History

HISTORY

Upstream, Downstream, All Around the Stream - A brief history of petroleum

All of the oil world is divided into three: 1) The "upstream" comprises exploration and production;
2) The "midstream" are the tankers and pipelines that carry crude oil to refineries, and; 3) The
"downstream" which includes refining, marketing, and distribution, right down to the corner
gasoline station or convenient store. A company that includes together significant upstream and
downstream activities is said to be "integrated".

By generally accepted theory, crude oil is the residue of organic waste--primarily microscopic
plankton floating in seas, and also land plants--that accumulated at the bottom of oceans, lakes,
and coastal areas. Over millions of years, this organic matter, rich in carbon and hydrogen atoms,
was collected beneath successive levels of sediments. Pressure and underground heat "cooked"
the plant matter, converting it into hydrocarbons--oil and natural gas. The tiny droplets of oil liquid
migrated through small pores and fractures in the rocks until they were trapped in permeable
rocks, sealed by shale rocks on top and heavier salt water at the bottom.

Typically, in such a reservoir, the lightest gas fills the pores of the reservoir rock as a "gas cap"
above the oil. When a drill bit penetrates the reservoir, the lower pressure inside the bit allows the
oil fluid to flow into the well bore and then to the surface as a flowing well. "Gushers" - "oil
fountains" as they were called in Russia--resulted from failure (or, at the time, inability) to manage
the pressure of the rising oil. As production continues over time, the underground pressure runs
down, and the wells need help to keep going, either from surface pumps or from gas reinjected
back into the well, known as "gas lift". What comes to the surface is hot crude oil, sometimes
accompanied by natural gas.

But as it flows from a well, crude oil itself is a commodity with very few direct uses. Virtually all
crude is processed in a refinery to turn it into useful products like gasoline, jet fuel, home heating
oil, and industrial fuel oil.

In the early years of the industry, a refinery was little more than a still where the crude was boiled
and then the different products were condensed out at various temperatures. The skills required
were not all that different from making moonshine, which is why whiskey makers went into oil
refining in the nineteenth century. Today, a refinery is often a large, complex, sophisticated, and
expensive manufacturing facility.

Crude oil is a mixture of petroleum liquids and gases in various combinations. Each of these
compounds has some value, but only as they are isolated in the refining process. So, the first
step in refining is to separate the crude into constituent parts. This is accomplished by thermal
distillation--heating. The various components vaporize at different temperatures and then can be
condensed back into pure "streams".

Some streams can be sold as they are. Others are put through further processes to obtain higher-
value products. In simple refineries, these processes are primarily from the removal of unwanted
impurities and to make minor changes in chemical properties. In more complex refineries, major
restructuring of the molecules is carried out through chemical processes that are known as
"cracking" or "conversion". The result is an increase in the quantity of higher-quality products,
such as gasoline, and a decrease in the output of such lower-value products as fuel oil and
asphalt.

Crude oil and refined products alike are today moved by tankers, pipelines, barges, and trucks. In
Europe, oil is often officially measured in metric tons; in Japan, in kiloliters. But in the United
States and Canada, and colloquially throughout the world, the basic unit remains in "barrel",

though there is hardly an oil man today who has seen an old-fashioned crude oil barrel, except in
a museum.

When oil first started flowing out of the wells in western Pennsylvania in the 1860's, desperate oil
men ransacked farmhouses, barns, cellars, stores, and trashyards for any kind of barrel--
molasses, beer, whiskey, cider, turpentine, sale, fish, and whatever else was handy. But as
coopers began to make barrels specially for the oil trade, one standard size emerged, and that
size continues to be the norm to the present. It is 42 gallons.

The number was borrowed from England, where a statute in 1482 under King Edward IV
established 42 gallons as the standard size barrel for herring in order to end skullduggery and
"divers deceits" in the packing of fish. At the time, herring fishing was the biggest business in the
North Sea. By 1866, seven years after Colonel Drake drilled his well, Pennsylvania producers
confirmed the 42-gallon barrel as their standard, as opposed to , say, the 31 1/2 gallon wine
barrel or the 32 gallon London ale barrel or the 36 gallon London beer barrel.

And that, in a roundabout way, brings us right back to the present day. For the 42 gallon barrel is
still used as the standard measurement, even if not as a physical receptacle, in the biggest
business in the North Sea--which today of course in not herring, but oil.

This article taken from "The Prize" by Daniel Yergin

FINDING OIL & GAS

Fundamentals of Finding & Producing Oil & Gas in the Illinois Basin

Hydrocarbons - crude oil and natural gas - are found in certain layers of rock that are usually
buried deep beneath the surface of the earth. In order for a rock layer to qualify as a good source
of hydrocarbons, it must meet several criteria.
Characteristics of Reservoir Rock
For one thing, good reservoir rocks (a reservoir is a formation that contains
hydrocarbons) have porosity. Porosity is a measure of the openings in a
rock, openings in which petroleum can exist. Even though a reservoir rock
looks solid to the naked eye, a microscopic examination reveals the
existence of tiny openings in the rock. These openings are called pores.
Thus a rock with pores is said to be porous and is said to have porosity
(Figure 1).
Figure 1: Porosity

