Where is the Oil?

[DonFromTexas]

In my short “career” of handling my daughters mineral interests, something has been bothering me, lately more and more. I am led to believe on one hand that all the oil is well known, depth, exact edges of each pool, etc. This allows us to get paid royalties from a well drilled on other than our own acreages even or not paid for oil from a well very close to our own acreage. This is money, and there are some highly paid people making such decisions.Some areas are crowded with wells, and from some method we can determine exactly how far oil will run to a well, and no further. We have areas adjacent where not a single well exists.

In the vein of the old saying “if you are so smart, why aren’t you rich” something is missing. I see very frequently wells drilled then plugged and abandoned. Unproductive wells. How can that happen if we know so much about it? Sure flies in the face of reason, don’t it? Are the areas with no wells actually known to be void of oil?

I would appreciate anyone putting me back on the right track of thinking about this.

[M_Barnes]

Geologist here… No, the exact location of all the oil and gas is not clearly known. Our knowledge is bound by the best technology available at the moment and we are trying to predict thousands of feet below the surface using seismic, outcrops, depositional history, maturation timing, structural timing, data from nearby wells, economics, etc. The variables are vast. The edges are not hard lines and they keep moving over time and during production as the pools shrink. (Think of vinegar and oil said dressing-you think the layers are discrete, but actually are not.) The shapes of the conventional sandstone or limestone reservoirs are inferred. Is is a sand dune; is it a river bank; is is a turbidite; is it a reef; is it an atoll; is it a carbonate bank, etc. What is the porosity and permeability? Is there a hidden fault than cannot be seen from the seismic? If we drill it, will it make money for us? In the unconventional shale reservoirs, it is even more complex and the science is young on them, so lots more to learn. They have even lower porosity and permeability, so large fat oil molecules may not be able to move while tiny gas molecules might. We don’t know exactly how far out the fractures go-the natural ones and the induced ones. There are so many unknowns for each and every well-even when we think we have a pretty good idea of what is going on. We are constantly evaluating what did we think we knew, what was different, how can we complete a well better, what was a surprise, etc. Areas with no wells can have many reasons. The economics are bad and it would cost too much to drill versus the value of what we can get out, nothing is currently perceived to be of value there, or no one has looked there yet. etc. (My grandfather was a geologist a hundred years ago-areas where his generation had no wells because they were drilling with cable tool rigs and could only go a few thousand feet are now full of horizontal wells in shales at 15,000+ feet deep-he would be amazed.)

Geologists and geophysicists and engineers have been working on these issues for several hundred years and we are constantly learning new things. It is amazing that we know as much as we do, but plenty more to learn. We drill on ideas with a healthy amount of risk analysis and do the best we can. We would like to be right more than we are wrong. When I started my career, we were thrilled if our ratio was one success to nine failures in conventional wells (back in the pencil and paper days with no 3D seismic). Now, in the shale plays, some of the success rates are up in the high 95% range. Quite a difference in 45 years!

[DonFromTexas]

Wow! As always, thank you so much for taking time to explain all that to me. It meshes well with my limited knowledge. Here is a picture of one that I have sat and puzzled over for years now. It would appear that oil is so smart it knows where the section lines are! Is the colored sections owned by someone very stupid, and all their oil is being sucked up by neighbors? What should that owner do?

[M_Barnes]

In general, the RCC will not allow wells to drain another property as they set the distance between wells. Horizontal wells do not drain very far away from the well bore (depends upon the reservoir and whether it is oil or gas) Reservoirs rarely align with the section lines…given that they are surrounded by horizontal wells, a question may be in order.

I do not know that part of Texas, so someone else may comment as to the activity and ownership. Could be that the company that has the most leases does not have enough money to drill right now. Or they could be drilling elsewhere that they think has more potential. Or it may not be leased.

If I were the owner, I would contact the lessee and ask what their plans are and when under the “Reasonably Prudent Operator Standard”. There are implied covenants in the oil and gas lease. The following is from Oil and Gas Law in a Nutshell by John S. Lowe. “The Reasonably Prudent Operator Standard has generally been employed to impose upon a lessee the obligation to act: in good faith, competency, and with due regard for the lessor’s interests.”

