The stats are compelling with respect to the amount of oil left in the ground after primary recovery. Some say, up to eighty percent of the oil is still left in the ground after the old pump jack moves up and down over many years. So are old fields worth taking a look at or are you better off just drilling a new well?
My experiences thus far in Kentucky and Illinois have been positive. The benefits of picking up an old well that is producing a small amount or a field with many shut in wells is that it often can be a value proposition. The problem with old wells is that you never know what the true conditions are down hole until you start cleaning it out. Buying a shut in well reminds me of purchasing a used car. Everything goes great until the transmission falls out and you have to decide what to do.
For example, I recently started converting a well to a waste water injection well. After purchasing new tubing and a special size packer, we determined that there was a hole in the casing. We had budgeted a certain amount for this project and this will take us over budget by $5-7K. As the operator of old wells, this is often the case and you can not allow it to get your spirits down.
On the flip side, we have stimulated wells within budget and the subsequent production was a multiple of what our expectations were. Many old wells did not have good records recorded, especially in KY, therefore positive surprises can pop up often. Remember, many old stripper wells were shut in during times when oil was in the basement and not worth producing.
It comes down to expectations when looking at a recompletion or work over oil deal. Do not be fooled by the promoters using big production numbers in their proforma projections. Research local production averages and understand the geology of the formations before investing. Also, make sure the operator has a track record with respect to working with old wells in the area.
Wednesday, December 13, 2006
Wednesday, November 08, 2006
The Democrats and Oil Prices
Each political party is strong in one direction or the other, but Democrats are certainly better known for their environmental "programs". They have consistently bashed the Republicans and big oil for the recent highs in oil prices and subsequent record profits. In a political year, I can't say I blame them, but the storm clouds are gathering and I believe oil prices will be higher under a Democratic Congress and potential future president than under the current administration. My conclusion stems from the son of a blacksmith in Iran.
The current president of Iran, Mahmoud Ahmadinejad, is leading a chorus of supporters in the Middle East that would like nothing more than to banish the "infidels" from Iraq and Israel. The Shia majority that was suppressed under Saddam is know getting their payback, and full fledged civil war is on the horizon. Saudi Arabia, a majority Sunni country and the largest petroleum source in the world, is now flanked by Shia on both sides. There is no love lose between Shia and Sunnis. Iran, in concert with Syria, and Hezbollah will seek to consolidate power and thus control of oil in the Middle East.
Our enemies know how oil can have a grip on our economy and have no incentive to keep prices low. High oil prices fuel terrorism and their world view, which does not include Israel surviving as a country. Without commenting on whether we should have gone in to begin with, that is water under the bridge, the question now is do we leave or stay.
The Democrat bias seems to be less aggressive than the Republican stay the course mantra. The country has registered frustration over Iraq with the recent Democrat takeover in the House and Senate. If the forces of the left that favor a quick exit from Iraq prevail, the region will be in turmoil and oil prices will move significantly higher.
Imagine a world in which a fundamentalist theocracy controls the most productive oil assets on the planet. Oh, and we haven't begun to talk about Al Qaeda, Nigerian rebels, Hugo Chavez, China/India Growth, and a multitude of other negative influences on oil supply/demand.
I believe the next twenty years will be a great time to be positioned in oil/gas investments. Markets move in cycles and the past twenty years have not been friendly to oil investors. Most domestic oil in the USA is produced by small independents. They suffered for years to keep their leases productive and those that have survived deserve to be rewarded. Accredited Investors can position a portion of their investable assets into oil/gas direct participation deals and enjoy substantial tax benefits, as well as cash flow.
The current president of Iran, Mahmoud Ahmadinejad, is leading a chorus of supporters in the Middle East that would like nothing more than to banish the "infidels" from Iraq and Israel. The Shia majority that was suppressed under Saddam is know getting their payback, and full fledged civil war is on the horizon. Saudi Arabia, a majority Sunni country and the largest petroleum source in the world, is now flanked by Shia on both sides. There is no love lose between Shia and Sunnis. Iran, in concert with Syria, and Hezbollah will seek to consolidate power and thus control of oil in the Middle East.
Our enemies know how oil can have a grip on our economy and have no incentive to keep prices low. High oil prices fuel terrorism and their world view, which does not include Israel surviving as a country. Without commenting on whether we should have gone in to begin with, that is water under the bridge, the question now is do we leave or stay.
The Democrat bias seems to be less aggressive than the Republican stay the course mantra. The country has registered frustration over Iraq with the recent Democrat takeover in the House and Senate. If the forces of the left that favor a quick exit from Iraq prevail, the region will be in turmoil and oil prices will move significantly higher.
Imagine a world in which a fundamentalist theocracy controls the most productive oil assets on the planet. Oh, and we haven't begun to talk about Al Qaeda, Nigerian rebels, Hugo Chavez, China/India Growth, and a multitude of other negative influences on oil supply/demand.
I believe the next twenty years will be a great time to be positioned in oil/gas investments. Markets move in cycles and the past twenty years have not been friendly to oil investors. Most domestic oil in the USA is produced by small independents. They suffered for years to keep their leases productive and those that have survived deserve to be rewarded. Accredited Investors can position a portion of their investable assets into oil/gas direct participation deals and enjoy substantial tax benefits, as well as cash flow.
Friday, September 22, 2006
Using the GasGun to Stimulate Marginal Oil Wells for Increased Production
Hi Dr. Schmidt, thanks for taking the time out of your busy day! I know the GasGun® is in high demand these days, would you mind telling our readers a little bit about your company?
It is my pleasure to speak with you today.
J Integral Engineering was formed in 1992. In 1994, we won a Small Business Innovation Research grant from the Department of Energy to develop, test, optimize, and commercialize the use of progressively burning solid propellants for the economical stimulation of oil and gas wells. The concept, initially conceived from a research study I helped conduct at Sandia National Laboratories in the early 1970's, was field-tested and a practical design was optimized.
The GasGun became commercial in July 1998. We have conducted over 2000 stimulations to date throughout the U.S., Canada, and Europe. In 2004, we introduced our third generation GasGun device that solved the problems of earlier designs, and the industry has responded with a phenomenal increase in demand for this innovative and economical stimulation method.
How does your technology differentiate itself from other similar devices?
The GasGun is several times more powerful than other stimulation tools using solid propellant. The GasGun is also significantly more effective in producing fractures since it is the only device available that uses multi-perforated grains that are progressively burning. This means that the rate at which the propellant burns increases with time, producing gas faster as the material is consumed.
Progressive burning is much more effective in driving fractures deep into the formation by advancing the fractures late in the process when crack volumes are the greatest. Independent research bears this out. In a study conducted by Sandia National Laboratories, a multi-perforated propellant was 300 times more effective in enhancing formation permeability than a standard solid propellant in a direct side-by-side comparison.
Three of our customers have made direct comparisons for themselves, trying the GasGun and a competing product in neighboring wells. In each case the GasGun was determined to be more effective and less expensive. All three have said they expect to use the GasGun exclusively in the future.
Please tell our readers about the type of results that are typical with the GasGun? What type of formations it works in?
Reports from our customers indicate production improvements in approximately 80% of the wells treated. Typical increases range from two to five times the original production with a few being a great deal larger than that. These results involve a wide variety of lithologies including sandstone, limestone, dolomite, chert, shale, and coal. Put simply, the GasGun fractures rock - of any type. If the formation in question has oil or gas present at sufficient pressure and there is some impediment to the flow of these fluids to the wellbore, then a GasGun stimulation may be indicated. The impediment could be either low matrix permeability or formation damage of some kind. But, regardless of the rock type, the GasGun will create multiple fractures and improve the ability of the formation to move fluids through it.
Are there areas or conditions where the gun doesn't work as well?
We have treated some wells where there was no improvement in production. We performed some careful analyses on some of these wells back when we had our government grant to determine the cause for lack of improvement. In every case it was determined that the well already had adequate permeability and little or no skin (i.e. near wellbore damage). These wells were simply depleted reservoirs, and no amount of stimulation would improve production.
Many operators are concerned about "Hitting the Ocean", would you mind explaining how your technology overcomes the disadvantages of the typical frac job?
That is an excellent question. In fact, the ability to stimulate formations with a close water contact is one of the biggest advantages of a GasGun stimulation over a typical frac job. Based on research conducted by Sandia National Laboratories, GasGun fractures are expected to grow radially from 10 to 50 feet out into the formation, but no more than 2 to 5 feet above or below the zone treated. GasGun stimulations are not like hydraulic fracturing which is conducted so slowly that the treatment has time to find the path of least resistance. The time of pressurization for the GasGun is only tens of milliseconds and the pressures reached overpower the earth's internal stresses. This forces the fracturing to be confined to within a few feet vertically of the zone in question. The best field evidence supporting this claim comes from the many GasGun treatments we have performed in the Arbuckle dolomite in Kansas. These wells are known to have close water contact and frequently water out when even a mild acid job is attempted. Many operators now routinely frac the formation with the GasGun and follow with an acid job that goes in on vacuum.
I noticed you have done a tremendous amount of completions in the Arbuckle formation, any reason? See above.
I also read one of your operators has a process of using the gun and acidizing immediately, please elaborate?
In carbonate reservoirs, it can be very advantageous to create a confined fracture system with the GasGun prior to using acid. The fracture network helps the acid to do its job and to stay in the formation of interest.
