Location, Location, Location
It costs as much to drill a dry hole as it does to drill a successful one. So you should try to ensure that you invest in a drill prospect where there is a high degree of confidence that oil or gas will be found. (A lease represents the right to drill on a particular piece of land).
Ideally you want your money invested in a program after you have ascertained the following:
- Where is the drilling taking place? (Is the area already known for success and has there already been a significant amount of geological research conducted there?)
- What has been the success rate of previous drilling in this area?
- Typically, how much oil does the average well in this area produce?
- What is the expected rate of decline?
- How many years do these wells usually remain profitable?
- Are the leases proven or not? (Has a particular lease already had any past successes?)
- Is the drill program developmental or exploratory drilling? (Is the intended drilling location an offset to existing successful wells? Or is it a ‘wildcat’ well in an unproven rea?)
- Is the geology in the area considered a ‘blanket’ or ‘fractured’ formation?
- Is the prospect situated close to a refinery or pipeline to keep the transport costs reasonable
Most U.S. states make this information available in their public records. It’s just a matter of knowing how to look.
Leases can be very expensive and valuable, especially if they in the middle of an oilfield where the neighboring lease owners are majors such as Chevron and Shell and where there is already abundant production. A simple analogy is that fishing in an aquarium is much better than fishing in just any lake.
Therefore, please note that Operators with limited capital can generally not afford to acquire quality leases. And you must realize that the odds of success become extremely limited if you opt to drill on a lease that has very limited or no previous history and no independent geological exploration data.