Another characteristic of reservoir rock is that it must be
permeable. That is, the pores of the rock must be connected
together so that hydrocarbons can move from one pore to
another (Figure 2). Unless hydrocarbons can move and flow from
pore to pore, the hydrocarbons remain locked in place and
cannot flow into a well. In addition to porosity and permeability
reservoir rocks must also exist in a very special way. To
understand how, it is necessary to cross the time barrier and take
an imaginary trip back into the very ancient past. Figure 2: Permeability
Imagine standing on the shore of an ancient sea, millions of years ago. A small distance from the
shore, perhaps a dinosaur crashes through a jungle of leafy tree ferns, while in the air, flying
reptiles dive and soar after giant dragonflies. In contrast to the hustle and bustle on land and in
the air, the surface of the sea appears very quiet. Yet, the quiet surface condition is deceptive. A

look below the surface reveals that life and death occur constantly in the blue depths of the sea.
Countless millions of tiny microscopic organisms eat, are eaten and die. As they die, their small
remains fall as a constant rain of organic matter that accumulates in enormous quantities on the
sea floor. There, the remains are mixed in with the ooze and sand that form the ocean bottom.

As the countless millennia march inexorably by, layer upon layer of sediments build up. Those
buried the deepest undergo a transition; they are transformed into rock. Also, another transition
occurs: changed by heat, by the tremendous weight and pressure of the overlying sediments, and
by forces that even today are not fully understood, the organic material in the rock becomes
petroleum. But the story is not over.

For, while petroleum was being formed, cataclysmic events were occurring elsewhere. Great
earthquakes opened huge cracks, or faults, in the earth’s crust. Layers of rock were folded
upward and downward. Molten rock thrust its way upward, displacing surrounding solid beds into
a variety of shapes. Vast blocks of earth were shoved upward, dropped downward or moved
laterally. Some formations were exposed to wind and water erosion and then once again buried.
Gulfs and inlets were surrounded by land, and the resulting inland seas were left to evaporate in
the relentless sun. Earth’s very shape had been changed.

Meanwhile, the newly born hydrocarbons lay cradled in their source rocks. But as the great
weight of the overlying rocks and sediments pushed downward, the petroleum was forced out of
its birthplace. It began to migrate. Seeping through cracks and fissures, oozing through minute
connections between the rock grains, petroleum began a journey upward. Indeed, some of it
eventually reached the surface where it collected in large pools of tar, there to lie in wait for
unsuspecting beasts to stumble into its sticky trap. However, some petroleum did not reach the
surface. Instead, its upward migration was stopped by an impervious or impermeable layer of
rock. It lay trapped far beneath the surface. It is this petroleum that today’s oilmen seek.

Types of Petroleum Traps
Geologists have classified petroleum traps into two basic types: structural traps and stratigraphic
traps. Structural traps are traps that are formed because of a deformation in the rock layer that
contains the hydrocarbons. Two common examples of structural traps are fault traps and
anticlines.

An anticline is an upward fold in
the layers of rock, much like an
arch in a building. Petroleum
migrates into the highest part of
the fold, and its escape is
prevented by an overlying bed of
impermeable rock (A).

A fault trap occurs when the
formations on either side of the
fault have been moved into a
position that prevents further
migration of petroleum. For
example, an impermeable
formation on one side of the
fault may have moved opposite
the petroleum-bearing formation
on the other side of the fault.
Further migration of petroleum
is prevented by the
impermeable layer (B).

Stratigraphic traps are traps that
result when the reservoir bed is
sealed by other beds or by a
change in porosity or
permeability within the reservoir
bed itself. There are many
different kinds of stratigraphic
traps. In one type, a tilted or
inclined layer of petroleum-
bearing rock is cutoff or
truncated by an essentially
horizontal, impermeable rock
layer (C).

Or sometimes a petroleum-bearing formation pinches out; that is, the formation is gradually cut
off by an overlying layer. Another stratigraphic trap occurs when a porous and permeable
reservoir bed is surrounded by impermeable rock. Still another type occurs when there is a
change in porosity and permeability in the reservoir itself. The upper reaches of the reservoir may
be impermeable and nonporous, while the lower part is permeable and porous and contains
hydrocarbons.

SECURING LEASES
Once a likely area has been selected, the right to drill must be secured before drilling can begin.
Securing the right to drill usually involves leasing the mineral rights of the desired property from
the owner. The owner may be the owner of all interest in the land, or just the mineral rights. As
payment for the right to drill for and extract the oil and gas, the owner will usually be paid a sum
call a "lease bonus" or a "hole bonus" for every well drilled on the leased land. He will also retain
a royalty on the production, if any, of the leased property. The royalty is the right to receive a
certain portion of the production of property, without sharing in the costs incurred in producing the
oil, such as drilling, completion, equipping and operating or production costs. The costs are borne
by the holder of the right to drill and extract the mineral, which right is usually referred to as the
working interest.In many cases the procurement of the lease from the land owner is
accomplished by a lease broker who will, in turn, offer and then assign the lease to an operator
such as Maverick Energy, Inc. Maverick Energy is very selective in choosing leases for drilling.
The lease broker usually retains an overriding royalty on the working interest as compensation for
his services. In the case of Maverick’s leases, there generally is a retained land owner’s royalty of
1/8 of all production and a 1/16 overriding royalty on the working interest, retained or granted to
one or more persons who may have acted as lease brokers.

