Land Data Errors Crush Property Value

By:  Tom Agnew

 

It's Happening Again

Oil prices are at historical lows. Budgets are being slashed. More than 250,000 layoffs have been announced in the last eight months. Just like the last oil bust, back offices are being sacrificed. When back offices are sacrificed, data is mishandled. When data is mishandled, the oil and gas industry loses billions.

Land Area Hit Hardest

The land area suffers the most when jobs are cut. There are insufficient resources to add, maintain and correct the data. At first, there are no consequences. Deferred maintenance tasks build up over time, however, accumulating what we call “Data Debt”. Eventually, you will need to pay off this debt.

Divestiture Cummupins

Data Debt always comes due when properties are divested. If Data Debt is ignored during a divestiture, it will be foreclosed -- costing you millions in lost acreage, lost assets in lost value.

A new report from the oil and gas consultancy Molten argues that clean data is essential to maximizing the value of an acquisition or divestiture and should be treated as an important asset. The consultancy argues that better valued and managed data gives executives and investors greater certainty in their A&D decision making. Companies with accurate and up to land data will command and receive higher prices for these assets.

But ignoring Data Debt will cost you dearly. A recent study by the University of Utah published by The Oil and Gas Financial Journal found average loss rates of 4.6% on A&D transactions, due to errors and omissions. This same study found error rates over 19% when data had been neglected for a period of time.

Error Rates Will Rise in 2016

We expect land error rates to approach 20% during the downturn this year. We see this dramatic rise in errors due to: deep staff cuts in the land and accounting areas, unfinished data cleanup projects put on hold, and hasty integration of recent acquisitions. This lost value could average $4,000-$5,000 per lease during a divestiture.

With the expected rise in A&D activity this year, we believe total lost value may approach $10 billion in 2016. These losses will show up in busted deals, asset write-downs and price adjustments.

What to Do?

Be prepared, and plan ahead. Pay down your Data Debt before you divest. In our experience, this means allocating $100-$300 per lease to clean up your land records just prior to a major divestiture. This data cleanup could save you millions and pay for itself 20-fold.