Asset management is a holistic, organized approach to keeping all of your assets accounted for. With proper asset management, you will be able to keep track of all data, conduct more efficient audits, detect problems in advance, plan for the future, and increase productivity in the immediate term.
Prepare for market volatility
Oil prices can be volatile in the face of global events. The COVID-19 pandemic, in particular, has sent prices on a rollercoaster. Initially, prices plummeted due to low demand, and a crunch in available storage space resulted. At one point, prices went below $0 per barrel; holders were paying others to take the oil off their hands rather than pay for storage. However, as the world reopened in 2021, the script flipped. Prices skyrocketed, reaching their highest in six years because the return of demand outpaced production capacity.
Geopolitics also plays a factor. While most nations and companies scaled back production in response to the pandemic, Saudi Arabia increased production after it could not agree with OPEC about production quotas, and waged a price war on Russia. An uneasy political situation in Venezuela also has analysts on edge over concerns that a power struggle could paralyze production there.
Use asset management software
Oil asset management software has revolutionized the way producers manage their operations. It allows the central tracking of assets at multiple drilling sites from one location. It enables all employees to access information as they need it rather than having to track it down. It enables access to safety manuals when paper copies are unavailable or impractical. Software is also incredibly efficient in maintaining records, which allows for smoother operations and assists in compliance with regulations.
ERP (Enterprise Resource Planning) software can assist a company in developing long-term financial plans. It takes data from facilities and feeds them into analytical systems. These systems then deliver data showing the company the impact of their current strategies and project the possible outcomes of potential future projects.
Software is also available for the day-to-day aspects of oil production. For example, a Computerized Maintenance Management System (CMMS) allows users to keep tabs on the performance of their equipment. It will provide warnings when a problem is detected. You can use this information to proactively schedule maintenance and address these problems to prevent them escalating into larger ones. This will help save both time and money. For example, you can schedule each well at a field to be serviced individually, one at a time, so that production never has to come to a complete stop.
Draft your contracts carefully
When you’re drafting a contract to lease land for oil production, the details matter. The industry is moving away from standard lease forms and toward custom lease provisions, which can be much more complicated. This is why your contracts need to be tightly and carefully written to protect yourself from litigation. Here are some common clauses and provisions in oil contracts that both lessors and lessees should be familiar with.
Termination of contracts
Oil contracts can terminate automatically under two main conditions. The primary term is the time during which the lease remains in effect regardless of whether the lessee is producing any oil. It can last for any length of time, but most commonly lasts three years. Many contracts also have a continuous development clause, which incentivizes the lessee to continue drilling after the primary term has expired.
Additionally, there are other situations where a contract can be terminated early, such as breach of contract or insolvency. Contract termination is one of the most important keys to an oil contract because many other clauses refer back to the terms of termination.
Acreage retention clause
Acreage retention clauses determine how much acreage a lessee will retain for each well it drills after the automatic termination of the lease. Usually, they will require the lessee to release land not being used in an active well at the end of the primary term. These clauses are meant to protect the lessor by restoring their control of land that has gone unused and allowing them to look for another lessee that might do something with it. If a continuous development clause is in place, the current lessee will usually retain the right to continue working on active wells.
Depth severance clause
Depth severance clauses determine a depth of production below which the lessee must release further depths. The lessee is commonly required to relinquish these “deep rights” after one or two years. If there is a continuous development clause, then the depth severance clause may be different for each well.
Royalty deductions are paid by landowners to the E&P (exploration and production) companies leasing their land. These fees are intended to cover the costs incurred by the company in production – primarily transportation, gathering, compression, and processing. They are the largest source of lease income for the E&P companies.
Lessees need to be sure that the royalties will be enough to cover all expenses.
Learn to harness unstructured data
Structured data is data that has been organized in a predefined template. It can easily be referenced from a database because all of the information is labeled systematically. When an online form asks you to fill in boxes with such information as your name, address, password, email, or credit card number, it is asking for structured data. In the oil industry, one example of structured data is geographical coordinates referring to the location of an oil field.
However, only a small portion of data is structured; the remaining 80 to 90% is unstructured. That word may sound discouraging, but it doesn’t necessarily have to be a bad thing. Unstructured simply refers to the fact that such data are stored irregularly. Examples include emails, audio files, image files, word processor documents, presentations, and spreadsheets.
If not treated properly, unstructured data can be difficult to find, as it can get buried deep in the pages of documents or left on a hard drive in a drawer. If the information cannot be found, it cannot be used, limiting efficiency. It is estimated that up to 80% of working time is spent digging through unstructured data. The good news is that with care, you can avoid these pitfalls. Here are some ways to harness the power of unstructured data.
- Use consistent formatting for things such as file names and email subjects.
- Avoid the excessive use of shorthand, as word searching tools may not be able to identify acronyms or slang.
- Scan all of your documents as PDFs so that you can search them for keywords, rather than reading hundreds of pages to find the information you need.
- Use text analysis software to comb through your files and analyze them.
- Centralize your data and make multiple backups.
Organizing your data as it accumulates will increase the ability of software to extract useful information from it and save you from time-intensive archival digs in the future.
Exercise capital discipline
In recent years, oil producers have been under the highest economic pressure in decades. A major catalyst of this pressure was the collapse of oil prices in 2014, from which many parts of the industry had not recovered even before COVID-19. In response, companies have been tightening their purses and implementing more stringent profitability requirements. For example, Exxon Mobil has announced plans to require profitability at a cost of about $15/bbl for projects in the future. To keep up with the tightening marketplace, producers will have to examine their costs more closely than ever to maintain efficiency and extract more value than ever from their operations.
Trust Company of Oklahoma’s Oil and Gas Services
When you dive into the complicated world of oil, you’re going to need a partner that knows their stuff. At Trust Company of Oklahoma, we manage over 17,000 oil and gas assets in 25 states across the country. This includes producing and non-producing assets: minerals, working interests, royalties and overrides in significant basins where major activity is taking place. We have the expertise to break down the nitty-gritty of contracts and guide you through regulatory requirements. Contact us and let us know how we can help you.