Oil & Gas Masterclass: How to Evaluate Energy Investments – Part 1 | Aspen Funds
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Oil & Gas Masterclass: How to Evaluate Energy Investments – Part 1

Join co-hosts Bob Fraser and Ben Fraser in this informative episode of the Oil & Gas Masterclass as they dive into the world of oil & gas investments. In Part 1 of this captivating series, they are joined by a special guest, Jeff Mohajir, President and Chief Executive Officer of Mohajir Energy Advisors, a renowned expert in the field. Together, they explore the intricacies of evaluating oil and gas investments, why it makes sense now to invest in this asset class, the keys to doing due diligence on these investments, and where he is finding the biggest opportunities right now.

Learn more about Mohajir Energy Advisors ⁠⁠⁠⁠⁠https://mohajir.com/

Connect with Bob Fraser on LinkedIn ⁠ht⁠tps://www.linkedin.com/in/bob-fraser-22469312/⁠⁠⁠
Connect with Ben Fraser on LinkedIn ⁠⁠⁠https://www.linkedin.com/in/benwfraser/⁠⁠

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Transcription

Ben Fraser: Hello, Future Billionaires! Welcome back to another episode of the Invest Like a Billionaire podcast.

Today on the podcast we have something a little bit unique. So just recently we hosted a webinar on oil and gas investing. And this is something that we thought was just. Too good not to share with our podcast listeners. And so we’re actually gonna do a two part series because this was a pretty long webinar and really diving deep into the nuances of oil and gas investing.

And so we brought on a 40 year expert in this space. His name is Jeff Mohajir of Mohajir Energy Advisor. He’s been a consultant on billions of dollars of drilling for very large operators and they’ve operated five of their own. Funds. And so he’s seen everything you can see over the past 40 years and up and down markets and as this landscape has evolved.

And so this is something that you’ve been following us for a while that we’re very bullish on. We think there’s a lot of opportunity in oil and gas investing. And so we really wanted to lay out, this masterclass concept of all the things you gotta think about when you’re looking at deals in this sector.

And so some of the things we cover first and foremost on this first part of the podcast is, What’s the bigger picture environment? What’s the macro environment going on? What’s the political environment? What are the economic things going on, and how is it changing the energy landscape?

And then we dive really deep into the technical side of it, right? Understanding, the nuances of horizontal versus vertical drilling. We talk about different ways and types of investing, oil and gas. Even talk about fracking, right? And then the next Part of this, you’ll see the kind of final pieces that we talk about, which will include talking about the risk factors and things you gotta consider, and then really where we’re seeing the opportunity.

So a lot of juicy detail here that you’re gonna wanna stay tuned for. So do not tune out and enjoy this masterclass part one on oil and gas investing. 

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Hello everyone. Thanks for coming on today. This is our oil and gas masterclass, even rhymes. We’re super excited to do this today in the whole kind of topic is a deep dive on oil and gas investing and really how to evaluate energy investments. Right?

So if you’ve been tuning into our podcast or listening to any of the content we’ve been putting out at Aspen Funds, we’re very bullish on oil and gas. Meaning we’re very You believe that the prices have some room to run to the upside? There’s a lot of extraneous factors going on that we think support investing in this asset class.

And as we’ve been doing over the past couple years, we’ve been seeing a lot more people coming out with different oil and gas opportunities, and they’re not all created equal. And so we wanted to bring on our guest today, Jeff Mahajer, who we’re very excited to have here in person in our office here in Kansas City.

Jeff has been in this space for almost 40 years. 40 years, yeah. Okay. So he’s seen it all, been through many cycles and obviously just has a whole lot of experience, the wisdom to share with us. 

Bob Fraser: So we’re gonna be focusing on making oil and gas investing approachable to investors who haven’t done oil and gas before.

So a lot of folks in our world have done real estate investing, node investing, other kinds of investing, but Oland gas is one of these scary things that a lot of people have have had bad experiences in or have heard about bad experiences. So we’re gonna dive in and actually look at how to do this, right?

Yeah. 

Ben Fraser: So before we do that, Jeff, can you give a little bit of your background and just Sure. To give people context for, your expertise and 

Jeff Mohajir: track. Sure. I went to the University of Kansas, studied geology, rock jock and got a job right out of school, moved to Houston. And so a lot of people call it the planet Houston.

