Legal Definitions - dry hole

A dry hole in the oil and gas industry refers to a well that has been drilled but is found to contain insufficient quantities of oil or natural gas to make its continued development and operation economically viable. In simpler terms, the potential revenue from the hydrocarbons discovered would not cover the substantial costs associated with drilling, completing, and maintaining the well for production.

Here are some examples to illustrate this concept:

• Imagine an energy company, "Horizon Drilling," invests millions in drilling an exploratory well in a promising new geological formation. After reaching the target depth, their tests reveal the presence of natural gas. However, the pressure is very low, and the estimated reserves are so small that the projected revenue from selling this gas would be significantly less than the cost of installing the necessary pipelines, processing facilities, and ongoing operational expenses. Horizon Drilling would declare this a dry hole because it's not economically sensible to proceed with production.

• Consider "Deep Earth Energy," which drills a development well in an area adjacent to an existing productive oil field. While they do encounter some crude oil, the geological analysis shows that the oil-bearing rock is very thin and the oil itself is highly viscous and mixed with a large amount of water. The specialized equipment and extensive processing required to extract and refine this low-quality, limited oil would make the entire operation unprofitable. Therefore, Deep Earth Energy would classify this well as a dry hole, despite finding some oil, because it cannot justify the investment.

• A small independent driller, "Prairie Ventures," completes a well after several months of work. Initial tests indicate a very slow flow rate of oil, perhaps only a few barrels per day. Even with favorable market prices for oil, the daily revenue from such a low output would not cover the fixed costs of maintaining the well, paying royalties, and transporting the oil, let alone recouping the initial drilling expenses. Prairie Ventures would deem this a dry hole because the well's production capacity is too low to ever become profitable.