Lease Compliance and Disparate Data

Lease Compliance and Resolution of Data

Lease compliance issues in domestic shale have become critical to E&P asset protection. Lease jeopardy has grown into a major component of risk management of upstream resources.

It demands a well-defined, cohesive data management strategy that creates business intelligence from disparate sources.

Land Administration Information Systems Inadequate

Land Administration is a traditional role within an E&P enterprise.  Within Royalty complianceits domain falls the safeguarding of all of a company’s land assets, among them the oil and gas leases.

Landmen are highly specialized members of an E&P exploration and production team whose duties include assisting in the analysis of deeds, leases and other contracts.  A landman’s responsibility typically includes ensuring that the company’s land assets database is maintained and key attributes of lease provisions recorded and updated.

Unfortunately, these talented and versatile members of the upstream resources team are increasingly handicapped in their lease administration duties. This is because information technology hasn’t kept pace with changing demands in the leasing arena.

The data they’re so meticulously maintaining is in a static data repository. As a result it’s unused by advanced oil and gas software with lease analysis and business intelligence capabilities.

Changing Aspects of Lease Compliance

Several factors are driving changes in shale lease compliance.  As competitors move rapidly in vying for a shrinking pool of unconventional land assets of increasingly significant value, lessors are reexamining the royalty structure of their existing leases.

This and falling natural gas prices have helped motivated lessors, newly focused on their monthly royalty payments, to analyze their lease provisions, often with professional legal advice.  This has become a highly litigious area, with more and more attorneys building a lucrative practice area in oil and gas lease compliance and its growing body of case law.

“Royalty and land and lease rights disputes were the most common types of unconventional oil and gas litigation during 2012,” reports Navigant.

“Oil and gas companies involved in unconventional exploration continue to face not only the challenge of differing state laws, but also a constantly evolving legal landscape as landmark cases make their way through state courts,” noted Navigant, referring to Butler v. Powers Estate, litigation based upon the provisions of a 19th century oil and minerals’ lease.

If an E&P company isn’t performing due diligence on lease provision compliance, it is exposing itself to the potential of costly litigation and risking the devaluation or loss of key productive assets. Overnight what was regarded as a stable corporate asset can become a legal liability if lease oversight has failed.

A company lacking a consistently reliable system for proactive lease compliance is apt to be blindsided by an eager attorney who’s found a non-complaint lease under which he can get his fingernails.

Consolidating Disparate Lease Data into Business Intelligence

Most companies already have on hand the data needed to be proactive in their unconventional E&P lease compliance.  It often exists in various forms that convey different meanings in non-integrated data stacks. Examples include the property management data base, the financials system, the reserves model, and the drilling information.

With the right analytical methodology, this disparate data can be consolidated into an information system that provides reports and alerts that help lessen lease jeopardy.

Building a Viable Lease Compliance System

A multi-part, iterative process is used to build and deploy a viable lease compliance application.

First, leases are identified and reviewed, with their critical provisions defined, e.g., key dates, key quantities.  Next, the different systems of record are identified, and the key attributes that define the leases’ critical provisions are mapped to the destination system, with inconsistencies corrected.

At this point the source data is cleansed — incorrect or inaccurate data is modified, deleted or replaced. The resulting “good” data is synchronized to the master data set, with links established to the various source systems.

Integration with the initial lease provision inventory now occurs, with processes put into place to ensure the lease provision inventory remains accurate and current.  Lastly, lease provision tracking is established, with sensitivity cases defined.

Some of the critical sensitivity issues are royalty escalation, cessation of production and continuous drilling. Business process owners are assigned to the system and critical, sensitivity-driven alerts established for key users.

For more, read our post on leveraging unconventional information assets for Upstream…

Bad Oil and Gas Software: Key Concerns

Optimizing Oil and Gas Software

Oil and gas software is an essential component for businesses in the energy industry. It allows them respond to problems more quickly, review historical data more easily and send reports to managers automatically.

Oil and gas software also allows enables the implementation of  a formal process for tracking production as opposed to the collection of spreadsheets that has traditionally been used in this industry.

