Oil & Gas Mineral Resources in Florida s Future South Florida Water Management District Current Appraisal Issues in Florida May 16 17, 2002 ADAM S MARK HOTEL ORLANDO, FLORIDA Presented by: Thomas A. Herbert, Ph.D., P.G. Tallahassee, Florida
Background and Experience Thomas A. Herbert, Ph.D., P.G. Professional Geologist with 36 years experience First chairman of the Florida PG licensing board Involved in the majority of oil exploration programs in Florida since 1979 Keen interest in minerals asset valuation
What are we doing today? Part I: Part II: Oil & Gas Mineral Rights The Geologic Setting and Background Part III: Oil Company Perspectives Part IV: Likely Scenarios Appraisers Might See Part V: Questions and Answers
Part I: Oil & Gas Mineral Rights
Valuation of Oil & Gas Minerals: Some Key Points Assets are out of sight Evaluations involve technical and scientific understanding of the area and the subject property you may need expert help Institutional knowledge is critical not unlike appraisal business Perceptions of value range widely depending upon the perceptions of parties involved
Tips for Land Managers and Appraisers Regarding Minerals Valuation of mineral assets may be costly May be expensive to acquire assets Land managers and appraisers may be called in to plan acquisition strategies Mineral reservations might be an option for some projects Simple review of situation may be all that s needed to clear O&G minerals issues
Roots of Oil & Gas Minerals Issues in Florida Exploration and Production Industry generally not well known or understood in the state Florida is an oil producing state; in 1978 ranked 6 th in USA Excellent potential for additional discoveries 70 years of exploration activities have created many interesting O&G minerals ownership scenarios
Oil & Gas Exploration Issues Segue to Potential Valuation Problems Production of O&G has created true wealth Exploration companies and discoveries have created land rushes Fringe players have complicated ownership of surface and minerals Speculators have created unreasonable expectations Large land holdings have strategic advantages for owners
Why are Oil & Gas Mineral Rights a Florida Issue? Urban development continues to move into oil prone areas International investors buying Florida Oil exploration often not seriously considered in land planning or land use regulations Environmental land acquisitions occurring in prospective oil exploration areas Regulatory prohibitions/constraints making resource buyouts an emerging scenario
Review of Types Mineral/Land Resource Interests Fee Interest surface as well as subsurface rights to all minerals Mineral Interest subsurface rights for oil and gas and solid minerals O&G Minerals Petroleum only O&G Minerals Restricted Restricted by depth or field
Who Has Control? Surface owner Lessee Mineral owner of severed interests Bona fide oil exploration company Speculators
Mineral Valuation in Producing Fields With established production value of minerals would be high Value based on revenue from royalty stream from production O&G rights probably too expensive to acquire
Florida Annual Crude Oil Production 1943 to 2002 Million Barrels Per Year 50 45 40 35 30 25 20 15 10 5 0 1943 Sunniland Discovery 1978 48 Million Barrels of Oil 1970 Jay Field Discovery North Florida South Florida Total State Production 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 1943 1960 1980 2002 Year
Mineral Valuation in Oil & Gas Prone Areas Within oil trends undrilled acreage may have extraordinary value that should be considered Closeology to existing production is an important factor Leasing history important Plans by exploration companies critical Size of subject property important
Why Are Oil & Gas Minerals Important? The issues need to be addressed and handled fairly among all parties Issues over minerals valuations can be an impediment to land acquisitions for environmental projects Precedents may be important
Petit Bois Island
Part II: The Geologic Setting and Background
Oil & Gas Reservoirs: Geologic Targets of Opportunity Accumulations of petroleum hydrocarbons in a trap or reservoir below land surface Map view of the extent of the reservoir identifies subsurface owners who may share in potential recovery thereby establishing mineral asset value
A Hill Under the Ground: Oil & Gas Reservoir Structural trap or hill Impervious seal Porosity in the hill Source of hydrocarbons Time and temperature; Nature s crock pot
1,200 Acre Field with 15 Wells 3 2 1 10 11 12 15 14 13
Florida Oil & Gas Areas 1. Smackover Trend 1 5 6 2. Sunniland Trend 3. Rubble Zone Trend 4 3 2 4. Offshore South Florida Basin 5. Destin Dome 6. Apalachicola Basin
History of Oil Exploration 1920 to 1945 A few shallow wells drilled before 1920 By 1920 Florida was a target Governor and Cabinet offered a $50,000 prize in the 1930s Sunniland field discovered in 1943 Humble Oil and Refining Company Photographer : Murray, J. A. 1943
Sunniland Oil Starts the Rush Major oil companies begin leasing private lands in 1946-1947 State lands and state waters leased Large landowners targeted O&G minerals severed by purchases Promoters complicate mineral ownership
Role of Drilling and Production Technology Early wells were drilled with wooden derricks and steam engines By the 1940s rotary drilling to 12,000 was possible In 1970s directional drilling of a mile of horizontal distance was possible 21 st century technology allows horizontal wells to reach large areas from one location
Significant Field Discoveries 1. Sunniland (1943) 2. 40 Mile Bend Field (1953) 4 6 3. Felda Field (1966) 4. Jay Field (1970) 5. Bear Island (1972) 6. Blackjack Creek (1972) 7. Raccoon Point (1976) 3 1 5 7 2 790 million barrels since 1943
Creation of Value: The Prize In Santa Rosa and Escambia Counties since 1970 more than $12 billion in revenue $1.5 billion in royalties to mineral owners In Collier, Lee, Hendry Counties since 1943 more than $1.6 billion in revenue $200 million in royalties to mineral owners Chevron offshore project $14 billion
Offshore Controversies Chevron offshore natural gas Coastal Petroleum in Florida state waters South Florida Basin All of these exploration areas are subjects of buyback of leases
