The Appalachian Basin is the oldest oil and gas producing basin in the United States. Through its 150-year history oil and gas development has seen several boom and bust cycles. Until the early 2000’s most observers of drilling activity would have said the basin will never see another boom cycle, and then the Marcellus Shale came on, followed by the Utica Shale, and stacked plays. The recent cycle has settled back from a 2012 high to a stable development plateau. Founded on oil, natural gas now leads energy production in the basin.
Hundreds of small operators contributed to the drilling activity through the 20th century. Peak drilling activity occurred in the late 1800’s, in the 1930’s prior to World War II, and re-surged again in the late 1970’s and early 1980’s following the 1970’s energy crisis and the 1973 OPEC oil embargo.
As the larger companies changed hands or moved west to Texas, the small operators took over existing wells. With a drop in the price of oil in 1985 and lower prices for natural gas, drilling activity slowed, and many small operators picked up existing stripper wells[i] from the larger companies.
Departure of Small Producers
Small oil and gas producers, many of them second or third generation family operations, have provided the backbone to energy production in the basin. Now, with the majors and large independents changing the landscape, small operators are retiring and selling off their assets. In some cases, small operators have been fortunate to have HBP (held by production) rights to the deeper Marcellus and Utica shales, making more money in mineral rights payments than they have with years of oil or gas production. Others are less fortunate and struggling; burdened by new regulatory requirements, higher operating costs, and taxes largely brought on by the unconventional well drilling.
Many small operators have 10 to 200 wells producing a relatively small volume of oil, gas, or a combination of both. Most of these wells can be classified as marginal wells, requiring a higher price per barrel of oil or Mcf of natural gas to be worth operating because of low production rates, and/or high production costs from its location, and/or its high co-production of substances that must be separated out and disposed of (like salt water and non-combustible gases mixed with natural gas). A marginal well becomes unprofitable to operate whenever oil and gas prices drop below its critical profit point. At that point, if not produced for more than one year, the well is to be plugged. Plugging costs can run from $10,000 to $100,000 or more per well. This presents a significant liability to small operators when they reach the unproductive economic stage for their wells.
Producing Assets Optimization Model
The good news for small operators who want to sell their assets is a renewed interest by mid-size to large independent operators and investors who want to acquire marginal wells and improve the economics.
Our work with sellers of producing assets has demonstrated a number of operational inefficiencies that negatively affects net revenue. For example:
- Owners have limited time for personal well tending, having to contract well tending at higher rates, or only operating wells on a limited schedule.
- Inability to provide workovers when needed and having to contract out.
- Utilizing contract labor and equipment for plugging, repairs, earthworks, sedimentation and erosion control.
- Limited gas pricing restricted by 3rd party pipelines.
We help sellers find buyers that have the financial strength to take on liabilities while using economy of scale and experience to improve margins. Buyers are looking for long life, low decline assets that are in the mature stage of the decline curve but have many years of production remaining. These buyers have operations that increase scale which drive unit cost improvements. They reduce costs with operational efficiencies, optimize production, and can often diversify the gas marketing to improve pricing. Back office efficiencies and integration of assets reduces redundancies, all contributing to an improvement in net revenue from the acquired assets.
Sometimes the acquired assets provide valuable HBP deep rights, royalties, PUDs, and wells that have the potential to be re-completed in formations up-hole.
The oil and gas renaissance in the Appalachian Basin created many challenges for small operators, but it has also brought the financial strength and experience of independents capable of acquiring small operators’ assets and providing an opportunity for the small operators to retire into the solemn twilight.
PG2 provides consulting services to oil and gas operators for the sales of producing assets.
[i] “For tax purposes, a stripper well is defined as any oil or natural gas well property whose maximum daily average oil production does not exceed 15 bbls of oil, or any natural gas well whose maximum daily average gas production does not exceed 90 Mcf, per day, during any 12-month consecutive time period. IRS as producing less than 90,000 cubic feet per day.” (National Stripper Well Association)