How to Start an Oil-Field Service Business

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Oil-field equipment and services is a catch-all term for any company that deals with the oil and gas exploration and production process. In general, these companies manufacture, repair and maintain equipment used in drilling, but they’re also constantly working on new drilling techniques, technological advances and oil and gas discoveries.

There’s a reason the oil industry is renowned for creating millionaires. This career can be extremely lucrative, but it also requires a ton of capital to start and a ton of knowledge about the oil industry. Plus, there are plenty of very real environmental concerns and regulations that can cause permanent roadblocks. If you have technical and field knowledge of industry operations as well as a wealth of oil-industry contacts, then you are much more likely to succeed.

Starting an Oil Company Isn’t Cheap

Petroleum-products businesses and oil-exploration businesses usually require a huge amount of capital to start. This is not an industry into which you can jump without financing because there are a lot of costs. You’ll need to purchase land, which in Texas can run about $2,345 per acre, but that’s just general land across the state. Oil-rich land in the Permian Basin? Forget it. That could run upward of $58,000 per acre, and you’ll probably want around 50 acres.

Beyond the $500,000 to $2.9 million you’re probably spending on land for your oil-exploration business, equipment can represent 24% of your startup costs. This alone could cost between $1.5 million and $2 million.

After that, you’ll need staff, and the best workers don’t come cheap. The average petroleum engineer makes $129,990 a year, the average geoscientist makes $89,700 a year and even petroleum-pump system operators make an average of $66,020. All in all, you should expect at least $6 million in startup costs. Quite often, figures that run from $50 million to $100 million are more realistic.

Start With a Good Oil and Gas Lawyer

Starting a petroleum-products business or oil-exploration company generally has a lot of legal red tape. You’re going to need to find a good oil and gas attorney who knows his way around complex energy transactions and can make sure you’re always in compliance with federal and state regulations. These regulations are always evolving and are extremely complicated, so a good lawyer is paramount to your company’s success.

Raise the Funding

Unless you happen to be independently wealthy (like really, really wealthy), you will need financing before starting an oil company. You can try to obtain a business loan through a bank or through the Small Business Administration. The interest loans for the latter generally range from 7.25% to 12%.

If a loan isn’t a good option, you can search for investors. This can include family and friends or angel investors. Angel investors usually work with some type of profit-sharing and interest structure.

Invoice factoring is also a common way that oil-service companies get funding. Basically, what happens is that you sell invoices (the accounts receivables) to a third party at a discount. This gives you immediate cash instead of waiting for the net 30, 60 or 90 terms on a customer payment, and it does not create debt.

Find a Location

Location is one of the most important factors for an oil-field service business. You need to go where there are resources and where you’re able to access them. This requires some research. For example, the petroleum industry might support about a third of all jobs in Alaska, but a great deal of oil in the state is protected within national parks and wildlife preserves. Alaska also has some of the highest taxes in the industry.

Make sure you open your oil-field service business in a place that has a lot of oil-rich fields. Some places to consider for good oil and gas investment:

  • Manitoba
  • North Dakota
  • Texas
  • Mississippi
  • Oklahoma

You can also consult services like Ringdata and the Energy Information Agency’s Drilling Productivity Report to narrow down your options.

You’ll Need Permits

Starting an oil company is one thing, but starting an oil-exploration business or oil-field service business is something else entirely. This is a highly regulated field that always requires permits. You can’t just drill or lay down a pipeline on any land you want (even if that land is privately owned and you have the owner’s permission). The type of permit you need depends on what exactly you plan to do and state and federal law, so consult your attorney. For example, you’ll probably need to get a drilling permit for the following:

  • Drilling a brand new wellbore: A wellbore is the hole that’s drilled into the ground and leads to those lucrative natural resources.

  • Recompletion: This is when you’re using an existing wellbore but expanding it to a different field or reservoir or deepening it beyond the approved dimensions in the same field.

  • Reclass: This is when you’re changing the purpose of a service well from something like injection or disposal to an oil- or gas-producing well. This is also needed to change a well from oil to gas if you’re in the panhandle east or west fields of Texas.

  • Field transfer: This is when you’re moving a well from one regulatory field to another regulatory field, but you are not doing any new work to the wellbore. This is simply a transfer.

  • Re-entry: You’re opening up a wellbore that has already been plugged.

When you file for your permit, you’ll need to include information like the purpose of filing, the profile of your wellbore, the name of your lease, the well number, the vertical depth of the wellbore and the county in which you’re operating, but that’s just the bare minimum. Be aware that getting a permit for an oil-exploration business is a lengthy process. Thankfully, energy regulators have been issuing more permits in recent years. For example, the Railroad Commission of Texas issued 34% more drilling permits in 2018 than it did in 2017, which was largely driven by a rise in oil-barrel prices.

Hire the Talent and Get the Equipment

Oil-exploration businesses and petroleum-products businesses need a lot of equipment, especially if they’re drilling. You’ll need equipment to do seismic testing, transportation, directional services for horizontal drillers and more. Since brand-new equipment raises costs significantly, look into used options. A service like Oiltizer can help you find quality used equipment online.

In addition to machinery, technology-based services are also an asset, and this requires a whip-smart, highly trained team. These services include things like energy data management, locating new energy sources, drilling and formation evaluation and geological sciences. You’ll have to cast a wide net and consult with other like-minded business owners to find top talent.

Mind Maintenance and EPA Regulations

You’ve probably heard about the BP oil spill. Many argue that this accident, which cost BP an estimated $65 billion, could have been avoided by following proper maintenance protocol. Beyond the tragedy of lives lost, the BP oil spill caused a wealth of environmental problems, and many of the surrounding ecosystems will never fully recover.

To stop environmental damage like that caused during the BP oil spill, the EPA has tight regulations about what oil services companies can and cannot perform. There are strict regulations regarding industrial waste, particularly in the realm of crude oil and natural-gas waste, and strict emissions standards for oil and natural gas production facilities. Make sure you follow EPA regulations closely once you open your business.