However, poor oil and gas software can also create problems, which may be classified into the areas of assets, production and revenue.

Assets

Oil and gas software can cause a failure to pay out on a well interest. This can occur when the software Oil and Gas Software: Field Data Capturecalculates the royalty improperly, causing the balance to fall below the minimum pay requirement for that account.

Poor software can also cause a business to over bid or under bid on an asset by miscalculating the expected value of that asset. The primary factor that determines an asset’s value is the current price of crude oil or natural gas, which can fluctuate greatly over time.

Political factors can also have a significant effect on asset valuation, especially in areas characterized by civil unrest. Technological improvements can increase an asset’s value in the future by reducing the recovery costs.

Production

Software can also create problems with production such as inaccurate estimates of production and reduction in actual production. These problems include double-counting the output of one or more wells, causing your company’s total production to appear higher than it actually is.

Software can also cause your company to drill a hole in a poor location that costs more to operate than it produces. The incorrect allocation of production is another problem that can be caused by poor software.

Facilities with multiple wells must allocate resources to each well, which is generally based on each well’s production. Software that reports production incorrectly can result in a sub-optimal allocation of resources.

Revenue

The loss of a lease is one of the most significant problems for an oil and gas company that relates to revenue. This problem typically occurs when a company is unable to successfully market a lease or sustain its production for an extended period of time.

The failure to receive revenue from all well interests can also be a major problem affecting a company’s revenue. Well interests include basic royalties that are paid to the mineral rights owner and overriding royalty interests that are retained by third parties such as geologists.

Well interests include working interests that a company receives after royalties in exchange for exploring, developing and operating the property. Bad software can also reduce a company’s revenue by inaccurately estimating the reserves remaining in a particular well.

For more, read this post on how oil and gas software can improve decision making and forecasting.

Lease Compliance and Custom Software: Eliminating the Single Point of Failure

Onshore Drilling and Lease Compliance

Does your company participate in onshore drilling? If so, you would probably agree that lease compliance is an ongoing issue. Onshore wells are smaller, so you have more of them, with the accompanying lease provisions that your company may or may not have a system for tracking.

If you work for a small to mid-size company, like many of our clients, you probably employ one person to manage lease compliance. He or she references data from rig reports, the land department, regulatory, etc. every week.

This person is a great at what they do, but they also represent a single point of failure. An outdated report, a miscalculated Excel equation, or the departure of this person can represent a significant risk for your company.

Eliminating the Single Point of Failure

Lease compliance and custom softwareAs we’ve highlighted in the past, like for Chesapeake Energy, lease jeopardy can be a very expensive problem for an E&P company. Even leaving out large settlements, the cost in resources for employees to gather the data and prepare for a lawsuit is a huge loss.

One way to free up employee’s time for value-add activities is to develop a custom software application that manages lease provisions. For example, since continuous drilling is often a compliance concern, the application could be a continuous drilling provision tracking system.

The landman inputs the provisions and terms of each lease. The tracking system is then pointed at the drilling data system. As a result, the lease provisions and actual drilling dates are tied together in the database.

When a violation to those provisions occurs, the system can automatically flag this. By contrast, using the old system of a single person and an Excel spreadsheet, this violation might have remained buried in a spreadsheet until the landowner decided to sue.

Streamlined Lease Compliance Reporting

In addition to money saved due to averted lawsuits, the time saved by your landman is not insignificant. Manual reporting takes up many hours each week, and this is time spent that does not lead to better decisions or increased leaseholds.

A custom application can also match your business’ process in a way that no off-the-shelf system ever could. As your company looks to grow or be acquired, a streamlined lease compliance process is a very attractive option.

For more on automating lease compliance, check out this case study, or download our white paper, Avoiding Lease Jeopardy.

