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Drilling Fundamentals Give Investors An Edge

|Includes: IO, Noble Energy, Inc. (NBL), NZERF, PDS, RDS.A, TAOIF

[ Before investing in any company, particularly exploration please consult an advisor or invest only what you can afford to lose as the rewards can be high but the losses can be too, and this blog may over simplify the inherent and unknown risks that a novice investor is unaware of ]


3D Seismic Video

New 3D Seismic Technology improves the accuracy of drill targets.

Which helps locate the right kind of rock layer that holds Oil or Gas.

Porosity is the fraction of pore space or free space in the reservoir.

Permeability is the measure of ease which fluid flows through pore spaces in the reservoir.

The quantity of Oil reserves in place is estimated by calculations after several wells are drilled and the volume of Oil is summed over the various thicknesses of the beds and the areal extent of the deposit. The whole geological system needs to be investigated including how the depositional pattern of the beds (rock layers) and the structural features (anticlines, traps etc.) as well as the fluid layering interfaces. This information is obtained from seismic data, well samples and cores, well logs and well test data.

Once a well has 'spudded' or started drilling a MWD or Measurement While Drilling is a sensor package that sits in a tool behind the drill bit to communicate the exact location in space, distance, time, depth and x-y-z direction as a well bore is being drilled.

The data can be viewed in real time by display at the rig, or by satellite to office towers worldwide. A team of people work 24/7 to monitor progress, advise and consult on risks and strategies while drilling.

With Millions of $ spent on acquiring and interpreting seismic, and the drilling of new oil and gas wells, both on land and offshore, investors seem to focus only on the upside of finding resources that will pay dividends for years to come.

That is great for companies who do make discoveries, but if they don't strike oil, they still have to pay the tab; for the crew, equipment and experts who planned and drilled the well through to completion.

For this reason, investors are wise to consider some sure and steady operators and service companies who drill wells every day as they still get paid no matter what the final outcome. With the global rush for energy resources lots of opportuntity still exists in the suppliers of energy services around the planet.

If you are an industry insider, this blog post likely won't be for you, but if you are brand new to following an oil and gas play you might introduce yourself to the complexities of drilling a well and the stages of expense that benefits the providers of energy services on the well location.

It is also possible to make money on wells that are not successful by owning the well servicing companies or drilling outfits that get paid for meters drilled whether the Oil company is successful or not.

Profits in Oil & Gas come from getting rocks matched up with brainpower and capital to unlock the joules trapped in hydrocarbons that can be sold for $. Rocks have to have characteristics that lead to economically viable oil or gas production. The "Reserves" in the ground must be under sufficient pressure to flow commercial quantities, the Rocks have to have geological desirable attributes like sufficient Porosity and Permeability to be considered economic for a project.

In simplest terms rocks are aged by time and depositional sequence. The best reservoir rock tends to come from Carbonates, Sandstones and Shales.

Most Sedimentary Rocks are either Sandstones or Carbonates.

Almost all Oil production comes from accumulations in the pore spaces of either Sandstones or Carbonates, but of late Shale is now overtaking that kind of thinking.



(click to watch video)

The volumetric flow rate is = permeability / fluid viscosity X cross-sectional area x Pressure Differential across the rock layer/ thickness of the rock layer.

So in laymens terms, the lighter the density of the fluid or the higher the quality of API number for Oil the better it is for this equation. The higher the cross-section number, the better your permeability is. The higher the pressure drop and the thicker the rock is, the better the permeability can be.

This is very hard work to determine and it relies on expertise in many disciplines, but the goal is to quantify reserves.

Pressure is important because Water 'coning' can occur when water rises in a cone shape near a well and results in premature water production before all the recoverable oil has been displaced from the reservoir. This can result is a decrease in the recovery factor for the oil.

The whole area of Reservoir Engineering is quite complex, and not as simple as it may sound here.


Hydrocarbons in place, the gross volume of rock containing hydrocarbons is estimated from thickness and area calculations.

During the early life of a well the Oil Production rate is HIGH, then this IP or Initial Production rate declines in BBL/Day over time due to many scientific factors mostly to do with geology, pressure, temperature, porosity and permeability. Artificial methods can be employed to boost production like downhole heating, pumps, gas drives and other methods.

The amount of reserves in place is calculated by available engineering data and geological data. The quality of the data obtained improves the meaning behind the numbers. Exploration wells often lack much of the data that more developed reservoirs have; such is the reward of drilling a well on unchartered waters or land if an unknown basin is discovered for the first time.

These oil reservoirs are disproportionally distributed globally.

Most are drilled, (in a few rare cases like Oilsands they are mined.)

To explore for Oil, the following criteria must all exist.

(click to watch production test video)

Why do we even drill for Energy?

To chase Joules, or BTU's giving us the ability to convert one form of energy in the ground to another form of energy on surface. The value of this energy in the work it does for human kind fetches a price per Kilojoule or converted to electricity a price per Kilowatt for every hour of everyday.

