Oftentimes we hear about ‘outsourcing’ and we think negative thoughts. Some of you may even be expecting to hear about how some company now has lease analysts or division order analysts based in India — although that isn’t what I’m talking about today. I’d like to discuss a trend I’m seeing in small to medium sized operators that I believe is gaining speed. I’ve seen a few companies capitalize on this concept by being innovative and ‘ahead of the curve’. This trend I’m talking about is the outsourcing of land administration duties to outside service companies. Most of these companies operate on a on a fixed fee basis or a model similar to what land services firms (brokers) use — using contractors or employees to perform those functions for their client and passing along those costs (plus a markup) to the client.
What types of duties are being outsourced?
- Lease Data Entry
- Division Order Setups
- Lease Maintenance
- Rental, Royalty, and Shut-in Payments
As many of you know, the work involved in land administration continues well past the exploration phase. There are always additional unit wells being drilled, working interest partners acquiring and divesting interests, transfers occurring due to the sale of minerals or death of a mineral owner, maintenance on wells requiring shut-in payments or activation of a force majeure clause, and the list goes on and on… Major corporations have these tasks down to a fine art, and they typically have in-house staffing in place to handle them. Small to medium sized companies don’t always have this luxury, and in some instances they don’t even have staff with appropriate expertise in how to accomplish these tasks by directing contractors.
Imagine a small operator who has a few producing fields, or has broken into a shale play, but doesn’t have the level of staffing to keep up with the requiring administration of all the contracts (leases, JOAs, gas balancing agreements, etc). It is reasonable to believe that the operator could plan on selling the assets in a short term time frame (1-3 years), and they don’t want the expense or burden of hiring, training and overseeing staff to manage these responsibilities. Office space is also a big issue for most companies — they simply don’t have any desk space for new bodies — and more office space causes the expense of adding employees to be even higher.
Alternately, envision an operator who has acquired 1000 producing leases and the associated wells. Many of these leases allow different types of royalty deductions (all post production costs, gathering costs, compression costs, H2S treatment costs, etc), a operator strapped for time might just pay all the royalty deduction leases a cost free royalty to lessen the burden of complexity. Whereas if they were able to outsource the lease data entry to a professional who:
- Understood what royalty deductions were allowable in that state.
- Understood how to setup the lease data to allow as much deduction of costs as allowable by law.
- Understood the best way to link that deduction information to a PRA system used to generate royalty checks.
Then the operator would be able to increase margin and have a better ROI.
At this point everyone should be seeing an opportunity: Long term work that meets a required need that many companies don’t have an interest in performing.
There are several companies out there doing this work that can integrate with the software your currently use, or provide their own if you are still using spreadsheets to keep up with your data. When you evaluate the cost of outsourcing land administration duties many people find that they come out ahead until their company reaches a ‘critical mass’ that requires in-house staffing. So what costs can outsourcing alleviate? Here’s a short list:
- Land Management Software (Licensing, Support, General Expertise)
- Lease Analyst, Division Order Analyst, Land Analyst, Business Analyst Staffing
- Best Practices Expertise (A Pound of Prevention)
- Monthly Check Write Functions for Required Payments
- APO/BPO Tracking
- Shut-In Well Analysis (Watch for a new post on this topic soon)
- Document Management (Hard copy file generation, digitization / scanning, organization)
Are you interested in getting help with any of these functions? Send me an email at email@example.com. Are you involved with this type of work? Or do you currently outsource some (or all) of your land administration duties? Tell us about it in the comments below!