What are the costs? Turnaround time?
The GasGun is a very economical alternative to other stimulation methods. We also pride ourselves in turnaround time. In order to provide a quick response to well operators, we have arrangements with ten wireline companies in the U.S. and Canada that have and inventory of tools available on short notice. We have also designed the tool itself to be very easy to field. A typical job will only take and hour or two to complete, and the well can be put back on production immediately.
Do you have any new improvements slated for future GasGuns? Do you devote much of your time to R & D?
We are always looking for improvements. In fact, it was the introduction of our third generation tool design two years ago that finally solved previous design problems and gave us wide industry acceptance. We currently offer only one tool diameter (3 3/8”) that is used in any casing 4.5” and larger. But we expect to be introducing a 4” diameter GasGun to the market soon. We have also begun design work on smaller diameters that can be used in slimhole completions. We have also worked out the details and acquired the necessary equipment to offer a tubing-conveyed GasGun stimulation. This will be especially useful in horizontal wells.
Can the gun be used in horizontal wellbores? See above.
Is the bulk of the success from the GasGun from removing near wellbore damage?
Most of the wells we treat are marginal stripper wells that have very little data on wellbore and reservoir conditions. As a result, it is difficult to know for certain the primary reason for our success. However, what information we do have strongly suggests that near wellbore damage is the biggest cause of limited production in the wells we treat.
My company will be implementing the GasGun on 5-7 wells in the Knox formation of Kentucky, any advice for our first treatment?
Since the Knox formation is a dolomite, you might want to consider a GasGun treatment followed with a small acid job. However, with 5-7 wells to treat, it may be worth putting the well on test after the GasGun treatment alone and then test again after the acid job. That way you can determine if the acid treatment is really providing adequate additional benefit to be worth the investment in the succeeding wells. Let your logs guide your selection of the interval to be treated, and perforate the zone adequately with 6 shots per foot with a large entry hole. Match the size of the GasGun tool requested to the size of the perforated interval. I would also suggest being careful on selecting the height of the fluid column used over the tool. The GasGun needs a minimum of a 300 foot fluid column, and we tend to recommend 1000 feet or greater if possible. However, some operators err on the side of too much fluid, which may make the treatment overbalanced. As a result you may have excessive fluid entry after the GasGun is shot, and the well may take a long time to clean itself up.
Thanks, and we appreciate your time & expertise! I appreciate the opportunity to provide this information. The more the oil and gas industry knows about this exciting stimulation method, the quicker we can increase the flow of oil and gas from many old tired wells and to solve difficult stimulation problems in new wells. Thank you.
Interview with Dr. Richard Schmidt from J Integral Engineering, Inc. 165 SW Tualatin Loop West Linn, OR 97068 Phone: (503) 557-1370 http://www.thegasgun.com/
It is my pleasure to speak with you today.
J Integral Engineering was formed in 1992. In 1994, we won a Small Business Innovation Research grant from the Department of Energy to develop, test, optimize, and commercialize the use of progressively burning solid propellants for the economical stimulation of oil and gas wells. The concept, initially conceived from a research study I helped conduct at Sandia National Laboratories in the early 1970's, was field-tested and a practical design was optimized.
The GasGun became commercial in July 1998. We have conducted over 2000 stimulations to date throughout the U.S., Canada, and Europe. In 2004, we introduced our third generation GasGun device that solved the problems of earlier designs, and the industry has responded with a phenomenal increase in demand for this innovative and economical stimulation method.
How does your technology differentiate itself from other similar devices?
The GasGun is several times more powerful than other stimulation tools using solid propellant. The GasGun is also significantly more effective in producing fractures since it is the only device available that uses multi-perforated grains that are progressively burning. This means that the rate at which the propellant burns increases with time, producing gas faster as the material is consumed.
Progressive burning is much more effective in driving fractures deep into the formation by advancing the fractures late in the process when crack volumes are the greatest. Independent research bears this out. In a study conducted by Sandia National Laboratories, a multi-perforated propellant was 300 times more effective in enhancing formation permeability than a standard solid propellant in a direct side-by-side comparison.
Three of our customers have made direct comparisons for themselves, trying the GasGun and a competing product in neighboring wells. In each case the GasGun was determined to be more effective and less expensive. All three have said they expect to use the GasGun exclusively in the future.
Please tell our readers about the type of results that are typical with the GasGun? What type of formations it works in?
Reports from our customers indicate production improvements in approximately 80% of the wells treated. Typical increases range from two to five times the original production with a few being a great deal larger than that. These results involve a wide variety of lithologies including sandstone, limestone, dolomite, chert, shale, and coal. Put simply, the GasGun fractures rock - of any type. If the formation in question has oil or gas present at sufficient pressure and there is some impediment to the flow of these fluids to the wellbore, then a GasGun stimulation may be indicated. The impediment could be either low matrix permeability or formation damage of some kind. But, regardless of the rock type, the GasGun will create multiple fractures and improve the ability of the formation to move fluids through it.
Are there areas or conditions where the gun doesn't work as well?
We have treated some wells where there was no improvement in production. We performed some careful analyses on some of these wells back when we had our government grant to determine the cause for lack of improvement. In every case it was determined that the well already had adequate permeability and little or no skin (i.e. near wellbore damage). These wells were simply depleted reservoirs, and no amount of stimulation would improve production.
Many operators are concerned about "Hitting the Ocean", would you mind explaining how your technology overcomes the disadvantages of the typical frac job?
That is an excellent question. In fact, the ability to stimulate formations with a close water contact is one of the biggest advantages of a GasGun stimulation over a typical frac job. Based on research conducted by Sandia National Laboratories, GasGun fractures are expected to grow radially from 10 to 50 feet out into the formation, but no more than 2 to 5 feet above or below the zone treated. GasGun stimulations are not like hydraulic fracturing which is conducted so slowly that the treatment has time to find the path of least resistance. The time of pressurization for the GasGun is only tens of milliseconds and the pressures reached overpower the earth's internal stresses. This forces the fracturing to be confined to within a few feet vertically of the zone in question. The best field evidence supporting this claim comes from the many GasGun treatments we have performed in the Arbuckle dolomite in Kansas. These wells are known to have close water contact and frequently water out when even a mild acid job is attempted. Many operators now routinely frac the formation with the GasGun and follow with an acid job that goes in on vacuum.
I noticed you have done a tremendous amount of completions in the Arbuckle formation, any reason? See above.
I also read one of your operators has a process of using the gun and acidizing immediately, please elaborate?
In carbonate reservoirs, it can be very advantageous to create a confined fracture system with the GasGun prior to using acid. The fracture network helps the acid to do its job and to stay in the formation of interest.
What are the costs? Turnaround time?
The GasGun is a very economical alternative to other stimulation methods. We also pride ourselves in turnaround time. In order to provide a quick response to well operators, we have arrangements with ten wireline companies in the U.S. and Canada that have and inventory of tools available on short notice. We have also designed the tool itself to be very easy to field. A typical job will only take and hour or two to complete, and the well can be put back on production immediately.
Do you have any new improvements slated for future GasGuns? Do you devote much of your time to R & D?
We are always looking for improvements. In fact, it was the introduction of our third generation tool design two years ago that finally solved previous design problems and gave us wide industry acceptance. We currently offer only one tool diameter (3 3/8”) that is used in any casing 4.5” and larger. But we expect to be introducing a 4” diameter GasGun to the market soon. We have also begun design work on smaller diameters that can be used in slimhole completions. We have also worked out the details and acquired the necessary equipment to offer a tubing-conveyed GasGun stimulation. This will be especially useful in horizontal wells.
Can the gun be used in horizontal wellbores? See above.
Is the bulk of the success from the GasGun from removing near wellbore damage?
Most of the wells we treat are marginal stripper wells that have very little data on wellbore and reservoir conditions. As a result, it is difficult to know for certain the primary reason for our success. However, what information we do have strongly suggests that near wellbore damage is the biggest cause of limited production in the wells we treat.
My company will be implementing the GasGun on 5-7 wells in the Knox formation of Kentucky, any advice for our first treatment?
Since the Knox formation is a dolomite, you might want to consider a GasGun treatment followed with a small acid job. However, with 5-7 wells to treat, it may be worth putting the well on test after the GasGun treatment alone and then test again after the acid job. That way you can determine if the acid treatment is really providing adequate additional benefit to be worth the investment in the succeeding wells. Let your logs guide your selection of the interval to be treated, and perforate the zone adequately with 6 shots per foot with a large entry hole. Match the size of the GasGun tool requested to the size of the perforated interval. I would also suggest being careful on selecting the height of the fluid column used over the tool. The GasGun needs a minimum of a 300 foot fluid column, and we tend to recommend 1000 feet or greater if possible. However, some operators err on the side of too much fluid, which may make the treatment overbalanced. As a result you may have excessive fluid entry after the GasGun is shot, and the well may take a long time to clean itself up.
Thanks, and we appreciate your time & expertise! I appreciate the opportunity to provide this information. The more the oil and gas industry knows about this exciting stimulation method, the quicker we can increase the flow of oil and gas from many old tired wells and to solve difficult stimulation problems in new wells. Thank you.
