Business plan and structure pg.4
3.4 Research and Development
The Pennsylvania oil rush was a boom in petroleum production which occurred in northwestern Pennsylvania from 1859 to the early 1870s. It was the first oil boom in the United States.By the end of 1859 wells sprouted throughout the oil country. Those pioneer wells produced about 4,500 barrels that year. In 1860 wells in northwestern Pennsylvania produced several hundred thousand barrels and by 1862 production reached three million barrels. The nation’s oil bonanza had begun, and huge fortunes would soon be made.
But not by Colonel Drake. He failed to act quickly to control production and he had not bought much land in the area. In 1860 the Seneca Oil Company severed its connection to Drake, paying him $1,000 for the use of his name on oil barrels.
By the end of the Civil War Drake had lost all his money and his health. He moved first to Vermont and then to New Jersey because he thought the sea might improve his health. In the late 1860s old acquaintances from the oil industry raised $4,000 for Drake. In 1873 the Pennsylvania legislature allotted Drake $1,500 annually. In November 1880, after years of bad health and constant pain, Drake died poor and a pensioner, never having benefitted from “discovering” oil in Titusville, Pennsylvania, on August 27, 1859.
Swelling production of Pennsylvania oil led to a rapid drop in price, which drove many producers out of business but which also drove consumers away from other sources of illumination, allowing Pennsylvania oil to corner the market.
The cycle of boom and bust plagued Pennsylvania oil production until John D. Rockefeller organized Standard Oil and imposed order on the industry in the 1870s. In the next decade Thomas Edison’s light bulb and electrification would replace kerosene, threatening the dominance of oil. The petroleum industry would be saved, in turn, by the coming of the automobile and the need for gasoline, which would be supplied by other areas of production, particularly Texas, and then foreign sources. But in the latter part of the 19th century, Pennsylvania oil dominated the market, pointing the way to America’s eventual reliance on petroleum.
Critical Issues Facing the USA:
There are several critical issues facing this country concerning our ENERGY NEEDS.
Issue Number One:
America needs more production from its domestic oil and gas reserves in order to forestall additional increases in, and further reliance on, dependence on foreign oil and gas imports. Imported oil now is over 60% of our daily use in this country.
Issue Number Two:
America's 650,000 oil and gas "stripper wells" represent the fastest and most dependable source to increase production. On average, they produce over 25% of the oil (29% in 2001!) and 8% of the natural gas used daily in this country.
Issue Number Three:
There is a huge amount of "sour" natural gas that can be produced and treated to produce a higher quality natural gas. "Sour gas" is so called because it contains hydrogen sulfide. Sour gas is present in four large oil and natural gas formations in Texas. Approximately 13% of all natural gas reserves in the U.S. may be prone to hydrogen sulfide contamination. The demand for increased production for this abundant sour gas will grow significantly in the future.
Issue Number Four:
Natural gas is the fuel of choice for the future. Yet, trillions of cubic feet of gas in Texas alone could be lost through well-abandonment by 2010 if someone, does not acquire and restore marginal gas wells. This is a huge resource; it should not be wasted.
The cumulative impact of stripper well production plays a significant role in the U.S. economy. In the last ten years, 4.3 billion barrels of oil equivalent has been achieved from these marginal producers. By contrast, the stripper wells abandoned and lost during this same time cost more than 22,000 jobs and $4 billion in economic activity. Most people do not know that you can't just turn an oil well on and off . One-sixth of our natural gas production comes from associated oil production. If you lose one, you lose the other. In the last ten years, over 175,000 oil and gas wells have been abandoned or plugged. The American oil and gas industry has a vital interest in maintaining and enhancing the production of these stripper wells. To that end, the industry and the Department of Energy have a number of studies under way at universities and laboratories around the country. Here in Texas, the Southwest Research Institute in San Antonio and the Petroleum Engineering Departments at the University of Houston and Texas A&M University all have received DOE grants for studies of enhanced oil and gas recovery methods. Louisiana State University and the University of Oklahoma have also received major grants to study enhanced oil and gas recovery. These are important matters for our domestic energy industry and our national welfare.
Nearly two out of every three barrels of oil ever discovered in the United States still remain trapped underground after conventional recovery operations. This staggering amount of remaining oil-approximately 200 billion barrels-can be one of America's best hopes for greater energy security.
4. The Industry, Competition and Market
Critical Issues Facing the USA:
There are several critical issues facing this country concerning our ENERGY NEEDS.
Issue Number One: America needs more production from its domestic oil and gas reserves in order to forestall additional increases in, and further reliance on, dependence on foreign oil and gas imports. Imported oil now is over 60% of our daily use in this country.
Issue Number Two: America's 650,000 oil and gas "stripper wells" represent the fastest and most dependable source to increase production. On average, they produce over 25% of the oil (29% in 2001!) and 8% of the natural gas used daily in this country.
Issue Number Three: There is a huge amount of "sour" natural gas that can be produced and treated to produce a higher quality natural gas. "Sour gas" is so called because it contains hydrogen sulfide. Sour gas is present in four large oil and natural gas formations in Texas. Approximately 13% of all natural gas reserves in the U.S. may be prone to hydrogen sulfide contamination. The demand for increased production for this abundant sour gas will grow significantly in the future.
Issue Number Four: Natural gas is the fuel of choice for the future. Yet, trillions of cubic feet of gas in Texas alone could be lost through well-abandonment by 2010 if someone, does not acquire and restore marginal gas wells. This is a huge resource; it should not be wasted.
STRIPPER WELLS: WHY BOTHER?
American energy is increasingly supplied by what we call marginal oil and natural gas wells, also known as "stripper wells" (wells that produce less than 15 barrels of oil per day or less than 60 thousand cubic feet of natural gas per day).