I did a tour in Houston where a lot of energy folks go. I work for a company called Panhandle Eastern Pipeline that moved from Kansas City right down on Broadway to to Westover in west, I’m sorry, Weimer in Houston. And it was a great experience. It was interstate pipeline. Got a lot of great experience.

They moved me very quickly from the geology department into contracts. So I ended up doing a lot of contract work and was there for almost five years. My dad had started a consulting firm here in Kansas City. With an office in Houston and it was Energy Consulting right now, energy Consulting petroleum Engineering, geological Con consulting, geophysical Consulting.

And his anchor client was a large endowment fund that was wanting to do energy investing in. Back in the late eighties, oil prices had crashed and this fund had put together a mezzanine Bank fund. And so we were named the technical or exclusive technical consultant to the fund. So we, the fund basically made around $400 million in investments.

We advised on all of those, obviously by making $400 million. We probably looked at over a billion dollars worth of investments and and 

Bob Fraser: advised on geology engineering, all things technical related to this. And value 

Jeff Mohajir: valuation. Technical and economic. And economic, yeah. So we’d run all the economic models doing all the forecast and, from a, we were very fortunate in the fact that the fund made over a 20% rate of return when they when they closed.

So at that point we decided, Hey, we’re, you know what? We’re doing a pretty good job for the fund. Why don’t we consider doing it for ourselves? In 1992, we came across a project that we really liked and we decided to move forward on it. It was in the Rockies. It was about 400 producing oil and natural gas wells.

That we partnered with a company called K N Energy. Who was interesting enough was the predecessor to Ken Morgan, if anybody knows that name. Sure. So they’re the predecessor to Ken Morgan. They were our partner and we went out and we developed probably around a hundred to 150 wells in about a three year time span.

Cann sold their interest to a small company called Tom Brown, Inc. Outta Midland at the time. This would’ve been 1997 a person by the name of Georgia w Bush was on the board of Tom Brown. And he after they they bought us out after they bought us out, he left and ran for Governor of Texas.

But they since had been sold to Inana and now they have been sold to inventive. And how did they do on your investment? They did great. I remember. In 1997, when we sold, we priced all of our natural gas. It was a very natural gas centric play. We priced all of our natural gas at $2 per mcf gas price flat for the life of the property.

So this is 50 years long live reserves, and we sold the reserves for roughly about 50 cents per m mcf proved m MCF in the ground, and that was 1997. Wow. I thought we did very good on it. So in 2003, Tom Brown took our assets sold to Inana for $3 per NCF in the ground. So they did better it. And that actually gave me a great lesson about capital formation and what your motivators are in terms of Your divestment strategy and how capital can push you maybe a little sooner rather than later in terms of selling something.

Ben Fraser: And through the past, several decades you’ve done I think five funds. 

Jeff Mohajir: And even actually five, five different LLCs or investment opportunities is what we really have done. 

Ben Fraser: Yes. And at different points of the market. The latest one you did was thousand 20. Which has seemed like a hard time to be in a space, but has obviously done very well.

Jeff Mohajir: Yeah. That we were again, very blessed. We took advantage of a situation where 2020, everybody knows April 11th, 2020 oil traded at negative $37 a barrel. So what ended up happening was there were a lot of private equity companies or firms that really got killed. They were looking for ways to rationalize their portfolio companies.

We happened to know one of the portfolio companies and we put together a letter of intent to buy them out. And so we put the letter of intent in place in September with a August 1st, 2020 effective date, and ended up closing on December 29th, 2020. Yeah, it was, a lot of people at that time thought, energy’s dead.

Never go above $35 a barrel. Again, gas will never go above $2. An MCF again. But obviously we thought that was a great time to be investing. 

Ben Fraser: I think before we dive into a lot of the more technical things, I’d love to just set the stage because inevitably whenever we, talk about oil and gas, I just got an email from someone that said, I can’t believe you guys are considering this.

Just in a couple years, EVs are gonna take over and oil and gas is gonna be irrelevant. And so there is this kind of, sense and narrative that is being consistently propagated with, the mainstream news that oil and gas is yester day’s energy. And why would I be investing in something that’s no gonna longer be relevant?