Interview with Dr. Richard Schmidt from J Integral Engineering, Inc. 165 SW Tualatin Loop West Linn, OR 97068 Phone: (503) 557-1370 http://www.thegasgun.com/
Tuesday, September 05, 2006
Interview With The Hard Hitting Harvard Lineman Turned Oil & Gas Fraud Attorney, Mitch Little
Thanks Mitch for taking the time out of your busy schedule, would you mind telling our readers a little bit about your practice and background?
I am an associate with the law firm of Scheef & Stone, LLP in Dallas, Texas. I practice commercial litigation, and a large part of my practice is devoted to oil and gas and securities fraud. I graduated from Harvard University with Bachelor’s degree in Government and received my law degree from the University of Texas. I have first-chair trial experience and have a good track record of obtaining rescission for oil and gas investors.
2- I heard you played Defensive End on the Harvard football team, what's more difficult sacking a quarterback or sacking an unscrupolous operator/promoter? Which one is more enjoyable?
Sacking a quarterback is more difficult. Taking down a promoter is more rewarding. Quarterbacks get up. If I’m doing my job right, sometimes a promoter won’t get up.
3- With respect to oil/gas fraud, it appears people do not understand that many promoters do not structure their deals correctly. Please Explain.
There’s really no "right" or "wrong" way to structure a deal as a promoter. "Fair" or "unfair" is probably a better comparison. As an investor in oil and gas, you have to know going in that there is a giant risk of losing your entire investment. Oil and gas is extremely risky, and you shouldn’t invest money you can’t afford to lose. Most investors want a fighting chance to make money; unfortunately, many promoted oil and gas investments do not provide the investor with that fighting chance. If you understand the industry—and you can think like a crook—you can tell the difference.
4- What is a Reg D offering?
That’s a very big question that I’ll try to condense into a small answer. "Reg D" refers to Regulation D to the Securities Act of 1933, an important piece of federal legislation. Regulation D covers private offerings. When Google has an "IPO," that’s obviously a public offering for which registration is required under the ’33 Act. Most oil and gas deals are offered privately under an exemption to registration—Regulation D. The issuer of the security cannot use public solicitation and must take in only accredited investors. There are many other restrictions, but that’s generally what a Reg D offering is.
5- What is a rescission and how does it work?
Good question. I’ll make reference to the Texas Securities Act for ease of reference. An interest in an oil and gas lease (i.e. working interest) is a security. As a result, the types of investments we’re discussing fall under the rubric of the Texas Securities Act and Federal securities law.
In basic terms, a rescission is getting your money back with interest and attorney’s fees. Under Texas law, there are a couple of things that trigger a rescission:
(1) Offering an unregistered security publicly (telephone cold-calling, internet, etc.), and
Offering an unregistered security by means of a misstatement or omission of material fact.
Here’s the key message: there’s nothing wrong with selling unregistered securities as long as you have an exemption. If you do something to violate the exemption, like offering it publicly or just out-and-out fraud, the investors get their money back.
6- Are they difficult to get?
That depends on the financial wherewithal of the issuer of the security and, in my experience, the depth of the fraud. I have obtained rescissions for clients with demand letters, and I have had securities fraud litigation drag out for two and three years. The answer to your question is probably "Sometimes."
7- What are some tell tale signs an investor has been wronged?
Some of the hallmarks of oil and gas fraud include:
(1) Lack of communication with the investor;
(2) Significant action being taken on the project without the investor’s consent or acknowledgement;
(3) Returns that fall far short of pro forma projections;
(4) Having your interest "rolled over" into another project;
Significant unexplained drilling delays; and
(6) Reduction in the investor’s working interest.
8- What is a cease & desist order?
A cease and desist order ("C&D") is an order that is typically issued by a governmental agency, like a state securities board or the SEC, that directs an issuer of securities to immediately "cease and desist" from selling securities in a certain state or selling securities altogether. I would encourage any investor to do some research online to determine whether the company trying to sell you has been C&D’ed and get a reasonable explanation from the company. You’ve got to make sure you’re getting the whole story before you invest.
9-Can you speak to liability associated with owning working interest in a field? Any asset protection strategies to employ before purchasing such as buying them in an llc or other form?
The liability is virtually limitless; you have to understand going in that this is an investment in which you can lose your entire investment and then some. When you purchase working interest, you’ve got to understand that you’re liable for your pro rata share of costs associated with the drilling and completion of an oil or gas well, which doesn’t come cheaply these days.
The oil and gas promoter has many tools to hedge your bet, the most common of which is the "turnkey offering." The promoter promises to make you a hole to x feet at y dollars. If the hole is drilled for less than y dollars, he keeps the difference. If it costs more, he eats the difference.
What the investor doesn’t know is that the well can be drilled for ½ y or even 1/10 y. It’s the biggest scam going right now.
10- Have you seen a marked increase in investor fraud cases with the recent rise in oil?
Absolutely. It’s rampant. Please, please be careful in Texas.
11- Any state or federal agencies we can contact for information on companies offering units?
Yes, absolutely. Before you make an investment in a Reg D, Rule 506 oil and gas offering, make sure that the issuer has filed a Form D with the Securities Exchange Commission and with the Secretary of State or Securities Commission of the state in which you reside.
Issuers of private offerings are required to make these filings when claiming an exemption. If there’s no Form D already on file or on file within 15 days after your investment is made, that should be a major red flag.
12- Any independent forums or other resources you would recommend to our readers.
If you’re curious about oil and gas investments, you should check out a site run by Bernie Bicoy called Venture Research Info and its message boards. You can find it at http://www.vcresearch.info.
13- How can we contact you and how do you work? Hourly rate or contingency?
You can contact me via e-mail at mitch.little@solidcounsel.com or by telephone in the Dallas area at 214.472.2140. I work on both an hourly rate and contingent fee basis; I typically leave that up to the investor.
I am an associate with the law firm of Scheef & Stone, LLP in Dallas, Texas. I practice commercial litigation, and a large part of my practice is devoted to oil and gas and securities fraud. I graduated from Harvard University with Bachelor’s degree in Government and received my law degree from the University of Texas. I have first-chair trial experience and have a good track record of obtaining rescission for oil and gas investors.
2- I heard you played Defensive End on the Harvard football team, what's more difficult sacking a quarterback or sacking an unscrupolous operator/promoter? Which one is more enjoyable?
Sacking a quarterback is more difficult. Taking down a promoter is more rewarding. Quarterbacks get up. If I’m doing my job right, sometimes a promoter won’t get up.
3- With respect to oil/gas fraud, it appears people do not understand that many promoters do not structure their deals correctly. Please Explain.
There’s really no "right" or "wrong" way to structure a deal as a promoter. "Fair" or "unfair" is probably a better comparison. As an investor in oil and gas, you have to know going in that there is a giant risk of losing your entire investment. Oil and gas is extremely risky, and you shouldn’t invest money you can’t afford to lose. Most investors want a fighting chance to make money; unfortunately, many promoted oil and gas investments do not provide the investor with that fighting chance. If you understand the industry—and you can think like a crook—you can tell the difference.
4- What is a Reg D offering?
That’s a very big question that I’ll try to condense into a small answer. "Reg D" refers to Regulation D to the Securities Act of 1933, an important piece of federal legislation. Regulation D covers private offerings. When Google has an "IPO," that’s obviously a public offering for which registration is required under the ’33 Act. Most oil and gas deals are offered privately under an exemption to registration—Regulation D. The issuer of the security cannot use public solicitation and must take in only accredited investors. There are many other restrictions, but that’s generally what a Reg D offering is.
5- What is a rescission and how does it work?
Good question. I’ll make reference to the Texas Securities Act for ease of reference. An interest in an oil and gas lease (i.e. working interest) is a security. As a result, the types of investments we’re discussing fall under the rubric of the Texas Securities Act and Federal securities law.
In basic terms, a rescission is getting your money back with interest and attorney’s fees. Under Texas law, there are a couple of things that trigger a rescission:
(1) Offering an unregistered security publicly (telephone cold-calling, internet, etc.), and
Offering an unregistered security by means of a misstatement or omission of material fact.
Here’s the key message: there’s nothing wrong with selling unregistered securities as long as you have an exemption. If you do something to violate the exemption, like offering it publicly or just out-and-out fraud, the investors get their money back.
6- Are they difficult to get?
That depends on the financial wherewithal of the issuer of the security and, in my experience, the depth of the fraud. I have obtained rescissions for clients with demand letters, and I have had securities fraud litigation drag out for two and three years. The answer to your question is probably "Sometimes."
7- What are some tell tale signs an investor has been wronged?
Some of the hallmarks of oil and gas fraud include:
(1) Lack of communication with the investor;
(2) Significant action being taken on the project without the investor’s consent or acknowledgement;
(3) Returns that fall far short of pro forma projections;
(4) Having your interest "rolled over" into another project;
Significant unexplained drilling delays; and
(6) Reduction in the investor’s working interest.
8- What is a cease & desist order?
A cease and desist order ("C&D") is an order that is typically issued by a governmental agency, like a state securities board or the SEC, that directs an issuer of securities to immediately "cease and desist" from selling securities in a certain state or selling securities altogether. I would encourage any investor to do some research online to determine whether the company trying to sell you has been C&D’ed and get a reasonable explanation from the company. You’ve got to make sure you’re getting the whole story before you invest.
9-Can you speak to liability associated with owning working interest in a field? Any asset protection strategies to employ before purchasing such as buying them in an llc or other form?