Each barrel of oil and each MCF of gas produced domestically adds to the economic vitality of the United States, reduces energy dependency and keeps dollars from flowing abroad. It also produces considerable tax revenue to states, counties and localities. In 2001, production from stripper wells had a market value of $12.7 billion.
There remain some 300 billion barrels of oil in the United States today. If only 10% of this oil could be recovered through new recovery methods, such as the ones AEDC offers, it would make a huge difference to this country. For example, even the most aggressive estimates of the oil in the Artic Wildlife Refuge are about 10 billion barrels. And, if we started drilling today, we would not see any oil for almost 10 years. Stripper wells, by contrast, already exist, have proven production histories, production equipment, and transportation facilities in place. Why wouldn't you elect to exploit that capability now?
Twenty-eight (28) states have stripper oil wells. Texas, Oklahoma, Kansas and Ohio are the four with the largest number. Texas, alone, has slightly over 126,000 stripper oil wells.
Twenty-eight (28) states have stripper gas wells. West Virginia, Pennsylvania, Ohio and Texas are the four with the largest number. West Virginia has over 36,000 such wells; Texas has over 29,000 stripper gas wells. In 2004, Texas totals over 14,000 abandoned, orphan wells according to the Texas Railroad Commission published report.
The cumulative impact of stripper well production plays a significant role in the U.S. economy. In the last ten years, 4.3 billion barrels of oil equivalent has been achieved from these marginal producers. By contrast, the stripper wells abandoned and lost during this same time cost more than 22,000 jobs and $4 billion in economic activity.
Most people do not know that you can't just turn an oil well on and off . One-sixth of our natural gas production comes from associated oil production. If you lose one, you lose the other. In the last ten years, over 175,000 oil and gas wells have been abandoned or plugged.
The American oil and gas industry has a vital interest in maintaining and enhancing the production of these stripper wells. To that end, the industry and the Department of Energy have a number of studies under way at universities and laboratories around the country. Here in Texas, the Southwest Research Institute in San Antonio and the Petroleum Engineering Departments at the University of Houston and Texas A&M University all have received DOE grants for studies of enhanced oil and gas recovery methods. Louisiana State University and the University of Oklahoma have also received major grants to study enhanced oil and gas recovery. These are important matters for our domestic energy industry and our national welfare.
Nearly two out of every three barrels of oil ever discovered in the United States still remain trapped underground after conventional recovery operations. This staggering amount of remaining oil-approximately 200 billion barrels-can be one of America's best hopes for greater energy security.
OIL CITY, Pa. -- The deep gas play may be ramping up Pennsylvania's historic oil and gas patch, but it is putting a big hit on the traditional shallow oil drilling and production sprinkled profusely throughout the northwestern counties.
"The Marcellus and Utica shale drilling is affecting shallow oil operators," said Ray Stiglitz, owner of Allegheny Well Services Inc. and a longtime oilman. "The question is: why not more oil drilling when PennGrade is nearly at $100 a barrel? There are a lot of reasons and they involve what is happening because of the deep gas drilling."
Repercussions from the shift to deep gas recovery are threatening the state's crude oil industry.
Rapidly increasing supply and well service prices, scarcity of materials, waning interest in oil drilling, difficulty in signing oil leases, onerous new regulations and more are whipsawing oil drillers and producers.
In turn, oil production is down, and that is hurting the region's two leading refiners that rely on western Pennsylvania crude oil.
"The numbers for oil drilling are down," said Craig Lobins, district manager of the Department of Environmental Protection's oil and gas management office in Meadville. "It's a big drop in 2011 from the previous year."
In 2007, there were 1,733 oil drilling permits issued for the four leading oil production counties -- Venango, Warren, Forest and McKean. While that total spurted to 1,817 in 2008 when oil hit record high prices at $138-plus a barrel, it fell to 1,092 for 2011.Overall, the northern DEP office issued 4,221 oil and gas drilling permits for 27 northern counties in 2011, down considerably from the 4,683 in 2010."But 60 percent of those permits were for the deeper shale gas and that just keeps climbing. That is a significant shift away from oil," said Lobins.Just three years earlier, the deep gas play accounted for about 5 percent of all permits issued.
As the Marcellus and Utica shale play sizzles up the oil and gas patch, the old-time petroleum industry is getting a bum's rush, said Gary Hovis, an oil producer from Kennerdell.
"We'll be losing producers and drillers here soon," said Hovis, whose 20 producing oil wells in the southern part of the county include one drilled in 1880.
A long oil heritage: Pennsylvania, birthplace of the petroleum industry thanks to Col. Edwin Drake's fortuitious 1859 well near Titusville, has 19,000-plus oil wells in production. Those shallow wells plugged nearly 4 million barrels of crude oil into the marketplace last year.
In sharp contrast to deeper oil wells in the Oklahoma and Texas fields, Pennsylvania's wells are classified as stripper wells, or shallow wells that are marginal producers and eke out 10 barrels of oil or less a day. The average stripper well in Pennsylvania yields less than half a barrel (0.43) of oil a day, or about 18 gallons of crude oil.
Still, at today's going rate of nearly $100 a 42-gallon barrel, there's money to be made in conventional oil production that typically features a mom-and-pop operation going back two or three generations.
The enterprise, though, has been turned topsy-turvey because of the deep shale gas industry that has drawn in global, mega-energy companies intent on tapping hugely prolific natural gas tucked inside rock strata ten-times deeper than Pennsylvania's conventional oil sands.
