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2 Things You Must Know About KrisEnergy Holdings Ltd’s Business – Part 2

In an earlier article, I covered a portion of the oil and gas exploration business, using KrisEnergy Holdings Ltd (SGX: SK3) as an example.  I’ve covered two out of the four stages of its business;  pre-exploration and exploration. Now let us look into where the money is made, the third and fourth stage, the appraisal/development and production.

Appraisal/Development

Once the company believes that it might have made a discovery from its exploration wells, it would begin the appraisal phase. This phase involves the acquisition and analysis of field data, followed by the drilling of delineation wells. This drilling is to analyse the economic viability of the production and estimate the reserves. If all is well, the company will start preparing a plan to develop the area.

This is the point where the company might need to obtain more financing, either through debt or equity raising to bring the wells to the production stage. Once the capital is raised, development wells would be drilled and facilities for the production would be constructed.

Production: The Ultimate Price                                                         

The final destination. If all goes well, the company can finally start production, pumping up the long awaited oil and gas. However, there is still maintenance of the field that needs to be done on an ongoing basis, ensuring that the extraction is done in the most efficient way to bring out the best possible yield for the wells.

Foolish Summary

Understanding the process of extracting oil and gas out from our ground to power our society gives us a better sense of the difficulty and intricacies involved in the entire process. It is also why investors tend to see exploration companies as speculative in nature. However, as long as the company is able to manage its risk in a prudent manner and investor understands the risk involved and sizes the investment properly, there is no reason why the process should be viewed as speculative.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any companies mentioned.