The liability is virtually limitless; you have to understand going in that this is an investment in which you can lose your entire investment and then some. When you purchase working interest, you’ve got to understand that you’re liable for your pro rata share of costs associated with the drilling and completion of an oil or gas well, which doesn’t come cheaply these days.
The oil and gas promoter has many tools to hedge your bet, the most common of which is the "turnkey offering." The promoter promises to make you a hole to x feet at y dollars. If the hole is drilled for less than y dollars, he keeps the difference. If it costs more, he eats the difference.
What the investor doesn’t know is that the well can be drilled for ½ y or even 1/10 y. It’s the biggest scam going right now.
10- Have you seen a marked increase in investor fraud cases with the recent rise in oil?
Absolutely. It’s rampant. Please, please be careful in Texas.
11- Any state or federal agencies we can contact for information on companies offering units?
Yes, absolutely. Before you make an investment in a Reg D, Rule 506 oil and gas offering, make sure that the issuer has filed a Form D with the Securities Exchange Commission and with the Secretary of State or Securities Commission of the state in which you reside.
Issuers of private offerings are required to make these filings when claiming an exemption. If there’s no Form D already on file or on file within 15 days after your investment is made, that should be a major red flag.
12- Any independent forums or other resources you would recommend to our readers.
If you’re curious about oil and gas investments, you should check out a site run by Bernie Bicoy called Venture Research Info and its message boards. You can find it at http://www.vcresearch.info.
13- How can we contact you and how do you work? Hourly rate or contingency?
You can contact me via e-mail at mitch.little@solidcounsel.com or by telephone in the Dallas area at 214.472.2140. I work on both an hourly rate and contingent fee basis; I typically leave that up to the investor.
Thursday, August 24, 2006
Interview With Steve Bowen, Well Enhancement Services
Hi Steve, Thanks for taking time from your busy schedule!
1-Would you tell our readers what your company does?
Well Enhancement Services increases production by creating horizontal laterals in oil and gas wells. Our laterals extend from the wellbore out 300 ft into the producing formation. We create these horizontal laterals in all directions and at multiple operating depths with typically three or fours laterals per depth. In other words, we open up the well in order to allow oil and gas to move more freely to the wellbore, thus increasing the drainage radius. We believe that we can allow wells to drain an addition 15% of the oil that is in place.
2-Is this proprietary technology, if not how do you differentiate yourself from your competition?
This is a proprietary technology that was first patented in 1995. We hold a US license of the technology and operate only in the US.
3-What type of properties or wells work best with your process?
We look for producing properties with tight or fractured formations. In other words, any well would be a viable candidate for our procedure if it could benefit from increased permeability, i.e. the ability to allow fluids to flow more easily through rock, or where extending a drain hole out a couple hundred feet would allow a well to reach an untapped reservoir. We work particularly well in water floods since the water drive pushes the oil to the wellbore nicely. Lastly, we can operate in wells with a casing size as small as 4.5".
4-Could you ever use acid with your jets as your pulling your laterals out of the formation?
That’s a good idea and one that we have already tried. However, we learned that our nozzle doesn’t have enough flow rate to place sufficient acid in the laterals to make a difference. It only takes about 3 GPM at high pressure to cut rock. Besides, the acid in the wellbore had the added effect of damaging our down-hole equipment, so we recommend a separate acid treatment after we are done with the well.
5-Any fear of hitting the "Ocean" with your laterals?
There is always a fear of hitting the "ocean" down below; however, we have never had that unfortunate experience. We have operated as little as 25 ft above the ocean and have never had a problem. The jetting hose is very rigid at pressure, so the nozzle will want to continue straight unless it hits something hard at a sharply oblique angle.
6-How many completions have you done?
We have done about 50 wells over the last 1 ½ years.
7-What is the average increase in production? How long does it last?
The typical increase in production is 3 to 5-fold. We have seen as much as a 10-fold increase in production. Large percentage increases in production usually are due to jetting past wellbore damage. Increases in production usually also have a direct correlation to the quality of the well. In other words, a 10 BOPD well will usually provide a much better net increase than a ½ BOPD well.
8-Cost Analysis?
We base our pricing on the depth of the well and on the number of laterals created. A typical price range will be $25,000 to $35,000 ranging from 4 laterals to 8 laterals. We can jet as many laterals in as many zones as desired. The operator will need to provide the workover rig and should also budget in appropriate post-lateral treatment such as an acid treatment or frac job.
9-Does your company also lease property and jet laterals for production dollars?
Our primary business model is to purchase wells for our own account and then enhancement them for the increased production value. We put our money where our mouth is since we apply the technology to our own wells. Since we don’t have enough wells to be dedicated to our own account, we will do fee for service on third-party properties.
10-Biggest Success? Wells you don't like to work on?
Our best successes are those 10-fold increases. The best successes are on newly drilled wells, wells participating in a water flood, and wellbore damage cases. I don’t like to work on wells that are not suitable for the technology. Wells of that nature are those that are highly depleted with no down-hole pressure and no potential for increased drive away from the wellbore.
11-Any future improvements slated for the technology?
Our near term plan is to go deeper. Our current equipment will work nicely to 4,500 ft. We can easily operate at 9,000 ft with a larger unit sized appropriately.
Thanks, and good luck in your drilling this year!
1-Would you tell our readers what your company does?
Well Enhancement Services increases production by creating horizontal laterals in oil and gas wells. Our laterals extend from the wellbore out 300 ft into the producing formation. We create these horizontal laterals in all directions and at multiple operating depths with typically three or fours laterals per depth. In other words, we open up the well in order to allow oil and gas to move more freely to the wellbore, thus increasing the drainage radius. We believe that we can allow wells to drain an addition 15% of the oil that is in place.
2-Is this proprietary technology, if not how do you differentiate yourself from your competition?
This is a proprietary technology that was first patented in 1995. We hold a US license of the technology and operate only in the US.
3-What type of properties or wells work best with your process?
We look for producing properties with tight or fractured formations. In other words, any well would be a viable candidate for our procedure if it could benefit from increased permeability, i.e. the ability to allow fluids to flow more easily through rock, or where extending a drain hole out a couple hundred feet would allow a well to reach an untapped reservoir. We work particularly well in water floods since the water drive pushes the oil to the wellbore nicely. Lastly, we can operate in wells with a casing size as small as 4.5".
4-Could you ever use acid with your jets as your pulling your laterals out of the formation?
That’s a good idea and one that we have already tried. However, we learned that our nozzle doesn’t have enough flow rate to place sufficient acid in the laterals to make a difference. It only takes about 3 GPM at high pressure to cut rock. Besides, the acid in the wellbore had the added effect of damaging our down-hole equipment, so we recommend a separate acid treatment after we are done with the well.
5-Any fear of hitting the "Ocean" with your laterals?
There is always a fear of hitting the "ocean" down below; however, we have never had that unfortunate experience. We have operated as little as 25 ft above the ocean and have never had a problem. The jetting hose is very rigid at pressure, so the nozzle will want to continue straight unless it hits something hard at a sharply oblique angle.
6-How many completions have you done?
We have done about 50 wells over the last 1 ½ years.
7-What is the average increase in production? How long does it last?
The typical increase in production is 3 to 5-fold. We have seen as much as a 10-fold increase in production. Large percentage increases in production usually are due to jetting past wellbore damage. Increases in production usually also have a direct correlation to the quality of the well. In other words, a 10 BOPD well will usually provide a much better net increase than a ½ BOPD well.
8-Cost Analysis?
We base our pricing on the depth of the well and on the number of laterals created. A typical price range will be $25,000 to $35,000 ranging from 4 laterals to 8 laterals. We can jet as many laterals in as many zones as desired. The operator will need to provide the workover rig and should also budget in appropriate post-lateral treatment such as an acid treatment or frac job.
9-Does your company also lease property and jet laterals for production dollars?
Our primary business model is to purchase wells for our own account and then enhancement them for the increased production value. We put our money where our mouth is since we apply the technology to our own wells. Since we don’t have enough wells to be dedicated to our own account, we will do fee for service on third-party properties.
10-Biggest Success? Wells you don't like to work on?
Our best successes are those 10-fold increases. The best successes are on newly drilled wells, wells participating in a water flood, and wellbore damage cases. I don’t like to work on wells that are not suitable for the technology. Wells of that nature are those that are highly depleted with no down-hole pressure and no potential for increased drive away from the wellbore.
11-Any future improvements slated for the technology?
Our near term plan is to go deeper. Our current equipment will work nicely to 4,500 ft. We can easily operate at 9,000 ft with a larger unit sized appropriately.
Thanks, and good luck in your drilling this year!
Wednesday, August 23, 2006
Direct Participation Oil/Gas Deals, Things to Look for in a Security Offering
Interview with Colleen Keefe, Director of Securities, Department of Financial Institutions. Kentucky
1- Thanks, for taking the time to answer a few questions for the benefit of our readers and the investing public! Would you mind telling us a little bit about what you do regarding Securities in the oil & gas business?
The Office of Financial Institutions through its Division of Securities regulates the offer and sale of Securities in Kentucky. This includes the sale of securities into or from the Commonwealth. Generally, the Division reviews registration and exemption filings for securities offerings; reviews applications for registration as an agent, broker-dealer, investment adviser, and adviser representative; investigates potential violations of the Securities Act of Kentucky; and educates investors on making informed investment decisions.