So I think let’s dive in kind of at the big picture here of why does it even make sense to consider this space and are we gonna be around, in a couple years having this conversation? 

Jeff Mohajir: I think, number one, it’s. You said it. It’s about energy and power.

Electricity. Obviously, I think we are moving towards an electric or a power driven. Economy. But what most people don’t think about is how do you generate power? I have a, I think I’ve told you this story maybe, and I have a great friend who lives down the street from me, bought one of these beautiful, electric Mustang SUVs and he came and picked me up and it’s great.

And he, he said, touting some of the green energy. And I told him, I said, I’m a little upset with you. And he said why? And I said you’ve just increased our carbon footprint on our block. And he said I bought an electric powered car. And I said you realize that the majority of power in Kansas City comes from is generated by coal.

So the more you’re plugging in your garage, the more coal generation for power there is. And anyway, he said that’s too complicated. I can’t think about that. But no, I, that, that is it. Oil and natural gas, particularly natural gas on the power side, the more electric cars are, the more batteries there are, it’s gonna take more natural gas to generate that power.

Ben Fraser: Yeah. We’ve got a few slides here. Do you want to chime in on some of the kind of green energy thoughts? 

Bob Fraser: Yeah. And so green energy, we’re all rooting for green energy, right? Yeah. But there’s really, a reality check that’s needed. According to the eia by 2030, existing mines and projects under construction will only be able to produce about half what’s needed to satisfy demand for electric ve vehicle production.

So 59 new lithium mines are needed. 38 new cobalt mines, 72 new nickel mines. And it’s worth noting that the lithium mines, for instance, it started between in the last not last decade, took an average of 16 years to develop. 

And by the way, those mines all operate on diesel, right?

Diesel, 

Jeff Mohajir: very high 

Bob Fraser: excavators, diesel trucks transporting diesel operated, refineries. And it, it takes a massive amount of fossil fuels to do that. Go ahead and flip the next slide. They’re saying it needs, we need about 40 times the lithium production, 40 x in the next let me see.

But between now and 2040, yeah, 40 times more lithium. Where are we gonna get that? 

Ben Fraser: About and this is just to meet the stated goals 

Bob Fraser: for electric people, electric demand and graphite. We need 25 x cobalt, 20 x nickel, 20 x. And not just that but a lot of times to develop it. Go ahead and do the next slide.

So this kind of answers the question and for anybody that’s, that can see this. So if you look at all fuels today of all energy sources, right now 83% are carbon, 83%, and it’s about a third, coal, natural gas, and oil. But as you pointed out, If you want to move something, a mass of something from one place to another, only liquid petroleum can do that.

That’s correct. Now that’s ships airplanes, correct. It trains. They’re all running on liquid petroleum products. 

Jeff Mohajir: Yeah. I always think about this. Always think about, it’s a little bit like physics, if you’re, we live in a global economy, our whole economy, Amazon is all based on moving products freely around the globe, and the only way to efficiently move mass is through liquified petroleum.

Yeah. So ba 

Bob Fraser: back to this slide. So 83% of fuels are carbon. So 17% is non-carbon, and that’s, nuclear hydro wind. Wind is 17% of the 17%. So it’s just really not much. And we’ve been trying to decarbonize really since the 1970s, so 50 years and we’ve gotten 17%. While we’re all rooting for it, the truth is, green energy just is not ready to carry the load of what we have.

Yeah. And I think 

Ben Fraser: going back to the kind of mineral exploration needed for Lithium and all these other ones in the us, there hasn’t been a new lithium mine permitted for how long. And it’s just Yeah. That we’re not making the steps needed to actually increase the production.

It’s magically gonna appear 

Bob Fraser: somehow. So it’s a lot of wishful thinking. The truth is, we are a carbon-based economy and we are, we will be for the foreseeable future. And there’s a lot of hope out there and fission or fusion, but it’s not close. The world is walked away from nuclear, which I’m, I think is a great alternative.

But and there the even new nuclear is, Very safe and very cost effective and very clean. There’s new generation of nuclear technologies. Fission, fusion is a long ways away. Yeah, there’s nothing even close. So 

Ben Fraser: yeah. Do you wanna comment on kind of some of the ESG narratives that’s driven supply down?

