A Typical of Oil and Gas Transaction

A typical of oil and gas transaction- Before an oil or gas well can be drilled and even before the consultant or engineer ever sees the prospect many things have to be done. The following is a typical structure of an oil and gas drilling transaction.

oil fields already in production

The principal party in an oil well drilling operation is the operator. This is the "oil company," either a well-known major company or an independent. The Texas Railroad Commission (which regulates all drilling and production in Texas) officially designates this party as the operator, and we will use that term. Every well in Texas should have a sign on it designating the operator and the name of the well. The operator employs the drilling consultant, who is there to protect the operator's interest.

The operator also hires a geologist, who locates an area that he feels is a good prospect for petroleum. The geologist may recommend a development well that attempts to hit a structure already producing or he may recommend drilling a wildcat well into an untested structure.

The operator next directs a landman to acquire drilling rights. A major company will usually have a paid staff of geologists and landmen. A small independent may engage outsiders for a fee. The landman determines who owns the mineral rights in the area to be drilled and then attempts to acquire lease rights from the landowner through a document called the oil and gas lease. He will generally have to negotiate terms that are acceptable to the operator, because a lease that is too burdensome to the operator will kill the deal and cause the operator to look elsewhere.

The items the landman must negotiate include:
  1. Bonus
  2. Delay rentals 
  3. Royalties
  4. Length of time within which drilling must commence
  5. Payment for and/or restrictionsagainst surface damage and water use, etc

The landman pays the lease bonus to the landowner when the lease is signed, normally with a draft payable in 30 to 60 days. The landman will then use that period before the draft is paid to examine the title. If he is not satisfied with the title, he cancels the draft, and the lease is cancelled. To check the title the landman obtains from the landowner any abstract of title from an abstract company, or he may sometimes check the title directly from the county records. He may have to do certain curative work to correct any defects in the title. For instance, there may be a prior oil lease outstanding on the property, which needs to be cleared from the record. If the landman does not do his job properly the operator may find that oil refineries and gas pipelines are unwilling to purchase the well output because he cannot show that he owns it. to drill a well and have someone else walk up and say, "Thank you for my new well."

The operator then contacts one or more investors. These may be other oil companies, but they are usually outsiders who wish to invest in an oil well but lack the expertise to do so directly. They will entrust their money to the operator in exchange for part ownership of the well. The operator will typically sell about 75% of his interest in the well to the investors who will pay 100% of the drilling costs. The operator will thus get about a 25% interest, sometimes called a "carried interest" in the well, at no cost, in exchange for his efforts and his skill.

The operator then hires the drilling contractor who owns the drilling rig and employs the crew to drill the well. A drilling contract, which sets out in detail the obligations of the contractor, is signed by both parties. The consultant at the drill site should be familiar with this contract. It will determine which services and equipment will be provided by the contractor for his fee and which are extras to be provided by the operator. The operator also hires specialists to perform other services such as casing, cementing, logging, perforating, fracturing, acidizing, lost tool recovery, drilling fluid preparations, etc.

The geologist is used again to analyze the drilling results and to determine which zones, if any, are worth producing. If there are one or more good zones, the well will be completed for production. If there is more than one good zone, there may be a multiple completion for producing several zones simultaneously. If there are no good zones, the well will be plugged and abandoned in accordance with the regulations that protect the water zones drilled through. The operator cannot just pick up the rig and leave an open hole.

The operator is then responsible for producing and selling the petroleum. The actual on-site production is handled by a pumper, either an employee or an independent serviceman, who has a route of wells that he visits periodically.

The landman is again engaged to:
  1. Prove to the purchasing refinery or pipeline that the operator has good title to the output.
  2. Determine how the proceeds are to be distributed.

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