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4 Major Operating Expenses for Oil and Gas Lease

Are you about to enter an oil and gas lease and you are wondering about your ongoing expenses? If YES, here are oil and gas lease ongoing expenses and how you can manage them.

Lease operating expenses, LOE, simply refers to the cost of operating the wells and equipment on a producing lease, many of which are recurring. The term “LOE” is frequently used in the oil & gas business to talk about costs associated with a given well or lease.

Most times, when there are multiple partners involved in the lease, the LOE is shared among the different parties; with the percentage of operating expenses, each partner is represented by their “gross working interest” or GWI in the well.

With today’s crude oil and natural gas prices, the survival of exploration and production (E&P) companies depends on razor-thin margins. Lease operating expenses––the costs incurred by an operator to keep production flowing after the initial cost of drilling and completing a well have been incurred––are a go-to variable in assessing the financial health of E&Ps.

The slump in crude oil prices that started some years ago––and natural gas prices that, by and large, have remained lower than many had hoped––have put extra financial pressure on many types of companies within the energy sector, E&Ps chief among them.

Note that a major metric in analyzing how well (or how poorly) E&Ps are doing on the cost side of the ledger is LOEs, which as explained are the costs incurred by an operator to keep production flowing after the initial cost of drilling and completing a well have been incurred.

For one thing, the costs associated with employees known as “pumpers,” “well tenders,” or “lease operators,” who regularly monitor and maintain onshore Wells is one well known LOE. Their wages, vehicle expenses, gasoline costs, and any other expenses they have for items they use while tending to the wells (such as methanol for de-icing) are all LOEs.

Other LOE elements come from operating and maintaining the on-site production equipment used to keep wells flowing and to process the hydrocarbons they produce so that they will be in a form suitable for transportation away from the lease.

However, note that not all well costs are included in the LOE basket. For instance, the initial cost to purchase and install the equipment is capitalized as part of the “producing property,” but the expenses for fuel used to power and maintain equipment at the lease site are included among LOEs. Here are the most pertinent LOE in the oil and gas industry.

Operating Expenses for an Oil and Gas Lease

  1. General Maintenance

Maintenance is just a single (and very broad) aspect of a multidimensional picture when it comes to LOE. Coupled with capital equipment maintenance, E&P companies are expected to marshal the labor force to conduct maintenance and ongoing operations.

As it stands, many if not necessarily most companies could stand to optimize at least one of these processes in order to reduce their LOE.

Note that as a well grows older, the amount of oil or gas that it produces via free flow will begin to decline significantly. Most modern companies use a wellhead compressor for gas lift and that lowers the density of the fluids inside the well, making it easier to extract oil and unlocking years of extra production potential.

Note that one significant way to reduce LOE is to reduce routine maintenance and inspection trips to the compressor itself. Instead, producers can instrument the compressor and use sensor reading to understand and analyze whether the machine can operate safely.

This allows producers to remotely restart their compressors without arranging an inspection tour, dramatically cutting planned downtime and increasing production.

  1. Environmentally Compliant Disposal

Have it in mind that the same frangible rocks that contain oil and natural gas also contain saltwater, which is then produced as a by-product of drilling. On an offshore oil rig, disposing of this by-product is as simple as letting it flows back into the sea. Inland oil wells such as those found in some basins will have more complex challenges.

On land, saltwater is regarded as an environmental hazard that can poison ecosystems, and its treatment has to be carefully analyzed. The most common choice is to drill a second dry well alongside the first one, pump saltwater into it, and then cap the well with a non-porous rock.

It can be daunting to coordinate the disposal of wastewater in this manner. The material should be pumped as soon as possible, and every day that it remains aboveground represents an additional storage cost.

Therefore, to minimize LOE related to saltwater, producers are beginning to expedite disposal using the right mix of personnel and equipment. If an operator mismatches its disposal capacity with its need to dispose of saltwater, then it is paying unnecessary overhead.

  1. Saltwater Separation and Pipeline Maintenance via Chemical Mechanisms

Chemical treatment is a very crucial and basic step in the oil production process. Separating crude oil into its various grades is an intensive process that doesn’t start at the refinery, but instead at the well itself. Chemical additives are known to help separate oil from saltwater, thin out paraffin and asphalt to prevent blockages in the well and pipelines, clean emulsions on the bottom of tanks and prevent wells from becoming shut-in.

Acquiring and deploying these chemicals can represent a primary component of a company’s LOE. Notably, there are too many variables that control whether a production company is spending wisely when it comes to chemical management.

For example, are batch (or “truck”) treatments happening at the correct frequency and intervals? Or are the correct amounts of chemicals injected for continuous chemical treatments? Underdosing chemical exposes the operator to expensive equipment damage or even well shut-ins that result in both lost production and costly well walkovers. On the other hand, overdosing results in wasting chemicals.

  1. Labour Pool for Efficient Operations

Labour, like maintenance, is indeed a broad aspect of a multidimensional LOE picture. A traditional oil well makes use of labor during almost every stage in the production process, but out of necessity, this is beginning to change. During the early part of the 2010s, the oil industry experienced what experts called The Great Crew Change.

A big percentage of the workforce retired—taking their institutional knowledge with them—and leaving much of the remaining personnel composed of under-35s. Also, low oil prices have depressed hiring budgets, which entails that there isn’t much new talent entering the field.

Lease operating expenses tend to increase when this newly shrunken workforce is deployed ineffectively. When equipped with mobility options and industry 4.0 applications, each crew member can cover a large area, addressing problems remotely and pre-emptively.

Lowering your Lease Operating Expenses (LOE), operating lean, an all the while maintaining safety and regulatory compliance requires a new, digital approach. To mitigate the LOE, oil companies need a solution that does more than simply reduce maintenance costs.

They need an expansive digital toolkit that helps them optimize their operational expenses over every aspect of the production process.