DRILLING
Once an area has been selected and the right to drill thereon has
been obtained, actual drilling may begin. The most common
method of drilling in use today is rotary drilling. Rotary drilling
operates on the principle of boring a hole by continuous turning of a
bit. The bit is the most important tool. The rest of the rig ( a derrick
and attendant machinery) is designed to make it effective. While
bits vary in design and purpose, one common type consists of a
housing and three interlocking movable wheels with sharp teeth,
looking something like a cluster of gears. The bit, which is hollow
and very heavy, is attached to the drill stem, composed of hollow
lengths of pipe leading to the surface. As the hole gets deeper,
more lengths of pipe can be added at the top. Almost as important
as the bit is the drilling fluid. Although known in the industry as
mud, it is actually a prepared chemical compound. The drilling mud
is circulated continuously down the drill pipe, through the bit, into
the hole and upwards between the hole and the pipe to a surface
pit, where it is purified and recycled. The flow of mud removes the
cuttings from the hole without removal of the bit, lubricates and cools the bit in the hole, and
prevents a blow out which could result if the bit punctured a high pressure formation. (See the
drilling rig to the right.)
The cuttings, which are carried up by the drilling mud, are usually continuously tested by the
petroleum geologist in order to determine the presence of oil.

DRILLING TO TOTAL DEPTH
The final part of the hole is what the operating company hopes will be the
production hole. But before long, the formation of interest (the pay zone, the oil
sand, or the formation that is supposed to contain hydrocarbons) is penetrated
by the hole. It is now time for a big decision. The question is, "Does this well
contain enough oil or gas to make it worthwhile to run the final production string
of casing and complete the well?"
EVALUATING FORMATIONS
Examining Cuttings
To help the operator make his decision, several techniques have been
developed. One thing that helps indicate whether hydrocarbons have been
trapped is a thorough examination of the cuttings brought up by the bit. The
mud logger or geologist (Remember him? He’s been there all along,
monitoring downhole conditions at the location.) catches cuttings at the
flow ditch and by using a microscope or ultraviolet light can see whether oil
is in the cuttings. Or he may use a gas-detection instrument.
Well Logging
Another valuable technique is well logging. A logging company is called to the well while the crew
trips out all the drill string. Using a portable laboratory, truck-mounted for land rigs, the well
loggers lower devices called logging tools into the well on wireline. The tools are lowered all the
way to bottom and then reeled slowly back up. As the tools come back up the hole, they are able
to measure the properties of the formations they pass.Electric logs measure and record natural
and induced electricity in formations. Some logs ping formations with sound and measure and
record sound reactions. Radioactivity logs measure and record the effects of natural and induced
radiation in the formations. These are only a few of many types of logs available. Since all the
logging tools make a record, which resembles a graph or an electrocardiogram (EKG), the
records, or logs can be studied and interpreted by an experienced geologist or engineer to
indicate not only the existence of oil or gas, but also how much may be there. Computers have
made the interpretation of logs much easier.

Coring
In addition to these tests, formation core samples are sometimes taken. Two methods of
obtaining cores are frequently used. In one, an assembly called a "core barrel" is made up on the
drill string and run to the bottom of the hole. As the core barrel is rotated, it cuts a cylindrical core
a few inches in diameter that is received in a tube above the core-cutting bit. A complete round
trip is required for each core taken. The second is a sidewall sampler in which a small explosive
charge is fired to ram a small cylinder into the wall of the hole. When the tool is pulled out of the
hole, the small core samples come out with the tool. Up to thirty of the small samples can be
taken at any desired depth. Either type of core can be examined in a laboratory and may reveal
much about the nature of the reservoir.

COMPLETING THE WELL
After the operating company carefully considers all the data obtained from the various tests it has
ordered to be run on the formation or formations of interest, a decision is made on whether to set
production casing and complete the well or plug and abandon it. If the decision is to abandon it,
the hole is considered to be dry, that is, not capable of producing oil or gas in commercial
quantities. In other words, some oil or gas may be present but not in amounts great enough to
justify the expense of completing the well. Therefore, several cement plugs will be set in the well
to seal it off more or less permanently. However, sometimes wells that were plugged and
abandoned as dry at one time in the past may be reopened and produced if the price of oil or gas
has become more favorable. The cost of plugging and abandoning a well may only be a few
thousand dollars. Contrast that cost with the price of setting a production string of casing -
$50,000 or more. Therefore, the operator’s decision is not always easy.

Setting Production Casing
If the operating company decides to set casing, casing will be brought to the well and for one final
time, the casing and cementing crew run and cement a string of casing. Usually, the production
casing is set and cemented through the pay zone; that is, the hole is drilled to a depth beyond the
producing formation, and the casing is set to a point near the bottom of the hole. As a result, the
casing and cement actually seal off the producing zone-but only temporarily. After the production
string is cemented, the drilling contractor has almost finished his job except for a few final
touches.

CEMENTING
After the casing string is run, the next task is
cementing the casing in place. An oil-well cementing
service company is usually called in for this job
although, as when casing is run, the rig crew is
available to lend assistance. Cementing service
companies stock various types of cement and have
special transport equipment to handle this material in
bulk. Bulk-cement storage and handling equipment is
moved out to the rig, making it possible to mix large
quantities of cement at the site. The cementing crew
mixes the dry cement with water, using a device called a jet-mixing hopper. The dry cement is
gradually added to the hopper, and a jet of water thoroughly mixes with the cement to make a
slurry (very thin water cement).

