the cement slurry fills the annular space.
A top plug, which is similar to the
bottom plug except that it is solid, is released
as the last of the cement slurry enters the casing.
The top plug follows the remaining slurry down the
casing as a displacement fluid (usually salt water
or drilling mud) is pumped in behind the top plug.
Meanwhile, most of the cement slurry flows out of
the casing and into the annular space. By the time
the top plug seats on or "bumps" the bottom
plug in the float collar, which signals the cementing
pump operator to shut down the pumps, the cement
is only in the casing below the float collar and
in the annular space. Most of the casing is full
of displacement fluid.
After the cement is run, a waiting
time is allotted to allow the slurry to harden.
This period of time is referred to as waiting on
cement or simply WOC.
After the cement hardens, tests may
be run to ensure a good cement job, for cement is
very important. Cement supports the casing, so the
cement should completely surround the casing; this
is where centralizers on the casing help. If the
casing is centered in the hole, a cement sheath
should completely envelop the casing. Also, cement
seals off formations to prevent fluids from one
formation migrating up or down the hole and polluting
the fluids in another formation. For example, cement
can protect a freshwater formation (that perhaps
a nearby town is using as its drinking water supply)
from saltwater contamination. Further, cement protects
the casing from the corrosive effects that formation
fluids (as salt water) may have on it.
Perforating
Since the pay zone is sealed off by
the production string and cement, perforations must
be made in order for the oil or gas to flow into
the wellbore. Perforations
are simply holes that are made through the casing
and cement and extend some distance into the formation.
The most common method of perforating incorporates
shaped-charge explosives (similar to those used
in armor-piercing shells). Shaped charges accomplish
penetration by creating a jet of high-pressure,
high-velocity gas. The charges are arranged in a
tool called a gun that is lowered into the well
opposite the producing zone. Usually the gun is
lowered in on wireline
(1). When the gun is in position, the charges are
fired by electronic means from the surface (2).
After the perforations are made, the tool is retrieved
(3). Perforating is usually performed by a service
company that specializes in this technique.
Acidizing
Sometimes, however, petroleum exists
in a formation but is unable to flow readily into
the well because the formation has very low permeability.
If the formation is composed of rocks that dissolve
upon being contacted by acid, such as limestone
or dolomite, then a technique known as acidizing
may be required. Acidizing is usually performed
by an acidizing service company and may be done
before the rig is moved off the well; or it can
also be done after the rig is moved away. In any
case, the acidizing operation basically consists
of pumping anywhere from fifty to thousands of gallons
of acid down the well. The acid travels down the
tubing, enters the perforations, and contacts the
formation. Continued pumping forces the acid into
the formation where it etches channels - channels
that provide a way for the formation's oil or gas
to enter the well through the perforations.
Fracturing
When sandstone rocks contain oil or
gas in commercial quantities but the permeability
is too low to permit good recovery, a process called
fracturing may be used to increase permeability
to a practical level. Basically, to fracture a formation,
a fracturing service company pumps a specially blended
fluid down the well and into the formation under
great pressure. Pumping continues until the formation
literally cracks open. Meanwhile, sand, walnut hulls,
or aluminum pellets are mixed into the fracturing
fluid. These materials are called proppant. The
proppant enters the fractures in the formation,
and, when pumping is stopped and the pressure allowed
to dissipate, the proppant
remains in the fractures. Since the fractures try
to close back together after the pressure on the
well is released, the proppant is needed to hold
or prop the fractures open. These propped-open fractures
provide passages for oil or gas to flow into the
well. See figure to the right.
ARTIFICIAL
LIFT
After the well has been perforated,
acidized or fractured, the well may not produce
by natural flow. In such cases, artificial-lift
equipment is usually installed to supplement the
formation pressure.
Sucker-Rod Pumps
The artificial-lift method that involves
surface pumps is known as rod pumping or beam pumping.
Surface equipment used in this method imparts an
up-and-down motion to a sucker-rod string that is
attached to a piston or plunger pump submerged in
the fluid of a well. Most rod-pumping units have
the same general operating principles.
INJECTION WELLS
In the ordinary producing operation
only a portion of the oil in place is recoverable
by primary production methods. Such methods include
free-flowing wells and production maintained by
pumps. As oil is extracted from a reservoir or sands
the pressure which brings the oil to the well is
reduced. Secondary recovery methods are intended
to increase the recoverable percentage of the oil
in place by injecting a substance such as gas or
water into the producing formation. The injected
substance is intended to increase the pressure on
the oil in the formation and drive it toward the
well-bore. A well, called an injection well or water
injection well, is usually drilled in order to inject
the substance. Sometimes a previously drilled, abandoned
well can be reworked as an injection well. When
water is used as the injectant it is often produced
on the property itself. Excess water produced by
operating wells may be diverted to the injection
well and used as the injectant.
