The Start-Up SWD Company

SWDI Investors’ Guide – The Start-Up SWD Company                                    April 20, 2013

Introduction
Income, costs, and profits from saltwater disposal (SWD) wells fit into a complex equation. Oil and gas activity, good access, capable disposal well, and an experienced operator can combine to make an attractive start-up waste-water disposal company worthy of significant investment. This current post is a bullet list: business plan, market analysis, operational experience and due diligence issues for the careful investor considering a new start-up company.

New water management companies can start quickly anywhere in the oil patch; the bar-to-entry is low in terms of everything but money and frequently these ventures will seek start-up capital. The new venture and the prospective investor need a check list of important questions that require adequate answers before the start-up can be considered alive and well. Following is a list of these questions and discussions of what the answers must contain at the minimum.

1.      Who are the principals in the new venture?  List the operational partners in the venture and describe their responsibilities and duties. Who will be watching the well on a day-to-day basis, one of the partners or an employee? Is the company bonded and registered in the state? Who will be the bookkeeper? Do any of the principals have connection to oil and gas production, waste water trucking, or oilfield equipment? The principals must list how much capital has been raised and how much more is needed?
 

2.      What is the scope of the current waste water market?  Does the start-up have contracts or commitments in place for produced water? Is any water piped into the facility? How much total water is produced within reasonable driving range? How many disposal wells are located nearby; are these wells fully utilized? What is the level of new drilling in the area?

3.      What will be the new venture business plan?  Drilling and build-out will vary from project to project; how long before this particular project begins generating income? What is the forecast utilization rate and how does this increase with time? What are the hours of operation and what is the level of staffing planned? How much skim-oil will be recovered? What is the frequency and cost of routine maintenance? What happens to waste water brought to the site during routine maintenance? What are the forecast power costs? How are infrequent but inevitable major costs amortized? What level of operating expense will be aimed at reducing maintenance, vandalism, and future environmental liability?  Smart operators will spend a little money today to prevent large costs tomorrow. Some of these precautions have been discussed in previous blogs (e.g., continuous injection monitoring and seismic monitors)
     

4.      How is use-of-capital prioritized?  If the new venture takes over an existing facility, what kinds of improvements will be needed – more tanks, new pumps, pressure sensors, etc.? If the venture will involve drilling a new well and installing new surface equipment, what is the schedule for activities and expenditures? Will outlay be done in stages?

5.      What are the forecast economics?  The forecast will determine the viability of the project and as such it must contain realistic, accurate values for costs and revenues. Have all costs been included? Have the principals considered power, manpower, insurance, chemicals, and routine maintenance costs in a serious manner with reference to nearby operating SWD wells? Have all revenue streams been evaluated based upon local conditions? Are local prices expected to slump after this well comes on line? Will drilling activity cause disposal rates to increase?

 

Investors considering a SWD project must investigate the pros and cons of the specific project whether it is in operation or is meant to be drilled and the surface facilities built from scratch. An experienced, full-service contractor such as SWDI can help evaluate the project.

 

Bruce G. Langhus, PhD                                                                                    Marian M. Smith, PhD