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Responses to Small Entity-Related Questions, 7/22/2011

The summary statistics about the small entities hint at an interesting market structure, one with a 

large number of very small operators and a small number of large small entities. This raises a 

question about why the market is structured in this manner and whether the average statistics 

hide significant economic impacts.

1. I would like to know more about the very small entities participating in this industry (say 

those operating zero to 5 or 10 wells). Is there a particular industry niche in which these 

small entities operate or a particular kind of well they operate? 

EPA RESPONSE: Based upon the discussion that follows—in response to this and subsequent 

questions—there is no single industry niche for small operators since small operators can have 

different business strategies and that small operators can own different types of wells. The

organization of firms in oil and natural gas industry also varies greatly from firm to firm. 

Additionally, oil and natural gas resources vary widely geographically, as well can vary within a 

single field.

The first important broad distinction among firms is whether they are independent or integrated. 

Independent firms concentrate on exploration and production (E&P) activities, while integrated 

firms are vertically integrated and often have operations in E&P, processing, refining, 

transportation, and retail. To our awareness, there are no small integrated firms.

Independent firms may own and operate wells or provide E&P-related services to the oil and gas 

industry. Since we are focused on evaluating potential impacts to small firms owning and 

operating new and existing hydraulically fractured wells, we should narrow down on this sector. 

Among many important roles, independent small operators historically pioneered exploration in 

new areas, as well as developed new technologies. By taking on these relatively large risks, 

these small entrepreneurs (wildcatters) have been critical sources of industrial innovation and 

opened up critical new energy supplies for the U.S.1 In recent decades, as the oil and gas 

industry has concentrated via mergers, many of these smaller firms have been absorbed into 

large firms. In fact, news reports indicate this trend is continuing in new shale plays, such as the 

Marcellus Shale in PA and NY.

Another critical role, which provides an interesting contrast to small firms pioneering new 

territory, is that smaller independents maintain and operate a large proportion of the Nation’s low 

 

1

IHS Global Insight. “The Economic Contribution of the Onshore Independent oil and Natural Gas Producers to the 

U.S. Economy.” Prepared for the Independent Petroleum Association of America. April 2011. < 

http://www.ipaa.org/news/docs/IHSFinalReport.pdf>
2

producing wells (also known as marginal or stripper wells).2 While marginal wells represent 

about 80 percent of the population of producing wells, they produce about 15 percent of 

domestic production (see Table 1).

Table 1. Number of wells and production from marginal and non-marginal production wells, 

2009

Type of Wells

Wells 

(no.)

Wells 

(%)

Production 

(MMbbl 

for oil and 

Bcf gas)

Production 

(%)

Crude Oil

Stripper Wells (<15 boe per year) 310,552 85% 311 19%

Other Wells (>=15 boe per year) 52,907 15% 1,331 81%

Total Wells 363,459 100% 1,642 100%

Natural Gas

Natural Gas Stripper Wells (<15 boe per year) 338,056 73% 2,912 12%

Other Natural Gas Wells (>=15 boe per year) 123,332 27% 21,048 88%

Total Natural Gas Wells 461,388 100% 23,959 100%

Source: U.S. Energy Information Administration, Distribution of Wells by Production Rate 

Bracket. <http://www.eia.gov/pub/oil_gas/petrosystem/us_table.html> Accessed 7/10/11.

Note: Natural gas production converted to barrels oil equivalent (boe) uses the conversion of 

0.178 barrels of crude oil to 1000 cubic feet natural gas.

We understand from industry sources that many of these wells were drilled and initially operated 

by major firms (although the data are not available to quantify the percentage of wells initially 

drilled by small versus large producers). Well productivity levels typically follow a steep 

decline curve; high production in earlier years but sustained low production for decades. 

Because of relatively low overhead of maintaining and operating few relatively co-located wells, 

some small operators with a particular business strategy purchase low producing wells from the 

majors, who concentrate on new opportunities. As small operators have provided important 

technical innovation in exploration, small operators have also been sources of innovation in 

extending the productivity and lifespan of existing wells.3 Plugging and abandoning wells is 

complex and costly, so sustaining the productivity of wells is important for maximizing the 

exploitation of proven domestic resources. However, these marginal gas wells are likely to be 

older and in conventional formations, and as such are unlikely to be good candidates for refracturing/completion, which means they are unaffected by the proposed rule.

