Oil companies may have mislead investors on how much oil they can actually produce.
According to a report from Bloomberg’s Bradley Olson, several studies have found that the results of one-day production tests on oil wells do not say enough about how they will perform over 12 months.
Investors rely on these test results, which have little or no regulation, as an indication of future performance and share prices have surged on these results in the past.
Here’s what researchers said about them, via Olson:
“Some producers open flow valves full blast for the tests, an action not generally used in regular production, they said. Others install pumps to create artificial pressure, or measure just the first eight hours of flow, then multiply that by three to represent a full-day’s output.”
Allen Gilmer, CEO of research firm Drillinginfo told Olson, “It’s hyperbole. There is no relationship between those test numbers and what can be economically delivered on a sustained basis.”
A report from Drillinginfo said that a better measure is a month-long test of a well. But producers aren’t willing to wait longer than a day because they often don’t have the infrastructure to go to such lengths.
These test results are used to attract the funding they need for more pipelines.
For example, Olson noted that shares of Range Resources spiked after a one-day test showed that it could supply gas to 1,000 homes for a year.
One Drillinginfo report said that at South Texas’ Eagle Ford shale fields, the 24-hour results did not have a statistically significant relationship to production over a full year.