The Gas Case

One of the courses that initially gave gives me a bit of trepidation is analysis of business problem. There is a procedure to analyzing the problems. Different people may get similar but somewhat varying analysis. The key was reading carefully to understand the problem and sieving through all the information given to understand those that were relevant and those that were complementary.

The skillset is not one that is academic in nature, it takes practice to master and in real life these problems do not come as exercises, they come real time. These principles can be applied not only in business but other aspects of life.

I recently had a problem at work. One of the companies I handle my company’s investment portfolio with plans to drill a gas well in 2023, the rationale behind the plan is cost efficient and is in line with the energy transition to gas that is one my company’s organizational goals.

The market for gas in the world now, especially in Europe is insatiable. The war in Ukraine and Russia’s quest to punish the western world who are in support of Ukraine has led to a decline in gas supplies from Russia who in 2021 supplied 39 percent of all European Union gas imports.

The company is drilling a few oil wells around the location the gas well is planned and it will be cost efficient to use the same rig to drill the gas well after the oil wells to save rig mobilization cost.

Gas, however, has a different sales process than oil. A company can drill for oil, produce and place it in the open market. The type of oil produced, and demand will determine the price of your oil and the by-products from oil are diverse.

With gas, the standard is to have a sales agreement prior to gas production and if a company has proven reserves and has not drilled, it must find a buyer and negotiate a sales agreement before drilling. The dynamic of this is mostly due to the nature of gas. Unlike oil, specialized and pressurized facilities must be put in place, so the gas goes from point of production to termination.   

A lot of companies drilled and capped or locked in their gas wells when oil was the beautiful bride, as gas became financially viable, they entered into agreements, built facilities and flowed their wells

The company has drilled gas reserves which they are aggressively in the marketplace looking for buyers.  They still want to drill and cap the well due to the demand for gas at present which they forecast will remain in 2023 and beyond. The well cost is approximately 25 million dollars of which my company will provide 60 percent equity.

My decision Question is: Should I approve for the funds in 2023 budget or not.

I have gone through the analytic process and arrived at a decision, I hereby invite you the reader to analyze the situation and take a decision too.    

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