What Does Due Diligence Really Involve on Complex Capital Projects
The oil and gas industry has always been known to be the place to make large investments. However, these investments carry great risks if the site being acquired or invested in has not been thoroughly vetted.
The major challenges and complexity of drilling rig operations only add to the financial and safety risks involved with investing in these operations. For this reason, due diligence has to be carried before acquiring or investing in a drill site.
However, due diligence can be a lot more complex and comprehensive than most people realize. So let’s take a look at the proper due diligence that should be performed before investing in complex capital projects.
Table of Contents
1.Understand the corporate structure
Before investing in an oil and gas project, investors should gain a good understanding of the project’s corporate structure. This includes reviewing the project’s leadership and employees.
Investors should make sure to look over general information about the company, documents pertaining to the property, the project’s employees and the benefits they receive.
A list of the project’s executives, management, and employees should be acquired and reviewed. It may also be useful to look over any organisational policies and procedures that are being followed by the employees at the worksite.
Learning how the project is being run is essential for understanding how it will fare in the future, so investors should spend some time focusing on due diligence in this area. If you are having trouble assessing how the project is being run, you could enlist the aid of oil & gas consulting firms to help you understand the risks inherent with the project.
A drilling rig consulting company could also help investors learn about other operational aspects of the project that are difficult to understand.
2.Review the land or site ownership
The next stage of due diligence involves reviewing the purchase agreement for the site. This land due diligence step will inform you whether or not the lease matches up with the claims on the purchase agreement.
For this stage, investors should look over the purchase agreement exhibits and schedules, and the lease exhibit and schedules. Information about the well exhibits and well production can also be useful during this step.
You should be careful to identify any title issues or transfer issues that could lead to problems in the future.
3. Look over legal documents and contracts
The next stage of due diligence is to check if the project has encountered any legal problems. These include current legal issues that are currently affecting the project, or legal issues that could affect the project in the future.
Investors may be able to get a clearer picture of their deal’s scope by auditing contracts. This should uncover any fraudulent activities that have taken place in the project in the past, and any fraud activities that are currently in progress.
Once this step is complete, you should be able to view a schedule of each lawsuit filed against the project, as well as any lawsuits threats the project has faced.
4. Perform environmental due diligence
Environmental concerns are always important to address before investing in any oil and gas project. After all, many operations in this industry are known to wreak havoc on the surrounding environment, which could lead to costly and time-consuming legal problems in the future.
Carrying out environmental due diligence should ensure that the project is following local laws. It is also useful for discovering any hazards that could alter the course of the project and affect its overall value.
The standard procedure during this stage is to perform a Phase I environmental assessment. This will uncover if any contamination has occurred at the site itself or on nearby land. This assessment should also establish if contamination could impact the project’s activities or the surrounding region in the future.
A typical Phase I environmental assessment involves undertaking a walkthrough of the site and identifying any areas of environmental concern. After this has been completed, geological, hydrogeological, and regulatory data should be compiled and reviewed to identify any environmental risks.
If possible, aerial photographs of the site should also be acquired and reviewed. Sometimes the extent of contamination can only be realized by observing the site from far away.
If any environmental concerns have been identified, a Phase II environmental assessment will need to be performed. The second stage of environmental assessment involves gathering soil and/or water samples from the site and testing them for signs of contamination.
Any concerns about contamination becoming a problem in the future should be discussed with a drilling rig consulting expert. This stage of due diligence should never be neglected, so investors should do their best to ensure the site is operating safely and in line with local laws before investing.
5. Identify financial liabilities
One of the final stages of due diligence is to look for any financial liabilities that could impact the project. During this step, investors will need to determine if the project’s reported cash flows and financial practices are sound. They can confirm this by reviewing both audited and unaudited financial statements, financial procedures, any insurance policies, and insurance claims by the project.
As you can see, performing due diligence in oil & gas projects is a lot more complex and time- consuming than most people would assume. However, this level of complexity is justified, given the massive scale of these projects and a large amount of investment put into them.
If you have concerns about investing in an oil & gas project, you should get in touch with oil & gas consulting firms who can help you perform your due diligence assessment and ensure your investment decision is sound.