In reaction to what it sees as a regulation over-reach and a desertion in the oil trade's ranks, the Pennsylvania Independent Petroleum Producers (PIPP) is back at beating the drums. The trade group of about 250 independent producers was formed in in 1984 in Oil City in vigorous opposition to the controversial Act 223, the Oil and Gas Act of 1984, that laid out strict and comprehensive regulations for the state's oil and gas industry. Its overtures led to several easements and modifications of the legislation.
Today, PIPP is again raising issues it believes must be resolved if the shallow oil industry is to survive the deep gas rush, said Hovis, president of the trade group. PIPP members have met frequently with industry people, elected officials and representatives from the Pennsylvania Department of Environmental Protection that oversees oil and gas operations. The gist of the talks has been an insistence by oil drillers and producers that newer and tighter regulations adopted in light of the Marcellus and Utica shale surge ought to be different for shallow oil.
"Those associated costs to comply mean we are just coasting along with old production. We are not in the same category as the deep gas because our volume is so low, the wells are shallow, the production water so much less and on and on," said Hovis.
There are charges that DEP inspectors, their ranks significantly expanded last year to handle an anticipated surge in deep gas drilling, are drawing a bead on oil producers because "they aren't busy enough with Marcellus," said Glenn Weaver, a longtime oil driller and producer from Franklin. Weaver's cache of wells numbers about 70 in Venango County.
"They hired a lot of manpower in preparation for Marcellus and Utica. They has not jumped up like they thought so they are out looking for problems so they can issue fines and pay for their department," insisted Weaver. "I've punched holes in the ground for 50 years but maybe, no more."There is a copious amount of anecdotal information as to oilmen's insuations that they are being harassed by inspectors. One driller said a five-gallon can filled with lubes to service a well was accidentally tipped over at a well site. As the driller cleaned it up, a DEP inspector fined him $5,000 on the spot. Another producer who said he was fined for "brine dripping off a collection tank"said the inspector saw it on one day and returned the next day with a violation notice, a move the oilman though ran counter "to protecting the environment, which is what they are supposed to do, by letting it drip another day."For Stiglitz, the suggestion that the shallow oil industry is somehow complicit in environmental infractions doesn't sit well.
"A lot of this has to do with a fear factor. We are law-abiding, tax-paying citizens but we are looking over our shoulder all the time. What's coming next down the pike? Will we be viewed as outlaws? As a contributing memer of society, this is an awful way to live," said Stiglitz.
While their objections are pointed, their campaign to upend what they consider are onerous regulations prompted by a very different deep gas industry is civil, contends Hovis."We have a long history with oil and we want to keep it going. It's a business we enjoy, it's a way of life. And, it's in your blood," he said.
Thousands of wells
Pennsylvania, birthplace of the petroleum industry, has 19,000-plus stripper, or shallow, oil wells in production. Last year, those wells plugged nearly 4 million barrels of crude oil into the marketplace.
They are classified as stripper wells that are marginal producers and eke out 10 barrels or less of crude a day. Most of Pennsylvania’s crude comes from McKean, Warren, Forest and Venango counties.
There are more than 55,000 shallow natural gas wells that produce enough to satisfy 25 percent of the state’s annual demand. Those wells, too, are shallow and marginal producers.
In contrast, the wells drilled over the past decade into the Marcellus and Utica shales are deeper, more prolific and more problematic since they require millions of gallons of water for fracking. The flowback fluids, or brine, contain drilling chemicals and are substantially more copious than what flows from shallow wells.
‘One size doesn’t fit all’
Despite the differences, the state regulations on the oil and gas industry make little distinction between shallow and deep operations, said Hovis. That is creating an onerous situation for marginal well operations that have less volume and create less production water.
A delegation of PIPP members met with state energy officials in Harrisburg earlier this year to argue their case that “one size doesn’t fit all,” Hovis said. The visit didn’t yield any solution, he added.
This past summer, Gov. Tom Corbett also dodged the question of whether new drilling and production regulations were unduly hard on and not applicable to shallow oil and gas production. He told an audience he would have “to find out exactly what’s going on there.”
The new regulation, one that would sharply restrict discharge limits for chloride, would upend the usual treatment methods provided by brine disposal plants such as the Franklin brine plant, a facility Hovis said is “essential for the survival” of shallow oil and gas production but will have to close if the new chloride-reduction regulation is approved.
The alternative of injecting brine into disposal wells is not realistic because Pennsylvania’s geology does not meet injection well specifications, Hovis said.
The new restrictions will spell the end of shallow production because the industry will have no acceptable method of brine disposal, he insisted.
4.1 Industry Definition
Governmental Regulations:
The oil and natural gas industry is subject to various types of regulation throughout the world. Laws, rules, regulations, and other policy implementations affecting the oil and natural gas industry have been pervasive and are under constant review for amendment or expansion. Pursuant to public policy changes, numerous government agencies have issued extensive laws and regulations binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply. Such laws and regulations have a significant impact on oil and gas exploration, production and marketing and midstream activities. These laws and regulations increase the cost of doing business and, consequently, affect profitability. Because public policy changes affecting the oil and natural gas industry are commonplace and because existing laws and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with such laws and regulations. However, we do not expect that any of these laws and regulations will affect our operations in a manner materially different than they would affect other oil and natural gas companies of similar size and financial strength.
Environmental:
Our operations are subject to the usual hazards incident to the drilling and production of oil and gas, such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires and pollution and other environmental risks. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operation. In addition, the presence of unanticipated pressures or irregularities in formations, miscalculations, or accidents may cause our drilling activities to be unsuccessful and result in a total loss of our investment. We do not maintain insurance of the various types to cover our operations with policy limits and retention liability customary in the industry. The occurrence of a significant adverse event, the risks of which are not covered by insurance, could have a material adverse effect on our financial condition and results of operations. We cannot give any assurances that we will be able to obtain adequate insurance in the future at rates we consider reasonable.
