Operating Costs

Once the investment syndicate has drilled and found oil and/or gas, the partners will be responsible for paying the well’s ongoing operating costs. And this will be deducted from their share of the oil or gas income. Wells will only return profits after revenues have covered all the expenses. Therefore, it is your responsibility as a prospective investor to ensure that the Operator is also willing to operate for cost.

This is because once wells have been successfully drilled and completed, regular maintenance must be conducted. The Operator typically will provide this ongoing maintenance as per an operating agreement with the investment partnership. Since the average investor does not know what is involved in the well/lease maintenance, it is easy for investors to accept inflated bills for operating costs. However, you should understand that most daily well maintenance is basic and can be performed by relatively unskilled labor. Indeed, it should not be an expensive endeavor. So, ensure that the Operator is required to provide accountability if requested.

This relates to how unscrupulous Operators may engage in a practice in which the investors are ‘Operated to Death’. This involves the artificial manufacturing of excessive operating costs that eat away profits for everyone but the Operator (who skims off the top by creating these excessive operating costs).

It is therefore imperative that post-drilling operating costs are addressed prior to the commencement of drilling. If the Operator violates an agreement to operate at cost, then the operating company can be removed ‘for cause.’

Stonehenge Capital Research has a protocol for dealing with these issues. Call us if you want to find out more.

In short, the only reasonable way for the Operator to profit from the drilling and management of a well should be via the company’s participation on an equal basis with all of the individual investors or partners. And that involves merely receiving a percentage of revenues as payment for being an Operator. Accordingly, the more oil or gas produced, the more the Operator will earn and the more investors will also make.

Due Diligence Tips: The Operator

• The Drilling Operator
• Cold Callers Can Often Leave You ‘Out in the Cold’
• The Operator’s Track Record

Due Diligence Tips: The Drill Project

• Operating Costs
• Location, Location, Location
• Drilling Costs