Offset Wells in the Western Basin - Millions of Dollars Owned to Owners!

There are numerous potential drilling locations in the Western Canadian Basin that go undrilled even though they can be easily identified through an offset well or offset wells.

An offset well is any well that is drilled within a section or quarter section basis either laterally or diagonally around a parcel of land. Imagine a tic tac toe board and the 9 squares are parcels of land. If you look at the middle square then an offsetting well or offset wells would be any well or wells that are drilled in the 8 squares that surround the middle square.


Offset wells are important to monitor for numerous reasons such as:

• Compensatory royalties owed to freehold land owners
• Potential notice from the government on crown lands from freehold offsets
• Drainage reports on undrilled lands
• Identify drilling prospects via production numbers from other wells
• Identify a better producing zone than the one you are currently producing in

In the case of freehold lands, an offset well could trigger a clause in the land lease that would cause a "Drill, Drop or Compensate". Basically, if there is an offset well or offset wells that was drilled after the effective date of the land lease and the freehold owner has farmed out the land to an oil and gas company, then it potentially triggers the clause that says the oil and gas company has usually 6 months to drill a well, drop the lease or compensate the freehold owner. Typical leases denote that the oil and gas company will pay 50% of the royalty based on production from the offset well. There are circumstances where there are more than one offsetting well, so the freehold land owner should see which one has the best production history that goes back to the effective date. Please note, each lease is different, so there may be different clauses in the lease than what is denoted above. If you have or think you have an offset well against lands that you own, you should consult an attorney for help.


Example of Offsets in Western Canada

My company, Argentis Group has a process to run lands for offsets and we have used public data to identify potential offset wells. One of the companies that we have looked at has over 6,000 wells surrounding their undrilled freehold lands that are listed in public data. Of these 6,000+ sections of land, there are 1,300+ potential locations that have an offset well producing 20 barrels of oil equivalent or greater. If you look at this companies undrilled crown lands, there were over 54,000 sections that were undrilled with over 10,000 offset wells producing more than 20 barrels of oil equivalent.

Offset wells can be significantly costly if not followed. If a freehold land owner has a 5% royalty on an oil well and the average price is $96 Canadian for the next 8 years according to the Sproule price forecast, knowing that the average production from an oil well in the western basin is 40BOED, then this is equal to $70,080 per year in royalties owed to the freehold land owner. Over the average life of a well, approximately 8 years, this means that a freehold land owner could be out over $560,000.

The major reason that offset wells go unnoticed is that it is extremely hard to manage this process. In essence you are looking for wells that competitors are drilling around your lands. A lot of the time, oil and gas companies know what is going on in the core areas, but typically do not know what is going on in their un-core areas. Another major reason is that wells are being drilled all the time and oil and gas companies would have to continually monitor large amounts of land which they do not have time to do.

Argentis Group does have a process that allows us to utilize your land information to show you where wells are producing within a section or quarter section basis around your crown and freehold lands. This information can be run in numerous ways to show the following on freehold or crown lands:

1. Un-drilled lands with an offset well or offset wells drilled after an effective date of a lease which is producing in an offseting zone
2. Un-drilled lands with an offset well or offset wells drilled before an effective date of a lease which is producing in an offseting zone
3. Un-drilled lands with an offset well or offset wells drilled after an effective date of a lease which is not producing in an offseting zone
4. Un-drilled lands with an offset well or offset wells drilled before an effective date of a lease which is not producing in an offseting zone

If you are an individual freehold land or and oil and gas company and you should be keeping close tabs on your lands and rights. Argentis Group can help you with this. Please feel free to contact me at info@argentis-group.com.

Recent Experiences With Drilling Companies - I Can't Make This Stuff Up

I am taking a bit of a deviation from my usual posts with numbers and statistics to write about some experiences that I recently had that continues to support my thoughts that there are problems with the Western Canadian Basin.

Since I am part owner of a consulting company that works with oil and gas companies and also companies that service the oil and gas industry, I have to continually be trying to find sales. Just to give a bit of a background, my company, Argentis Group, provides operational audits in oil and gas companies to identify areas to reduce costs and/or increase revenues. One of the processes that we run in oil and gas companies typically identifies missed reserves, which can have can have a significant impact on reducing capital spend associated with reserves replacement, not to mention reducing DD&A costs and find and develop costs. In addition, we run an offset well report that shows were wells are draining un-drilled land holdings. We also use public data to identify potential drilling prospects for oil and gas companies.

Since Argentis Group can run reports on un-drilled lands to spot potential drainage and we can identify significant cost savings that can be deployed to potential new drills, I thought I would call drilling companies to see if they would be interested in learning about an innovative way to identify drilling prospect for their clients and show them a way to potentially self-fund their projects out of Capital Cost Savings. I thought that since the majority of drilling companies have seen their business reduced 43% in the last year, they might be interested in understanding how to potentially increase their utilization rates on their rigs all while helping their clients out by finding reserves and potentially increasing their client's net asset value. Just a hunch, but I think that drilling companies might want figure out ways to help increase their rig utilization rates.

