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The Ripple Effect: A Systematic Approach to Shut-In Analysis

May 19, 2020 Best Practices Contract Analytics Digital Transformation Document Intelligence

As the market conditions fluctuate from week to week, management teams will be hyperfocused on balancing operational review of assets to manage economic consequences and preserve asset value. Thankfully, there is a systematic approach to evaluating assets that gives a comprehensive picture of opportunities and restrictions for production based on the supply chain of contracts that govern assets.

First, assess HBP unconventional wells:

Each production unit or pool will receive the rosebud analysis by locating the most restrictive lease terms and obligations on the shut-in of production. This would look like, the highest payment, shortest consecutive limitation, nearest impending cumulative limitation, or even a restriction on causes for production shut-in. By tying the top restrictions to each unit among production facilities, storage capacity, and volume commitments, you give your decision-makers a clear picture of the unique consequences buried in the contract terms of your leases.

Definition of Production • Lack of Market • Shut-In Obligations • Shut-In Limitations • Force Majeure • Continuous Operations • Rolling Pugh Clause

Then, look at Legacy Conventional Wells:

Traditional assets will require a supply chain analysis of storage capacity, wellbore integrity, and cessation of production language. Ensure that the payment obligations and timing are queued for processing and your approvals are documented to avoid untimely payments in one of the industry’s biggest historical moments. Depending on the definition of Operations and Production, intermittent production may satisfy the requirements of basic leases, but don’t rest before checking for those pesky in paying quantities clauses.

Wellbore Integrity • Prior Shut-In Periods • Force Majeure • Definition of Operations • Definition of Production

For assets under Active Development:

Decisions for capital approval will be unique to each situation, and the analysis is similarly unique. That said, continuous development requirements and approaching primary term expiration will require option to extend and force majeure review at a minimum. The impact of losing these proved undeveloped locations can wipe away the valuation of your assets where it hurts most, reserves.

Term Expiration Option to Extend • Shut-In Obligations • Shut-In • Force Majeure  • Continuous Operations • Pugh Clause • Continuous Development

Next, look at the cost of future development growth on Term Assets:

Future development growth is the price tag on your term core assets, these leases must be managed, and the potential value locked within them might be even more valuable to other operators. Before you add your assets to the trading room floor, weed out all the consent and notification requirements to expedite the due diligence and closing process.

Term Expiration • Option to Extend • Assignment Consent • Force Majeure • Pugh Clause • Notification

The Ripple Effect begins with Facilities:

Lack of production has an impact beyond the wellhead — the ripple effect begins with the production facilities and storage within your internal gathering system. Gathering and processing contracts will reveal each detail and their levers while you focus on the physical maintenance of infrastructure. Master service agreements will contain change of control and termination language that will undermine the value of your assets should they lapse in the shuffle of it all. Cessation of production will send you back to the lease records for rolling pugh and retained acreage losses.

Capacity and Dedication Language • Pressure Requirements • Physical Maintenance • Storage Capacity • Storage Obligations • Low Volume Fees • Pressure Fees

Finally, turn to Midstream & Marketing:

Look at transportation agreements for commitments and force majeure. Without sales there is nothing. Are you hedged? Companies that do have absolute shipping requirements for certain systems/sales points. When uneconomic situations present themselves, critical alternative pricing structures provide guidance for remedy or renegotiation.

Volume Commitments • Commodity Marketing • Uneconomic Pricing • Alternative Pricing Structure • Pressure Requirements / Fees • Ratable Allocation • Ethane Recovery / Rejection • Storage Capacity • Storage Obligations

 

With ThoughtTrace and a systematic approach to Shut-In Analysis is possible and far less daunting than traditional methods. Learn More Today:

For more information on using ThoughtTrace software to complete a systematic shut-in review and other high-value analyses, contact our experts and set up a demonstration. 

 


About ThoughtTrace:

ThoughtTrace launched the first industry-specific Document Intelligence and Contract Analytics platform that provides value on day one with minimal training and setup. Leveraging AI/ML as a complement to human expertise, the ThoughtTrace platform identifies critical obligations in contracts exponentially faster and with greater accuracy than traditional methods. ThoughtTrace reads, organizes, and surfaces data that gives users operational agility, actionable insights, and decision-making superpowers.

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