A rework well or producing well requires maintenance by a company representative sometimes referred to as a “pumper” to insure the well(s) produce at their capacity and to monitor production. As per the terms of the lease, a gate may be installed by the well Operator to prohibit access to the Property by unauthorized personnel. The gate is typically locked and a key may be provided to the landowner. The well may require periodic maintenance by a service rig during the life of the well. Surface equipment includes a wellhead, gas meter, storage tank (for oil wells), separator, and pipeline. Lease is held-by-production during the life of the well(s).
When the well is no longer considered productive, the Company is required to plug the well under the direction of the Division of Oil and Gas inspector for the State. This involves placing cement plugs at various depths to isolate producing intervals, protect fresh water aquifers and coal seams. The site is reclaimed and vegetation is established to prevent erosion from the well site. After all wells on a lease are plugged, the lease is terminated and returned to the mineral owner.
After completion and testing of a workover well or an offset well, the well is put into production. As in the case of oil, the oil is pumped into a 100 BBL or 200 BBL tank(s). The pumper inspects the well on a daily or regular routine basis and monitors the production of oil. As the tank(s) nears capacity, the pumper will make arrangements for pickup of the oil for delivery to the Purchaser. The cost of hauling the oil to the refinery varies by distance from the well to the refinery and can range from $3 to $6 per BBL. The cost of the freight charge is borne by the Company. Oil collected or shipped during the month is paid by the Purchaser in the following month. The price paid for the produced oil is based on the average monthly market price.
4.2 Primary Competitors
Industry Competition For Leases, Materials, People and Capital Can Be Significant
Strong competition exists in all sectors of the oil and gas industry. We compete with other independent oil and gas companies for the acquisition of oil and gas leases and properties. Most of these entities have significantly greater assets and name recognition. We also compete for the equipment and personnel required to explore, develop and operate properties.
Competition is also prevalent in the marketing of oil and gas. Typically, during times of high or rising commodity prices, drilling and operating costs will also increase. Higher prices will also generally increase the costs of properties available for acquisition. Certain of our competitors have financial and other resources substantially larger than ours.
They also may have established strategic long-term positions and relationships in areas in which we may seek new entry. As a consequence, we may be at a competitive disadvantage in the acquisition of oil and gas leases and properties. In addition, many of our larger competitors may have a competitive advantage when responding to factors that affect demand for oil and gas production, such as changing worldwide price and production levels, the cost and availability of alternative fuels, and the application of government regulations.
We will hire third party companies to undertake our development programs.
We will have to hire employees or retain independent companies to oversee or perform our development operations. We currently do not have sufficient funds for either. As such, even with exploitable deposits of oil or gas, we may not be able to develop our leasehold interests.
Our organization is subject to extensive and complex, federal and state laws and regulations. If we fail to comply with the laws and regulations that are directly applicable to our business, we could suffer civil and/or criminal penalties or be subject to injunctions or cease and desist orders.
4.3 Market Size
Environmental matters and costs can be significant.
As an operator of oil and gas properties, we are subject to various federal, state, and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on us for the cost of pollution clean-up resulting from our operations in affected areas. Any future environmental costs of fulfilling our commitments to the environment are uncertain and will be governed by several factors, including future changes to regulatory requirements. There is no assurance that changes in or additions to public policy regarding the protection of the environment will not have a significant impact on our operations and profitability.
We have no history as a company engaged in oil and gas development or exploration.
We have no history of earnings or cash flow from oil and gas operations. If we are able to proceed to production, commercial viability will be affected by factors that are beyond our control such as the particular attributes of the deposit, the fluctuation in the prices of oil and gas, the cost of construction and operating an oil or gas well, prices, and refining facilities, the availability of economic sources for energy, government regulations including regulations relating to prices, royalties, restrictions on production, quotas on exploration, as the costs of protection of the environment.
If our exploration costs are higher than anticipated, then our profitability will be adversely affected.
We are currently proceeding with development and/or exploration of our leasehold interests on the basis of estimated development/exploration costs. If our development/exploration costs are greater than anticipated we may be forced to terminate our operations until such time as we generate additional revenues to fund our operations. Factors that could cause development/exploration costs to increase are adverse weather conditions, difficult terrain, unknown or unexpected results when we re-enter a well, increased government regulation and shortages of qualified personnel.
We face many operating hazards.
The development and operation of an oil or gas well involves many risks, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. These risks include, among other things, ground fall, flooding, environmental hazards, and the discharge of toxic chemicals, explosions and other accidents. Such occurrences may result in work stoppages, delays in production, increased production costs, damage to or destruction of mines and other producing facilities, injury or loss of life, damage to property, environmental damage, and possible legal liability for such damages.
There may be insufficient oil and gas reserves to develop any of our properties and our estimates may be inaccurate.
There is no certainty that any expenditures made in the development/exploration of any properties will result in discoveries of commercially recoverable quantities of oil or gas. Most development/exploration projects do not result in the discovery of commercially extractable deposits of oil or gas and no assurance can be given that any particular level of recovery will in fact be realized or that any identified leasehold interest will ever qualify as a commercially developed. Estimates of reserves, deposits, and production costs can also be affected by such factors as environmental regulations and requirements, weather, unexpected or unknown results when we re-enter a well, environmental factors, unforeseen technical difficulties, unusual or unexpected geological formations, and work interruptions.
Short term factors relating to reserves, such as the need for orderly development of the wells may also have an adverse effect on our development/exploration, drilling and on the results of operations. There can be no assurance the production of insignificant amounts of oil can be duplicated in a larger exploration program. Material changes in estimated reserves, development/drilling costs may affect the economic viability of any project.
