Penny-Wise and Pound-Foolish: Perspective on Oil and Gas Acquisitions

Like real estate, the money in oil and gas is made when the asset is bought. 

Divergent skills play into making a good acquisition.  (Most famous is, of course, golf!)  Soft skills in relationships and negotiating do get deals done, but the purchase is premised upon hard skills, technical analysis and a thorough search for deal-killers.  Bidding strategy and PSA terms are, by comparison, a second-order variable compared to the question of whether the asset has the potential for improved value.

Economists have long called our industry "capital intensive," and I call that an understatement.  The cost of business has inflated tremendously with the prevalence of horizontal drilling and hydraulic fracturing.  Leasing costs, drilling costs, completion costs have turned even simple project from millions of dollars to tens of millions of dollars.

 I wonder sometimes, what is the appropriate amount of engineering before drilling a single $6 million well or purchasing a modest $10 million production package?  How much would be spent on engineering a building of equivalent cost?  Maybe more experience and judgment are involved than in designing a weight-bearing structure, or maybe not.  Certainly, though, petroleum engineering is not fungible; it is not a commodity. It is a service and one rendered with variable reliability.

 When a person is penny-wise and pound-foolish in acquisitions, he pays attention to the wrong variables, saving on the small things because they are visible and quantifiable while ignoring the larger, if less immediate, drivers.  Since the money is made when the investment decision is made, wouldn't it make sense to spend the money to make a decision you can rely upon?