2- There seem to be a lot of violations and past fraud in the industry, any ways that individuals can guard against this?
Prior to making any investment, you should review all written materials PRIOR to handing over your money and should be sure you fully understand and are comfortable with the investment. Among other things, a seller should disclose to you the manager’s operating history, risk factors, how the investment proceeds will be used. Never rely on verbal representations especially if they contradict what is in writing. If you do not understand anything you should either ask questions of the seller or consult with an attorney, CPA, or other professional. If you do not understand an investment or cannot get satisfactory answers to your questions, you should not invest. You should also contact your state securities administrator to get background information on the individual or firm selling the investment and to learn if any required filings for the offering have been made. Always remember, if an investment sounds too good to be true, then it is! It’s that simple. For additional resources, consult www.nasaa.org and look at Investor Education and for listing of state securities administrators.
3- Is there a central registry of Securities registered with the state?
The Division of Securities maintains a database of all registration and exemption filings submitted to the Division.
4- What are the requirements for operators selling oil/gas investment units in KY?
The requirements vary depending on how the securities are sold. If an offering is being sold as a “private placement” then the operator may not sell by general solicitation.
5- Who should investors contact to check the background of an operator?
Their state securities administrator. See listing on www.nasaa.org .
6- For operators, is there a template or list of disclosures that would make their offering compliant in KY?
See Offering Circular Guidelines on the Office’s website.
7- What are the penalties for not properly registering a oil/gas investment in KY?
Violators of the Securities Act of Kentucky may be subject to civil monetary penalties and a willful violation of the Securities Act of Kentucky is a Class D felony.
8- Any final advice for someone that is approached for investment?
Investigate BEFORE you invest and if it sounds too good to be true, then it is!
1- Thanks, for taking the time to answer a few questions for the benefit of our readers and the investing public! Would you mind telling us a little bit about what you do regarding Securities in the oil & gas business?
The Office of Financial Institutions through its Division of Securities regulates the offer and sale of Securities in Kentucky. This includes the sale of securities into or from the Commonwealth. Generally, the Division reviews registration and exemption filings for securities offerings; reviews applications for registration as an agent, broker-dealer, investment adviser, and adviser representative; investigates potential violations of the Securities Act of Kentucky; and educates investors on making informed investment decisions.
2- There seem to be a lot of violations and past fraud in the industry, any ways that individuals can guard against this?
Prior to making any investment, you should review all written materials PRIOR to handing over your money and should be sure you fully understand and are comfortable with the investment. Among other things, a seller should disclose to you the manager’s operating history, risk factors, how the investment proceeds will be used. Never rely on verbal representations especially if they contradict what is in writing. If you do not understand anything you should either ask questions of the seller or consult with an attorney, CPA, or other professional. If you do not understand an investment or cannot get satisfactory answers to your questions, you should not invest. You should also contact your state securities administrator to get background information on the individual or firm selling the investment and to learn if any required filings for the offering have been made. Always remember, if an investment sounds too good to be true, then it is! It’s that simple. For additional resources, consult www.nasaa.org and look at Investor Education and for listing of state securities administrators.
3- Is there a central registry of Securities registered with the state?
The Division of Securities maintains a database of all registration and exemption filings submitted to the Division.
4- What are the requirements for operators selling oil/gas investment units in KY?
The requirements vary depending on how the securities are sold. If an offering is being sold as a “private placement” then the operator may not sell by general solicitation.
5- Who should investors contact to check the background of an operator?
Their state securities administrator. See listing on www.nasaa.org .
6- For operators, is there a template or list of disclosures that would make their offering compliant in KY?
See Offering Circular Guidelines on the Office’s website.
7- What are the penalties for not properly registering a oil/gas investment in KY?
Violators of the Securities Act of Kentucky may be subject to civil monetary penalties and a willful violation of the Securities Act of Kentucky is a Class D felony.
8- Any final advice for someone that is approached for investment?
Investigate BEFORE you invest and if it sounds too good to be true, then it is!
Wednesday, August 16, 2006
Beware the Oil Investor Scorned
In the spirit of being conservative and fully disclosing all material facts, oil operators should abide by all federal and state securities laws when soliciting units in limited partnerships or other investment vehicles. I am not a securities attorney, but will try to educate investors as best as possible going forward on proper procedures for operators. Through research, discussion with state regulators, and securities attorneys, I hope to shed some light on unfair practices in the direct participation oil & gas business. The problem is that promoters or operators often profit even before drilling a hole due to skewed costs presented to unknowing investors. There is nothing I hate more than a liar and crook.
In fairness to my readers, this is especially important to me since I have been directly affected by improperly prepared offering memorandum. Prior to becoming a direct oil & gas investor, I was also a passive investor with an operator. The result of the findings of the federal and state regulators is still pending, but could have serious consequences for me as an investor. This wake up call has led me on a mission to learn as much as possible about proper private placement offerings. I hope to be the most compliant operator, if and when I ever raise money. At first glance, the state of Kentucky seems to have an excellent process for operators registering securities to be sold in their state. I have contacted the Securities Division in KY and have forwarded some interview questions for future articles.
Also, I have found a very comprehensive site for investors to research potential partners in the industry. The Venture Research Institute seems to be the most informative website on oil & gas fraud I have found: http://www.vcresearch.info/open/forums.asp. I will also be looking to interview Bernie Bicoy, in admin at the site, for upcoming articles. Bernie Bicoy takes an objective view on the investigative process and has assembled a fantastic collection of information for prospective investors.
It seems as though there needs to be a concerted effort by federal and state regulators to create a uniform "Best Practices" test. Knowing how government works, I would not bet on that, therefore, it should be operators "beware". "Beware" of the investor scorned by excessive fees and non-disclosure. Operators should take the time to introduce themselves to the securities laws in the states they are offering securities and look to go above and beyond to be good corporate citizens. I know for sure I will strive to achieve that level of responsibility as a future operator.
In fairness to my readers, this is especially important to me since I have been directly affected by improperly prepared offering memorandum. Prior to becoming a direct oil & gas investor, I was also a passive investor with an operator. The result of the findings of the federal and state regulators is still pending, but could have serious consequences for me as an investor. This wake up call has led me on a mission to learn as much as possible about proper private placement offerings. I hope to be the most compliant operator, if and when I ever raise money. At first glance, the state of Kentucky seems to have an excellent process for operators registering securities to be sold in their state. I have contacted the Securities Division in KY and have forwarded some interview questions for future articles.
Also, I have found a very comprehensive site for investors to research potential partners in the industry. The Venture Research Institute seems to be the most informative website on oil & gas fraud I have found: http://www.vcresearch.info/open/forums.asp. I will also be looking to interview Bernie Bicoy, in admin at the site, for upcoming articles. Bernie Bicoy takes an objective view on the investigative process and has assembled a fantastic collection of information for prospective investors.
It seems as though there needs to be a concerted effort by federal and state regulators to create a uniform "Best Practices" test. Knowing how government works, I would not bet on that, therefore, it should be operators "beware". "Beware" of the investor scorned by excessive fees and non-disclosure. Operators should take the time to introduce themselves to the securities laws in the states they are offering securities and look to go above and beyond to be good corporate citizens. I know for sure I will strive to achieve that level of responsibility as a future operator.
Sunday, August 13, 2006
Salt and Oil Don't Mix, a Trip to the first American Gusher
In the early 1800's, you would have used far more salt than oil. In fact you would not have much use for oil, but salt was very expensive.
Salt was used to flavor and cure meats. In March, 1829 "American Oil" gushed 50 feet into the air in Burkesville, Cumberland County, Kentucky. The first American gusher flowed for weeks and produced thousands of barrels of oil that flowed into the Cumberland River from Renox Creek. Eventually this well did produce oil for a purpose, but not to heat homes rather for "medicinal" purposes. It was sold under the trade name "American Oil" in glass bottles throughout Europe and the USA.
Two hundred years from now, what will be the commodity that is in high demand? At present oil reigns king, but the prospects of continuously increasing prices and subsequent economic pressure should spur innovation. I am very much in favor of alternative energy sources such as fuel- cells, ethanol, bio-diesel, wind, solar, and nuclear power. I welcome change and have positioned myself in front of many of these trends, but oil continues to be first in my mind as the asset I can profit from. My choice of investment is through direct participation oil/ gas deals or common stocks. The other sectors, other than nuclear, are still in their infancy, thus very aggressive. If I were to invest in these sectors, I would utilize diversified sector funds or unit trusts.
Next week, I will be travelling to the historic area of the Burkesville gusher to look at some shallow producing oil fields. Cumberland County, Kentucky is attractive for drilling because oil can be found at shallow depths above 2000 feet. Based on my discussions with some operators in the area, not much by way of enhanced oil recovery has been tried in this area. It would be nice to introduce some new ideas into an area of oil exploration that is one of the oldest in the USA.
What makes my job as a small operator so exciting is that there are many opportunities to drill in areas that have been proven performers. If I can find leases that have current production and more acreage to drill, I'll apply some modern techniques to increase my odds of hitting a nice well. As discussed in previous articles, hyperspectral imaging combined with side view aerial radar will be a starting point for me to identify "hotspots". Following the satellite images, we will utilize geochemical testing to further refine our focus.
It is amazing to me that after over 175 years of known oil production in a county, I can still unearth opportunities in "American Oil"!