The Pennsylvania oil rush was a boom in petroleum production which occurred in northwestern Pennsylvania from 1859 to the early 1870s. It was the first oil boom in the United States.By the end of 1859 wells sprouted throughout the oil country. Those pioneer wells produced about 4,500 barrels that year. In 1860 wells in northwestern Pennsylvania produced several hundred thousand barrels and by 1862 production reached three million barrels. The nation’s oil bonanza had begun, and huge fortunes would soon be made.
But not by Colonel Drake. He failed to act quickly to control production and he had not bought much land in the area. In 1860 the Seneca Oil Company severed its connection to Drake, paying him $1,000 for the use of his name on oil barrels.
By the end of the Civil War Drake had lost all his money and his health. He moved first to Vermont and then to New Jersey because he thought the sea might improve his health. In the late 1860s old acquaintances from the oil industry raised $4,000 for Drake. In 1873 the Pennsylvania legislature allotted Drake $1,500 annually. In November 1880, after years of bad health and constant pain, Drake died poor and a pensioner, never having benefitted from “discovering” oil in Titusville, Pennsylvania, on August 27, 1859.
Swelling production of Pennsylvania oil led to a rapid drop in price, which drove many producers out of business but which also drove consumers away from other sources of illumination, allowing Pennsylvania oil to corner the market.
The cycle of boom and bust plagued Pennsylvania oil production until John D. Rockefeller organized Standard Oil and imposed order on the industry in the 1870s. In the next decade Thomas Edison’s light bulb and electrification would replace kerosene, threatening the dominance of oil. The petroleum industry would be saved, in turn, by the coming of the automobile and the need for gasoline, which would be supplied by other areas of production, particularly Texas, and then foreign sources. But in the latter part of the 19th century, Pennsylvania oil dominated the market, pointing the way to America’s eventual reliance on petroleum.
Critical Issues Facing the USA:
There are several critical issues facing this country concerning our ENERGY NEEDS.
Issue Number One:
America needs more production from its domestic oil and gas reserves in order to forestall additional increases in, and further reliance on, dependence on foreign oil and gas imports. Imported oil now is over 60% of our daily use in this country.
Issue Number Two:
America's 650,000 oil and gas "stripper wells" represent the fastest and most dependable source to increase production. On average, they produce over 25% of the oil (29% in 2001!) and 8% of the natural gas used daily in this country.
Issue Number Three:
There is a huge amount of "sour" natural gas that can be produced and treated to produce a higher quality natural gas. "Sour gas" is so called because it contains hydrogen sulfide. Sour gas is present in four large oil and natural gas formations in Texas. Approximately 13% of all natural gas reserves in the U.S. may be prone to hydrogen sulfide contamination. The demand for increased production for this abundant sour gas will grow significantly in the future.
Issue Number Four:
Natural gas is the fuel of choice for the future. Yet, trillions of cubic feet of gas in Texas alone could be lost through well-abandonment by 2010 if someone, does not acquire and restore marginal gas wells. This is a huge resource; it should not be wasted.
The cumulative impact of stripper well production plays a significant role in the U.S. economy. In the last ten years, 4.3 billion barrels of oil equivalent has been achieved from these marginal producers. By contrast, the stripper wells abandoned and lost during this same time cost more than 22,000 jobs and $4 billion in economic activity. Most people do not know that you can't just turn an oil well on and off . One-sixth of our natural gas production comes from associated oil production. If you lose one, you lose the other. In the last ten years, over 175,000 oil and gas wells have been abandoned or plugged. The American oil and gas industry has a vital interest in maintaining and enhancing the production of these stripper wells. To that end, the industry and the Department of Energy have a number of studies under way at universities and laboratories around the country. Here in Texas, the Southwest Research Institute in San Antonio and the Petroleum Engineering Departments at the University of Houston and Texas A&M University all have received DOE grants for studies of enhanced oil and gas recovery methods. Louisiana State University and the University of Oklahoma have also received major grants to study enhanced oil and gas recovery. These are important matters for our domestic energy industry and our national welfare.
Nearly two out of every three barrels of oil ever discovered in the United States still remain trapped underground after conventional recovery operations. This staggering amount of remaining oil-approximately 200 billion barrels-can be one of America's best hopes for greater energy security.
4. The Industry, Competition and Market
Critical Issues Facing the USA:
There are several critical issues facing this country concerning our ENERGY NEEDS.
Issue Number One: America needs more production from its domestic oil and gas reserves in order to forestall additional increases in, and further reliance on, dependence on foreign oil and gas imports. Imported oil now is over 60% of our daily use in this country.
Issue Number Two: America's 650,000 oil and gas "stripper wells" represent the fastest and most dependable source to increase production. On average, they produce over 25% of the oil (29% in 2001!) and 8% of the natural gas used daily in this country.
Issue Number Three: There is a huge amount of "sour" natural gas that can be produced and treated to produce a higher quality natural gas. "Sour gas" is so called because it contains hydrogen sulfide. Sour gas is present in four large oil and natural gas formations in Texas. Approximately 13% of all natural gas reserves in the U.S. may be prone to hydrogen sulfide contamination. The demand for increased production for this abundant sour gas will grow significantly in the future.
Issue Number Four: Natural gas is the fuel of choice for the future. Yet, trillions of cubic feet of gas in Texas alone could be lost through well-abandonment by 2010 if someone, does not acquire and restore marginal gas wells. This is a huge resource; it should not be wasted.
STRIPPER WELLS: WHY BOTHER?
American energy is increasingly supplied by what we call marginal oil and natural gas wells, also known as "stripper wells" (wells that produce less than 15 barrels of oil per day or less than 60 thousand cubic feet of natural gas per day).