Energy Software Could Make a Difference for Chesapeake Suit

22392-13683243629342287-David-White_originThe Houston Business Journal posted an article yesterday about Barnett Shale owners suing Chesapeake Energy over mineral rights. The dispute involves 4000 acres of land, and “the complaint says Chesapeake allegedly violated lease agreements by underpaying on royalty payments from gas produced on the plaintiffs’ land in Tarrant and Johnson counties.”

We’ve posted before about Chesapeake’s issues with lease compliance. While they may be trying to squeeze extra money out of historically low gas prices, it’s equally possible that the E&P company does not have robust energy software that can automate much of the lease management process. Without it, companies are left with confusing spreadsheets that can be difficult to parse for exceptions, drill dates, deadlines and the like.

Particularly as companies grow, like Chesapeake is, simpler solutions used for managing compliance become less scalable. Over time, solid oil and gas software is required to avoid expensive and complicated lawsuits like the ones Chesapeake is facing at the moment.

For more on how custom software solutions can automate compliance and protect your company from lease jeopardy, download our lease compliance white paper now!

Lean Concepts in Oil and Gas: Using Data to Refine Processes

As we’ve discussed in a previous post, hydraulic fracturing has become a repeatable process that more and more resembles a factory assembly line. The challenge, however, is to find ways to use data or oil and gas software to optimize these plays and make them profitable. As I was preparing for a presentation on complex shale lease provisions, it occurred to me that shale operations, being more closely related to manufacturing than, say, offshore operations, might benefit from applying Lean concepts.

You can read more about Lean concepts and E&P here. As the article highlights, “Lean is a process-centric improvement methodology aimed at accomplishing more with less. Lean process improvement focuses on elimination of waste and shortening production flows by benchmarking against theoretical maximum performance.”

Lean Concepts E&P

E&P firms are inundated with data! But this data is not always available at the right time or in the right format. Successful implementation of Lean concepts necessitates looking backward and learning from history as reflected in data.

As you can see at the right, the ideal cycle for optimization of drilling involves a feedback loop that allows for constant improvements to the process.

Think about your organization and how information currently flows. Do you have tools like SharePoint and a well maintained integrated database that enables business intelligence and good decision making? Or are you relying on Excel and the contents of your inbox?

Shale is a manufacturing process that can be optimized. Don’t miss out on reaping the benefits of your own information. For more, watch our presentation to HAPL, called “Frac Your Data.”

Oil and Gas Software the Key to Optimizing Industry Growth

I’ve discussed in a previous post the impact that the oil and gas industry has on jobs in the United States. I took note this past week of an article in the Oil and Gas Financial Journal regarding the testimony of Daniel Yergin (author of The Quest: Energy, Security and the Remaking of the Modern World) to the US House  Energy and Commerce Subcommittee on Energy and Power. His statements regarding the oil and gas industry’s contributions to the economy are worth highlighting:

  • Oil and gas production currently supports 1.7 million jobs, with growth to 3 million by 2020.
  • Even in areas where there is no activity, long supply chains mean jobs are created everywhere. For example, in New York, where shale gas development is banned, at least 44,000 jobs have been created by the industry.

In addition to job creation, Yergin commented on the continuing concern around what fracking does to the environment. The technology is not new, but the impact of the scale and intensity in regions that are not accustomed to oil and gas development is still in question. “Understandably, the environmental impacts need to be carefully assessed and monitored, and the public needs to be confident about these impacts.”

But the environmental concern due to shale drilling isn’t all bad. Emission reductions can be attributed to increased availability of natural gas as well! According to Yergin, “US carbon dioxide emissions from energy consumption are down 13% since 2007… the most significant part is the result of natural gas supplanting coal in electric generation at a rapid rate.”

In order to manage both the increase in employees and environmental compliance, oil and gas companies can’t rely on outdated software. To remain competitive and grow, they need software that can keep up and help busy employees remain efficient.

For more on using software to manage employee data, read our case study…

To find out why most oil and gas companies avoid creating a system for managing compliance, read our series on the topic!