 

2

Duda, J.R., G. Covatch, D. Remson, S. Wang. 2005. Projections of marginal wells and their contributions to oil and 

natural gas supplies. Society of Petroleum Engineering Journal, SPE98014. 

<http://www.netl.doe.gov/technologies/oil-gas/publications/AP/MarginalWells_AP-DOE.pdf>

3

Duda, J.R., G. Covatch, D. Remson, S. Wang. 2005. Projections of marginal wells and their contributions to oil and 

natural gas supplies. Society of Petroleum Engineering Journal, SPE98014. 

<http://www.netl.doe.gov/technologies/oil-gas/publications/AP/MarginalWells_AP-DOE.pdf>
3

Although, small operators maintain a large proportion of the marginal and stripper well 

population, this does not indicate that some small operators are not also drilling and 

hydraulically fracturing wells alongside larger operators in unconventional formations. 

Companies of any size can drill and complete any type of well. For example, Savoy Energy 

Corporation’s mission is to economically extract oil from abandoned wells through recompletion 

and work-over activities.4 Savoy Energy had $174 thousand in assets in 2009; ranked 137 in the 

Oil and Gas Journal’s top 150 producers by assets.5 Although, Savoy Energy may own 

abandoned oil and gas wells, the firm is re-completing wells, potentially, with hydraulic 

fracturing technology.

2. Do these small or niche operations correspond to higher cost/revenue ratios or higher 

cost/capital ratios? For example, do these small entities use these REC solutions 

currently? 

EPA RESPONSE: The analysis in the RIA, based on limited data, indicates that smaller firms

(defined by SBA criteria as having fewer than 500 employees) have higher engineering 

compliance cost/revenue and engineering compliance cost/capital ratios than larger firms. This 

is partly explained by the fact that smaller firms tend to be independents focused on E&P, while 

the relatively few large firms tend to be vertically and in many cases horizontally integrated, with 

processing, transportation, refining, and even retail operations. 

Also, smaller independents may have more volatile financial indicators because much depends 

on the projects they are engaging in at the time the ratio is determined, as well as economic 

conditions during the years summarized by the financial indicators. Also, there may be some

unusual data points driving some of the high impact ratios. Please see additional analysis 

provided at the end of this document for more discussion of these data. 

We assume small firms are performing RECs in CO and WY, as in many instances RECs are 

required under state regulation. However, we have had insufficient time to work with oil and gas 

commissions in these States to understand whether appropriate data is available to examine this 

assumption.

In addition to State regulations, some companies are implementing RECs voluntarily such as 

through participation in the Natural Gas STAR Program and the focus of recent press reports. In 

our review of Gas STAR and other information, we only found examples of large operators 

voluntarily performing RECs on hydraulically fractured wells. That said, there could be 

examples of smaller companies implementing existing RECs that are not sharing those 

experiences with Gas STAR. 

 

4

Savoy Energy Corporation. (2011). Savoy Energy Corporation: About Us. Available online at: 

http://www.savoyenergycorp.com/index.html

5

OGJ. (2010). OGJ 150. pg. 5. Available online at: http://www.ogj.com/index/ogj-surveydownloads.html#ogj200100
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As described in more detail below, many small independent E&P companies often do not 

conduct any of the actual field work. These firms will typically contract the drilling, completion, 

testing, well design, environmental assessment, and maintenance. Therefore, we believe it is 

likely that small independent E&P firms will contract for RECs from service providers if 

required to perform RECs. An important reminder is that performing a REC is a straightforward 

and inexpensive extension of drilling, completion, and testing activities.

3. Is the average REC cost valid for these very small firms or the wells they operate? 

EPA RESPONSE: To the extent that very small firms may specialize in operating relatively few 

low-producing stripper wells, another way to ask this question is whether these low-producing 

wells are likely candidates for re-fracturing/re-completion and, if so, whether the expected costs 

and revenues would be valid. These marginal gas wells are likely to be older and in conventional 

formations, and as such are unlikely to be good candidates for re-fracturing/completion. 

To the extent the marginal wells may be good candidates for re-fracturing/completion, the REC 

costs would be valid. The average REC cost is valid for RECs performed on any well, regardless 

of the operator size. The reason for this is that the REC service is contracted out to specialty 

service providers who charge daily rates for the REC equipment and workers. The cost is not 

related to any well characteristic. 