Bob Fraser: Yes. So there it was there was a, we can talk more about ESG a little bit. But there was, during the Obama, at the end of the Obama recession, you remember the Obama recession, it’s like the economy never quite got going. And energy demand globally just started to plateau.

And if you look at the curves, it started to plateau out. The narrative came forth. We’ve done it, we’re post fossil fuels now. And that was great. Until demand starts creeping up, which we saw, in the post Covid era. But what happened is this narrative why would you want to invest in a dead business, right?

In a dead, it has no future. And so what happened is global energy investment decreased by 55% in new production generating new fossil fueled production. And it’s one of these things that’s so unpopular. If you say you’re drilling for oil, you almost have to put a paper bag over your head.

Especially, if you’re on the coast or something, or in the right, the wrong crowds, yes. And you’re destroying the planet. And so that just, people exited the market. And meaning, meaning meanwhile, a lot of our politicians, John Kerry, has been going around and trying to make sure that there was no access to capital for any of the fossil fuel producers.

So literally you couldn’t get bank loans, you couldn’t get credit and really undermining this. And and the problem with that, okay, so it’s dropped by 55% investment. The problem is that global energy production is decreasing about five to 7% per year because of depletion. Meaning you’re pulling the oil out, your production is dropping.

We need 5 million barrels a day of new production coming online every year just to maintain production. Correct. Production level. So the problem and the problem is if you don’t invest, you don’t get that. So what we’re seeing is you simply can’t fix it. Seven years of underinvestment is gonna take seven years of overinvestment.

After seven years, we will see production begin to increase. But the problem is there’s not a lot of marginal production. So as soon as we see demand, our views, we’re gonna see, we’re gonna see energy prices rise and right, right now, because of China’s slowness and a few other things, we’re not seeing demand hitting yet.

Ben Fraser: Yeah. And I think playing to that thought of the demand side of it, lot, most estimates are predicting even by 2030, that demand for oil and gas is going to be at least the same, if not increase. Just because we can’t hit these goals as fast as they want us to convert to the renewable energies.

And it’s, Beyond 2030 it’s probably, still pretty aggressive on, how quickly we can adopt some of these technologies. So you got a decreasing supply curve. You got at least consistent, if not growing demand. And, that usually only does one thing to the market.

And that’s what’s interesting here. I’d love to parlay that conversation into, just from your experience being in the space for a long time, what are you seeing right now as where what’s happening in the landscape? Because you, you mentioned earlier in 2020 when oil prices went negative for a day.

And a lot of these, companies that we’re investing were gonna be a little bit over leveraged and got wiped out. It’s changed the appetite a little bit. It’s changed the game to where it’s, the thought process and how you invest is different than a few 

Jeff Mohajir: years ago for sure.

The investment strategy is completely changed in my career. The investment strategy for oil and gas, particularly for oil and gas entrepreneurs had been a value play. It always been a value play. We have a very capital intensive business, as Bob mentioned. You have somewhere between a seven to 10% just a natural reservoir decline.

For most reservoirs you’ve got a depleting asset that needs to be replaced with new drilling, which is. Capitally intensive. And so it was always a value play. You buy something, you sprinkle just the right amount of capital into it, and then you sell it to a much larger investment company or oil and gas company for a disproportionate sh interest rate of return.

Ben Fraser: Oh, you’re saying value creation, is that through drilling or is that existing production 

Jeff Mohajir: value added through drilling through And you’re, and you basically are selling the undeveloped locations, the proved undeveloped. So the upside, you’re selling the upside, right? 

Ben Fraser: Because you proved you’re print out the reserves and then you’re selling that to the next guy to go drill it.

Very 

Jeff Mohajir: similar to something that you would experience in the.com era. You’re basically selling upside Well with Covid and because we had so many. Capital institutions get hit hard and we’re not able to return capital back to limited partners. We have in the oil and gas base, in oil and gas base, we have had our industry go from more of a value play to much more of an income play.

