Young Oil and Gas Producers: A Vanishing Breed?

Abstract: Who says a 27-year-old can't become a successful independent operator? Not Chad Hathaway, who did it "his way" using wells destined for plugging and abandonment.

Analysis: One sometimes wonders whether many pure risk-takers exist among today's young people, and whether they would choose the oil and gas business as the place in which to play against those risks.

What are the chances of there being young adults who, like some of the famous oilmen of the early 20th century, are ready to accept responsibilities that, while leaving them more or less constantly vulnerable in a financial sense, also could make them wealthy, once again filling the mold of the classic independent oil producer? The truth is, the 21st century's complicated, highly regulated, and risk-averse business model makes it almost impossible for people to realize such ambitions.

But a few do, and Chad Hathaway is one of them.

Newspaper reporter Erin Waldner wrote compellingly about Hathaway in a recent (August 29th) story in the Bakersfield, CA, Californian. The story goes something like this:

Hathaway, 27, of Bakersfield, a graduate of Fresno State University and a member of a multi-generation San Joaquin Valley oil industry family, became an independent oil operator by dint of leasing 70 acres in the venerable Tejon oilfield near his home and bringing six "orphaned" oil wells back to production. He chose the orphans--inactive wells with an inactive operator--because they already had been drilled decades ago and were capable of resumed production after some reconditioning. Hathaway spent two years returning the wells to production, much of it in his spare time, drawing on the unpaid help of friends and some family money to do so. Today, five of the wells are pumping an average total of 10 barrels of medium-gravity oil a day which, at today's high wellhead prices, delivers a respectable monthly net income over and above Hathaway's salary as an employee of a local well service company. The estimated recoverable oil reserves beneath Hathaway's lease total some 250,000 barrels, so if he keeps the wells pumping, their useful lives will have been extended significantly.

But there's a lot more to the story, much of it also mentioned in Ms. Waldner's newspaper article. For starters, while taking his two-year sojourn into independent producerhood, Hathaway suffered from leukemia and its often-debilitating effects. He also underwent a bone marrow transplant operation that helped him regain his health, and even managed to get married. Meanwhile, he worked his regular 8-to-5 job, and even found time to partake of at least some aspects of an active youthful lifestyle. Just being young is a major thread, so far, through Chad Hathaway's life.

Being part of a veteran oilpatch clan also helped. Hathaway notes that his father, former owner of a producing, drilling, and well service contracting company, earned a 10 percent overriding interest in the Tejon field production in return for posting the upfront money Chad needed to bond the wells, which the state requires from all leaseholders who purchase existing oil and gas production. However, the bond requirement for an individual rejuvenated well is lifted after it produces continuously for six months. Several of Hathaway's wells have filled that requirement, and others have not yet reached the six-month producing plateau.

But a lot of hard physical work was involved, as well. Hathaway told of being at the lease after work and on weekends, sometimes actually installing field equipment, including pumping units, and replacing the lease's electric power distribution system, much of which had either deteriorated or had been "liberated."

While admitting that he probably underestimated the financial and physical effort it took to reach his goal, Hathaway says he'd do it again, provided he might decide one day to give up working for somebody else (he'd already begun the orphan well program before he got his present job with Western Well Service in nearby Taft, CA).

But he encourages young people who have some oilfield experience and access to capital to look into orphaned wells as a way to start out on their own in the oil and gas business.

"I've been blessed," he stated. "My family's name is respected in this area, so I have forebears, including my grandfather and my father, to thank for that. They put in a lot of hard work and gained a lasting reputation for honesty and fair dealing. And while I have only about three years' formal experience in the business, the family's reputation is still there. So, it's incumbent on me to keep that reputation intact."

But Hathaway apparently has that extra "something" that makes him what he calls "an educated risk-taker."

"I've already been through a lot in my life," he asserted, referring apparently to his bout with a potentially deadly disease. "There aren't many things that intimidate me, anymore. But anyone with a strong desire to enter this business can do what I did. And one way they can start is by finding economical deals that involve orphaned wells."

Mike Glinzak, who heads up the orphan and idle wells program for California's Division of Oil, Gas and Geothermal Resources (DOGGR), said the state currently lists more than 1,000 wells as officially orphaned (i.e., wells either not producing or on which required operating permits are not current).

Speaking from his Bakersfield office, Glinzak explained that probably fewer than 100 currently orphaned California wells have the potential to be returned to economical production. Most orphans ultimately are plugged permanently, he said, with DOGGR using funds set aside for that purpose from various fees and taxes paid by the state's producers.

However, he added, all orphaned wells are listed on the DOGGR website, and interested operators often scan the list for possible further investigation.

"Once DOGGR declares an orphan well to be a public nuisance, it is regarded as officially 'deserted' by the last operator of record and becomes a ward of this office," he explained. "But the lease on which the wellbore lies reverts back to the minerals owner, and they of course have the right to assign that lease to a new operator who can work the well or wells over and resume production, provided they post the well bonds and pay the necessary permitting fees."

In lieu of a new lease being written, DOGGR eventually plugs the well and removes all pertinent surface equipment from the lease. The division also can obtain a judgment against the former lease operator in case other assets exist that, if located and sold, could be used to offset the plugging costs.

Most oil and gas producing states have similar laws for handling orphaned wells. In Texas, for example, the state's Railroad Commission (RRC) has jurisdiction over them and uses a fund financed from operator fees to pay for plugging and abandonment costs. As of July 31, 2003, a total of 17,106 wells were on the commission's constantly changing orphaned well list. Texas probably has the most orphaned wells in all 50 states. With more than 355,000 existing wells in Texas, most of them capable of only marginal production, the RRC's budget for plugging orphan wells alone ranges into millions of dollars each year.

Joe Mayorga, assistant director of field operations at RRC headquarters in Austin, said nonproducing wells are considered orphans if the lease on which they exist expires without renewal, or if the operator of record's certificate of compliance with state regulations is terminated either through lack of payment or by the operator's bankruptcy or outright disappearance from the roster of active businesses. The RRC also moves to get judgments against any such operators or their representatives who can be found.

Mayorga noted that active operators also examine Texas' orphan well list, available at the RRC website. From time to time, he said, operators search the list for potential well workover and/or recompletion deals. They, too, are free to contact minerals owners to negotiate new leases on the property or properties involved. If orphan wells and their leases can be combined with existing ones economically, operators will foot the bill for returning them to the producing column. The trouble is, most orphaned wells aren't usually located on single leases, and most aren't productive enough to fit an established operator's business plan.

He wouldn't hazard a guess as to whether orphaned Texas wells could be the start of something big for a young entrepreneur like Chad Hathaway, but Mayorga stressed that once a well is plugged, it ceases forever to be a source of a much-needed commodity whose value remains high over time. As an unclaimed orphan, it ends its life as a financial burden to all the state's oil and gas operators and ultimately to taxpayers, the real victims of those who walk away from open wellbores.

That brings back the question of whether there are young people today who, like Chad Hathaway, aren't risk-averse and who might look to cast-off wells as a way of entering the oil and gas business. If at least a few such people do exist, and if they have a working knowledge of how to scrimp and save and fix old oilfield machinery and coax oil and gas from old, beat-up wells, as well as a proven ability to pay their debts, why shouldn't they give it a try?

A major roadblock is the upfront money to carry out such a project. Conventional investors are highly unlikely sources of backing. And it would probably be difficult to convince relatives or friends to risk the funds.

There could be another avenue open, however: Might it be in the interest of successful, ongoing independent oil and gas producers to make themselves available to lend a hand to young would-be independent producers, either as advisors or even as partial financial supporters?

One wonders what the answer might be.