Common implied covenants are:

1. The implied covenant to Test

2. The implied covenant to Reasonably Develop

3. The implied covenant for Further Exploration

4. The implied covenant to Protect agains Drainage

5. The implied covenant to Market

6. The implied covenant to Operator Prudently and Properly.

[Steve_Durrett]

I also am not familiar with this particular area, but you might just as easily easily make the argument that the owner of the colored sections is not stupid, but instead very smart for not wasting their money drilling in those sections. Just because a well has been drilled does not mean it has been profitable. Many wells are not. A smart operator will let his neighbors find out if the area is worth drilling before risking their own money.

There has been a great deal of money lost in this industry over the last 5-6 years.

[DonFromTexas]

Just so nobody gets angry, I did NOT mean to infer the owner was stupid! In fact the owner was in fact on this forum, that is where I boldly copied the photo. My point was that it was something I did not understand.

[tracy_lenz]

Engineer here…a little late to the conversation, but wanted to add this in case others were wondering.

In my experience, these random “blank spots” in development are usually related to the land/lease owner, lease terms, or operator. Rarely that the oil reservoir just “stops” when there’s unconventional horizontal drilling involved (but vertical production…maybe). Everything M_Barnes said about the reservoirs being hard to find is also true, for your question on why we don’t know everything.

(Side note, the map above is an image from NM, probably the north-most edge of the Delaware Basin)

Land/Lease Owner: When I see a patch like this that lines up with the section lines and looks like it could have been a good property line, this is my first thought. I worked an area we were desperate to drill; some of our best reservoir. But a stretch of sections were owned by a certain family who was in conflict. We needed to negotiate a new lease in order to be able to drill (the lease we had wouldn’t allow any more surface locations) and the family was in too much disagreement to come to agree on anything. We tried upping our payment far beyond normal and still no traction, and this was 2014 when oil was $100. We gave up and went on to other easier sections to drill.

Lease terms: Similarly, I’ve also seen it where we skip over a section because the lease has a funny, unfavorable structure vs ones around it. Sometimes landman get creative to get deals done (“you can lease this southwest 1/4 section and develop it, but you have to pay us $500,000 for every well you drill if we decide to not participate and then if the well makes a really good profit then we want back in but with these new terms…yadda yadda”). Sometimes these leases were set up in a much different economic market, which usually you can renegotiate, but at that point, you may be on to better things.

Wells being drilled are (hopefully) economic, but when factors like this start stacking up, it can quickly make a well not worth drilling even if the production is the same section to section.

Operator: Every now and then it’s due to those leases being owned by a different operator than the surrounding developed sections, who isn’t currently focused in that area since they may have better areas to focus on than the operators surrounding that area. Think little tiny company who only owns 20 sections of operated sections, vs a Chevron-sized company that’s busy funneling money into billion-dollar projects offshore.

[DonFromTexas]

Thanks Tracy, that information was very helpful in my understanding of things.

[tracy_lenz]

You’re welcome! Happy to help!

[DonFromTexas]

I am still paranoid that the neighboring section wells are actually sucking all the oil out of MY section. Nobody really knows just what goes on down there in the dark deep underground

[tracy_lenz]

I did notice that comment in your original post and wanted to clarify on that. Unfortunately, there is a high likelihood that eventually neighboring wells will start draining the oil from your section if you don’t have an equal balance of wells.

I’m assuming your assets are in TX based on your username, and in Texas there are field rules that say how close to the section line you can place a well. This is for this reason; to make it fair for each side to have a chance to capture their oil. Those rules are based on optimal development and drainage though, and eventually, a well will start draining beyond that distance. If you’ve heard anything about “parent wells” or “child wells” this is the phenomenon that’s being named. Just because the industry is putting 4 horizontal wells in a section doesn’t mean that each well is uniformly draining 1/4th the section. Also, the key word above is “chance.” Texas favors the first one to go after the oil, even if it’s draining from your neighbor’s lease. As long as you follow the rules of the field for development and your neighbor had an equal chance (as in, you didn’t drill into their section or too close to the line), then whatever you produce is rightly yours. If your neighbor didn’t drill an equal offsetting well to drain their reservoir at the same time, that’s their problem. You see quite a bit of odd historic field development for this very reason.