One of the steps to unlock this energy is to drill a hole deep into certain types of rocks (borehole) and unlock oil or gas that contains these joules trapped within the Hydrocarbon molecule.

The first step after seismic, and geophysical and geologic interpretation is to identify a drill site. Hopefully somewhere warm.

Before Drilling

Before you can begin drilling for hydrocarbons, there are issues that need to be sorted out.

Where will the rig be located? Who owns the land? What permission is needed? After mineral rights, proper permits from government agencies How do you know that oil and gas are present beneath the drill rig? There are a number of considerations before the drill rig begins operations. These activities generally fall into the broad categories of mapping, leasing, and permitting.

Mineral Rights

These legal documents allow owners to develop resources.

Access Rights

Sometime special permissions from stakeholders, landowners or governments are needed.

Lease Preparation

Drilling Engineering Dept.

Bid Document and Contract, $/Day or $/Meter drilled


A legal description for a parcel of land is analogous to what a street number and street name, city, state, and zip code are to a mail carrier. The legal description gives surveyors and property owners a mechanism by which to precisely locate tracts of real estate.

It also allows property to be transferred, leased, and mortgaged.

Drill rigs are very large pieces of equipment. When combined with the support equipment, supplies, work force, and access roads, the total area needed for a drilling operation can easily exceed 40 acres in size.

An accurate surface map also facilitates determining land ownership above the hydrocarbons and who owns the minerals beneath the surface; seldom are the mineral and surface owners the same.


Surface owners can not prohibit the exploration of minerals owned by another party. For example: if you own the surface, but someone else owns the minerals, you CAN NOT stop a well from being drilled on your property.

Payments are made to the property owner for user privileges, loss of crops by the property owner, use of water, rights of way for roads and pipelines, and for damages to the land and surrounding property.

Mineral ownership refers to the owner of the minerals at depth.

Shareholders of a company hope to earn $ via the extraction of hydrocarbons that are produced and sold over time, the company buys the rights to the minerals and develops them, share owners get a piece of the rewards.

Mineral ownership has become very complex.

For example: if you sell land, you may retain ownership of the minerals beneath it. Or you as the original land owner may have sold a portion of the mineral rights to someone or given some to heirs who may have split up their interest, and retained a portion for them self.

It can get very complicated with a large group of people owning a small fraction of the original 100%.

Transfers of mineral ownership are accomplished by a legal instrument called a mineral deed.

A mineral lease is a legal document; it conveys to the lessee from the mineral owner who is called the lessor, the right to drill for and produce hydrocarbons.

The landman's role to the process is critical. This person is the field agent that locates mineral owners, verifies their ownership (through a legal description), and negotiates the terms of the lease.


Each state and country has a regulatory body that oversees petroleum operations. The regulatory body requires a number of permits for such things as drilling on public land, off shore and along a coastline.

This regulates location and construction of prospect wells, requirements for fresh water protection in vicinity of drilling, formation drainage allocation, and well to well spacing requirements. Permits can be offshore or on land.

Offshore NZ, Onshore NZ.

Arctic Sea

Offshore Israel

Mineral leases can be everywhere!

Example Offshore Taranaki



LINKS NZOG New Zealand Oil and Gas (Matuku-1 Offshore Well)

If the reservoir rock is not fractured or if permeability is poor, sometimes permeability can be artificially created by overpressuring the rock to crack or break it, as in hydraulic fracturing.

It takes a lot of Horsepower to break a rock 3 kilometers or more down a well. This is expensive technology but the rewards are huge for the companies who spend the $ for the fracturing to increase permeability and therefore increase flow of oil or gas which can be sold for $.

It's not as simple as below, but an Oil company's cash flow, balance sheet, P&L reserves, and reserves indicate the value of the company. Since much of this value is based on the Reservoir and Reserves the numbers below tend to give a pulse of the company.

Oil Production tends to decline as the pressure depletes in the well the barrels per day drop off over time. This is normal, but needs to be well understood to predict declines in income from wells.

Armed with an Income Statement, Balance Sheet, EBITDA (Earnings Before Interest and Taxes) and Debt, you can get an idea how much cash is flowing into the company. You can make better long term decisions if you understand where the money is coming in from and whether it will grow, shrink or remain unchanged in the future.

The Main Features of a rig:

Power Systems

Hoisting System

Fluid Circulating System

Rotary System

Well Control System

Well Monitoring System


The Goal as an investor grow your investment by earn Oil Dividends while the company tries to grows its oil production.

(Engineer how to build the sites)

Drilling engineers design and implement procedures to drill wells as safely and economically as possible.

They work closely with the drilling contractor, service contractors, and compliance personnel, as well as with geologists and other technical specialists. The drilling engineer has the responsibility for ensuring that costs are minimized while getting information to evaluate the formations penetrated, protecting the health and safety of workers and other personnel, and protecting the environment.

Engineers are responsible for figuring out Pe= probability of engineering success of the well or drilling project.

Some wells have more than 1 payzone, meaning more than chance at success.