Salt was used to flavor and cure meats. In March, 1829 "American Oil" gushed 50 feet into the air in Burkesville, Cumberland County, Kentucky. The first American gusher flowed for weeks and produced thousands of barrels of oil that flowed into the Cumberland River from Renox Creek. Eventually this well did produce oil for a purpose, but not to heat homes rather for "medicinal" purposes. It was sold under the trade name "American Oil" in glass bottles throughout Europe and the USA.
Two hundred years from now, what will be the commodity that is in high demand? At present oil reigns king, but the prospects of continuously increasing prices and subsequent economic pressure should spur innovation. I am very much in favor of alternative energy sources such as fuel- cells, ethanol, bio-diesel, wind, solar, and nuclear power. I welcome change and have positioned myself in front of many of these trends, but oil continues to be first in my mind as the asset I can profit from. My choice of investment is through direct participation oil/ gas deals or common stocks. The other sectors, other than nuclear, are still in their infancy, thus very aggressive. If I were to invest in these sectors, I would utilize diversified sector funds or unit trusts.
Next week, I will be travelling to the historic area of the Burkesville gusher to look at some shallow producing oil fields. Cumberland County, Kentucky is attractive for drilling because oil can be found at shallow depths above 2000 feet. Based on my discussions with some operators in the area, not much by way of enhanced oil recovery has been tried in this area. It would be nice to introduce some new ideas into an area of oil exploration that is one of the oldest in the USA.
What makes my job as a small operator so exciting is that there are many opportunities to drill in areas that have been proven performers. If I can find leases that have current production and more acreage to drill, I'll apply some modern techniques to increase my odds of hitting a nice well. As discussed in previous articles, hyperspectral imaging combined with side view aerial radar will be a starting point for me to identify "hotspots". Following the satellite images, we will utilize geochemical testing to further refine our focus.
It is amazing to me that after over 175 years of known oil production in a county, I can still unearth opportunities in "American Oil"!
Tuesday, August 01, 2006
Setting Oil Well Investment Expectations
If you receive a proposal from an operator looking for your investment dollars, you need to have reasonable expectations going into the investment. If the proposal has proforma profit numbers based on a well producing 100+ barrels of oil per day, how reasonable is that? Sometimes the spreadsheet of potential profits will show profits based on different levels of production from 5 barrels of oil up to hundreds of barrels. Remember most wells in the USA will ultimately end up as stripper wells producing less than 15 barrels of oil per day, with most producing just a few. It is very easy for a new investor in the oil patch to get very excited about potential. Before jumping in with both feet, the investor must set realistic expectations of production.
Ask the operator what his average well in the area "settles in at". Confirm his numbers by calling other operators in the area. Speak to geologists and call well service companies in the area to add further confirmation. Many states have online geological surveys that will show you well data in the area that you are considering as an investment. These online systems can be cumbersome at first, but are a treasure trove of information, so be patient.
Understand the formations that the operator is trying to produce from. Is it sand or limestone, maybe shale? Are there any particular risks such as "hitting the ocean" or having a high water cut? How many formations does the operator typically see production from?
Another area of setting too high of expectations is well service. Often, especially during hot oil markets like the present, well service equipment and labor is in high demand. Therefore, often there are delays associated with getting a piece of equipment or skilled labor to the well site. Did the CAT get frozen to the field? Is the acid truck stuck in the mud? These types of problems are common in the environment we drill in, thus the investor must have patience.
I like to underpromise and overdeliver, therefore, I tend to be ultra conservative in my assumptions. If that means losing potential partners/investors, so be it! This is not a game of get rich quick. It is a game of allocating a portion of your investable assets into a sector of the economy that has tremendous tax benefits, creates consistent cash flow, and will continue to be in high demand. Inevitably, you will have hiccups in both directions, good and bad. We have a process in place to mitigate risk, but you have to expect it. On the flip side, you always have the potential of hitting a big well. Stand at the plate and swing the bat, that is the only way to hit the ball. Investing in oil wells can be sexy to talk about at dinner parties, but it is persistent, long term investing that reap true rewards for the investor.
Ask the operator what his average well in the area "settles in at". Confirm his numbers by calling other operators in the area. Speak to geologists and call well service companies in the area to add further confirmation. Many states have online geological surveys that will show you well data in the area that you are considering as an investment. These online systems can be cumbersome at first, but are a treasure trove of information, so be patient.
Understand the formations that the operator is trying to produce from. Is it sand or limestone, maybe shale? Are there any particular risks such as "hitting the ocean" or having a high water cut? How many formations does the operator typically see production from?
Another area of setting too high of expectations is well service. Often, especially during hot oil markets like the present, well service equipment and labor is in high demand. Therefore, often there are delays associated with getting a piece of equipment or skilled labor to the well site. Did the CAT get frozen to the field? Is the acid truck stuck in the mud? These types of problems are common in the environment we drill in, thus the investor must have patience.
I like to underpromise and overdeliver, therefore, I tend to be ultra conservative in my assumptions. If that means losing potential partners/investors, so be it! This is not a game of get rich quick. It is a game of allocating a portion of your investable assets into a sector of the economy that has tremendous tax benefits, creates consistent cash flow, and will continue to be in high demand. Inevitably, you will have hiccups in both directions, good and bad. We have a process in place to mitigate risk, but you have to expect it. On the flip side, you always have the potential of hitting a big well. Stand at the plate and swing the bat, that is the only way to hit the ball. Investing in oil wells can be sexy to talk about at dinner parties, but it is persistent, long term investing that reap true rewards for the investor.
Friday, July 28, 2006
Hyperspectral Imaging for Hydrocarbon Intensity: No Ritalin Needed!
I have heard in my travels across the midwest the word "Doodlebugger", a quack who professes to be able to mysteriously find oil. As I research new methods to help find oil, I am always skeptical, but recently came across technology that seems very promising: Hyperspectral Imaging.
So what is hyperspectral imaging? In layman's terms it measures the elemental signature at the earths surface. From data collected from satellites, the earth's surface is portrayed in millions of different colored pixels. Each pixel is a fingerprint of the chemical elements and molecular compounds found. Studies have shown that hydrocarbon seepage can be found at the earths surface and creates what we view as "hotspots" that warrant further analysis. This technology up until recently was only used by the big boys in the oil industry, but now can be reasonably added to an exploration budget of most small indepedent oil explorers.
One company in West Virginia, Quickstrike, www.yourquickstrike.com has utilized this technology plus other geochemistry to refine their search for oil/gas. Their sister company Geo-Max exploration has successfully built an impressive track record of oil and gas finds. Pete Hall and Jack Vires are very easy to talk to and can answer any questions or concerns you have regarding this technology. This is a close family run business, which is one of the "elements" I like to see in companies I have relationships with.
My company, Dynamic Natural Resources and Hughes Energy, Fairfield-IL, plan on utilizing hyperspectral imaging in upcoming months. We will create a 2 mile by 2 mile snapshot of the area we are prospecting. Once we have attained the hotspots, we will utilize "side looking airborne radar" to locate the main fractures. Overlaying the fracture map and the "hotspots", give us a fantastic starting point for further research.
When a hotspot and multiple fractures converge this creates the perfect environment for an accumulation of oil. More fractures create voids and higher permeability, thus more areas for oil to accumulate.
To further confirm our findings, we then utilize geochemistry. As oil and gas vertically migrate to the surface over millions of years they change the soil, plants, and water. Where oil seeps, bacteria live in the soil and "feed" on the hydrocarbons. Soil samples can show us where the bacteria are concentrated and these results can be put into a computer to be graphically displayed on our maps. Also, bacteria resperate CO2 when they feed on the hydrocarbons and we will test for higher concentrations.
I can't explain the chemistry behind the next geochemical test, but iodine has been a reliable indicator of hydrocarbon intensity. We measure via soil samples and map using gps coordinates. The high concentrations also validate our thesis of oil seepage.
Last but not least, we will utilize soil gas analysis. Gas is made up of mostly methane and oil mostly pentane and butane. We can find some of the large microseepage using this technique and the ratio of oil/gas.
I am confident that utilizing cutting edge technology will allow us to have above average success in the field. Remember, oil well investing always carries risk even when you find the oil.
In future articles, I will be interviewing various explorers that have utilized these technologies and updating readers on our progress in the field.
So what is hyperspectral imaging? In layman's terms it measures the elemental signature at the earths surface. From data collected from satellites, the earth's surface is portrayed in millions of different colored pixels. Each pixel is a fingerprint of the chemical elements and molecular compounds found. Studies have shown that hydrocarbon seepage can be found at the earths surface and creates what we view as "hotspots" that warrant further analysis. This technology up until recently was only used by the big boys in the oil industry, but now can be reasonably added to an exploration budget of most small indepedent oil explorers.
One company in West Virginia, Quickstrike, www.yourquickstrike.com has utilized this technology plus other geochemistry to refine their search for oil/gas. Their sister company Geo-Max exploration has successfully built an impressive track record of oil and gas finds. Pete Hall and Jack Vires are very easy to talk to and can answer any questions or concerns you have regarding this technology. This is a close family run business, which is one of the "elements" I like to see in companies I have relationships with.