This method of water disposal usually
alleviates the need for a separate water disposal
well. If the water from the producing wells does
not provide enough injectant to provide proper pressure
for secondary recovery, a water supply well may
be required to provide an adequate supply of water.
OIL PRODUCTION
Once an accumulation of oil has been
found in a porous and permeable reservoir, a series
of wells are drilled in a predetermined pattern
to effectively drain this "oil pool".
Wells may be drilled as close as one to each 10
aces (660
ft. between wells) or as far apart as one to each
640 acres (1 mile between wells) depending on the type of reservoir
and the depth to the "pay" horizon. For
economic reasons, spacing is usually determined
by the distance the reservoir energy will move commercial
quantities of oil to individual wells. The rate
of production is highest at the start when all of
the energy from the dissolved gas or water drive
is still available. As this energy is used up, production
rates drop until it becomes uneconomical to operate
although significant amounts of oil still remain
in the reservoir. Experience has shown that only
about 12 to 15 percent of the oil in a reservoir
can be produced by the expansion of the dissolved
gas or existing water.
SECONDARY
RECOVERY
Water flooding is one of the most common
and efficient secondary recovery processes. Water
is injected into the oil reservoir in certain wells
in order to renew a part of the original reservoir
energy. As this water is forced into the oil reservoir,
it spreads out from the injection wells and pushes
some of the remaining oil toward the producing wells.
Eventually the water front will reach these producers
and increasingly larger quantities of water will
be produced with a corresponding decrease in the
amount of oil. When it is no longer economical to
produce these high water-ratio wells, the flood
may be discontinued. As mentioned previously, average
primary recoveries may be only 15% of the oil in
the reservoir. Properly operated waterfloods should
recover an additional 15% to 20% of the original
oil in place. This leaves a substantial amount of
oil in the reservoir, but there are no other engineering
techniques in use now that can recover it economically.
In most cases, oil reservoirs suitable for secondary
recovery projects have been produced for several
years. It takes time to inject sufficient water
to fill enough of the void spaces to begin to move
very much oil. It takes several months from the
start of a waterflood before significant production
increases take place and the flood will probably
have maximum recoveries during the second, third,
fourth, and fifth years after injection of water
has commenced. The average flood usually lasts 6
to 10 years.
Water floods have been highly successful
in the Wyoming Basin and probably account for 75%
of the total production from the area. Flood recoveries
will generally be an additional 80% to 100% of the
primary production. There are no special problems
with floods in the Wyoming Basin. Ample supplies of salt water
are generally available and injection pressures
are not too high - 1500 PSI or less. Corrosion is
minimal and no expensive, high-pressure equipment
is involved. Sufficient potential flood properties
are available on reasonable terms - especially smaller
areas owned by independent operators who do not
have the finances to support the installation of
properly engineered secondary recovery operations.
Water floods in the Wyoming Basin should return 2 to 3 times their
cost and are considered to be low-risk prospects.
OPERATION
When all equipment is in place, the
oil may begin to flow into the holding tanks to
await pick up. It can be expected that a well will
not be in production for certain times due to adverse
weather conditions, mechanical malfunctions and
other unforeseen circumstances. After the production
period commences, it is necessary to incur certain
costs in order to bring the oil to the surface.
These costs include normal maintenance on the pump
and other equipment, replacement of any pipe or
tanks as needed, compensation to the operator of
the pump, and payment of any incidental damages
to the owner of the surface rights of the leased
property. In some cases, the oil in a pay zone will
be mixed with salt water. In such cases, the oil
must be separated from the salt water and the salt
water disposed of in a manner which is not harmful
to the environment. The water may be hauled away
by tank truck but often this phenomenon requires
the drilling, nearby the oil producing well, of
another well into which the salt water will be pumped.
The cost of this water disposal well
is normally considered to be a cost of operation.
Finally, there may be additional costs incurred
in opening up a new pay zone when any presently
producing pay zone becomes economically unfeasible.
Because opening a new pay zone involves the installation
of very little, if any, new equipment, the costs
involved therein usually are not very substantial.
SALE OF OIL
Once the oil is out of the ground and into the holding
tanks, it must be sold. In most cases each holder
of a working interest has the right to take his
portion of production in kind, therefore, make his
own arrangements for its sale. It is not uncommon,
however, for all the holders of a working interest
of a well to enter into the same arrangement with
the same buyer of the oil production. These sale
contracts are normally entered into for periods
of not longer than a few months but in no case longer
than one year.
The buyer of the oil will
generally be advised by the operator of the working
interest as to the identity and extent of ownership
of each of the holders of the working interest,
as well as the identity of the royalty holders and
the amount of their interests. The information will
be compiled on division orders which are the basis
upon which the buyer of the oil can divide the proceeds
of sale among the various holders.
The buyer of the oil will
pick up the oil from the holding tanks at periodic
intervals, gauge it and remit the remaining proceeds
in the proper amounts to the holders of the working
interest and the royalties.