And it’s brought in a discipline where, there was so much capital and because of interest rates, it was relatively cheap capital. That was getting deployed. That when prices went down, the private equity, the institutional capital dried up. And then you have on top of that the esg, which you have a lot of the limited partners that might be in a private equity fund, be it an endowment or a some kind of other institutional, Capital source just doesn’t want to invest in hydrocarbons.

Bob Fraser: So people are exiting the market. So 

Jeff Mohajir: capital fled, capital has fled. It’s brought somewhere of a discipline to where, not only do you have that, but then you also have geologically you’ve got where we have all of these plays have been figured out. You don’t have a land rush, so to speak.

You know all of the plays in Texas 

Bob Fraser: Yeah. Meaning the producing basins. Correct. They’re known quantities. Correct. Yeah. Correct. Yeah. Correct. So it’s not this 

Jeff Mohajir: WildCAD, everybody’s chasing, trying to get into new, a new play and trying to, figure out how we can get, High returns over capital being employed and so 

Bob Fraser: as capital has fled, the, a lot of this, a lot of the big boys have stopped leveraging heavily.

Capital is there’s got much more conservative, they’re not putting debt on these things. They’re not, there’s, there’s not a lot of, capital is far less available today, both in terms of debt and equity to big boys and little guys correct. In the space. And it’s also caused the pricing of oil fields to drop dramatically.

When you say it’s gone from, it’s not priced on income, it’s not, or it’s not priced like a.com where, hey, we got this great idea, it’s worth a billion dollars, correct? To now. How much money can you produce cash for me next month? That’s what I’m gonna pay you on. Prices of these producing assets have dropped precipitously.

Jeff Mohajir: Correct. And investors are, you’re on sale, right? Yeah. The investors are much more concerned with dividends or distributions, instead of 

Bob Fraser: blue sky. Correct. Hey, it’s gonna be amazing. Correct. There’s also 

Ben Fraser: been a broader just approach to not oversupplying the market too, cuz part of what happened in kind of Covid era and obviously demand, but then there was a lot of just pump pump.

And you’ve kinda said that not more, not just discipline on the capital structure side of, having lower leverage, but also a sense of, hey, let’s not flood the market because we these prices a little bit where they’re at. We don’t wanna get back to 20 $30 

Jeff Mohajir: oil. Correct. And there’s this old adage, right?

The best cure for high prices are high prices, right? The best cure for low prices are low prices, right? And so you have this. This idea that capital is efficient and it comes into a market when it’s needed. At the same time, we have oil and gas companies who, got really kicked, during covid prices have come back up in 2021, 2022.

And so a lot of them figured out their, their bank loans and they have, their balance sheets are in good shape, right? And so now they’re saying to themselves, look, for us, it’s better to maintain, instead of having 12 rigs running and trying to bring a bunch of supply on, it might be better for us to only have.

Four or five rigs running, right? 

Bob Fraser: No one’s chasing the upside as much anymore, and you’re seeing this as price. When prices hit $120 a barrel, not too long back, you didn’t see a lot of new production coming online. People are like, 

Jeff Mohajir: eh, not only did you not see a lot of new production, you didn’t see a lot of new capital because these investment allocators, whether it be at a pension or at a, endowment or a private equity, they don’t want to be the one.

To have to write down their investment 30% again, like they did in 2020. 

Bob Fraser: And this was you’re talking about the COVID crash. There was a crash before, this was around the 2016 timeframe with the, so much of the industry, there’s bankruptcies left and right. Correct. And it was people chasing the, the fracking revolution, which really hold horizontal and fracking technology.

People don’t realize how new that 

Jeff Mohajir: is. New, relatively new. Yes. And so all 

Bob Fraser: these plays, these basins got massively developed and it was a lot of blue sky, a lot of.com type and type. Correct. Emotion or exuberance. And then when the crash came around 2016, just bankruptcies galore in the industry.

So it’s the, it’s the second major hand slap on the industry. And now the industry is just We’re not 

Jeff Mohajir: taking any risk here. I think it has brought in a discipline and you’ve seen that from, it was an overdevelopment in some of these plays to now just the right amount of development and a lot of companies or underdevelopment or under a lot of companies at the time, in 2016, were trying to drill their way out of Right.

