For the Best Oil Profits... Think Small...
by David Fessler, Investment U Senior Analyst
Tuesday, July 26, 2011: Issue # 1564
“Stripper wells” sound like something you might find in Las Vegas.
In reality they have nothing to do with Sin City… but they could just be the ticket for your investment portfolio.
If you’re oil and gas industry tech-savvy, you know that stripper (or marginal) wells are old oil or gas wells that are near the end of their commercial lives. As such, they produce minimal amounts of oil or natural gas.
According to the Interstate Oil and Gas Compact Commission (IOGCC), a stripper oil well is one that produces 10 barrels of oil per day (BOPD), or 60,000 cubic feet (Mcf) of natural gas per day or less.
For the most part, stripper wells started life as normal wells producing much higher volumes via the natural underground pressure present in a new well. As time passes, the pressure drops and so does the volume of oil or gas produced.
But here’s the interesting part: Even after the pressure and well production drops to marginal levels, up to two-thirds of the oil in the reservoir may still be there...
Each reservoir is different, of course, so the amount of oil left varies widely. The remaining oil may not be economically retrievable using conventional lifting technology. As a result, many of these marginal wells are at risk of being plugged or prematurely abandoned, leaving a lot of oil or gas behind.
Oil Stripper Wells Are Still Producing Oil
According to the National Stripper Well Association (NSWA), most oil stripper wells average 2.01 barrels per day. There are around 400,000 of them in the United States, with about 320,000 still actively producing oil. Since 1994, the number of oil stripper wells has remained relatively constant.
Sure, you might have to think small... Two barrels a day doesn’t sound like much. But there’s money in numbers, so to speak. As you can see from the graph below from the Energy Information Administration, taken together, oil stripper wells accounted for over 16 percent of all the oil produced in the United States in 2009.
Their share of production continues to go up. The reason is that production gradually decreases over time from non-stripper oil wells.
Natural Gas Stripper Wells
The situation is similar with regards to natural gas stripper wells. The NSWA’s definition of a gas stripper well differs slightly from the IOGCC’s. It says that natural gas wells fall into the stripper category if their daily production falls below 90,000 cubic feet of natural gas per day.
The graph below from the EIA shows the count (the United States has about 340,000) and overall U.S. production natural gas stripper wells account for.
Some natural gas stripper wells also produce natural gas liquids, which are separated and refined in a similar manner as crude oil.
Collectively, natural gas stripper wells produce about 2,912 billion cubic feet of natural gas, or about 11 percent of the entire production in the United States in 2009.
From 1994 through 2008, the number of gas stripper wells rose, and with the exception of 2005, so did their share of overall gas production.
Starting in 2006, their share of contribution flattened, and then started to decrease. This is solely due to the increased contribution that high-volume horizontal shale wells have made since that time.
The Best Bet for Stripper Well Exposure
Many stripper wells are owned by little “mom and pop” operations. Small private companies that own a dozen or so wells are the norm. But as the price of oil fluctuates, these operators increasingly find themselves unable to continue with maintenance and equipment issues. They're increasingly selling out to larger operators.
One of those that has more stripper wells in Colorado than any other is the Bill Barrett Corporation (NYSE: BBG). The company is most active in the Rocky Mountains region of the United States. Its most active projects are in the Piceance Basin, the Powder River Basin, the Uinta Basin, the Wind River Basin, the Deseret Basin and the Big Horn Basin.
The company doesn’t publish its statistics on how many stripper wells are part of its ongoing operations, but according to an article that appeared a few years ago in The Denver Post, it’s one of the largest operators of stripper wells in Colorado.
And 62 percent of the wells in Colorado are stripper wells. The Colorado Oil and Gas Conservation Commission indicates that of the roughly 25,700 active wells in the state, 9,599 are natural gas stripper wells and 6,480 are oil stripper wells.
Stripper well oil and gas extraction technology is constantly improving. Most of these wells are unmanned and remotely monitored, keeping production costs low, an important factor when you’re talking about wells producing small amounts of oil and gas.
Investors wanting exposure to stripper wells might want to consider picking up a few shares of Bill Barrett Corporation.
And remember the next time you pass one of those old wells lazily pumping away, it’s making a significant contribution to the oil and gas supply in the United States.