Each barrel of oil and each MCF of gas produced domestically adds to the economic vitality of the United States, reduces energy dependency and keeps dollars from flowing abroad. It also produces considerable tax revenue to states, counties and localities. In 2001, production from stripper wells had a market value of $12.7 billion.
There remain some 300 billion barrels of oil in the United States today. If only 10% of this oil could be recovered through new recovery methods, such as the ones AEDC offers, it would make a huge difference to this country. For example, even the most aggressive estimates of the oil in the Artic Wildlife Refuge are about 10 billion barrels. And, if we started drilling today, we would not see any oil for almost 10 years. Stripper wells, by contrast, already exist, have proven production histories, production equipment, and transportation facilities in place. Why wouldn't you elect to exploit that capability now?
Twenty-eight (28) states have stripper oil wells. Texas, Oklahoma, Kansas and Ohio are the four with the largest number. Texas, alone, has slightly over 126,000 stripper oil wells.
Twenty-eight (28) states have stripper gas wells. West Virginia, Pennsylvania, Ohio and Texas are the four with the largest number. West Virginia has over 36,000 such wells; Texas has over 29,000 stripper gas wells. In 2004, Texas totals over 14,000 abandoned, orphan wells according to the Texas Railroad Commission published report.
The cumulative impact of stripper well production plays a significant role in the U.S. economy. In the last ten years, 4.3 billion barrels of oil equivalent has been achieved from these marginal producers. By contrast, the stripper wells abandoned and lost during this same time cost more than 22,000 jobs and $4 billion in economic activity.
Most people do not know that you can't just turn an oil well on and off . One-sixth of our natural gas production comes from associated oil production. If you lose one, you lose the other. In the last ten years, over 175,000 oil and gas wells have been abandoned or plugged.
The American oil and gas industry has a vital interest in maintaining and enhancing the production of these stripper wells. To that end, the industry and the Department of Energy have a number of studies under way at universities and laboratories around the country. Here in Texas, the Southwest Research Institute in San Antonio and the Petroleum Engineering Departments at the University of Houston and Texas A&M University all have received DOE grants for studies of enhanced oil and gas recovery methods. Louisiana State University and the University of Oklahoma have also received major grants to study enhanced oil and gas recovery. These are important matters for our domestic energy industry and our national welfare.
Nearly two out of every three barrels of oil ever discovered in the United States still remain trapped underground after conventional recovery operations. This staggering amount of remaining oil-approximately 200 billion barrels-can be one of America's best hopes for greater energy security.
OIL CITY, Pa. -- The deep gas play may be ramping up Pennsylvania's historic oil and gas patch, but it is putting a big hit on the traditional shallow oil drilling and production sprinkled profusely throughout the northwestern counties.
"The Marcellus and Utica shale drilling is affecting shallow oil operators," said Ray Stiglitz, owner of Allegheny Well Services Inc. and a longtime oilman. "The question is: why not more oil drilling when PennGrade is nearly at $100 a barrel? There are a lot of reasons and they involve what is happening because of the deep gas drilling."
Repercussions from the shift to deep gas recovery are threatening the state's crude oil industry.
Rapidly increasing supply and well service prices, scarcity of materials, waning interest in oil drilling, difficulty in signing oil leases, onerous new regulations and more are whipsawing oil drillers and producers.
In turn, oil production is down, and that is hurting the region's two leading refiners that rely on western Pennsylvania crude oil.
"The numbers for oil drilling are down," said Craig Lobins, district manager of the Department of Environmental Protection's oil and gas management office in Meadville. "It's a big drop in 2011 from the previous year."
In 2007, there were 1,733 oil drilling permits issued for the four leading oil production counties -- Venango, Warren, Forest and McKean. While that total spurted to 1,817 in 2008 when oil hit record high prices at $138-plus a barrel, it fell to 1,092 for 2011.Overall, the northern DEP office issued 4,221 oil and gas drilling permits for 27 northern counties in 2011, down considerably from the 4,683 in 2010."But 60 percent of those permits were for the deeper shale gas and that just keeps climbing. That is a significant shift away from oil," said Lobins.Just three years earlier, the deep gas play accounted for about 5 percent of all permits issued.
As the Marcellus and Utica shale play sizzles up the oil and gas patch, the old-time petroleum industry is getting a bum's rush, said Gary Hovis, an oil producer from Kennerdell.
"We'll be losing producers and drillers here soon," said Hovis, whose 20 producing oil wells in the southern part of the county include one drilled in 1880.
A long oil heritage: Pennsylvania, birthplace of the petroleum industry thanks to Col. Edwin Drake's fortuitious 1859 well near Titusville, has 19,000-plus oil wells in production. Those shallow wells plugged nearly 4 million barrels of crude oil into the marketplace last year.
In sharp contrast to deeper oil wells in the Oklahoma and Texas fields, Pennsylvania's wells are classified as stripper wells, or shallow wells that are marginal producers and eke out 10 barrels of oil or less a day. The average stripper well in Pennsylvania yields less than half a barrel (0.43) of oil a day, or about 18 gallons of crude oil.
Still, at today's going rate of nearly $100 a 42-gallon barrel, there's money to be made in conventional oil production that typically features a mom-and-pop operation going back two or three generations.
The enterprise, though, has been turned topsy-turvey because of the deep shale gas industry that has drawn in global, mega-energy companies intent on tapping hugely prolific natural gas tucked inside rock strata ten-times deeper than Pennsylvania's conventional oil sands.
