"I Love Waiting Months for Production Data!,” said no one EVER.
The agonizingly slow pace of Oklahoma reporting has high price consequences
It’s been five months since the big oil company a few blocks south of yours completed their well. They released a public statement eons ago, and Wall Street is hungry to learn more about their discovery. Based on their reported initial potential (IP), it seems like they may have located a mega sweet spot in a promising new area of the Arkoma Basin.
You know the best place to find oil/gas is right next to where it already exists. Before you make the recommendation to buy acreage, relocate rigs, or modify your completion plans, you want to know if the actual production volumes reflect a strong ROI. And so you hurry up and wait... wait... wait.
So far you’ve analyzed their spacing, pooling and permit information which gave you an early glimpse of the formation they’re producing from, and you’ve reviewed an estimate of the AFE drilling & completion costs. You have some sense of potential EUR, and you’ve looked at the publicly filed drilling data, so you’ve estimated how long it took them from spud to IP. You know which direction and how deep they drilled. Heck, you even know a bit about their well design and the completion fluids they used.
You have all kinds of ancillary data that is no doubt valuable, but the pressure is mounting. Senior management wants to know if the new darling of Wall Street has unlocked a big pay zone.
Every day you scour the results from your third-party data supplier, and you’re constantly checking the OTC and OCC to get any sign of early performance beyond that initial IP. You’ve advised your reservoir management team to hold steady and wait. Meanwhile, several other operators are encroaching and buying up (or fleeing) positions left and right. The flurry of activity is causing panic, and you’re not sure if ‘wait and see’ is the best strategy.
I think not. Everyday geoscientists and engineering teams make multi-million-dollar decisions
that is truly a marvel when you consider the complexity and scale at which they operate. Data access and quality plays a huge role in investment, development and divestiture decisions. Considering today’s capital market is putting more pressure on Operators to focus on ROI, specialization and cost optimization, it’s imperative to gain early insight into actual production volumes before making a multi-year commitment – particularly in a fluctuating oil price economy. Production volumes, after all, are the holy grail of well-related data, and the only way to know for sure: Was it a dud or a stud?
If you’re managing investor expectations, are responsible for building a business case for CapEx spend or are recommending a pivot to a new development strategy, you’d sure like to be able to support your proposal with tangible results. It’s a lot easier to raise money and gain management approvals if you can demonstrate economic viability. Without timely and accurate production volumes, it’s anybody’s guess. This scenario becomes even more time-sensitive during shale development. If you’re developing the Woodford, for example, you probably want to pay attention to decline rate and understand the general trends for well costs over a broader aggregate. Too bad this can take a long time to compile – especially in Oklahoma if you are using the OTC and OCC as your data source.
Oklahoma, it’s not OK.
Last year during the DUG Midcontinent Exhibition and Conference, we heard a consistent frustration around reported volumes and the Oklahoma regulatory system. Multiple operators, speakers and attendees referenced the complexity of Oklahoma filings and the lack of early visibility into well performance.
But why is it so complex, and what takes so long to get reported volumes? Well, for starters, the regulatory filings in Oklahoma that address spacing and pooling requirements can appear several months ahead of a well permit! This is interesting because if you pay attention you can get a really early glimpse of future drilling plans long before a permit is ever filed. This is the good news in OK. Yay!
But for some cosmic desire for world balance (yin and yang offset I suppose), guess what? While you may know months in advance of a filed permit that a well is likely to be drilled, it may take just as many months or more to find out what that same well’s oil & gas production is!
Why is that?
Because in OK you have the pleasure of dealing with two different state regulatory bodies, the Oklahoma Corporation Committee (“OCC”) and the Oklahoma Tax Commission (“OTC”). They both report monthly volumes; the OTC provides both gas and oil, whereas the OCC reports gas volumes and manages the forms containing information about oil purchasing. In addition, the OCC reports wellhead volumes while the OTC reports sales volumes, which can be an issue for gas. While the OTC actually provides oil volumes, they are notoriously behind in reporting production by months due to various audit requirements…. and frequently have significant gaps in historical coverage or incorrect values (painfully obvious when you plot them and expect to see a normal decline, but instead there are random spikes). Add to this changing reporting systems and well….. it’s a mess. If this sounds somewhat confusing, you’re right; it is.