Chevron Coastal Petroleum South Florida Basin
Environmental Issues and South Florida Operations: Protection through Acquisition Panther habitat Everglades watershed Big Cypress watershed Florida Bay
New Exploration Trends Escambia Santa Rosa Okaloosa Franklin Gulf Lee Hendry Collier
Part III: Oil Company Perspectives
Oil Company Perspectives Risk and Reward in the Corporate Boardroom Landowner Roles Dealing with the O&G Regulatory System Dealing with Environmental Lands Purchases
Oil Company Perspectives Oil field production is a complex industrial operation from a business standpoint Producing properties have a revenue stream from sales of O&G Field operator pays royalties to mineral owner(s) based on lease agreement Other mineral interests may share revenues and expenses
Oil Company Perspectives Entity producing the field bears costs of exploration and production Production needs to be large to cover costs including many dry holes High maintenance costs
The exploration company must acquire an oil and gas minerals interest in the property to obtain permits to drill from the state Acquisition of Oil & Gas Rights O&G mineral rights are usually leased from owner or another lessee In a field situation there may be one mineral owner or hundreds Assembling the leases for acreage can be a daunting task
Move as rapidly as possible to evaluate the acreage Generic Exploration Strategy Acquire control of prospective acreage before exploration activities start Control is usually in the form of options, leases or subleases on the rights to drill and produce Give away as little of the deal as possible to landowners or other interests
Action! Timing is critical in leasing and in exploration activities Oil companies tend to move quickly to acquire large areas of prospective acreage called a land play Once in control, exploration can take place at the pace governed by available capital and regulatory permitting
Financial Side for Acquisition of Oil & Gas Rights Lease usually requires a cash bonus ($20- $50/ acre) Annual rental in dollars per acre ($2-5/year) 1/8 to 1/4 of the value of production as a royalty with no load for costs or expenses Other sub lessees may require additional payments and fractional royalties (overrides)
Dissenting Mineral Owners O&G law allows companies to drill if 75% of owners consent to exploration and production within a drilling unit Dissenting owners are carried into the deal as working interest owners and production costs are deducted before payout High percentage of carried interest cools exploration excitement
Bottom Line for Oil Company Lots of front end time and money to acquire mineral acreage Large front end costs for geophysical testing Drilling cost for test well is $1.5 to $2.5 million In Florida about one wildcat well in ten has been a field discovery (10% success) Level of expenditures for exploration are a measure of industry s interest in an area
Proximity to oil production enhances potential values of the O&G mineral rights Landowner Perspective Small landowners collect rents and any royalties on production can be significant in high production areas Knowledgeable landowners in the catbird seat Large landowners may take role in the exploration process to help improve timing of investments and returns
State s Role: Protection of Mineral Owner Rights Establishes well spacing Environmental rules Prohibits wasteful operations Monitors production
Oil & Gas Regulatory System FDEP Oil and gas section Florida Geological Survey FDEP Wetlands WMD Site permits Local Permits Land use, construction Federal Wetlands, wildlife Surface Owner Access permission/conditions
Permitting Success In NW Florida and other prospective areas permitting of operations is straightforward South Florida, is difficult but not impossible It is wrong to think that environmental permitting issues will solve minerals valuation situations
Environmental Lands Purchases More than 50 years of environmental land purchases Everglades National Park Big Cypress Preserve Panther preserves EAA purchases Everglades protection areas
Part IV: Likely Scenarios Appraisers Might See
Each Project Stands Alone Factual review of mineral ownership situation Each project will have a unique set of circumstances that must be evaluated
Relict Plays Land records reflect a land play from a bygone era (1947-1960) Minerals severed and sold/leased in fractional units Minerals ownership lost in a maze of estates New owners require reasonably clear title and elimination of impediments to development
Resolution Strategy for Relict Plays Review of oil & gas potential for area Leasing history Interest by oil companies Production in area Review of land use and access issues Professional opinion letter
Unreasonable Expectations Landowner believes that there is unproduced oil beneath property Grandpa said that drillers capped a well in the 1940s No technical or scientific basis for claims
Resolution Strategy for Unreasonable Expectations Retain a PG or PE with petroleum experience to review situation Review landowners information and records Review of oil & gas potential for area Interest by oil companies Production in area Consultation with owner s representative Professional opinion letter
Fragmented Mineral Ownership Oil & gas minerals fragmented by land development schemes A nightmare of fractional interests to evaluate (thousands of entities may be involved) Ownership usually resides in estates and in overseas interests
Strategies for Resolving Fragmented Interests Retain a PG, PE, or leasing expert with petroleum experience to review situation Review information and records Consult with owner s expert or representative Obtain professional opinion letter Negotiate purchase of a portion of minerals in each potential drilling unit to remove incentives for exploration
Large Parcel Acquisition Assume knowledgeable owner Retain a PG to review situation Review landowners information and records Review of oil & gas potential for area Leasing history Interest by oil companies Production in area
Large Parcel Acquisition Consult with owner s expert/representative Develop valuation scenarios Professional report
Part V: Questions and Answers
End of presentation