Large operators may receive a discount for offering larger contracts which help a service 

provider guarantee that REC equipment will be utilized. However, we should note that the 

existence of a potential discount for larger contracts is based on a strong assumption; we do not 

have evidence to support this assumption. Since contracting REC equipment is analogous to 

contracting for drilling equipment, completion equipment, etc., the premium would likely be in 

the same range as other equipment contracted by small operators. Since the REC cost is a small 

portion of the overall well drilling and completion cost, the effect of any bulk discount disparity 

between large and small operators will be small, if in fact it does exist.

4. Are the REC solutions as effective on these niche wells as they are on the average well? 

EPA RESPONSE: Although small operators may own the majority of marginal and stripper 

wells, they will make decisions based on economics just as any sized company would. For 

developing a new well, any sized company will expect a return on their investment meaning the 

potential for sufficient gas, condensate, and/or oil production to pay back their investment and 

generate a return that exceeds alternative investment opportunities. Therefore, small or large 

operators that are performing hydraulic fracture completions will experience the same 

distribution of REC performance. For refracturing an existing well, the well must be a good 

candidate to respond to the re-fracture/completion with a production increase that merits the 

investment in the re-fracture/completion. For both a new well and a re-completed well, the cost 
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of the REC will be a small percentage of the overall cost of the event, from 0.3-0.7 percent 

according to our analysis. 

Smaller operators have specific business plans and field development strategies that may be 

niche and more closely associated with smaller operators, such as purchasing more mature fields 

or such as operating stripper wells; however, not all small operators have the same objectives or 

the same type of wells.

Additional Analysis in Response to Small Entity Discussion

Our sample of E&P firms (which includes independents and integrated firms) includes 122 small 

entities according to SBA criteria. The engineering compliance costs-revenues ratios indicate 

that 9 small entities experience an impact between 1 and 3 percent (7.4 percent of small firms) 

and 6 small entities experience an impact greater than 3 percent (4.9 percent of small firms). 

Table 2 below details the analysis for these 15 firms. Please refer to the discussion in Section 

3.5 of the RIA to better understand how the Oil and Gas Journal and American Business 

Directory Information were used to develop the analysis.

Before examining the quantitative analysis, however, we would like to discuss the results of 

rapid research into the objectives and recent history of the 15 small entities, based upon review 

of corporate websites. The following set of findings indicates the possibility that the impact 

ratios for 6 of the 15 small entities may be over-estimated:

Cano Petroleum, according to its corporate website primarily focuses of enhancing 

recovery from proven, mature oil fields. This means the company may do little 

hydraulic fracturing of natural gas wells. <http://www.canopetro.com/>

CNX Gas Corporation was acquired in 2010 by CONSOL Energy, a large firm. 

<http://www.consolenergy.com/>

Daybreak Oil, according to its corporate website, targets shallow oil reserves in Kern 

County California. This means the company may do little hydraulic fracturing of natural 

gas wells. We are also unaware of unconventional gas plays in CA in which fracturing 

would likely be occurring. <http://www.daybreakoilandgas.com/>

EnerJex Resources, according to its corporate website, primarily performs E&P on 

onshore oil properties in the U.S. This means the company may do little hydraulic 

fracturing of natural gas wells. < http://www.enerjexresources.com/>

NGAS Resources Incorporated is in the process of being acquired by Magnum Hunter 

Resources. We however, were unable to determine the impact indicators for Magnum 

Resources, as it seems to have been recently formed from Petro Resources. 

<http://magnumhunterresources.com/>
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Tri-Valley Corporation, according to its corporate website, is an oil and gas production 

company with California properties. We are unaware of unconventional gas plays in CA 

in which fracturing would likely be occurring. < http://tri-valleycorp.com/ >

A few observations are worth noting on Table 2. First, not surprisingly, the firms’ employ 

relatively few people. However, the amount of industrial activity, indicated by revenues, 

expenditures, and wells drilled indicates the likelihood that many of these firms contract for 

support services. Second, capital and exploration expenditures are high relative to revenue, 

which appears to hold true more generally for independent E&P firms compared to integrated 

major firms. This would seem to indicate the capital-intensive nature of E&P activities. As 

expected, this would drive up ratios comparing estimated engineering costs to revenues and 

capital and exploration expenditures. Third the high capital and exploration expenses compared 

to revenues may indicate that firms are following aggressive production strategies. As mention 

in the first response in this document, smaller producers have historically taken risks to open up 

new resources or employ new technologies; some of this behavior may be indicated by the 

analysis presented in Table 2.
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Table 2. Additional Analysis of Oil and Gas Journal and American Business Directory Information, 15 Small Entities with 

Engineering Compliance Cost to Revenue Ratios Greater than One Percent.