In reaction to what it sees as a regulation over-reach and a desertion in the oil trade's ranks, the Pennsylvania Independent Petroleum Producers (PIPP) is back at beating the drums. The trade group of about 250 independent producers was formed in in 1984 in Oil City in vigorous opposition to the controversial Act 223, the Oil and Gas Act of 1984, that laid out strict and comprehensive regulations for the state's oil and gas industry. Its overtures led to several easements and modifications of the legislation.
Today, PIPP is again raising issues it believes must be resolved if the shallow oil industry is to survive the deep gas rush, said Hovis, president of the trade group. PIPP members have met frequently with industry people, elected officials and representatives from the Pennsylvania Department of Environmental Protection that oversees oil and gas operations. The gist of the talks has been an insistence by oil drillers and producers that newer and tighter regulations adopted in light of the Marcellus and Utica shale surge ought to be different for shallow oil.
"Those associated costs to comply mean we are just coasting along with old production. We are not in the same category as the deep gas because our volume is so low, the wells are shallow, the production water so much less and on and on," said Hovis.
There are charges that DEP inspectors, their ranks significantly expanded last year to handle an anticipated surge in deep gas drilling, are drawing a bead on oil producers because "they aren't busy enough with Marcellus," said Glenn Weaver, a longtime oil driller and producer from Franklin. Weaver's cache of wells numbers about 70 in Venango County.
"They hired a lot of manpower in preparation for Marcellus and Utica. They has not jumped up like they thought so they are out looking for problems so they can issue fines and pay for their department," insisted Weaver. "I've punched holes in the ground for 50 years but maybe, no more."There is a copious amount of anecdotal information as to oilmen's insuations that they are being harassed by inspectors. One driller said a five-gallon can filled with lubes to service a well was accidentally tipped over at a well site. As the driller cleaned it up, a DEP inspector fined him $5,000 on the spot. Another producer who said he was fined for "brine dripping off a collection tank"said the inspector saw it on one day and returned the next day with a violation notice, a move the oilman though ran counter "to protecting the environment, which is what they are supposed to do, by letting it drip another day."For Stiglitz, the suggestion that the shallow oil industry is somehow complicit in environmental infractions doesn't sit well.
"A lot of this has to do with a fear factor. We are law-abiding, tax-paying citizens but we are looking over our shoulder all the time. What's coming next down the pike? Will we be viewed as outlaws? As a contributing memer of society, this is an awful way to live," said Stiglitz.
While their objections are pointed, their campaign to upend what they consider are onerous regulations prompted by a very different deep gas industry is civil, contends Hovis."We have a long history with oil and we want to keep it going. It's a business we enjoy, it's a way of life. And, it's in your blood," he said.
Thousands of wells
Pennsylvania, birthplace of the petroleum industry, has 19,000-plus stripper, or shallow, oil wells in production. Last year, those wells plugged nearly 4 million barrels of crude oil into the marketplace.
They are classified as stripper wells that are marginal producers and eke out 10 barrels or less of crude a day. Most of Pennsylvania’s crude comes from McKean, Warren, Forest and Venango counties.
There are more than 55,000 shallow natural gas wells that produce enough to satisfy 25 percent of the state’s annual demand. Those wells, too, are shallow and marginal producers.
In contrast, the wells drilled over the past decade into the Marcellus and Utica shales are deeper, more prolific and more problematic since they require millions of gallons of water for fracking. The flowback fluids, or brine, contain drilling chemicals and are substantially more copious than what flows from shallow wells.
‘One size doesn’t fit all’
Despite the differences, the state regulations on the oil and gas industry make little distinction between shallow and deep operations, said Hovis. That is creating an onerous situation for marginal well operations that have less volume and create less production water.
A delegation of PIPP members met with state energy officials in Harrisburg earlier this year to argue their case that “one size doesn’t fit all,” Hovis said. The visit didn’t yield any solution, he added.
This past summer, Gov. Tom Corbett also dodged the question of whether new drilling and production regulations were unduly hard on and not applicable to shallow oil and gas production. He told an audience he would have “to find out exactly what’s going on there.”
The new regulation, one that would sharply restrict discharge limits for chloride, would upend the usual treatment methods provided by brine disposal plants such as the Franklin brine plant, a facility Hovis said is “essential for the survival” of shallow oil and gas production but will have to close if the new chloride-reduction regulation is approved.
The alternative of injecting brine into disposal wells is not realistic because Pennsylvania’s geology does not meet injection well specifications, Hovis said.
The new restrictions will spell the end of shallow production because the industry will have no acceptable method of brine disposal, he insisted.
4.1 Industry Definition
Governmental Regulations:
The oil and natural gas industry is subject to various types of regulation throughout the world. Laws, rules, regulations, and other policy implementations affecting the oil and natural gas industry have been pervasive and are under constant review for amendment or expansion. Pursuant to public policy changes, numerous government agencies have issued extensive laws and regulations binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply. Such laws and regulations have a significant impact on oil and gas exploration, production and marketing and midstream activities. These laws and regulations increase the cost of doing business and, consequently, affect profitability. Because public policy changes affecting the oil and natural gas industry are commonplace and because existing laws and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with such laws and regulations. However, we do not expect that any of these laws and regulations will affect our operations in a manner materially different than they would affect other oil and natural gas companies of similar size and financial strength.
Environmental:
Our operations are subject to the usual hazards incident to the drilling and production of oil and gas, such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires and pollution and other environmental risks. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operation. In addition, the presence of unanticipated pressures or irregularities in formations, miscalculations, or accidents may cause our drilling activities to be unsuccessful and result in a total loss of our investment. We do not maintain insurance of the various types to cover our operations with policy limits and retention liability customary in the industry. The occurrence of a significant adverse event, the risks of which are not covered by insurance, could have a material adverse effect on our financial condition and results of operations. We cannot give any assurances that we will be able to obtain adequate insurance in the future at rates we consider reasonable.
