Understanding the US Onshore Market

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A Different Context

[/vc_column_text][dt_gap height=”25″][vc_column_text]The United States is one of the few countries in the world where individual ownership of mineral rights is allowed. Indeed, apart from offshore, most mineral rights are owned by individuals. Therefore, oil and gas companies wishing to obtain a mineral interest in the USA must typically do so by executing lease agreements with individuals.[/vc_column_text][dt_gap height=”35″][vc_column_text]

Interests

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When the owner of a mineral right enters into a lease agreement, two types of mineral interests are created; a working interest and a royalty interest.  The holder of the royalty interest typically receives a specified proportion, often one-eighth, of the minerals produced or of the gross revenue from selling the production. The royalty interest holder does not bear any costs of exploring, developing or operating the property; these are the responsibility of the working interest holder. However, the royalty holder may be responsible for production taxes on their share and for a share of the post-production costs such as transportation and processing. The royalty interest is sometimes called a non-operating interest or non-working interest.

A Working Interest (WI) owner is responsible for paying 100% of the exploration, development and production costs and their share of the revenue is the amount that remains after deduction of the royalty interest and other non-working interests.

Sharing of working interest is common, since it provides a means for companies to share the cost and risk of operations. In this joint working interest arrangement one party is designated as the operator of the property and the others are non-operators. The operator manages the day-to-day operations of the property, with the non-operators each being responsible for paying their proportionate share of the costs incurred.[/vc_column_text][dt_gap height=”35″][vc_column_text]

Lease Arrangements

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One consequence of individual ownership of mineral rights is that each lease typically comprises only a very few wells, each of which has a simple wellhead pump, crude oil storage tank and, if necessary, a produced water storage tank. Product is collected from the oil tank on a regular basis, typically by road tanker. If the well produces gas, the facilities will need to be more complicated, including a separator and export pipeline. Typically, this pipeline will transport the gas to a central facility that gathers gas production from a collection of neighbouring wells, separates any remaining water and condensate, and exports the product through a metered sales point into a transportation pipeline, normally operated by a third party. Some of the gas will be used as fuel for the processing, and there will be the capability to flare should the need arise.

Sharing of working interest is common, since it provides a means for companies to share the cost and risk of operations. In this joint working interest arrangement one party is designated as the operator of the property and the others are non-operators. The operator manages the day-to-day operations of the property, with the non-operators each being responsible for paying their proportionate share of the costs incurred.[/vc_column_text][dt_gap height=”35″][vc_column_text]

Information Capture and Reporting

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The lease operator will gather information on a regular basis, usually daily, about the operation of the wells and production facilities within the leases he operates. This data will typically include oil, gas and water production rates from each well, pressures and temperatures of the items of processing equipment, sales or export quantities, fuel and flare usage. The data is used to correctly allocate production and sales quantities to each lease and well, to monitor the performance of the wells, to report and forecast revenue, and to construct the formal returns for the state regulators. Where several leases share a common central processing unit, the allocation of product used by each lease, as well as the production streams, may become quite complicated.

The capture, organisation and analysis of this data are normally achieved using Excel spreadsheets or a software application configured for the purpose. This can become time-consuming and error-prone, especially for companies who have a mixture of operated and non-operated properties. In this case, the company will receive data in different formats from their lease operators, as well as that collected from their own operations. The data will need to be validated and re-formatted to a common structure in order to be suitable for use by the business.

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