The New Normal (Part III)
"The solution, or hedge against these increases, is to own oil and natural gas production."
-Jerry Spalvieri, Buckeye Exploration
“The future of Oil and Gas Exploration and Production in the Transition.
How you as consumers can benefit!”
We are already beginning to see energy costs leveling off, and in some cases slightly falling. Prices cannot always continue to go up, as supply and demand are always the driving forces.
Today, we are beginning to see declines to what could be “The New Normal” for at least the next three to five years. For instance, where $60/BO, which use to equal about $2.00 per gallon of gasoline, it is now $100+/BO, which should see gasoline prices stabilize somewhere over $4.00/gallon; hence “The New Normal”.
Likewise, for many years we had adequate supplies of clean burning natural gas for energy generation, with prices that consistently stayed in the $2.50-$3.00/MCF range to the producer. Today, natural gas is likely to remain over $5.00/MCF to the producer for the near and median term, meaning five to ten years, unless a drilling boom of some magnitude comes along.
Oil is priced on the global market and can be imported to some degree, whereas natural gas is strictly produced and priced on a national level without a means of importation. Therefore, the cost of electricity and natural gas utilities will most likely remain near double from just a few years ago; again “The New Normal.”
The transition to The New Normal is just beginning to take place. We will be dealing with the higher cost of energy during the immediate term and median term, meaning the next three to ten years. The ways to mitigate costs, such as wind, solar, or electric vehicles, all require high initial expense and materials that are owned and/or sourced from other countries.
Another way we have found is to own oil and gas production as a hedge against higher energy prices. The process is simple and very low risk. Owning oil and gas production has worked very well for us over the past 3½ decades and should continue to pay revenues that offset, and in most cases, more than offset what you pay for gas at the pump and utility costs.
How much have your energy costs increased lately?
When a barrel of oil was in the $50-$60 range, we were paying about $2.00/gallon for gasoline. Now, oil is trading for over $100/BO, gas at the pump is well over $4.00/gal. In the case of natural gas for electric generation and home utility use, utility companies charge by kilowatt hours (KWH) and dekatherms, which is generally about twice the cost they pay to the producer and mid-stream provider. Again, if the producer (upstream) price is more than double from $2.50/mcf to over $5.00/mcf, your energy usage bill will most likely be twice as much.
If you drive 1000 miles per month, and average 20 miles/gallon at $2.00/gallon, you pay $100.00 for gasoline. If gas is $4.00/gallon, your monthly driving bill is now $200.00. In this case, the cost is $100.00/month more, or $1200/year. Household energy costs double as well. If you averaged $100/month for utilities, you are now paying $200/month, or $1200/year more than just a couple of years ago. The increases for gasoline and household energy total $2400 more per year.
The solution, or hedge against these increases, is to own oil and natural gas production that pays you at least $200/mo. The business model is really very simple, since as energy costs double so do energy revenues. Naturally if prices decline, so do revenues. The question is, what is the cost to get $200/mo. of revenues from oil and gas production, at today’s economic parameters and present-day commodity pricing?
Cover your extra energy costs by investing in oil and gas!
The goal of this business model is to offset the extra $2400/year energy expense from oil and gas production revenues from an investment payout in twelve months or less. After that initial year’s payout, return on investment annually will continue to offset that additional cost differential.
*Typically, oil and gas wells have an average well life of 15-20 years at a steady decline curve, which generally return between 6 to 12 times return on investment over the life of the well.
The plan calls for a prospect investment of $500,000. Now we can drill, complete, and equip one new well, at the central Oklahoma depths (Lincoln County), where we are currently developing proven oil and gas reserves and have existing well production infrastructure in place.
We can also do a three well prospect utilizing existing wells and/or wellbores, where we have both proven developed and proven undeveloped reserves, for about the same $500,000 expense, thus increasing our odds for success. These procedures consist of uphole zone recompletions, re-entry washdowns of old wellbores, or simple well workovers and fixes.
Obviously, with valuable infrastructure such as tank batteries, flowlines, 3-phase electric power, and disposal wells already in place and paid for, this plan makes for a much quicker payout and higher return on investment!
This fact is even more true today with present day product commodity pricing.
Assuming the cost of one of these three-well prospects is $500,000, a 1% working interest at 75% net revenue interest (taking 25% out for existing lease burdens such as royalties and overriding royalties), the cost would be $5,000 per 1.0% working interest.
*It should be noted that a minimum investment of $2,500 for or 0.5% working interest is required in these particular upcoming low risk, low cost, multiple well proposals to be presented under the “Crowdfunding” registered format.
If you are interested in considering an investment in one of our upcoming multi-well oil and gas development projects, please fill out a request for information form and we will forward you a complete prospectus, along with an Economic Analysis for your review and potential qualification as a qualified investor.
Now if you would prefer to invest in one of our upcoming multi-well development prospects on a much more vested basis, say 5% working interest or greater, and are a qualified, sophisticated investor, please feel free to specify on the form of your intentions.
*It should be noted that intangible drilling costs are still a 100% tax write-off, while tangible drilling can still be
depreciated. Likewise, owning production still maintains depletion allowance tax benefits.