A rework well or producing well requires maintenance by a company representative sometimes referred to as a “pumper” to insure the well(s) produce at their capacity and to monitor production. As per the terms of the lease, a gate may be installed by the well Operator to prohibit access to the Property by unauthorized personnel. The gate is typically locked and a key may be provided to the landowner. The well may require periodic maintenance by a service rig during the life of the well. Surface equipment includes a wellhead, gas meter, storage tank (for oil wells), separator, and pipeline. Lease is held-by-production during the life of the well(s).
When the well is no longer considered productive, the Company is required to plug the well under the direction of the Division of Oil and Gas inspector for the State. This involves placing cement plugs at various depths to isolate producing intervals, protect fresh water aquifers and coal seams. The site is reclaimed and vegetation is established to prevent erosion from the well site. After all wells on a lease are plugged, the lease is terminated and returned to the mineral owner.
After completion and testing of a workover well or an offset well, the well is put into production. As in the case of oil, the oil is pumped into a 100 BBL or 200 BBL tank(s). The pumper inspects the well on a daily or regular routine basis and monitors the production of oil. As the tank(s) nears capacity, the pumper will make arrangements for pickup of the oil for delivery to the Purchaser. The cost of hauling the oil to the refinery varies by distance from the well to the refinery and can range from $3 to $6 per BBL. The cost of the freight charge is borne by the Company. Oil collected or shipped during the month is paid by the Purchaser in the following month. The price paid for the produced oil is based on the average monthly market price.
4.2 Primary Competitors
Industry Competition For Leases, Materials, People and Capital Can Be Significant
Strong competition exists in all sectors of the oil and gas industry. We compete with other independent oil and gas companies for the acquisition of oil and gas leases and properties. Most of these entities have significantly greater assets and name recognition. We also compete for the equipment and personnel required to explore, develop and operate properties.
Competition is also prevalent in the marketing of oil and gas. Typically, during times of high or rising commodity prices, drilling and operating costs will also increase. Higher prices will also generally increase the costs of properties available for acquisition. Certain of our competitors have financial and other resources substantially larger than ours.
They also may have established strategic long-term positions and relationships in areas in which we may seek new entry. As a consequence, we may be at a competitive disadvantage in the acquisition of oil and gas leases and properties. In addition, many of our larger competitors may have a competitive advantage when responding to factors that affect demand for oil and gas production, such as changing worldwide price and production levels, the cost and availability of alternative fuels, and the application of government regulations.
We will hire third party companies to undertake our development programs.
We will have to hire employees or retain independent companies to oversee or perform our development operations. We currently do not have sufficient funds for either. As such, even with exploitable deposits of oil or gas, we may not be able to develop our leasehold interests.
Our organization is subject to extensive and complex, federal and state laws and regulations. If we fail to comply with the laws and regulations that are directly applicable to our business, we could suffer civil and/or criminal penalties or be subject to injunctions or cease and desist orders.
4.3 Market Size
Environmental matters and costs can be significant.
As an operator of oil and gas properties, we are subject to various federal, state, and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on us for the cost of pollution clean-up resulting from our operations in affected areas. Any future environmental costs of fulfilling our commitments to the environment are uncertain and will be governed by several factors, including future changes to regulatory requirements. There is no assurance that changes in or additions to public policy regarding the protection of the environment will not have a significant impact on our operations and profitability.
We have no history as a company engaged in oil and gas development or exploration.
We have no history of earnings or cash flow from oil and gas operations. If we are able to proceed to production, commercial viability will be affected by factors that are beyond our control such as the particular attributes of the deposit, the fluctuation in the prices of oil and gas, the cost of construction and operating an oil or gas well, prices, and refining facilities, the availability of economic sources for energy, government regulations including regulations relating to prices, royalties, restrictions on production, quotas on exploration, as the costs of protection of the environment.
If our exploration costs are higher than anticipated, then our profitability will be adversely affected.
We are currently proceeding with development and/or exploration of our leasehold interests on the basis of estimated development/exploration costs. If our development/exploration costs are greater than anticipated we may be forced to terminate our operations until such time as we generate additional revenues to fund our operations. Factors that could cause development/exploration costs to increase are adverse weather conditions, difficult terrain, unknown or unexpected results when we re-enter a well, increased government regulation and shortages of qualified personnel.
We face many operating hazards.
The development and operation of an oil or gas well involves many risks, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. These risks include, among other things, ground fall, flooding, environmental hazards, and the discharge of toxic chemicals, explosions and other accidents. Such occurrences may result in work stoppages, delays in production, increased production costs, damage to or destruction of mines and other producing facilities, injury or loss of life, damage to property, environmental damage, and possible legal liability for such damages.
There may be insufficient oil and gas reserves to develop any of our properties and our estimates may be inaccurate.
There is no certainty that any expenditures made in the development/exploration of any properties will result in discoveries of commercially recoverable quantities of oil or gas. Most development/exploration projects do not result in the discovery of commercially extractable deposits of oil or gas and no assurance can be given that any particular level of recovery will in fact be realized or that any identified leasehold interest will ever qualify as a commercially developed. Estimates of reserves, deposits, and production costs can also be affected by such factors as environmental regulations and requirements, weather, unexpected or unknown results when we re-enter a well, environmental factors, unforeseen technical difficulties, unusual or unexpected geological formations, and work interruptions.
Short term factors relating to reserves, such as the need for orderly development of the wells may also have an adverse effect on our development/exploration, drilling and on the results of operations. There can be no assurance the production of insignificant amounts of oil can be duplicated in a larger exploration program. Material changes in estimated reserves, development/drilling costs may affect the economic viability of any project.