Special pumps pick up the cement slurry and send it up to a valve called a cementing head (also
called a plug container) mounted on the topmost joint of casing that is hanging in the mast or
derrick a little above the rig floor. Just before the cement slurry arrives, a rubber plug (called the
bottom plug) is released from the cementing head and precedes the slurry down the inside of the
casing. The bottom plug stops or "seats" in the float collar, but continued pressure from the
cement pumps open a passageway through the bottom plug. Thus, the cement slurry passes
through the bottom plug and continues on down the casing. The slurry then flows out through the
opening in the guide shoe and starts up the annular space between the outside of the casing and
wall of the hole. Pumping continues and the cement slurry fills the annular space.

A top plug, which is similar to the bottom plug except that it is solid, is released as the last of the
cement slurry enters the casing. The top plug follows the remaining slurry down the casing as a
displacement fluid (usually salt water or drilling mud) is pumped in behind the top plug.
Meanwhile, most of the cement slurry flows out of the casing and into the annular space. By the
time the top plug seats on or "bumps" the bottom plug in the float collar, which signals the
cementing pump operator to shut down the pumps, the cement is only in the casing below the
float collar and in the annular space. Most of the casing is full of displacement fluid.

After the cement is run, a waiting time is allotted to allow the slurry to harden. This period of time
is referred to as waiting on cement or simply WOC.

After the cement hardens, tests may be run to ensure a good cement job, for cement is very
important. Cement supports the casing, so the cement should completely surround the casing;
this is where centralizers on the casing help. If the casing is centered in the hole, a cement
sheath should completely envelop the casing. Also, cement seals off formations to prevent fluids
from one formation migrating up or down the hole and polluting the fluids in another formation.
For example, cement can protect a freshwater formation (that perhaps a nearby town is using as
its drinking water supply) from saltwater contamination. Further, cement protects the casing from
the corrosive effects that formation fluids (as salt water) may have on it.

Perforating
Since the pay zone is sealed off by the production
string and cement, perforations must be made in order
for the oil or gas to flow into the wellbore. Perforations
are simply holes that are made through the casing and
cement and extend some distance into the formation.
The most common method of perforating incorporates
shaped-charge explosives (similar to those used in
armor-piercing shells). Shaped charges accomplish
penetration by creating a jet of high-pressure, high-
velocity gas. The charges are arranged in a tool called
a gun that is lowered into the well opposite the producing zone. Usually the gun is lowered in on
wirelin (1). When the gun is in position, the charges are fired by electronic means from the
surface (2). After the perforations are made, the tool is retrieved (3). Perforating is usually
performed by a service company that specializes in this technique.

Acidizing
Sometimes, however, petroleum exists in a formation but is
unable to flow readily into the well because the formation has
very low permeability. If the formation is composed of rocks
that dissolve upon being contacted by acid, such as limestone
or dolomite, then a technique known as acidizing may be
required. Acidizing is usually performed by an acidizing
service company and may be done before the rig is moved off
the well; or it can also be done after the rig is moved away. In
any case, the acidizing operation basically consists of
pumping anywhere from fifty to thousands of gallons of acid
down the well. The acid travels down the tubing, enters the
perforations, and contacts the formation. Continued pumping forces the acid into the formation
where it etches channels - channels that provide a way for the formation’s oil or gas to enter the
well through the perforations.
Fracturing

When sandstone rocks contain oil or gas in commercial quantities but the
permeability is too low to permit good recovery, a process called
fracturing may be used to increase permeability to a practical level.
Basically, to fracture a formation, a fracturing service company pumps a
specially blended fluid down the well and into the formation under great
pressure. Pumping continues until the formation literally cracks
open.Meanwhile, sand, walnut hulls, or aluminum pellets are mixed into
the fracturing fluid. These materials are called proppants. The proppant
enters the fractures in the formation, and, when pumping is stopped and
the pressure allowed to dissipate, the proppant remains in the fractures.
Since the fractures try to close back together after the pressure on the
well is released, the proppant is needed to hold or prop the fractures
open. These propped-open fractures provide passages for oil or gas to
flow into the well. See figure to the right.
ARTIFICIAL LIFT
After the well has been perforated, acidized or fractured, the well may not produce by natural
flow. In such cases, artificial-lift equipment is usually installed to supplement the formation
pressure.

Sucker-Rod Pumps
The artificial-lift method that involves surface pumps is known as rod pumping or beam pumping.
Surface equipment used in this method imparts an up-and-down motion to a sucker-rod string
that is attached to a piston or plunger pump submerged in the fluid of a well. Most rod-pumping
units have the same general operating principles.

INJECTION WELLS

In the ordinary producing operation only a portion of the oil
in place is recoverable by primary production methods.
Such methods include free-flowing wells and production
maintained by pumps. As oil is extracted from a reservoir or
sands the pressure which brings the oil to the well is
reduced. Secondary recovery methods are intended to
increase the recoverable percentage of the oil in place by
injecting a substance such as gas or water into the
producing formation. The injected substance is intended to
increase the pressure on the oil in the formation and drive it
toward the well-bore. A well, called an injection well or
water injection well, is usually drilled in order to inject the substance. Sometimes a previously
drilled, abandoned well can be reworked as an injection well. When water is used as the injectant
it is often produced on the property itself. Excess water produced by operating wells may be
diverted to the injection well and used as the injectant. This method of water disposal usually
alleviates the need for a separate water disposal well. If the water from the producing wells does
not provide enough injectant to provide proper pressure for secondary recovery, a water supply
well may be required to provide an adequate supply of water.
OIL PRODUCTION
Once an accumulation of oil has been found in a porous and permeable
reservoir, a series of wells are drilled in a predetermined pattern to
effectively drain this "oil pool". Wells may be drilled as close as one to each
10 aces (660 ft. between wells) or as far apart as one to each 640 acres (1
mile between wells) depending on the type of reservoir and the depth to the
"pay" horizon. For economic reasons, spacing is usually determined by the
distance the reservoir energy will move commercial quantities of oil to
individual wells.The rate of production is highest at the start when all of the
energy from the dissolved gas or water drive is still available. As this energy
is used up, production rates drop until it becomes uneconomical to operate
although significant amounts of oil still remain in the reservoir. Experience
has shown that only about 12 to 15 percent of the oil in a reservoir can be
produced by the expansion of the dissolved gas or existing water.

