Oil and Gas Exploration and Production
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Industry Overview
The oil and gas exploration and production industry includes about 7,000 companies with combined annual revenue of about $260 billion. Major companies include Murphy Oil, Chesapeake Energy, Devon Energy, Anadarko Petroleum, and Occidental Petroleum. The industry is moderately fragmented: 10 percent of companies generate 60 percent of revenue.
This industry segment doesn't include transmission, refining, or retailing of petroleum and natural gas products.
Competitive Landscape
Demand is driven by economic activity, population growth, and energy efficiency for residential, industrial, and transportational uses of oil and gas. Profitability of individual companies is driven by the success rate of new wells drilled and the ability to increase production from existing wells. Large companies are advantaged by access to capital, including the ability to buy or merge smaller companies. Small companies compete by focusing on, and developing expertise in, a few geographic areas. The industry is capital intensive: average annual revenue per employee is about $2 million.
Oil and gas compete with other energy sources, such as coal, nuclear power, and hydroelectric power, for industrial and home heating applications. Renewable fuels, such as ethanol and biodiesel, and hybrid-electric cars, which use stored electricity from batteries instead of or in addition to gas or diesel, are emerging alternatives for transportation applications.
Products, Operations & Technology
Major products of the oil and gas exploration and production industry are crude oil (about 45 percent of industry revenue) and natural gas (55 percent). About 33 percent of US petroleum production comes from offshore wells and 67 percent from land-based wells. About 15 percent of US natural gas production comes from offshore wells.
Crude oil and natural gas are found in underground basins that meet certain geologic conditions. All exploration companies have staff geologists, and many hire companies specializing in geological research to identify areas with high potential for petroleum-bearing formations. Since the first US oil well was drilled in 1858, there have been hundreds of thousands of drillings (in 2006, the number of wells drilled approached 50,000, increasing to over 53,500 in 2007). Geologists use the geologic data from these drillings to identify areas with promise. To further improve the probability of finding petroleum, geologists can create 3D maps of underground rock formations using seismic waves from controlled explosions or sound generators (vibroseis).
Once a company selects an area to explore, it must obtain a lease on the mineral rights. Most companies hire a land services company to research the ownership of mineral rights. In most states, the mineral rights can be separated from the surface rights and owned by different parties. Land services companies employ landmen to present lease proposals to the mineral rights owners. The leases are for a fixed period, typically two to five years, and pay the owner a fixed fee for the right to drill during that period. The lease also defines access rights and rights to install and operate a well, along with royalty payments to the mineral rights owner for any hydrocarbon products extracted.
The exploration site is cleared and leveled and a drilling rig and crew brought in. Rotary rigs consist of a derrick and power source (usually two or more diesel engines), along with ancillary equipment, such as desanders and desilters, mud pumps, stacks of pipe, and living quarters for the crew. The crew commonly has 20 to 30 members and operates in 8-hour shifts, 24/7 until completion. A typical land-based well costs about $300 per foot to drill, and many wells cost $1 to $2 million to bring to production. The majority of commercial oil fields have been found at depths of 2,000 to 15,000 feet. Natural gas fields are generally between 2,000 and 25,000 feet. As a well is being drilled, geologists examine the cuttings evacuated from the borehole to evaluate the type and content of rock at each depth. Most exploration companies use a combination of their own rigs and crews and third-party drilling companies.
Gas flowing from a well has to be treated onsite to remove liquids and corrosive gases before it can be moved through a pipeline to a treatment plant.
Offshore drilling can be done in the shallow waters of the continental shelf or in deep seas. In shallow waters up to 500 feet, a drilling rig, such as a jackup rig, is towed to the drilling site and part of the platform sunk to the bottom. Legs are lowered from the upper platform to the sunken platform and the upper platform is then jacked up to the desired height above the water. Drilling is then conducted in a manner similar to onshore drilling. In deeper waters, submersible rigs or deepwater drillships may be used. Usually three shifts of crews are on for the offshore rigs – two living aboard, the third ashore. The shifts are rotated in two-week intervals. Large rigs can have as many as 200 workers living aboard. Wells require periodic workovers to maintain production levels. During service, a workover rig or a smaller service unit is used to raise and lower equipment into the well. Sand, rock, and other debris can be removed from the well using oil- or water-based mud or a nitrogen foam pumped into the well under high pressure. In some instances, wells can be drilled nearby and water or a gas (carbon dioxide or nitrogen) can be pumped in to drive the petroleum or natural gas toward the production well.
IT is used extensively to create the seismic 2D and 3D subsurface maps of potential drilling areas. To monitor production, companies operate Supervisory Control and Data Acquisition (SCADA) networks, which connect sensors and other equipment at each production site back to a staffed central control facility. The communication network may be older legacy wireline, microwave connections, or a modern wireless system.