When merger and acquisition specialists consider buying oil and gas properties, they look below the surface, where an asset’s value is largely determined by geology, age and production numbers. But due diligence that only asks what’s recoverable can miscalculate a field’s true operating potential and future market value. A field that can be readily integrated into a buyer’s systems, for example, holds a different value than one requiring millions of dollars in upgrades.

Front-end engineering studies are a form of due diligence that can provide a comprehensive survey of existing infrastructure. In addition to categorizing existing equipment, they can offer design recommendations for remote monitoring or using SCADA (supervisory control and data acquisition) for the entire field operation.

Most important, once companies gain a true understanding of the field’s current infrastructure and potential upgrade costs, they can incorporate this into M&A negotiations and post-closing project planning.

Due-diligence rationale

Until very recently, most oil and gas companies considering M&A assumed that if the field involved was working, the equipment must be fine. But unfortunately, what would seem to be a routine part of any M&A discussion—an inventory of the oilfield assets—is often missing.

Documentation for older oil and gas operations historically has been poor. Often, past acquisitions came with incomplete documentation, or upgrades done over time were not reflected in outdated and inaccurate “as built” records.
Today, companies buy fields with the goal of improving drilling or operations, and as a result, they look at the surface of the field in a new way. New technology like hydraulic fracturing and horizontal drilling has expanded executives’ view of the potential of aging oilfields and field optimization.

The bottom line: The back office is paying more attention now to the potential cost and time required to update an antiquated field to make it consistent with other operations. In fact, these anticipated costs are affecting purchase prices. A significant field acquisition of $300 million could require $30 million in infrastructure costs to achieve optimal operation; thus, an added cost equal to 10% of the purchase price is no longer being overlooked in negotiations.

Front-end deliverables

The first priority of a front-end engineering survey, or due diligence, is to document what equipment is in the field, how it is connected, existing electrical connections, and how communications and data transmission work.

In smaller fields of fewer than 20 wells, assessments can take as little as two to three days, with a report provided within two weeks. In larger fields, with hundreds of wells and several production or compression facilities, assessments may require six to eight weeks, with the report delivered within two to three months.

Seller involvement and timely disclosure of information and documentation are critical to the success of this effort. Failure by the seller to fully and honestly engage in this effort will lead to delays and inaccurate or incomplete information. Obtaining data may require having someone familiar with the field available to participate in site visits, as well as the ability to produce maps of the field and document equipment and installations.

The inventory created during the survey is essentially an operating blueprint for the field, showing exactly where equipment is and its current state. In many cases, part of the field may be up to date, while other parts may require substantial work. Many older fields don’t have a communications or data transmission system (data is gathered manually by workers who visit the fields and record readings on clipboards), or the older SCADA systems offer no way to communicate with the back office.

The second element of front-end engineering surveys can address these issues. In addition to providing an inventory, surveys measure the existing equipment against the purchasing company’s desired field operations, giving the buyer an exact look at what is needed to optimize the field, how much it will cost, and how long it is expected to take.

Remote monitoring

In most cases, the buyer’s desired field operations are synonymous with remote monitoring.

As the digital oilfield moves closer to becoming a reality, energy companies are realizing the benefits of new technology in enabling efficient operations—particularly in identifying problems before they lead to downtime. Monitoring a troubling trend in a piece of equipment and sending a technician with the proper tools and replacement parts to fix it—before it goes down—can save hours or even days of lost production when compared with the traditional “milk-run” methods of monitoring.

Planning field integration around full automation and remote monitoring allows for more than just quick problem-solving. The digital oilfield addresses many of the industry’s current challenges. Automating and optimizing the efficiency of data collection and transmission positions energy companies to operate effectively with the reduced expertise they are expected to encounter as aging personnel retire. Less driving time in the field reduces safety risk and environmental impact. Most important, giving all employees along the data chain access to the information they need, when they need it, enables good, timely decision making.

Considering both the cost of upgrading a field for automation, and the cost-savings realized with automation, the time and cost of executing a front-end engineering survey are relatively minor.

Two case studies

In 2006, GlobaLogix conducted a post-acquisition engineering survey in a South Texas field for a major international energy company that had recently acquired a large number of wells. The energy company had not completed a pre-acquisition front-end engineering study, but during the post-closing integration phase it began to assess the new field’s equipment, electrical connections and communications systems. The areas of the company’s existing operation and the new wells overlapped, but were being operated under completely different approaches, including models of operation, data communication, standards, types of measurement and control hardware, and systems for capturing data.
The buyer initially asked hardware and software vendors to investigate the potential of standardizing and installing new equipment and software across both the newly acquired field and its existing production assets. To its surprise, the cost estimates for this work ranged from $16- to $20 million—a cost that had not been forecast or budgeted for in the A&D process. The company had to find a different way to integrate the new field into its production environment to achieve its operating potential.

First, GlobaLogix developed a full picture of the field’s existing equipment and potential problems. Some were obsolete and needed to be replaced (for example, the equipment was out of support and parts could no longer be ordered). Other systems were relatively new and entirely serviceable.

The survey’s recommendations were designed to integrate the company’s legacy systems into the new equipment to create a robust, wireless system throughout the field. The plan addressed the field’s hardware, communication system and SCADA to develop a unified operating approach using a majority of the existing hardware. This cost less than $5 million, and achieved all the integration objectives.

In another case, a private-equity firm asked GlobaLogix to conduct pre-acquisition due diligence on two fields it was negotiating to purchase—one in the Marcellus shale area and one in the Barnett trend.

Lacking expertise in field operations, the buyer sought to accomplish three tasks. First, it wanted an inventory to ensure that the equipment the seller had outlined existed and was serviceable. Second, since the buyer planned to boost drilling activity, it wanted to determine whether the necessary technology and communications infrastructure was in place to accommodate the projected growth. If not, it wanted to know what hardware, software and communication devices would be required, and the cost. Third, it wanted an evaluation of the pipeline network to ensure it could handle new production.

The field survey answered these questions during the pre-acquisition, due-diligence time frame, allowing the buyer to use this knowledge during price negotiations. In fact, the seller absorbed half of the field-survey costs.

Jim Fererro is a vice president with Globa­Logix, a Houston-based oilfield automation company. See globlx.com.