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oseberg’s data odyssey continued (part 4): the red pill

techno viking

I underestimated the level of knowledge the market required to understand “unstructured data.” Allow me to provide a concise tutorial. 

Think of the data landscape of the upstream oil and gas industry as two bookends.

Courthouse

• Lease Data

Regulatory

• Spacings
• Poolings
• Location
• Exceptions
• Increase
• Density
• Unitization
• Field Rules
• Pooled/Lease
• Units

Drill Bit

• Permits
• Drilling
• Wells
• Completions
• Frac Insights

Operations

• Production
• Transfers
• Pluggings

Decoding the Enigma

The far left-hand ← bookend is anchored by the courthouse, where you can find the executive rights, title, ownership, encumbrances, implied and explicit covenants, conveyance documents, etc., for every county in the US that has active production and exploration. These unstructured documents, including paper, PDF, and TIFF, form the foundation for controlling 100s of billions of CAPEX and royalty income each year. In fiscal year 2020 alone, oil and gas royalty payments to federal, state, and tribal governments, as well as private landowners, totaled around $9.8 billion, as reported by the U.S. Department of Interior’s Office of Natural Resources Revenue. This encompasses royalties from federal onshore and offshore leases and Native American and private land leases. Google “what’s considered a large TAM?” Answer: $50-$100MM. 

The left-hand bookend is also filled with private individuals who constitute the largest portion of mineral ownership in the contiguous US. The complex interplay of land grants, birth, and the “three ds” death, divorce, and debt, marriage records, and family tree complexities has created a tangled web of private ownership. Moreover, mineral rights ownership is often separate from surface ownership, and increasing fractionalization of ownership adds to the complexity of accounting and title. This whole situation reminds me of Robin Williams’ description of golf, but let’s leave that aside for now. 

Surface ownership includes air rights over the land and from the surface to “plow-depth.” Below that, mineral owner’s rights exist – $9.8B/year worth of mineral rights – and a chaotic mass of unstructured data.

Subterranean Fortunes

Fee minerals within the lower 48 represent real property ownership of the subsurface, providing various income streams related to oil and gas development, such as lease bonuses, royalties from hydrocarbon production, and rental payments when wells are not in operation. Companies that acquire fee minerals often enjoy high operating margins without the need for significant capital and operating expenditures to explore and develop reserves. Fee simple mineral title and overriding royalty interests are perpetual, while net profit interests and volumetric production payments expire with the underlying leasehold. This perpetual ownership enhances their intrinsic value. Royalty companies can benefit from continued property development without requiring additional investments.

Not to mention, royalties are positioned at the top of the capital structure and therefore offer strong downside protection. Royalties are senior even to “Senior Secured Debt” because royalty owners are paid before debt holders, and royalties continue to be paid even in bankruptcy. Overriding royalty interests are also real assets that survive bankruptcy. 

There is one assumption for this public dumpster fire of unstructured data to be valuable – let’s continue this chapter in the next blog.

L,