A bad situation. So 

Bob Fraser: price, and that’s very hard price collapsing. You’re drilling faster and faster. Correct. To earn less and less Correct. And and then it’s the bottom half. Yeah. It’s the perfect storm at that day. Yeah, it was. And but, so a lot of discipline is coming in, but what’s happened because of this, because capital has fled and because of esg, esg, people don’t realize there’s a lot of activists, investors that have taken over boards of the majors and they’re focusing on renewables instead of oil and gas development, which is great for renewables, but it’s not very good for oil and gas and creating a, again, a big, under supply a lot.

Jeff Mohajir: It’s true. And the other thing that’s important is you’re right about the majors, but. Really when you think about oil and gas development and production in our country, it’s what we call the independent oil and gas companies that really are the ones that go out and take risk in new areas or do a lot of the drilling do a lot of the geology and those companies, they’re not Exxon, they’re not Chevron they have to get access to capital, whether it be through institutions, private equity, or banks. And that is very hard for them. So they’re not driving development. 

Bob Fraser: Okay, so let’s, you wanna, let’s shift, let’s 

Ben Fraser: just kinda the technical here.

So we’ve, a lot of the people on this webinar are probably thinking, I’ve seen some things come around, I’ve heard of, vertical versus horizontal. I’ve heard of fracking, I’ve heard, all these different terms. But let’s just break down, if you mentioned earlier on the oil and gas geology, 

Bob Fraser: How the, just start with geology.

How does oil and gas work? And, think about a real estate investor, we don’t know much about this kind of thing, so give us, give us your entire degree in five minutes or less. 

Jeff Mohajir: Think the, when I think about geology and it always does start with the rock, because you’re producing oil or natural gas out of rock sediments and rock is obviously subsurface.

So that’s one of the things to always think about. We think about real estate investing. We think about something on the surface one of the hard pieces of oil and gases as opposed to coal. You mine coal, or you mine minerals and you can put the minerals up on the surface and the warehouse next door.

With oil and natural gas, it’s typically you’re not storing it. You’re, the storage is in the ground, right? And now you’re trying to figure out just how much is down there. Will it produce economically at, given commodity prices? At given expenses? And so it can be anywhere from, three, 4,000 feet.

Actually, one of, surprisingly enough, the natural gas industry, particularly for natural gas interstate pipelines started not too far away. From this spot out in Lewisburg, Kansas where they were producing natural gas outta coal mines. Pretty shallow thousand feet, 1500 feet.

And they were collecting this natural gas and then selling it to end users. And that’s really how the mid-continent interstate pipeline business started. So it goes down, some, somewhere, anywhere between, a thousand feet all the way down to, 30,000 feet and then obviously the offshore, so six miles.

Yeah. Yeah. And and it can get pretty, it can get, it’s, the way that the, our industry drills is engineering feet on how they can bring oil and natural gas to the surface. And then we’ve had this major. New technology come in, come through for horizontal drilling. Okay? But before horizon, before we get through completions.

Bob Fraser: So I think a lot of people think about an oil and gas or an oil. You drill a hole and there’s this giant lake of oil down there and you hit it, and then it gushers up and you sell it. It’s not really like that, right? 

Jeff Mohajir: No, it’s a pond. It’s not really, the way, the best analogy I can give you is that, you’ve got a cup here.

And you put a straw in it and you just, each reservoir, each straw has a different size cup and the way that you suck the oil or natural gas out, the pressure that you’re using that’s what we’re trying to figure out is just how much is there. But it’s 

Bob Fraser: really, it’s not a reservoir in true sense of the most people think about it.

It’s really just oily 

Jeff Mohajir: rock. It’s oil well. Yeah, it’s not the clamps where you sh go out shooting and oil comes popping out of the ground. That’s typically 

Bob Fraser: not how it works. And so I, I think a lot of the traditional wells that were drilled early on in the fifties and sixties and stuff, they were certain geological formations.

There were salt caps and other things that really, very unique things are very rare, very difficult to find that had a lot of oil, a lot of that stuff’s played out and what’s happening now. And correct me if I’m wrong, but my understanding is it’s in shale play, so these are very tight plays. So the rock is very tight.

It’s not very porous. So the way you get oil out is the rock has to be porous. It has to like, think of a sandstone or a sand where the oil can move through the rock. That’s 

Jeff Mohajir: permeability. Yes. That’s permeability per permeability. 