My company, Dynamic Natural Resources and Hughes Energy, Fairfield-IL, plan on utilizing hyperspectral imaging in upcoming months. We will create a 2 mile by 2 mile snapshot of the area we are prospecting. Once we have attained the hotspots, we will utilize "side looking airborne radar" to locate the main fractures. Overlaying the fracture map and the "hotspots", give us a fantastic starting point for further research.
When a hotspot and multiple fractures converge this creates the perfect environment for an accumulation of oil. More fractures create voids and higher permeability, thus more areas for oil to accumulate.
To further confirm our findings, we then utilize geochemistry. As oil and gas vertically migrate to the surface over millions of years they change the soil, plants, and water. Where oil seeps, bacteria live in the soil and "feed" on the hydrocarbons. Soil samples can show us where the bacteria are concentrated and these results can be put into a computer to be graphically displayed on our maps. Also, bacteria resperate CO2 when they feed on the hydrocarbons and we will test for higher concentrations.
I can't explain the chemistry behind the next geochemical test, but iodine has been a reliable indicator of hydrocarbon intensity. We measure via soil samples and map using gps coordinates. The high concentrations also validate our thesis of oil seepage.
Last but not least, we will utilize soil gas analysis. Gas is made up of mostly methane and oil mostly pentane and butane. We can find some of the large microseepage using this technique and the ratio of oil/gas.
I am confident that utilizing cutting edge technology will allow us to have above average success in the field. Remember, oil well investing always carries risk even when you find the oil.
In future articles, I will be interviewing various explorers that have utilized these technologies and updating readers on our progress in the field.
Monday, July 10, 2006
Get In Front of the Oil Train
Recently, famed world traveling investment banker, Jim Rogers, predicted oil would hit $100 per barrel and that commodities would be in a 15 year bull market. Obviously, that was music to my ears, since my profits rise as oil increases in value. My experience over the years is that investors often shun ideas or trends that continue to hit new highs because they feel they are in too late. They tend to focus on ideas hitting new lows, which often keep going in that direction.
High Net Worth, Accredited Investors need to position themselves ahead of the OIL TRAIN. Not many investments offer the tax benefits and consistent cashflow associated with direct participation oil/gas investing. Also, if oil stays flat or continues to go higher, oil/gas tends to be a great alternative asset class in your portfolio and fantastic hedge. I am not saying go crazy and over concentrate your portfolio, which is far too risky, limit your exposure to 10-15% to natural resource ideas. You too can smile every time you fill your gas tank!
http://money.cnn.com/2006/07/06/news/economy/energy.rogers.reut/index.htm
High Net Worth, Accredited Investors need to position themselves ahead of the OIL TRAIN. Not many investments offer the tax benefits and consistent cashflow associated with direct participation oil/gas investing. Also, if oil stays flat or continues to go higher, oil/gas tends to be a great alternative asset class in your portfolio and fantastic hedge. I am not saying go crazy and over concentrate your portfolio, which is far too risky, limit your exposure to 10-15% to natural resource ideas. You too can smile every time you fill your gas tank!
http://money.cnn.com/2006/07/06/news/economy/energy.rogers.reut/index.htm
Saturday, June 17, 2006
Covered Calls, A Godsend in a Flat or Falling Stock Market
It is amazing to me that not many retail investors understand the concept of generating cash flow from their stock positions. When I tell people that I utilize covered calls to generate extra income, hedge my stock positions, and set strict sell disciplines they look at me like I am crazy. I was introduced to the concept from a stockbroker, Scott Masse, who runs Masse Wealth Management, in Smithfield, RI. Scott is also the owner of a few bars and one night over a few diet cocktails, ie. barcadi and diet cola, he explained the concept to me. The idea of writing covered calls is the only option strategy that you can employ at most of the major brokerage firms for your IRA investments. The reason is that writing covered calls is a very conservative strategy relative to other option strategies.
The strategy is very similiar to selling an option on a piece of real estate. For example, I'll give you $10,000 now, if you allow me to buy your property 6 months from now at a set price. If I choose not to exercise my option, you keep the money and we go our seperate ways.
With a stock, if I buy 1,000 shares of ABC OIL at $10 and the stock goes to $11 in the following month. I can sell someone the "right" or option to buy the stock from me six months from now at $12.50. For that right or option, the option buyer has to give me some consideration, similiar to the above real estate example, let's assume it is .50 per share or $500.
The $500 is immediately deposited into my brokerage account, but an option position also shows up on my statement. I can not sell the stock prior to 6 months unless I buy back the option in the open market. The option price can fluctuate from day to day, therefore, I typically hold my stocks until expiration.
Six months from now, two things can happen. One, the stock goes above $12.50 and the person "calls" me out of the position, which I am more than happy to do since I bought it at ten. Second, the stock has declined below $12.50 and the option holder is holding on to a worthless option. The option holder would not "call" the stock from me at $12.5 when he or she might be able to buy it in the open market at $11.50.
I then start the process all over again and write the calls again.
Let's examine what I accomplished with this strategy: 1. I hedged my position by 5% or $500 2. I set a strict sell price that I was willing to let the shares gor for, $12.50 3. I generated income that I could enjoy or reinvest.
I can not tell you how happy this strategy has made me since the crash of 2000-2001. The strategy has helped me keep my head above water in this depressing market.
A good friend of mine is a computer programmer. He also shares a passion for covered call writing and has written a program that is in beta testing. I am his BETA Dummy. So far, the program has saved me countless hours of research and has narrowed my focus to a short list of 5-10 natural resource stocks to add to my portfolio quarterly. In future articles, I'll discuss some of my picks and income generated from the covered call strategy, plus provide a link to the option software.
As a reminder, make sure you "know what you own" and consult with a tax professional or adviser before investing your hard earned money!
The strategy is very similiar to selling an option on a piece of real estate. For example, I'll give you $10,000 now, if you allow me to buy your property 6 months from now at a set price. If I choose not to exercise my option, you keep the money and we go our seperate ways.
With a stock, if I buy 1,000 shares of ABC OIL at $10 and the stock goes to $11 in the following month. I can sell someone the "right" or option to buy the stock from me six months from now at $12.50. For that right or option, the option buyer has to give me some consideration, similiar to the above real estate example, let's assume it is .50 per share or $500.
The $500 is immediately deposited into my brokerage account, but an option position also shows up on my statement. I can not sell the stock prior to 6 months unless I buy back the option in the open market. The option price can fluctuate from day to day, therefore, I typically hold my stocks until expiration.
Six months from now, two things can happen. One, the stock goes above $12.50 and the person "calls" me out of the position, which I am more than happy to do since I bought it at ten. Second, the stock has declined below $12.50 and the option holder is holding on to a worthless option. The option holder would not "call" the stock from me at $12.5 when he or she might be able to buy it in the open market at $11.50.
I then start the process all over again and write the calls again.
Let's examine what I accomplished with this strategy: 1. I hedged my position by 5% or $500 2. I set a strict sell price that I was willing to let the shares gor for, $12.50 3. I generated income that I could enjoy or reinvest.
I can not tell you how happy this strategy has made me since the crash of 2000-2001. The strategy has helped me keep my head above water in this depressing market.
A good friend of mine is a computer programmer. He also shares a passion for covered call writing and has written a program that is in beta testing. I am his BETA Dummy. So far, the program has saved me countless hours of research and has narrowed my focus to a short list of 5-10 natural resource stocks to add to my portfolio quarterly. In future articles, I'll discuss some of my picks and income generated from the covered call strategy, plus provide a link to the option software.
As a reminder, make sure you "know what you own" and consult with a tax professional or adviser before investing your hard earned money!
Thursday, June 15, 2006
Where Did All the Drilling Equipment and Well Service Equipment Go?
The well drilling and servicing businesses have been very prosperous the last few years. The industry, although, has been marked by an extreme cyclical past that discouraged capital investment. It doesn't feel too good to have a multi-million dollar piece of equipment collecting weeds somewhere in a field. When oil began to rise a few years ago, demand for drilling came back and rotary giants came back. The interesting thing is that although equipment can come and go, what about people?
Many people who in the late 70's or early 80's had done well in the oil business saw there returns diminish over the next two decades. Talented people tend to be able to switch gears, therefore, many of them moved on to more profitable endeavors. The average family oil business struggled for many years as oil prices languished. Funny, I don't recall hearing such outrage from politicians as has been witnessed lately. For the people that stuck it out and invested when times were bad, they are now reaping the benefits of the flip side...... to punish them for risk taking is un-american.
Now that times are booming, it is not neccesarily the equipment that is missing, but the human capital. People make things happen. I am sure many of them did not want to get back into oil just to see it languish again, so they waited it out. This has led to a lack of skilled labor in oilfields all over America. Human capital will always be more important than any piece of new equipment in the oilfield.
Many people who in the late 70's or early 80's had done well in the oil business saw there returns diminish over the next two decades. Talented people tend to be able to switch gears, therefore, many of them moved on to more profitable endeavors. The average family oil business struggled for many years as oil prices languished. Funny, I don't recall hearing such outrage from politicians as has been witnessed lately. For the people that stuck it out and invested when times were bad, they are now reaping the benefits of the flip side...... to punish them for risk taking is un-american.
Now that times are booming, it is not neccesarily the equipment that is missing, but the human capital. People make things happen. I am sure many of them did not want to get back into oil just to see it languish again, so they waited it out. This has led to a lack of skilled labor in oilfields all over America. Human capital will always be more important than any piece of new equipment in the oilfield.
