When people think of the oil and gas industry, they think of big profits. The industries profits are in fact, often quite big. But what tends to be overlooked, is that these profits come after great cost. Furthermore, these costs are often occurred at high risk, because not all projects that companies in the oil and gas industry undertake become profitable. In fact, many companies can, and do go bankrupt. Probably, nowhere is the risk of failure greatest, than in the upstream and exploration or production sector of the industry. This is a graph of success rates of oil and gas wells drilled in the U.S., with a successful well being one that actually goes on to produce oil and or gas. The success rate of exploration, or wildcat wells, is indicated by the blue line. The red line indicates the success rate of development wells, or wells drilled into proven producing areas. Improvements over the years in oil and gas industry technology and expertise have dramatically increased the success rate of exploration wells. The rate having jumped from around 20% in 1973, to between 60 and 70% in 2012. The success rate of developed wells has also improved. But, note that even development wells, many of which are drilled within sight of producing wells, are not 100% successful. There's always a significant chance, that a well will not prove economic and will need to be plugged and abandoned. The decision as to whether to complete or abandoned a well, has made it a point in the drilling process known as the casing point. This is the point during the drilling, after which the well has reached the target reservoir, but before production casing has been installed and cemented in place. Correct assessment of the production potential of the well, is critical. If the well is abandoned, there will be no way to recover the money spent to drill the well which can run in the millions to hundreds of millions of dollars, depending on whether the well is on or offshore. At the same time, the cost to complete a well is often as much or more than what it cost to drill the well to the casing point. So, if profits from oil and gas reserves producible from the reservoir are not foreseen to be sufficient to cover the total cost of the well, it will often be more cost effective to plug and abandon the well at the casing point than to complete it. The cost in revenues over the life of an oil and gas well can be subdivided into three phases. The first phase, is before the casing point. During this phase, which again is when the well is being drilled down to the target reservoir, there are no revenues from the well, only costs. These include the cost for the geologist to generate the prospect being drilled, the cost of leasing acreage and acquiring necessary drilling permits, the cost to prepare the well site for drilling were Spud Well. In the cost to drill to the casing point and log the hole. It is the data obtained through the wire line logging on the bore hole, along with information cleaned from drill cutting, so the rest are rock product from the well that are used to decide whether to complete the well. If the decision is to complete the well, then the life of the well enters the after casing point phase. In this second phase, a set of significant additional costs must be met. These include, installing the production, casing and perforating the well. Hooking the well up to a flow line that leads to a site, where the oil and gas can be shipped off for sale. Costs to operate and maintain production from the well. If production declines, or production equipment breaks down, costs for remedial work to get the well flowing at a good rate again. And costs for government mandated handling of any produced water. During this phase, however, the well is producing oil and gas which can be sold. So, the well is now generating revenue. This revenue is characterized, as before payout revenue. Payout occurs, when the operator of the well has received sufficient revenues from the oil and gas production to have fully paid off the cost to drill and complete the well. After Payout, the third and final phase in the life of a well begins. Costs during this phase are reduced to covering continued operation and maintenance of the well production. Any necessary remedial work on the well to keep flow maximized, handling produced water and in time eventual abandonment of the well. Or with this phase, sales of oil and gas from the well continue to bring in revenue. And as the well costs after payout, tend to be modest, revenues from the well can fall dramatically and still more than cover the expense of keeping the well operating. Consequently, this last phase in the life of a well, is by far the longest. And can extend for many decades, particularly if the sale price of oil and gas climbs with time, as the well's production falls.