Bob Fraser: Yes. And if the rock’s tight, it can’t move. And it’s also laid out, in these, for example, the shell plays, it’s laid out in sedimentary layers.

So it’s this giant layer, like you go out to the Grand Canyon and layers of red and then layers of white and it’s layers of oil bearing rock that are horizontal and for hundreds of square miles. Yeah. And then there’s another layer below that’s a different kind of oil bearing rock that’s hundreds of square miles and maybe it’s 10 feet deep or 20 feet deep in other places.

But it’s very predictable. 

Jeff Mohajir: Where it is. Correct. And that is that’s where the new technology came into play, right? For horizontal drilling. So what happened was, vertical drilling, obviously a lot of wells have been drilled. So vertical 

Bob Fraser: drilling, you put a, you just drill straight down and whatever 

Jeff Mohajir: happens, you’re, you’ve got a target, you go down, you’re drilling vertically into it, you’re try, you have a target reservoir.

And what happened was a lot of, and when you’re drilling, they have geologists on site and they get these, what they call shows as they’re drilling. They’d be oil or natural gas. And a lot of them, as these guys were drilling through shells, they would get these great shows. But they could never get him produce, right?

And so people would scratch their head, gosh, I’m drilling through here and I get these great shows. I can’t get this thing to produce. I’m always producing below it, or I’m producing above it until and I don’t know his name, but I, from what I understand, it was a young completion engineer at the in the Barnett Shale that worked for Mitchell Oil and Gas that broke the code on how to drill horizontally into a shale.

And you can imagine, you’re drilling and then you’re turning the pipe. 90 degrees into this zone, and then you’re trying to figure out a way, and you have to keep it straight because if you go, if you undulate, you’re gonna create P traps to where you can’t really produce past it.

It’s like you’re. Kitchen sink. Sure. You can’t get, you can’t get the gas or the oil past it so then you’ve, and then you have to find a way to complete it to where you can actually coax the oil or the natural gas out of that 

Bob Fraser: reservoir. Okay. Okay. So these, this ho, so Ry vertical we’ve drilled some vertical wells in it costs, for, a mile down or so, quarter million dollars to drill, and then another half a million-ish to complete it.

Meaning completing it means putting the pumping stuff on top and the piping and all that stuff. Casing, yeah. Casing. Yeah. So now horizontal is a completely different animal. So it’s maybe, five to 10 million per drill. And so the, but, and these things can go miles and miles.

So they maybe go a mile down and then they’ll go, 

Jeff Mohajir: Sometimes three miles. Out horizontally. 

Bob Fraser: Yes. And you can drill this way horizontally, then you can go drill this way horizontally. Correct. Rather than this way. So you can hit all the points of the compass from one single location.

Jeff Mohajir: Yeah. Which is great. What’s great about that is, we think about we had, hor we had vertical wells. We might have, on one section 640 acres, we might have something like 10 or 15 vertical wells on that section. Now with horizontal welling drilling, we have one one well can drain the same amount.

And you can imagine it’s, it, there’s less issues with operations and there’s probably less capital. Okay. And, 

Bob Fraser: Talk about the drilling risk, because, I’m a geologist enough to know that this stuff is in layers. And the, if the layers are predictable in their oil bearing nature and their nature, that really, there’s not a lot of ways to miss in a horizontal.

Jeff Mohajir: There’s not a lot of ways. And I think there’s always, we talk about drilling, we talk about dry holes. And a geologist will come up, he’ll draw some lines on a map and say, we, this is, where I think the reservoir is 5,000 feet below the surface. And you drill down there and you say, wow, we are getting some shows there.

Looks like there’s oil or natural gas down there and now I’ve gotta complete it. And this is where the engineering comes into play. And quite frankly, in any oil and gas investment I know we might talk about risk in a little bit, but this is mechanical risk in being able to. Complete the well in the right fashion to be able to get the oil and gas come out.

So while you might have geologically a well that hit, if you don’t complete it you might have a it might be aje geologic. It might not be an economic, well back to the risk. So 

Bob Fraser: if you com if you do complete it, there’s, the horizontal wells have a very high success rate, of hitting economic. 