SECONDARY RECOVERY
Waterflooding is one of the most common and efficient secondary
recovery processes. Water is injected into the oil reservoir in certain wells
in order to renew a part of the original reservoir energy. As this water is
forced into the oil reservoir, it spreads out from the injection wells and
pushes some of the remaining oil toward the producing wells. Eventually
the water front will reach these producers and increasingly larger
quantities of water will be produced with a corresponding decrease in the
amount of oil. When it is no longer economical to produce these high
water-ratio wells, the flood may be discontinued.As mentioned previously,
average primary recoveries may be only 15% of the oil in the reservoir. Properly operated
waterfloods should recover an additional 15% to 20% of the original oil in place. This leaves a
substantial amount of oil in the reservoir, but there are no other engineering techniques in use
now that can recover it economically.In most cases, oil reservoirs suitable for secondary recovery
projects have been produced for several years. It takes time to inject sufficient water to fill enough
of the void spaces to begin to move very much oil. It takes several months from the start of a
waterflood before significant production increases take place and the flood will probably have
maximum recoveries during the second, third, fourth, and fifth years after injection of water has
commenced. The average flood usually lasts 6 to 10 years.

WATERFLOODING IN THE ILLINOIS BASIN
Waterfloods have been highly successful in the Illinois Basin and probably account for 75% of the
total production from the area. Flood recoveries will generally be an additional 80% to 100% of
the primary production.There are no special problems with floods in the Illinois Basin. Ample
supplies of salt water are generally available and injection pressures are not too high - 1500 PSI
or less. Corrosion is minimal and no expensive, high-pressure equipment is involved. Sufficient
potential flood properties are available on reasonable terms - especially smaller areas owned by
independent operators who do not have the finances to support the installation of properly
engineered secondary recovery operations.Waterfloods in the Illinois Basin should return 2 to 3
times their cost and are considered to be low-risk prospects.

OPERATION
When all equipment is in place, the oil may begin to flow into the holding tanks to await pick up. It
can be expected that a well will not be in production for certain times due to adverse weather
conditions, mechanical malfunctions and other unforeseen circumstances. After the production
period commences, it is necessary to incur certain costs in order to bring the oil to the surface.
These costs include normal maintenance on the pump and other equipment, replacement of any
pipe or tanks as needed, compensation to the operator of the pump, and payment of any
incidental damages to the owner of the surface rights of the leased property. In some cases, the
oil in a pay zone will be mixed with salt water. In such cases, the oil must be separated from the
salt water and the salt water disposed of in a manner which is not harmful to the environment.
The water may be hauled away by tank truck but often this phenomenon requires the drilling,
nearby the oil producing well, of another well into which the salt water will be pumped. The cost of
this water disposal well is normally considered to be a cost of operation. Finally, there may be
additional costs incurred in opening up a new pay zone when any presently producing pay zone
becomes economically unfeasible. Because opening a new pay zone involves the installation of
very little, if any, new equipment, the costs involved therein usually are not very substantial.

SALE OF OIL
Once the oil is out of the ground and into the holding tanks,
it must be sold. In most cases each holder of a working
interest has the right to take his portion of production in
kind, therefore, make his own arrangements for its sale. It
is not uncommon, however, for all the holders of a working
interest of a well to enter into the same arrangement with
the same buyer of the oil production. These sale contracts
are normally entered into for periods of not longer than a
few months but in no case longer than one year. The buyer of the oil will generally be advised by
the operator of the working interest as to the identity and extent of ownership of each of the
holders of the working interest, as well as the identity of the royalty holders and the amount of
their interests. The information will be compiled on division orders which are the basis upon which
the buyer of the oil can divide the proceeds of sale among the various holders. The buyer of the
oil will pick up the oil from the holding tanks at periodic intervals, gauge it and remit the remaining
proceeds in the proper amounts to the holders of the working interest and the royalties.

WHY INVEST IN OIL & GAS?

The secret to asset appreciation is to buy in the path of growth.

Oil is one of the most important natural resources known to mankind. For most societies in the
world, oil is the principal natural resource that fuels their economies.

Then why, in this great age of communication and technology, do we need to be concerned about
a natural resource like oil? Simple. Nearly 98% of everything you have or do is in some way
related to crude oil. Heat for your home, gas for your car, 2 liter plastic bottles for pop, and
petroleum jelly are just a few examples of products created from crude oil.

The United States has the greatest standard of living in the world, as well as the largest economy.
Why? Because we have always tried to maintain control over the supply, as well as price, of oil.
Over the last 10 years, the U.S. economy has undergone the largest economic expansion in
history and cheap oil has fueled this unprecedented growth. Unlike the 1970s, when the U.S. was
held at bay by OPEC withholding oil production for political reasons, the growth of the oil industry
during the 1990s, and beyond, will be more likely be determined by the laws of supply and
demand.

