Be Aware of Dead Wells in Investment Decisions

Be Aware of Dead Wells in Investment Decisions

Oil and gas investors beware. “Dead” wells are coming back to “life” during mineral valuations.

Are you considering moving forward with an oil and gas deal?

Receive a nice flyer for an oil and gas property?

Given access to a promising data room?

Well, if you are ready to purchase, take a little time to make sure there are not any dead wells haunting the deal.

What is a Dead Well?

Dead wells are wells which are no longer capable of producing hydrocarbons economically and hold no future value. These wells may have been non-productive for months, or years, prior to the valuation, but operators delay reporting it as abandoned. Dead wells are usually waiting for plug and abandonment (P&A) operations, and can be left idle for a number of years before being P&A’d.  A P&A operation usually requires the well to be sealed, cemented and capped, and the remaining casing buried.

Why Dead Wells Showing Up in Mineral Valuations?

Unfortunately, traditional valuation tools make it easy to forecast production, and future value, to dead wells. There are a few reasons this happens. The first is that a person, usually a reservoir engineer, has to manually apply a forecast to each well. If the reservoir engineer is working with a large number of wells, or under a time crunch, they may not recognize that the well is not merely missing data, it is actually non-productive. The second is the axis scale used on the production graphs, within most economic forecasting software platforms, can be misleading, even to the most experienced engineers.  Third, the well status is not updated regularly. The status (producing, shut-in, P&A’d) has to be manually changed within the software used for traditional valuations.

Within the PetroValues“Methodology”, complex algorithms were created, which automatically screen wells by status and production. These algorithms ensure all dead wells are excluded from economic valuations.

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How do Dead Wells Impact the Economics?

To understand the impact of including just one single dead well in an economic valuation, the PetroValues team created an example case with a well located in the Williston basin. For this example, we set our workflow to apply a production forecast to a dead well, which would typically be filtered out, and include it in the calculations. The valuation was performed using a working interest (WI) of 100% and net revenue interest (NRI) of 80%.

The resulting Suggested Market Value is $1.4 million dollars.  This is the impact of one dead well, included in a mineral valuation, $1.4 million dollars.

 

PetroValues Map: Dead Well Example
PetroValues Suggested Market Value: Dead Well Example

 

 

 

 

 

 

 

 

Check out our Map

 

If the well is included in an acreage purchase, it may be very easy to miss. To demonstrate this scenario, the PetroValues team ran the economic valuation for the two sections, 28 and 33, that the dead well is drilled through. The Suggested Market Value of the property, excluding the dead well, is $4 million. When the dead well is included the Suggested Market Value increases to $5.2 million. In this case, there was only one dead well included in the valuation. Just imagine the impact if there were multiple dead wells included, there would be a drastic impact to the return on investment.

 

PetroValues Map: Dead Well Example Acreage
PetroValues Suggested Market Value: Dead Well Acreage Example, Dead Well Not Included
PetroValues Suggested Market Value: Dead Well Acreage Example, Dead Well Included

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

So yes, investor beware. Spend the time to check, and then recheck, that there are no dead wells haunting the next big deal.

For more tips related to oil and gas investments, please visit our previous blog “Valuating Oil and Gas Assets? Here is some advice.”

 

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