Managing regulatory compliance and risk

I wrote a few weeks ago about environmental regulations and how the difficulty of keeping up with these regulations can shut down business. Another article I read recently, called “Dealing with Regulatory Risk,” from the Oil and Gas Financial Journal, discussed the issue of regulation of fracing and LNG exports. The author, Don Stowers’ big point was that while regulation of these things serves a purpose and is important, over-regulating will have the effect of slowing down the economy and stalling job creation for the energy sector. Stowers also asked several important questions:

  • What is the legitimate role of government in regulating business?
  • Should federal, state or local officials do the regulating?
  • When does government regulation go too far, and who decides it?
  • When happens when excessive government regulation stifles business development and job creation?

Of course for most businesses, any regulation tends to be viewed as an obstacle, and as Stowers put, “an obstacle that needs to be dealtt with.” No matter whether we perceive these regulations to be going too far and to be bad for business, companies in the energy industry still need to examine their efforts to maintain compliance as far as is possible, as the stakes in fines or lawsuits can be very high.

If your company is involved in the energy industry, you should be asking a few questions

  • Do we have visibility into those areas where we might be out of compliance?
  • If so, would someone get a proactive alert to warn them of this?
  • Could the correct documents and records be produced if there was an issue?

If the answer is no to any of these questions, it may be time to invest in a solution that helps manage compliance. In this environment of increasingly complicated regulations, most companies can use all the help they can get!

See an example of what this solution might look like here

Environmental Compliance increasingly expensive for oil and gas companies

Regulations make or break for some area’s key industry

TIPRO recently published an article in their Fall/Winter edition of Upstream Texas discussing environmental regulations in the United States. In particular, the author discussed how the landscape for government regulation is only getting more difficult. Regulatory compliance drains the US economy of $1.75 trillion a year, and according to the Heritage Foundation, ” the cost of complying with regulations enacted during Obama’s first three years in office exceeds by five times the cost associated with new rules promulgated during the first three years of George W. Bush’s presidency.”

Of recent concern for oil companies, the US Fish and Wildlife Service (USFWS) has recently been debating whether to classify the dunes sagebrush lizard as an endangered species. This lizard makes its home largely in West Texas. When they decided against it, “if producers came across as extraordinarily relieved…it is only because the last couple of decades have demonstrated how restrictions and activity bans on lands identified as critical habitat for threatened or endangered species can decimate an area’s key industries.”

Cases aren’t decided by facts

And while many of these activity bans do in fact protect endangered species, the USFWS has also used evidence in hearings regarding a possible endangered species that is directly contradictory or wrong, leading some to believe that feelings and not just facts directed the proceedings. Since these classifications effect commerce and thousands of people’s livelihood, a speaker at one talk we recently attended, Ronald Schindler of Pioneer Natural Resources, discussed how all they wanted to do was, “live or die by the numbers” regarding environmental compliance.

With all of these increasing regulations, the rules do not necessarily transfer to implementation and actual compliance. Every oil and gas company has to ask themselves then, do we we have access to the information that would answer questions related to our compliance with them? Particularly when non-compliance can lead to downtime, or in one case relating to Shell, “suspension of all operations until issues are settled,” the costs of not having the answers can be high.

Find out more about how your company can create a plan surrounding compliance.

Lease Terms Driving Activity in the Eagle Ford

Operators in the Eagle Ford have had a rig count of over 250 rigs for more than a year, drilling faster and faster. But where is the pressure for that pace coming from?

As shale activities turn from wildcatting to manufacturing-style drilling projects, both pace and scale of operations are increasing. Many operators are accountable for improved drilling times as a main success indicator, so that even though some operators “scaled back the number of rigs be utilized,  they’re still drilling the same number of wells” according to R.T. Dukes of EagleFordShale.com. The transition in type of operations also means that where those who first jumped in for a strategic land position are no longer able to keep up the pace, companies more experienced in creating repeatable success are buying in and creating additional rigs. “Approximately 270 rigs have been running in the region for almost 12 months,” says R.T. Dukes.

“You have to drill a well to hold acreage,” said Tudor, who spoke at a media tour hosted by BHP Billiton Petroleum this month. “There’s a lot of that in America.”