Estimated Engineering 

Compliance Costs

Engineering 

Compliance 

Cost:Revenues Ratio

Engineering 

Compliance 

Cost:Capital Ratio

Estimated 

Wells 

Drilled*

Company

Employees

Revenues

(2008-09 

average in 

2008 dollars)

Capital and 

Exploration 

Expenditures

(2008-09 

average in 

2008 dollars)

Cap. 

And 

Expl. 

Exp: 

Revenues 

Ratio

W/ 

Product 

Recovery

W/O 

Product 

Recovery

W/ 

Product 

Recovery

W/O 

Product 

Recovery

W/ 

Product 

Recovery

W/O 

Product 

Recovery Gas Oil

Approach Resources Inc. 45 60,020,211 63,952,753 107% 990,193 -61,656 1.65% -0.10% 1.55% -0.10% 26 15

Cano Petroleum Inc. 63 34,887,046 71,462,081 205% 1,057,773 -65,941 3.03% -0.19% 1.48% -0.09% 27 16

CNX Gas Corp. 174 732,425,975 427,479,290 58% 10,054,401 -620,880 1.37% -0.08% 2.35% -0.15% 259 149

Credo Petroleum Corp. 13 13,646,985 11,575,551 85% 230,131 -13,832 1.69% -0.10% 1.99% -0.12% 6 3

Cubic Energy Inc. 17 2,541,405 10,581,561 416% 82,373 -5,172 3.24% -0.20% 0.78% -0.05% 2 1

Daybreak Oil & Gas Inc. 2 531,741 685,797 129% 86,307 -5,158 16.23% -0.97% 12.58% -0.75% 2 1

Double Eagle Petroleum Co. 24 46,921,924 36,199,845 77% 498,371 -31,343 1.06% -0.07% 1.38% -0.09% 13 7

EnerJex Resources Inc. 13 4,982,265 6,270,633 126% 2,168,953 -130,738 43.53% -2.62% 34.59% -2.08% 56 32

Glen Rose Petroleum Corp. 17 145,732 826,201 567% 74,079 -4,320 50.83% -2.96% 8.97% -0.52% 4 2

Index Oil and Gas Inc. 2 2,365,275 NA NA 32,005 -2,007 1.35% -0.08% NA NA 1 0

John D. Oil and Gas 7 4,440,787 1,767,977 40% 221,467 -13,729 4.99% -0.31% 12.53% -0.78% 6 3

NGAS Resources Inc. 111 70,999,440 35,232,168 50% 1,108,051 -69,837 1.56% -0.10% 3.14% -0.20% 29 16

Rex Energy Corp. 163 58,208,561 56,862,983 98% 1,096,455 -67,765 1.88% -0.12% 1.93% -0.12% 28 16

Tengasco Inc. 29 12,608,954 603,392 5% 159,794 -10,070 1.27% -0.08% 26.48% -1.67% 4 2

Tri-Valley Corp. 32 4,778,011 3,843,164 80% 73,724 -4,675 1.54% -0.10% 1.92% -0.12% 4 2

TOTAL 712 1,049,504,312 727,343,395 69% 17,934,077 -1,107,122 1.71% -0.11% 2.47% -0.15% 466 268

Note: Oil and Gas Journal reports total wells drilled. As described in RIA, we divided apportioned 63% to gas wells and 37% to oil wells, based on distribution 

of drilling activity reported by EIA. Shaded firms may have overstated engineering compliance cost estimates.

Sources: Oil and Gas Journal. “OGJ150.” September 21, 2009; Oil and Gas Journal. “OGJ150 Financial Results Down in '09; Production, Reserves Up.” 

September 6, 2010; American Business Directory for employee numbers.