Oil and Gas Damages Analysis: When Engineering Support Matters

Oil and gas disputes can raise questions about production, operations, contracts, and financial loss. Economic experts assess claimed damages using economic methods and evidence suited to the case. When a material input to the damages analysis depends on a technical question requiring specialized interpretation, engineering analysis can help evaluate the evidence supporting that input. Econ One has a team of experienced economists including some with engineering experience to help evaluate the technical and economic issues that arise in oil and gas disputes, from reservoir and production performance to pipeline access, royalty calculations, and asset valuation.

The expertise needed to evaluate an oil and gas damages claim depends on the issues in dispute. Many claims can be evaluated through economic and financial analysis using contracts, financial records, production data, and other available evidence. In other cases, a material assumption may depend on a specialized technical question. When it does, engineering analysis can provide additional support for the inputs used in the economic model. The economic expert remains responsible for the damages analysis and for how technical findings and other evidence are incorporated into the economic opinions.

Key Takeaways

The issues in the case determine the work needed. Many oil and gas damages questions can be addressed through economic and financial analysis. When a material assumption depends on a technical question involving well locations, production capability, equipment performance, reservoir behavior, or operational constraints, engineering analysis can provide additional support.
Technical assumptions can materially affect a damages estimate. A damages model depends on the reliability of its underlying inputs. When those inputs involve disputed or complex operational questions, engineering analysis can help evaluate the technical evidence and provide support for the assumptions incorporated into the economic model.
Engineering and economic analysis can provide complementary expertise. Engineers can address technical questions relevant to production and operations, while economists evaluate the resulting financial consequences. Econ One’s in-house engineering capability allows its economic experts to coordinate that work when technical analysis would strengthen the damages assessment.

Technical questions can arise in disputes involving wells, facilities, pipelines, or reservoirs. For example, the parties may disagree about which wells are relevant to the claim, how production should be allocated, what production was technically achievable, or how an operational constraint affected output. When such questions affect a material input to the damages analysis, an engineering review can help evaluate the underlying evidence and provide a credible basis for the assumptions used in the economic model.

Case Example: Technical Review of Well Locations in a Directional Drilling Dispute.

In one directional drilling dispute, a landowner alleged that wellbores from a neighboring development passed beneath their acreage and claimed a share of the revenue from the associated production. The initial claim identified approximately 70 potentially relevant wells based on surface proximity. Econ One’s experts reviewed directional survey data, well trajectories, and lease boundaries to evaluate which wells had a technically supportable connection to the claimed acreage. That review narrowed the well set to 30 (down from 70) wells, which provided a more supportable well population for evaluating production and the resulting financial loss.

As illustrated in the diagram below, the key technical question was not where the wells were located at the surface, but where the wellbores traveled underground. Directional surveys provided information about each well’s subsurface trajectory, while lease and property boundaries established its location relative to the claimed acreage. Reviewing these records together provided a more technically grounded basis for identifying the wells relevant to the damages analysis than surface proximity alone.

How Technical Findings Feed an Oil and Gas Damages Model

Technical findings can inform a damages model in different ways depending on the issues in dispute. Engineering analysis may help identify the relevant wells or production volumes, assess production capability or operational constraints, evaluate equipment performance, or estimate reasonable repair and recovery periods. These findings can provide support for the physical and operational assumptions considered by the economic expert in developing the damages analysis.

In this role, an engineering professional can provide focused support on technical questions relevant to the damages analysis without separately quantifying the resulting economic loss. The economic expert then evaluates those findings together with the financial, economic, and other evidence and determines how they should be reflected in the damages analysis. Clear communication between the two disciplines can help the economic expert understand the scope and limitations of the technical findings and appropriately incorporate them into the economic analysis

The economic expert selects and applies the appropriate methods to quantify loss. Depending on the claim, the analysis may involve measuring lost revenues or profits, calculating royalty interests, estimating incremental costs, evaluating mitigation, or determining the present value of future losses.

When Engineering Support Adds Value

Engineering support can be particularly useful when a disputed technical issue could materially affect the damages estimate. Depending on the case, this may involve interpreting directional surveys or reservoir studies, evaluating production capability or operational constraints, assessing equipment performance, or estimating reasonable repair and recovery periods. The relevant question is whether specialized technical analysis would provide meaningful support for an assumption that matters to the damages calculation.

The directional drilling dispute illustrates this distinction. Because the location of the wellbores affected which production was relevant to the claim, technical review provided important support for the damages analysis. By contrast, a dispute centered primarily on prices, contract terms, or financial records may require little or no specialized engineering analysis.

Engineering support can also help an economic expert respond to an opposing expert’s damages analysis. An engineer can review the underlying records to assess the production levels, well performance, or operating conditions assumed in the opposing model. That review can help the economic expert identify assumptions the records do not support and explain how they affect the damages estimate.

In-House Engineering Support for Economic Damages Experts

Econ One’s economic experts can draw on engineering expertise within the firm when specialized technical support would benefit the damages analysis. Engineering professionals can serve in a consulting role, working with the economic expert to review technical records, evaluate relevant assumptions, and address technical questions as they arise. This in-house capability allows technical and economic issues to be considered together while the economic expert remains responsible for the damages analysis and resulting opinions.

The opinions and statements contained in this post are those of the author or source and do not necessarily reflect the views of Econ One or its affiliates. This material is provided “as is” for general informational purposes only and does not constitute professional advice. Econ One disclaims all liability for any reliance placed on the information contained herein.