So, I called the top 7 drilling companies in Canada. I called either a VP of Sales, Sales Manager or a Senior VP who would be in charge of conventional drilling for Canada. I managed to get through to one VP (title and company to remain nameless) and left messaged for 5 and missed one who didn't have voicemail. I have to say, not having a voicemail for the VP responsible for sales for a large drilling company is a little crazy, what if someone wanted to, I don't know, maybe use their services and now can't leave a message to ask this drilling company to do business with them. I wonder how many sales this company has missed because of this?

The VP that I did actually get through to was actually very nice to me, considering that I was actually cold calling him and interrupting his day. Now that said, I was pretty shocked by what I was told. I went through a bit of a spiel about what Argentis Group does, the applicability of our services as it relates to a drilling company and I also mentioned the fact that based on an analysis of what we typically find, that I felt we might be able to have the impact of increasing their rig utilization rate by up to 15%. What I heard in response makes me thank my lucky stars that I do not have any stock in the publicly traded company. I was told that they had heard this type of pitch a couple of times (which I would assume they hadn't since no other company does what we do) and that they were comfortable with their rig utilization rate where it was and were not looking for ways to increase it at this time. WHAT???? If I were an investor in this company and a senior VP told me this, I would be shocked. I would be calling my broker to unload the shares ASAP. Who in their right mind, whether they use my solutions or not, would not be looking for ways to grow their business. I think that this person may not have been familiar with Shareholder Value.

The other shocking part of this is that I have yet to hear back from even one of the companies I called. I am guessing that since the rig utilization rate is 23% this year (January to September, down from an average of 40% in 2008) that they too might be satisfied with these sort of low utilization rates. I sure am glad that they have understanding shareholders that know that senior management is doing all they can to ensure that the company's continued success is first and foremost.

To me, this just highlights yet another problem in the Western Canadian Basin.

Then again, perhaps I did a bad job sell these people on my concepts, I certainly hope so for all the investors in these companies sake.

These opinions are mine and may not reflect your view. If you would like to contact me, then please feel free to do so at info@argentis-group.com. Argentis Group assists oil and gas companies with operational audits to identify areas to reduce costs, increase revenues and increase the overall asset value of an oil and gas company. PS. If you are a drilling company and you would like to talk to me about growing your business, then by all means contact me via email.

The British Columbia Carbon Tax - The New Additional Costs for Oil and Gas Companies

There is a new major expense that is impacting operating costs for oil and gas companies operating in British Columbia. It is the BC Carbon Tax that applies to the purchase and use of fossil fuels in the province of British Columbia. The tax rate starts at $15/tonne in 2009 and increases energy year by $5/tonne until 2012 when the rate will be $30/tonne.

As of July 1 2009, British Columbia's carbon tax rate on 1 Gigajoule of natural gas is $0.7449 or $0.709 per mcf. In 2010 the tax will be $0.945/mcf, in 2011 it will be $1.18/mcf and it will finally top out at $1.41/mcf in 2012.

Considering that the 2010 strip forward on natural gas is $6.05/mcf Canadian (as of October 3rd, 2009), this would mean that the tax on any gas consumed would be equal to almost 12% of the price. On the current AECO spot price of $2.66/mcf Canadian on October 3rd, 2009, this would represent a tax rate of almost 27%.

Another view on this is that the tax for 2009 is also equal to a 9% additional cost on the average operating costs of $7.63/mcf (based on National Energy Board figures for 2008). If the operating costs were to remain flat at $7.63 until 2012, then the new carbon tax would represent 12.4% additional costs in 2010, 15.5% in 2011 and 18.6% in 2012.

As it relates to oil and gas companies, in their operations, one the of largest consumers of natural gas will be their compressors for pipelines. The average size of a compressor on a pipeline is BC is 970 HP and based on initial calculations, the carbon tax would be approximately $57,000 this year, going to $142,000 in 2012.

Most oil and gas companies currently look at paying the tax as their only option, but there is another option that is available to offset the new tax. It involves harnessing waste heat from compressors and utilizing it to create electricity that can be used to offset the new costs of the carbon tax.

This would be accomplished by harnessing the waste heat to drive a turbine/generator to create electricity that could drive a supplemental electric compressor or this electricity can be sold back into the grid to create a revenue stream that can offset a portion or all of the carbon tax costs.

There is a double positive effect in harnessing waste heat to create electricity. One, you can generate a revenue stream on the electricity sold and two, you will receive carbon offset credits that have a value on the open market. Currently these credits are going for $15/tonne and this is approximately equal to the amount you would receive from generating 1 MW of green electricity.

If an oil and gas company understands the financial impact of the new carbon tax as it relates to their business, then they can start looking for waste heat in their operations to generate green electricity projects to assist with offsetting part or all of the new costs associated with the BC Carbon tax.