Another question I frequently receive from people thinking about making an investment in a US oil & gas drilling project concerns success rate. Most want to know the probability that we will hit oil and/or gas. James Williams, publisher of the Energy Economics Weekly, says “It depends on whether it is a development well or exploratory. About 91 percent for development, 45 percent for exploratory and 88 percent overall.” As the chart indicates, this confirms our own research for oil and gas wells drilled in Texas over the past 12 months. Our analysis shows that for this period, on average, 90.84 percent of drilled wells were put into production. That is they began producing and selling oil or gas or both.
But this isn’t the whole story. Well drillers/operators have a pretty good idea of how much oil and/or gas a well will produce once the well is drilled and tested. At that point an assessment is made as to whether to complete the well. If the probable production payout of the newly drilled and tested well indicates that the additional cost of completing the well will be recovered plus some additional return, then the well is completed and put into production. That way the investors will get at least part of their initial investment returned to them.
The more important question for investors is: “What are the odds that their investment will be paid back AND return a profit”. To my knowledge, data to answer this question is not available. Some wells that return a profit can payback the initial investment many times over, thus making up for the ones that don’t fully pay back the initial investment. I think that about one in 5-6 producing wells will ultimately reach “return on investment” status. When you factor in tax savings, these odds improve somewhat. This is why it’s not a good idea to think of an investment in a private oil and gas drilling project as a one time thing. Knowledgeable investors will invest in a number of individual projects to improve the odds of seeing a return on the sum total of all their investments. To some degree this also explains why investors join together to invest in oil and gas drilling projects...that way they can participate in more projects and further increase their odds of achieving real investment success.
I welcome your comments on this post as well as any verifiable statistics on the subject you care to offer. Just email me or post your comment.
Joe Ireland
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