As democracy and capitalism are spreading around the world, global oil consumption is at record
levels. Throughout Latin America, Russia, India and Asia, economic growth is accelerating at a
remarkable pace; much faster than anything we have seen in the U.S. Recently, Forbes
described the development now exploding across Asia:

"You can almost smell the money in Shanghai, Bangkok, Kuala Lumpau or just about any East
Asian commercial center outside Japan these days. Traffic snarled, construction booming, glitzy
shopping malls showing the latest Hollywood movies... These formerly traditional societies,
stagnant for centuries, are exploding into the modern capitalist world and spawning vast new
middle classes with a taste for consumer goods and the means to indulge that taste. Healthy

economics generate great wealth, and Asia is churning out billionaires as though on a conveyor
belt."

--Forbes

In these countries, more than two billion people, or more than 40% of the world's population, are
suddenly entering the age of consumerism. Thanks to American movies, TVs and VCRs, they
have seen what the rest of the world has and they want it all. "They want McDonald's french fries.
They want Coke. They want Levi jeans. They want Caterpillar tractors. They want cars, cameras,
mouthwash, homes, toothpaste, Tide, aspirin and ten thousand other products we take for
granted. "In vast regions of these countries, they're starting from the raw basics of modern life.
They need electric power, running water, sewage treatment plants, bridges, tunnels, roads, cities
-- you name it. "And oil is the one commodity absolutely essential to this tidal wave of global
growth. It's literally the blood supply of capitalism. If you're a developing country, you need all the
oil you can get to drive your trucks, your cars, your planes and ships. You need oil to run your
factories, machines and power plants so necessary to a modern industrial economy. "What we're
seeing is the first simultaneous, worldwide economic expansion since the late 1970s. But this
time, many newly industrialized countries are joining the party and importing an unending
procession of super-tankers laden with black gold."

--Personal Finance

An immense market and the promise of continuing growth are why oil and gas is such a sure
investment.

If you have comments ar questions about this and other topics of interest to Oil and Gas
investing, please feel free to ask Larry Neely, president of Maverick Energy, Inc.

IS OIL AND GAS A PROFITABLE INVESTMENT?
Yes. Oil & gas can be a very profitable investment. After all, some of the largest companies in the
world are oil and gas companies.

Investing in oil and gas can be accomplished in many ways; from purchasing stock in large public
companies to partcipating in private, independent projects. You can invest in oil and gas
exploration, refineries and service companies and you can invest through mutual funds or
derivatives such as commodities futures.

All of these investment areas in oil and gas are potentially profitable. However, as an investor you
should try to analyze their varying degrees of risk and reward.

One of the first factors of investing properly is trying to determine what your investment goals or
objectives may be. As an example, it may be that you are looking to receive a 7 to 12 percent
annual return. This type of return can be easily obtained with the purchase of stock from most of
the well-known major or independent oil companies.

Or, you may be looking for a rate of return in the 20 to 50 percent range. This can be
accomplished by purchasing stock in aggressive small independents or by investing with service
companies expanding into new markets.

There is also potential to receive much higher rates of return - some exceed 100 percent -
depending upon your ability as an investor to accept higher degrees of risk. Investing with
independent operating companies on a direct participation investment is one option. This is

similar to what the major companies do when they invest with each other in developing projects.

They also reduce their risk by participating with other oil companies that are located in different
geographic areas. It is not uncommon for oil companies to have a specific knowledge or
infrastructure in different geographic regions. By sharing in developmental costs, the companies
equally reduce risk and gain potential reserves by diversifying their risk.

Yes, investing in the oil and gas industry can be very profitable. However, it is very important to
have a good understanding of the type of programs, their structures, and your own level of risk.
This leads us to the next question.
IS OIL AND GAS A SAFE INVESTMENT?

Yes, investing in the oil and gas industry can be a safe investment. As we eluded to earlier, one
of the safest investments is to own stock in what many consider to be "blue chip" companies
known as the "Majors" in oil and gas.

One incentive in investing in a "blue chip" company is that your level of risk is quite low. As a
result, return levels are also fairly low. However, you will be making an investment in the oil and
gas industry. If this is your main objective and you're looking for low risk, this may be a good and
safe investment. On the other side of the coin: the higher the risk, the greater the return. Again,
we come back to your investment objectives.

One way our government helps address the issue of risk is that it allows companies that drill for
and produce oil and gas to offset some of the cost through the use of tax deductions.

Oil and gas are natural resources that deplete through extraction. In other words, these are not
renewable energy sources and our tax code has allowed a depletion allowance of up to 15 to 20
percent*. In addition to the depletion allowance, we have intangible drilling costs as well as
tangible drilling costs. There can be additional tax benefits depending upon what type of category
a particular project falls into.

For example, there are tax credits for drilling tight sands as well as unconventional reservoirs.

Even though the tax benefits are very helpful in offsetting some of the risk for oil and gas, no
consideration for an investment in oil and gas should be considered based on the tax benefits
alone. Tax benefits are what they are - BENEFITS. These benefits are very useful, however, if it
is taxes you are wanting to avoid, you would be much better off giving your money to a favorite
charity.

When investing in oil and gas there are many aspects of the industry to consider before
determining a safe investment. Three of the main features are:

1) Your investment acumen.
2) Investment objectives.
3) What type of investment vehicle?

1) Investment Acumen: Investment acumen means insight or judgment. In other words, as an
investor you need to have the knowledge to be able to ask the right questions and understand
what is the right answer. That way, you will be able to make much better investment decisions.
Safe decisions to invest or who to invest with are the first prerequisite to profitable investing.