The Rig is very expensive to engineer and build; rents runs into 10's of thousands of dollars per day, called a day rate. Land rigs are less than offshore rigs which can be astronomical and usually only afforded by the Majors or Supermajor oil companies.

Machined Parts cost $1000's and get consumed on each job.

Rigs are constantly consuming and wearing out metal parts that keep 1000's of people employed worldwide. You can invest in companies that make specialty metals, machinery, and rent or sell these parts.

Special Parts and Tools are also rented by the day and

sent to the wellsites worldwide. Well service companies often supply these to rigs, but sometime special orders are required.

If something breaks, it is machined from scratch

to replace or fix the broken part. You can invest in specialty manufacturers that have patents on certain parts.

Engineering a cutting surface is big bucks, and the best idea wins the business to drill into certain types of rocks. A single drilling job may use several types of bits, or 1 bit for the whole job. This is big business and some companies offer great suites of tools that rent out daily and they make good money.

Bits have different jobs, depending on how shallow, or deep the rock is, whether the rock is hard, soft, mixed or consolidated. Drilling straight down, building an angle, or drilling horizontal.

Whether PIPE, SPECIAL TOOLS, DRILL BITS or CASING, the Rig hands manually attach and carefully track every asset that goes in or out of a well.



Once drilling, the depth for various casings is determined by many engineers, geologist and drillers. The placement of casing is a decision that involves many people in the office and in the oilfield.

While drilling the earth scientists help determine where to place the casing by using geology tools to figure out where the drill bit is at downhole.

Sometime samples of rock are cut out and analysis is done on them.

Porosity, Permeability determine a reservoirs potential and since millions are bet on whether the wells will be a reliable income source for years to come, the scientists must be very accurate when they put forward any hard numbers that investors are using to estimate future revenues to come from any particular reservoir.

Drilling Fluids are a mixture of water, clay, special minerals and chemicals.


Hydrostatic Pressure refers to upward and downward forces that a column of fluid in a wellbore represents to drilling engineers.

Fluid density refers to if a fluid is compressible or not, and if its a underbalanced or overbalance condition when drilling. If the density is not a constant then its manage by various gases, fluids, chemicals that change the density to suit desired results.

Mud Density - refers to what Pressure the B.O.P. at surface is required to hold back annulus pressures coming back from drilling below, so you don't end up with blowout.

Tubing Pressure - refers to pressures inside the tubing running in the well rather than a space between outside of tubing, and the inside of the casing called the Annulus. You need to know the collapsing pressure of the Tubing so you don't get a mechanical crack or failure. You don't want high pressure flammable oil and gas bursting through a pipe, casing or coming back to surface when its not under control or bad things can happen, like a blowout.

Complex Fluids (Solids + Gases) this is an art and science and its managed in realtime by mud engineers and drilling engineers.

Buoyancy refer to Forces pushing up and forces pushing down on a body, the net effect of this force or pressure in a fluid is buoyancy.

Axial Stress is a relation between tension and compression and to avoid buckling of pipe or tubing you need to manage the weight on the drill bit. The more weight you apply to a drill bit can compress the drillstring (drill pipe) you don't wan't to damage the string with adding too much weight on bit.

Keep in mind wells can be several Km deep and the pipe and weight on bit can damage the drillstring or buckle and twist the pipe which could get you stuck or destroy the well.

Meters cost companies $ per minute (and per hour, per day).

The rate of penetration (meters/hr) can go faster when by lowering the hydrostatic head pressure against the hole bottom.

All the above topics are carefully managed by a team of people to achieve desired results, a successful well.

Most "Drilling Mud" contains Sodium bentonite

Sodium bentonite expands when wet, absorbing as much as several times its dry mass in water.

Because of its excellent colloidal properties,[3] it is often used in drilling mud for oil and gas wells and boreholes for geotechnical and environmental investigations.

Drilling fluids (or muds) are often used when drilling oil and natural gas wells. The drilling fluid is pumped from the mud pit through the drill string and out of the nozzle of the drill bit.

The fluid is continuously re-circulated wetting the drill bit interaction with the formation and carrying the cuttings up the annular space between the drill string and hole being drilled.

Drilling fluids fulfill many functions including:

Remove cuttings from the well

Control formation pressures

Maintain wellbore stability

Seal permeable formations

Lubricate, cool, and support the drill bit and drilling assembly

Typical water based drilling fluids are often suspensions of bentonite clay (gel) with additives such as barium sulfate (barite), calcium carbonate (chalk) or hematite.

Thickeners such as xanthan gum can be added to increase the viscosity of the fluid. The particle size distribution of the solids in the drilling fluid is an important physical characteristic affecting the interaction with the well formation and the rheological properties of the fluid itself.



The most cost effective way to move oil is through a pipeline. Trucks work for small volumes, rail works where rail is nearby the oilfields, but year over year costs are least by using a pipeline.

Disclosure: I am long NBL, TAOIF, NZERF, RDS.A.