Similarly, usually the first well to be completed gets the most oil, and the rest (assuming the same technology is being used) gets less based on how much time has passed (the more time between wells, the less recovery that “child” well typically has). This is mostly due to complex geomechanic mumbo-jumbo of how fractures form with and without offset depletion…but the key takeaway is that every well is different unless they were all drilled and frac’d at once (<-- the ideal case).

I could go on and on regarding this, but hope it sheds some light. It IS something to be concerned about. More mineral owners should be aware that they don’t have forever to decide to let someone drill if they have production directly around them. They may miss their window, depending on the reservoir.

[DonFromTexas]

Thanks again. No I am in Texas, but my mineral interests are all in New Mexico, Chaves and Lea counties. Others have tended to assure me that drilling was an exact science and no way could my oil ever run across a section line, a good example of artificial intelligence I guess, smart oil it is. I of course cannot MAKE someone leasing my interests to drill a well, so just waiting and hoping some is left there is he best I can hope for I guess. Since drillers also can see that my section has been drained, from four sides it would be smart of them to NOT lease my area from me, giving me a double whammy. I really am feeling sorry for myself!

[tracy_lenz]

@DonFromTexas

Since drillers also can see that my section has been drained, from four sides it would be smart of them to NOT lease my area from me, giving me a double whammy.

Chin up! If your area is active, it’s more likely other operator see your section and go, “oooh! an undrilled section!” Although a well can drain oil from that far away, it’s highly inefficient and takes a long time to get anything significant. To fully drain a section with a modern horizontal well from that far away would probably take 30-100 years, for example. The drainage is also happening elsewhere, so your undrilled section could be one of the better options left.

[tracy_lenz]

Hm, I’m curious…who has been assuring you that drilling was an exact science? Precise, complex…yes… but exact? Not sure I’ve heard it described that way. @M_Barnes explanation is more accurate. We spend a lot of time and energy and money doing all we can to characterize the oil and try to position the wells just right to make the most of it, but it’s still a risky business. I’ve seen people get themselves into trouble assuming we can treat these unconventional shale reservoirs like a manufacturing plant, pumping a reliable amount of oil on cue.

Ultimately every reservoir is a creation of nature, and about as predictable as the weather because of it (and weather is something we can see and fee and touch, and have been studying for thousands of years). I can tell you it’s hot in Texas in the summer, just like I can tell you there’s oil in the Lea county NM. As we get closer to summer and we gather more data, the models get better. But not even the best computer models can tell you today what the temperature will be on June 23rd, and none will be close to accurate until within 10 days (similar to when nearby wells have been drilled). And we won’t know the actual weather until the day has passed (after the well is drilled). If you have wells nearby, then yeah, there’s a very high likelihood there’s oil in economic quantities where you are. But still not 100%.

Also, when I say those wells will eventually drain across the section boundary, I don’t mean to scare you. That night not happen until 10-20 years down the road (…or 12 months…). It depends on the quality of the local reservoir, and if the wells are in the same reservoir (there could be many stacked reservoirs in your area). Generally, the better the wells around you, the higher the quality reservoir. The better the reservoir, the shorter the time to that drainage radius increasing.

I admit I’m not familiar with NM leasing rules so I’m assuming they’re similar to OK or TX, but if the operator of your lease isn’t acting, ideally there’s a clock on the lease where you can soon lease it to someone else. Hopefully it’s not held by production by a random 1970’s deep vertical well that produces a reliable 10 mcfd for the last 50 years (in my part of the country, that’s pretty common, but I haven’t worked NM). If so, you might be able check your lease for “paying quantities” (or something) language or look for a period of time where the well stopped producing for longer than is allowed. The operator won’t bring this to your attention if it happens; make them prove they’re following the lease rules if you have any question of it. (disclaimer: i’m not a landman)

Sometimes that data can be hard to dig up (let us know if we can help there), but the amount of royalty you’re receiving should be a good indicator. If the checks are more than nothing for each lease, you’re probably held to that operator. If it’s been years since the lease has received anything…you might be near to an “out”.

[DonFromTexas]

I was just exaggerating to be dramatic, tongue in cheek. You don’t need to toot M Barnes horn, she has taken me from dumber than a box of rocks to almost smart enough to ask silly questions! Yours and her explanation have been extremely helpful to me and I would bet to many more that followed the thread. Thank to both of you!