2) Investment Objectives: As we stated earlier, your investment goals, or potential returns,

accompanied with the appropriate amount of risk can only be determined by you, the investor.

As an example, if you are interested in analyzing the potential loss of your investment funds, you
would be much better off investing in "blue chip" major oil company stocks. However, if you could
accept a larger degree of risk, or in other words, potential loss of these investment funds, you
may consider investing in projects that offer a higher rate of return. This leads us into our next
category.

3) Investment Vehicles: These vehicles may be stock, an investment fund, a drilling fund, private
placement, commodities trading, or some combination of all of the above.

These options bring us to the next section: What ways are there to invest?

WHAT WAYS ARE THERE TO INVEST?

Major Oil Company Stock - All of the major oil companies that own the majority of reserves
throughout the world are probably traded companies. As an investor interested in oil and gas,
their stock can be considered one of the safest investments in oil and gas. However, as a general
rule, they do not provide a high rate of return.

Medium-sized Oil and Gas Companies - Many of these are publicly traded on the New York Stock
Exchange, as well as the NASDAQ and other exchanges throughout the world. Again, these
stocks can offer a higher rate of return, but potentially have more risk due to the fact that most of
these companies are still acquiring assets and going through a growth process.

Mutual Funds - These focus their portfolios towards the energy industry. They may own stock in
the majors, stock in independents or stock in companies that provided a variety of services for the
oil and gas industry. There may even be some direct participation in oil and gas development or
exploration projects.

Independent Oil and Gas Companies - There are over 4,000 independent oil and gas companies
located in the United States. Many of these firms offer the opportunity to invest with independent
producers in industry development projects as well as exploration. These direct participation
investments are called private placement and can utilize the full capability of the tax benefits.

Private placements do offer a much higher rate of return and can, in most cases, have a much
higher degree of risk.

One important fact to consider is that 90 percent of wells drilled on an annual basis in the United
States are drilled by an independent oil company. These producers may vary in size from one-
man shops to multi-level corporations.

Drilling Funds - In the early 1980s, many of the small independent companies that were publicly
held provided funds that specifically targeted drilling projects.

Most drilling funds can be broken down into two general categories: 1.) Exploration Drilling and
2.) Developmental Drilling.

Exploration Drilling is described as the search for oil or gas more than a mile away from any
existing or proven economic oil or gas wells.

Developmental Drilling is typically categorized as wells designed to define or extend a proven
field or existing production. This can be a step-out project to define the productive limits of a
reservoir or can be considered in-field (or in-fill) drilling of a pattern of wells. It can be used in a
waterflood development. Some types of horizontal drilling are considered developmental due to
the fact that the drilling operations are being conducted in known reservoirs, thereby reducing the
risk. Developmental drilling offers the highest profit potential of any oil and gas area, as well as
significantly lowering the risk.

Commodities Trading - Oil and gas are traded on a daily basis in different exchanges throughout
the world. Oil is the commodity that is most commonly referred to as West Texas Intermediate.
This commodity is traded on a daily basis in contract increments of 5,000 barrels. Even though
you are investing in the oil and gas industry, or one of the products of the industry, you would be
described as a speculator.

Basically, what you are speculating, is whether or not the price for a certain commodity will move
up or down. Speculating in oil and gas commodities can be a very volatile and turbulent market.
As an investor, one should keep in mind that you are speculating in price movement and not the
actual ownership of that commodity. Commodity trading has an extremely high degree of risk.

Royalty Funds - Generally speaking, a royalty fund is when royalty interests are being bought,
sold and held by the funds sponsors. In nearly all leasing situations, once a lease has been
developed, it provides a revenue stream. A portion of the revenue stream is set aside for royalty
which generally amounts to 12.5 percent and overriding royalty and/or carried working interest of
2 to 5 percent.

In a royalty fund the objective of the fund is to generate its revenue from royalties that are held
from different producing fields throughout the country. The main feature to owning a percentage
of a royalty fund is that the royalty owner (or interest owner) pays no percentage of operating or
developmental costs associated with the production of the oil or gas. Royalty programs generally
offer a low risk factor along with a relatively low return. However, their main feature is that these
types of programs last for many years.

Lease Acquisition Funds - The main feature with this type of fund is that the fund will retain a
royalty for accumulating the leases that it will "turn" into an operating company. Generally, the
funds are used for acquiring acreage in developing exploration plays. These types of acquisition
programs offer a higher degree of risk, but can generate a significant return on equity if the
sponsors of the fund are able to turn their acreage to other exploratory type oil companies.

Combination Funds - These are what they sound like, a combination of acquisition and drilling
funds. Generally, this type of fund will target a regional-type oil development play whereby they
will acquire existing properties and then do a developmental drilling program on the properties
they have acquired. These types of programs generally have a high degree of success and offer
an excellent rate of return as well as providing a minimal amount of risk.

To properly analyze these investment vehicles, it is important to devote the time and energy into
understanding the company and its projects.

HOW DO I ASSESS A POTENTIAL OIL & GAS INVESTMENT?

Understanding or assessing potential really starts with a two phase process:

1) The company that will be sponsoring the program.
2) The property that the company will be developing or acquiring.

The Company

One of the best ways I have found to analyze the company is to look at their management and
track record. Look for solid financial records as well as integrity in their management and
operations. The easiest way to find this information is to ask the company for what is commonly
called a Due Diligence document.