Enhanced Oil Recovery, Secondary, and Tertiary Recovery
Did you know that much of the oil in the ground is still present after primary recovery? In the king's english that means there is still a lot of oil left in a well even after 10 years of pumping. The reason oil production slows is that the natural drive that once pushed oil aggressively towards the wellbore has subsided. Normally, the natural drive is either water or gas in the formation. In this article, we look to explain some of the common enhanced or secondary/tertiary methods of oil recovery.
With oil hitting new highs every day, it is clear the cost benefit of utilizing technology to get at extra production makes sense. When oil was in the $10-20 range, the incremental cost of some enhanced oil recovery methods did not make economic sense.
One of the most common secondary recovery methods is a waterflood. Essentially, a waterflood is a reintroduction of water into the formation to create a drive to push more oil towards the wellbore. To increase the efficiency of a waterflood, new methods utilize Alkaline-Surfactant-Polymer floods and some explorers are introducing microbes into the wellbore to increase the sweep efficiency of the flood, both methods have been met with success.
One method I find very interesting and have used with success on one oil well is the radial jet enhancement. The technology utilizes jets of high water pressure to cut laterally into the formation up to almost 300 feet. The technology can be viewed at www.wellenhancementservices.com, ask for Steve Bowen if you are interested in utilizing the technology on some of your new or old wells.
With 80% of the oil still in the ground after primary recovery, there is still plenty of meat on the bone for utilizing EOR. New technologies are constantly being tested and will lead to greater gains in the future. One area I am very interested in is new drilling technology. The rotary drilling rig has not changed radically in 100 years but new advances are coming and we'll discuss those in future blogs.
With oil hitting new highs every day, it is clear the cost benefit of utilizing technology to get at extra production makes sense. When oil was in the $10-20 range, the incremental cost of some enhanced oil recovery methods did not make economic sense.
One of the most common secondary recovery methods is a waterflood. Essentially, a waterflood is a reintroduction of water into the formation to create a drive to push more oil towards the wellbore. To increase the efficiency of a waterflood, new methods utilize Alkaline-Surfactant-Polymer floods and some explorers are introducing microbes into the wellbore to increase the sweep efficiency of the flood, both methods have been met with success.
One method I find very interesting and have used with success on one oil well is the radial jet enhancement. The technology utilizes jets of high water pressure to cut laterally into the formation up to almost 300 feet. The technology can be viewed at www.wellenhancementservices.com, ask for Steve Bowen if you are interested in utilizing the technology on some of your new or old wells.
With 80% of the oil still in the ground after primary recovery, there is still plenty of meat on the bone for utilizing EOR. New technologies are constantly being tested and will lead to greater gains in the future. One area I am very interested in is new drilling technology. The rotary drilling rig has not changed radically in 100 years but new advances are coming and we'll discuss those in future blogs.
Tuesday, June 13, 2006
Risk in the Oil Drilling Game!
When considering whether or not to invest a portion of your assets into American oil, you must come to an understanding of risk inherent in this type of endeavor. As i have said before, if you are not a high networth or accredited investor limit your exposure to sector mutual funds and the like.
If you are an accredited investor, take a closer look at direct participation oil & gas deals.
Typically, there are two types of oil drilling deals, from a broad sense........Wildcats & Developmental Deals. Wildcats are the most aggressive types of drilling programs where oil has not been found within 1 mile of the drilling location, but the geologist might feel based on characteristics of the underlying lease that it is attractive to test for a producing well. Developmental Wells, which are the only kind I have ever invested in, are wells within 1 mile of known oil production. Many times when I have invested in these deals, I would see the adjacent leases' pumpjacks moving up and down just a few thousand feet away. The concept of a tangible investment is very reassuring in the wake of the Dot Com bubble, thus the ability to physically see a producing field adjacent to your prospect is very exciting. The fact that there are wells adjacent to your prospect does not guarantee success, but it is a great comfort.
I believe that oil will continue to be in high demand based on the growth of Asia and India. I tend to take a simplistic, common sense approach to the issue of Peak Oil. If most of the "Easy" finds or holes have been poked in the ground the last 100 years, new production will continue to gain in value. Oil will fluctuate in the short run, but the long term value seems clear .......UP! The oil wells we drill, when successful, will typically pay out for 15-20 years. Production will peak in the first few years and steadily decline, but 10 years from now oil should be higher.
Know what you own is a common refrain in investing, but it is very important in oil well investing. It is important that you meet the individuals that you are entrusting your hard earned money to. I will never invest in an oil deal without meeting the principals face to face. I want to see their operation in person. Independants vary in the amount of talent, machinery, and know-how, therefore it is important that you assess each company before giving them a dime.
I have decided to invest one third of my investable assets into the natural resource arena. The choices are not limited to oil & gas investing, but that is what i feel comfortable with. I have come to accept the fact that we will have many dry holes and unsuccessful wells over the years, but I view my investment process similiar to dollar cost averaging in mutual funds. By consistently investing in wells, I can remove the inevitable hiccups along the way. If I had quit investing in wells because my first well was a failure(true story), how could I now take pleasure every time I fill my tank!
Gerald Schiano
401-349-2990
dynamicoilceo@yahoo.com
If you are an accredited investor, take a closer look at direct participation oil & gas deals.
Typically, there are two types of oil drilling deals, from a broad sense........Wildcats & Developmental Deals. Wildcats are the most aggressive types of drilling programs where oil has not been found within 1 mile of the drilling location, but the geologist might feel based on characteristics of the underlying lease that it is attractive to test for a producing well. Developmental Wells, which are the only kind I have ever invested in, are wells within 1 mile of known oil production. Many times when I have invested in these deals, I would see the adjacent leases' pumpjacks moving up and down just a few thousand feet away. The concept of a tangible investment is very reassuring in the wake of the Dot Com bubble, thus the ability to physically see a producing field adjacent to your prospect is very exciting. The fact that there are wells adjacent to your prospect does not guarantee success, but it is a great comfort.
I believe that oil will continue to be in high demand based on the growth of Asia and India. I tend to take a simplistic, common sense approach to the issue of Peak Oil. If most of the "Easy" finds or holes have been poked in the ground the last 100 years, new production will continue to gain in value. Oil will fluctuate in the short run, but the long term value seems clear .......UP! The oil wells we drill, when successful, will typically pay out for 15-20 years. Production will peak in the first few years and steadily decline, but 10 years from now oil should be higher.
Know what you own is a common refrain in investing, but it is very important in oil well investing. It is important that you meet the individuals that you are entrusting your hard earned money to. I will never invest in an oil deal without meeting the principals face to face. I want to see their operation in person. Independants vary in the amount of talent, machinery, and know-how, therefore it is important that you assess each company before giving them a dime.
I have decided to invest one third of my investable assets into the natural resource arena. The choices are not limited to oil & gas investing, but that is what i feel comfortable with. I have come to accept the fact that we will have many dry holes and unsuccessful wells over the years, but I view my investment process similiar to dollar cost averaging in mutual funds. By consistently investing in wells, I can remove the inevitable hiccups along the way. If I had quit investing in wells because my first well was a failure(true story), how could I now take pleasure every time I fill my tank!
Gerald Schiano
401-349-2990
dynamicoilceo@yahoo.com
Monday, May 22, 2006
Stop Whining America!
As I sit at my bar in RI, I have Pink Floyd, Money, playing in the background. These days everyone seems to be complaining about high oil prices. Going into an election year, politicians are looking to crucify oil executives. Charges of gouging and price fixing abound.....What responsible commentators and politicians, in a free market, should be saying is invest in American oil/gas assets.
If you are not an accredited investor, buy shares in a natural resources mutual fund or buy shares in our major oil companies and reinvest the dividends. If you do have significant assets, invest in direct participation oil/gas partnerships. The government encourages exploration through generous tax incentives for private investors.
Start out small, and investigate the companies you look to invest with. 90% of domestic oil production comes from small independants. They are the bread and butter of the US oil market..... Many operating in states you would never guess had oil, for example S. Illnois where I have multiple wells paying me monthly!
I smile every time I go to fill my tank! Join the club!
Gerald Schiano, dynamicoilceo@yahoo.com
If you are not an accredited investor, buy shares in a natural resources mutual fund or buy shares in our major oil companies and reinvest the dividends. If you do have significant assets, invest in direct participation oil/gas partnerships. The government encourages exploration through generous tax incentives for private investors.
Start out small, and investigate the companies you look to invest with. 90% of domestic oil production comes from small independants. They are the bread and butter of the US oil market..... Many operating in states you would never guess had oil, for example S. Illnois where I have multiple wells paying me monthly!
I smile every time I go to fill my tank! Join the club!
Gerald Schiano, dynamicoilceo@yahoo.com
Welcome to the Wonderful World of Oil Investing
Did you know that America is one of the only countries in the world where you can participate in the wealth of our natural resources? Many countries, as witnessed recently in Bolivia, privatize the managing of a country's natural resources. I started this blog to educate investors on the benefits of direct investment in our country's oil/gas fields.
I have traveled the country interviewing various "mom & pop" oil/gas companies that have direct participation programs. I'll introduce to you various things that have made this process enjoyable and profitable.
I have traveled the country interviewing various "mom & pop" oil/gas companies that have direct participation programs. I'll introduce to you various things that have made this process enjoyable and profitable.
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