Now imagine you want to get a regional assessment done to focus on a specific formation within a particular county. You’ll need a lot of time and patience to gather, correct and analyze the results – and it is likely to still be 5-6 months behind current production. New wells, like the Wall Street Darling scenario, would likely be excluded from your analysis which leaves a significant blind spot. What if you were looking at potentially acquiring the assets of a company that had several new wells drilled in the SCOOP/STACK? How would you conduct meaningful due diligence?
Time is of the Essence In the age of shale drilling everyone wants to know as quickly as possible whether an Operator has:
- tapped into a new formation that could be the next big shale play
- applied a new completion technique (mechanical, chemical, drilling) that is producing more in the same formation
- extended an existing play into new geography
- validated a new spacing (areal and/or in-depth) vs. concerns about well interference/frac hits
- deepened or opened up new rock above or below existing reservoirs in stacked plays
- validated their predicted production vs. actual production
Reconciling the public data sources and fixing historical gaps is a major effort, undertaken only by a few commercial data vendors. It’s a time-consuming process that requires the scrutiny and domain knowledge of an engineer, and a detective-like prowess to uncover the truth.
Let’s assume you’ve got a great source for accurate data; how do you resolve the 5-6 month lag?
Here’s what we did.
When we created our Oklahoma dataset, we learned that the OCC provides some additional public data that is much harder to gather and analyze. It comes in the form of an image file which makes it difficult to extract pertinent details around oil purchases. But is it ever valuable!
Within these reports that are required on every oil purchase by the OTC (see, we’re talking about two agencies again!), we found detailed information about what oil volumes are being purchased from the lease and from which well. The OTC needs this level of detail so they can collect taxes owed to the state. Within each form, you can find oil volumes for each month from each producing unit that:
- are more current, on average by about 5 months, than the standard digital reported volumes on the OTC website
- provide better “ground truth” of historical volumes that can be used to correct older
production volumes that frequently have gaps and errors.
The hard part is extracting this information at scale, for example, a regional or state-wide assessment. It would take an incredibly long time to locate the appropriate forms, standardize the information and then manually pull out the important details. You would then want to go back and reconcile any discrepancies from your other data sources as well.
Within our Oklahoma dataset, we opted to employ a combination of advanced technology with domain expertise to do this heavy-lifting so we could: 1) Gain speed and efficiency; and 2) Ensure accuracy. By merging these three datasets, we are able to provide oil volumes 5-6 months sooner, and also deliver corrected and missing volumes so Operators are working with high-quality, current data. This makes a huge difference when analyzing an important decision re: an asset acquisition, well participation, company analysis, completion design etc.
In the shale plays the question and risk isn’t so much whether oil will be discovered…in most cases we know for sure it’s there. The question is more about the relative levels of production and at what declines we can engineer by pulling the levers on a myriad of factors including well length, placement, number of frac stages, amount of proppant, types of additives, injection pressures, etc. It’s a numbers game and still very much an empirical play. Every operator wants to see more data and results beyond their own wells... quickly. Having access to offset and regional production data is critical.
Like in many other states, the OK commissions responsible for regulating oil and gas operations and tracking revenues are understaffed and overloaded. They are doing the best job they can, but the time lag between when we know a well is producing vs. how much it is producing is too slow for today’s environment. Fortunately, there are additional, albeit more difficult to access and utilize, public sources of oil volume data.
If you intend to use a commercial vendor for OK production data, it’s a good idea to see where they stand on utilizing this purchaser data and compare recent volumes from fairly new wells. In a world where assets trade hands more frequently, leases get grabbed up faster at atmospheric prices per acre and new completion techniques are being applied routinely, the advantage of getting a look at a new well’s production by even a month can support a decision that may make or break a deal.