Jeff Mohajir: Now they do. Yes. Because in so many of these plays, there’s going from 2008, the geology is 2016, the so much of the risk has been taken out for an example. In one of the areas in Oklahoma, we you might have a, when you put together a drilling unit, you might consider putting a, what we call a parent will be drilled and then they’ll drill it horizontally, complete it, and it’s, oh man, that looks good.

A geologist or an engineer might come in and say, I can put 11 more of those out here. And he drills 11 more, and you can imagine it 10 or $15 million. A well, that’s a lot of capital. Will. He starts to find out on the sixth or seventh? It’s starting to interfere. Taking, I’m stealing production from my parents. So all these children wells are taking production from the parent. And so what we found out over time is that, okay, while you might drill a parent you’ve confirmed what you thought geologically and engineering wise, instead of having 12 children, you might only need five or six children.

And that is just a good way of preserving 

Bob Fraser: capital. So bottom line is a lot of the risk has just been taken out of this now. Correct. Now talk about fracking. So fracking, is this another of these things that is just this energizes. So many people, but I think very few people understand it. So 

Jeff Mohajir: talk about fracking.

Yes. Fracking’s been around since probably the thirties or forties, quite frankly, and Oh, I didn’t know that. Yeah. We’ve been fracking wells in this country and around the world for a long time, and again, it’s basically. After you drill, you talk about permeability and sometimes you have natural permeability in a reservoir to where the oil to natural gas will just come freely as you’re drilling, you put steel casing down the hole and then you have to perforate with, little bullet holes.

You basically send it a little gun down there, it perforates the steel casing. You’re shooting bullet holes into the steel casing and that’s gonna allow the reservoir, the oil and gas and the reservoir to come to, to seep into it, to seep into the steel casing. Then you’re producing it up to the surface sometimes.

Depending on the reservoir pressure, the reservoir will do it on its own. Other times you, as I mentioned before, you have to coax it out and one of the ways we coax it out is by fracking, and the way that you frack is whe after you perforated, you’ll go in at high pressure, sometimes temperature, and you will take water and some sand, and you will push it out into those perforations to create quote fractures.

So 

Bob Fraser: you pressure you pressurize the rock 

Jeff Mohajir: Correct. To get it to crack and it, that will, and you have sand and you have water and it’s not, so the sand goes 

Bob Fraser: into the cracks to to keep them 

Jeff Mohajir: open, to keep the prop the fractures or the fi fissures open so that the oil and 

Bob Fraser: gas can produce.

And so it creates, it increases permeability and Laos. And this is really what unlocked a lot of the shas Correct. That were very tight. They didn’t have hyper porosity and you couldn’t produce much. Correct. So with new fracking techniques, we’re able to produce it. Okay. So what’s the bad wrap against fracking?

Is it really destroying our, 

Jeff Mohajir: The bad wrap is that aquifers and, yeah. The bad rap is that the what they’re mixing in with the sand and the water is some kind of chemical that, is detrimental. And, you get a lot of these Oil and gas groups that will go out and say, oh the, it’s created, it gets into the aquifer and typically, Most oil and gas companies spend a lot of time trying to protect aquifers.

They put a lot of casing in place. They make sure that, when they frack their, there’s a typically a rock that will pro that will help from having the fracture go up into the aquifer. In in, a lot of times it’s, as you mentioned, a mile or two miles below the aquifer.

So people don’t realize the aquifers are not deep No, they’re like 300 feet or 500 feet. Yeah. They’re really on the 

Bob Fraser: surface. Correct. And where most of the drilling is going is far below, maybe even a mile below. 

Jeff Mohajir: So we spend a lot of time trying to take that. 

Bob Fraser: There are the oil and gas and the water are already in the same vertical space there anyhow.

Jeff Mohajir: That’s right. And they’re always natural. 

Bob Fraser: There’s always natural fractures. So there’s some bad actors doing fracking, but it can be done responsibly. 

Ben Fraser: All right, that’s the first part of this masterclass of oil and gas investing. We have part two coming for you here really soon. And so stay tuned. We’re gonna jump right back into the technical considerations to be aware of when you’re evaluating oil and gas. Thanks so much and stay tuned for part two.

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