Legal Definitions - market value at the well

Market value at the well is a term used in the oil and gas industry to determine the financial worth of crude oil or natural gas at the exact point where it is extracted from the ground. This value is calculated by taking the price at which the raw product is ultimately sold in the market and then subtracting all reasonable and necessary costs incurred to transport it from the well site and to process it, making it suitable for sale. Essentially, it represents the net value of the unprocessed resource right as it emerges from the earth, before significant downstream expenses are added.

• Example 1: Remote Onshore Oil Production

  Imagine a small independent oil company operating a well in a remote part of West Texas. The crude oil extracted from this well needs to be trucked 75 miles to the nearest pipeline hub, and it also requires a basic dehydration process to remove water before it can be accepted into the pipeline system. If the oil sells for $70 per barrel at the pipeline hub, and the trucking costs are $4 per barrel, with dehydration costing $2 per barrel, then the market value at the well would be calculated as $70 - $4 (transportation) - $2 (processing) = $64 per barrel. This calculation ensures that the value attributed to the oil is its worth before it leaves the well site and undergoes further preparation for market.

• Example 2: Natural Gas Field with Impurities

  Consider a natural gas field in Oklahoma where the extracted gas contains hydrogen sulfide, an impurity that must be removed before the gas can be sold into a major transmission pipeline. The raw gas is sent through a gathering pipeline to a nearby processing plant for "sweetening" (sulfur removal) and compression. After processing, it is then transported a short distance to the main pipeline. If the gas sells for $3.50 per MMBtu (million British thermal units) at the main pipeline, and the processing costs for sweetening and compression are $0.60 per MMBtu, with gathering pipeline transportation costing $0.15 per MMBtu, the market value at the well would be $3.50 - $0.60 (processing) - $0.15 (transportation) = $2.75 per MMBtu. This figure reflects the gas's value before it was treated and moved from the wellhead.

• Example 3: Offshore Oil Platform

  An oil company operates an offshore platform in the Gulf of Mexico. The crude oil produced on the platform is transported via a subsea pipeline to an onshore terminal. At the terminal, the oil undergoes stabilization to remove light gases and water before it can be loaded onto tankers for sale to refineries. If the stabilized crude sells for $78 per barrel at the onshore terminal, and the subsea pipeline transportation costs are $7 per barrel, with the stabilization process costing $3 per barrel, the market value at the well (on the platform) would be $78 - $7 (transportation) - $3 (processing) = $68 per barrel. This demonstrates how the value is determined at the point of extraction, even in complex offshore operations, by deducting the costs to get it to a marketable state.