Purchasing an oil and gas property comes with a fair amount of inherent risk. Whether buying into a producing property in an established field and trying to increase production with specific Enhanced Oil Recovery (EOR) methods or going out and wildcatting in an unproven basin there is always a certain level of risk when you’re working in the oilfield.
Heck, if it were easy everybody would do it, right?
But there are steps you can take to increase your chances of turning an old piece of dirt into a producing lease, and ensuring that you do so in an economical fashion, so you can go out and develop the next property.
We’ve broken the necessary steps into four categories for performing due diligence for purchasing an oil and gas property.
Due Diligence for Purchasing an Oil and Gas Property
- Assemble an acquisition committee
- Identify the property
- Aquire the seller’s bid package
- Review the production history of the property
- Identify if there are any properties in the bid package you will need to divest
- Sign a letter of mutual intent
- Submit good faith deposit under escrow
- Negotiate the terms of the sale
- Audit the Seller’s internal records
- Perform an oil and gas accounting audit
- Performa geological audit of the lease
- Perform a title audit of the lease
- Audit all well records
- Perform a physical inspection of the property
- Perform an environmental audit
- Identify the regulatory agencies that preside over the lease
- File all official paperwork after the sale
- Ensure the smooth transition of any ongoing operations
The process is a little different for a Well-to-Well leasehold agreement but similar to a lease purchase, there are steps to mitigate the risks associated with the business of producing oil and gas.
- Determine the Name and Legal Location of the lease
- Identify the nature of the quantum of the Seller’s interest in the lease
- Get the Legal Description of the lease
- Get a description of all encumbrances affecting the Seller’s interest in the lease
While there will always be risk associated with every business, there are steps you can take to reduce the assumed risk when you are looking to acquire an interest in an oil and gas play.