Oil & Gas Settlement Explanations

If you've ever wondered how Oil and Gas sales are calculated, below you will find helpful information.


Oil Settlement Explanation

Oil is measured in barrels, with a barrel being equal to 42 gallons.  Several factors can significantly affect both the quality and quantity of crude oil.  These include temperature, API gravity, and the presence of basic sediment and water, often abbreviated as BS&W.

The temperature of oil in a stock tank is generally close to that of the air surrounding the tank.  However, the temperature may be elevated if the oil has just been produced or has been heated in a heater-treater at the gathering system.  The temperature of the oil affects its overall volume, because like other fluids, oil expands or contracts in response to temperature change.  To compensate for this, crude oil and product measurement volumes are adjusted to a standard temperature at 60 degrees Fahrenheit.

API gravity refers to a measurement index developed by the American Petroleum Institute which describes how heavy or light oil is in relation to water.  API gravity is expressed in degrees.  The API gravity of water is 10 degrees.  If the oil’s API gravity is above 10 degrees, it is considered “light” and will float on water.  If the API gravity is less than 10 degrees, the oil is “heavy” and will sink.  API gravity determines how much the oil is worth because light oil will produce a higher yield of gasoline or diesel when it is refined.  Essentially, the higher the API number, the better quality of the crude oil.

As for BS&W, some remains in oil even after treatment.  Since these are impurities, and not part of sellable oil, they must be measured and removed or factored into the value if still remaining in the crude oil.

Many producing wells in the United States have multiple participants, called “interest owners”, that helped finance the well or field development.  Each is entitled to its share of the well’s production.  Once oil and gas production is ultimately delivered for sale, the final sale volumes and revenues need to be allocated back to the applicable interest owners.  Production allocation is the term for this process.                                                   

Gas Settlement Explanation

Periodically, the gas production from a well is assigned a BTU, or grade, by the gas gatherer. The higher the BTU condition, the higher gross dollar amount received (BTU Condition x MCF = MMBTU).  Additionally, the price of gas will fluctuate each month, typically based on a factor of the daily Houston Ship Channel index.

Then, based on a negotiated contract with the respective gathering company for each separate Joint Venture, the net dollar amount received ranges from 75% to 85%.  The gatherer’s share covers expenses such as line use, collection fees, etc.  Some companies take a flat fee, while others make multiple itemized deductions, either way resulting in basically the same 75% to 85% net.           

To reiterate, there are several variable factors, including monthly production, BTU condition, current price of gas, contract percentage, waste, and specific gatherer methods of calculation, all of which affect the net amount received for gas. 

Finally, after receiving a gatherer’s detailed statement, our Operator (or Accountant) then simply takes the net $ amount received from the gatherer and divides it by the total monthly sales from the well, for an average $ per MCF received, as reported on JIB statements to Venturers.

This general explanation is intended to put in layman’s terms the technical language and numbers used on most Oil and Gas industry statements.  To this end, we hope it has been helpful.

Crown Exploration II, Ltd. assumes no responsibility or liability for any errors or omissions in the content of this document. The information contained in the explanation is provided for educational purposes only with no guarantees of completeness, accuracy, usefulness or timeliness.

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