A due diligence is basically a summary report of the company, its management, its staff,
reserves, inventory, equipment and track record.

From the due diligence you should be able to determine how well an investor has fared in prior
programs, how economical the programs have been and how sound the proposed undertaking
might be. Technical due diligence will help eliminate most of the unsound investment proposals.

One area of the due diligence I like to focus on is "Prior Activities."

Basically, this will summarize the programs the firm or company has drilled in the past and how
they have fared. Prior activities will cover when the offer commenced, the amount of the offering,
the minimum size of units, the method of offering (private or public), the number of wells in the
project and the type of wells (development, waterflood, exploration). It will also cover the net
revenue, the frequency of payments (monthly, quarterly, dry hole) and it should also state the
amount of the promoted interest.

The projects should then be summarized by lease name and a yearly account of the gross
revenue, operating expenses, net revenue and cumulative barrels. You should be able to
determine an average return on revenue as well as a total return on investment. I have found that
these numbers can and will provide you with a fairly accurate track record of the types of projects
that this company has developed.

As an investor you should try to determine the credibility of the company under investigation. One
of the best ways I've found is to refer to the section of the due diligence covering corporate
references. Here you will find a list of references and areas in which they do business. It may be
accounting, supply stores, service companies, etc.

TIP - refer to the company that purchases the oil or gas that the firm has produced. Call the crude
oil buyer (or gas purchaser) and they will be able to give you an objective opinion about the
company you may be interested in. After all, this is the focal point of all exploration and
development companies. The bottom line is whether or not the company has the ability to find
and produce oil and gas on an ongoing and daily basis.

The Property
There are many ways to evaluate drilling proposals or acquisitions of producing assets.
Generally, the sponsor will provide you with a geological report or engineering report discussing
the potential of these reserves.

Unless you have a proper understanding of geology and/or engineering your best course of
action may be to consult with an energy analyst or advisor that is knowledgeable about the
company and/or projects you are considering. Quite frankly, the hardest part about determining

whether an oil and gas project will be successful is trying to locate the specific benefits of the
project through the terminology the geologist or engineer is using for a given area.

The best way to evaluate an oil project is to try to determine how successful the other wells that
were drilled in the area were. What we are really looking for is a history of wells that have been
drilled in a given area and what type of reserves have been recovered. This should serve as a
benchmark in determining the probability of success in this project. In most drilling proposals or
geological reports, what has been produced in the past will give a summary or probability of what
might be expected in the future or throughout the drilling process.

Analyzing geological and engineering reports is a process that should be undertaken by someone
with the proper investment acumen as well as understanding of geology and engineering. The
best description of this individual would probably be an energy analyst. However, with a little
common sense and time devoted to research and understanding, a non-industry individual should
be able to determine the proper investment scenario.

Again, we come back to the question of how we asses the potential of an oil and gas investment.
The two phases that I referred to in the preceding section are only a cursory review. There are
many aspects of an oil and gas project that need to be addressed. Some of these are sharing
arrangements, deal terms, liabilities, market for product, transportation, further development and
many other subjects.

For further information on this process you can refer to Frequently Asked Questions or simply
contact us at our E-mail address: mav2lcnd@verizon.net.

WHAT ARE THE TAX BENEFITS OF OIL AND GAS INVESTING?

Intangible Drilling Cost (deductible in full) In the process of drilling a well, there are certain
expenses incurred that have no salvage value. They may be labor, drilling expenses, testing, etc.
These expenses generally represent from 40 to 60 percent of the total cost of the well. The
investor's proportionate share of these intangible expenses can be deducted as a cost of
operation in the year in which they were incurred. Further reference: Sec. 263a of the 1986
Internal Revenue code.

Intangible Completion Costs These are treated the same as intangible drilling costs. These are
approximately 10 to 15 percent of the cost of the well.

Depreciation Equipment used in the completion and production of a well - pumping units, tanks,
well casing and any other physical equipment - is depreciated over a seven-year life under the
new Modified Accelerated Cost Recovery System (MACRS).

Tangible Completion Expenses These usually represent 25 to 40 percent of the total cost of the
well.

Depletion Allowance Fifteen to 20 percent of the gross annual income from the production of a
well is tax free revenue (according to IRS guidelines on producing heavy oil or stripper wells from
1993 forward).

Alternative Minimum Tax The percentage of depletion allowance for independent producers or
investors is no longer a tax preference item for the Alternative Minimum Tax (effective for tax

years beginning after 12/31/92). Percentage depletion has been repealed as a preference item.

WORLD OIL

WHAT IS A BARREL OF OIL, ANYWAY?

HOW CAN I GET MORE INFORMATION ON OIL AND GAS INVESTMENTS?

There are a few books that are specific to oil and gas investments. They are "The Why's and
How's of Investing in Oil and Gas" by Lewis Mosburg, Jr. and "Money in the Ground" by John
Orban.

Our industry tends to focus more on the specific disciplines rather than the different types of
investment vehicles.

Because of the diversity of the industry and its investment characteristics, as well as the fact that
we are recovering oil and gas from traps located several thousand feet from the surface of the
ground, our industry has always held a certain mystique and aura. This is why it has always been
misunderstood and why it is vital to thoroughly educate yourself before investing.

If you are interested in learning more about investing in the energy business and being a part of
the largest industry in the world, please feel free to contact Maverick Energy, Inc.,
at mav2lcnd@verizon.net.

If you haven't done so already, please read our Terms of use and Disclaimer. Thanks.

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