We’re starting to see the end of many lease agreements, with peak negotiations in the Eagle Ford dating from 2008 to 2010. Since many have a primary term of 3-5 years, 2012 has seen the first wave of preventative drilling, or drilling for the sake of keeping land position rather than economically feasible extraction. Some of the drilling activity we’re seeing is considered ‘preventative’, because if a well isn’t producing at the end of its associated lease agreement’s primary term, the landowner can renegotiate. If the land is being operated, it’s ‘held by production’, thus preventing the land from coming back onto the open market.  This activity saves operators any penalties associated with the lease agreement, as well as potentially higher royalties paid to the lessor. In short from Dukes: “It could mean millions of dollars per well.”

Drilling for lease compliance’s sake is a relatively new phenomenon, as lease contracts and provisions have never been more complicated, and land owners have never been as sophisticated and aware as currently is the case. Entrance has created a lease compliance management solution for one Eagle Ford operator, that tackles this problem head on.

Learn more about lease compliance here!

 

Oil and Gas Compliance Solutions – Creating a Plan

For the past few weeks, I’ve been talking about compliance in Energy. A growing area of concern in the industry, compliance crosses many areas of an oil and gas company – the constant set of changing requirements around safety, tax, land, legal, environmental and other compliance can feel overwhelming. Luckily, while every compliance scenario is different, there’s a way to answer common concerns with a compliance management information framework.

Ready to start thinking about systematic compliance solutions?

Achieve Compliance Strategy Buy In

  • Set a baseline to start from. In order to improve, you must assess the current situation. Establish a core set of metrics and start reporting on them now – whether it’s comfortable or not.
  • Establish and communicate compliance goals.  Once you know where you currently stand, set a realistic goal fore improvement. Want to decrease the number of contracts flagged for compliance to less than ten at all times? Want to reduce safety incidents by half? Define a goal, include metrics to determine success, and communicate that goal to those who can impact compliance.
  • Incentivize employees to reach those goals. Guide efforts the right direction by rewarding improvements in measurable results. Anyone can ‘try’ to be compliant, but in the end it’s a measurable fact. Make sure to celebrate successes in order to encourage continued improvement.

Establish a Plan of Action

  • Early Warnings – Define when and how preventative action can and should be taken. What are the signs that you might be headed toward noncompliance? How much lead time do you need to prevent a situation from occurring? With these two inputs, we can filter down to just what needs urgent attention and send custom alerts and action requests to your team.
  • Contingency Tactics – Determine how to solve the compliance issue itself. Prevent claims of negligence  by creating systematic, documented tactics for getting back on track quickly. Are you within a month of needing to take action before breaking a clause that could cause litigation? Define the actions, escalation, reporting into a workflow that will give information to the right person at the right time when time really is what counts.
  • Effect Mitigation – Create a way to deal with consequences of an issue – before you’re under fire. So you’ve had an issue, now what? Documenting best practices before a situation occurs, can help your team be ready for when it counts. We’ve seen contingencies varying from reporting on situations that may be similar in order to prevent similar results, to workflows of management escalation based on level of impact, and more.

Measure, Improve, Repeat

  • Continually measure success of your compliance program with appropriate, actionable metrics. We’ve said it before, and we’ll say it again, compliance is a fact, not a feeling. Gather the relevant information, and create a culture of accountability around compliance.
  • Make data-centric decisions with the latest, best information possible. You already have the information you need to make compliance decisions, but it might be hidden in unexpected locations throughout your organization. Determine the best information to guide your decisions and ensure that it’s always up to date.
  • Focus only on what matters, by keeping results in front of you. There are a lot of moving pieces in compliance, it  can be hard to focus on what matters when you’re overwhelmed with too much information from too many reports. By first determining which results are actionable, and then paring reporting down to send the person who can take action a report to act upon only when it’s necessary, time can be spent solving real compliance issues rather than just monitoring status.

Wondering what a system might look like that takes all of these considerations into account? Request our lease compliance white paper, which delves into the essentials of compliance as an information system.