SIC 1382
OIL AND GAS FIELD EXPLORATION SERVICES



This category covers establishments engaged primarily in performing geophysical, geological, and other exploration services for oil and gas on a contract or fee basis.

NAICS Code(s)

541360 (Geophysical Surveying and Map Services)

213112 (Support Activities for Oil and Gas Field Exploration)

Industry Snapshot

Companies performing oil and gas exploration services are most often divisions or subsidiaries of major oil companies, although the industry also boasts several significant independent contractors. Many of the industry's leaders are known as integrated companies, which cover the entire oil and gas industry, from exploration to refining to distribution. As such, the exploration branch of the industry is affected by trends in the field as a whole.

For example, in 1998 a drop in world oil prices led to a collapse in exploration and drilling activity. During that time the number of natural gas drilling rigs fell off by 40 percent, but rebounded by 2001 to produce at record levels, and then declined again. When oil and gas prices are suppressed, companies tighten their purse strings, often cutting costs by idling explorative drilling. During 2003 the U.S. war against Iraq, as well as a workers' strike in Venezuela, pushed oil prices back up. As a result, oil companies had revenues to once again pursue increased exploration activities.

Partly because the United States is considered a mature oil region, the major American companies—Exxon/Mobil, Texaco, and Chevron (which, along with the European giants British Petroleum/Amoco/Arco and Royal Dutch/Shell, control the American market)—focused their exploration efforts elsewhere. The Energy Information Administration (EIA) reported that the increases in the U.S. majors' exploration and development expenditures have mostly been directed toward the North Sea and Southeast Asia.

Organization and Structure

Much of the exploration process is done before wells are actually drilled. Once a company obtains the mineral rights to the land it wishes to drill, three-dimensional (3-D) seismography, aboveground sonic sampling, and other methodologies are utilized to determine where oil is most likely to be found. Once seismographic data about either underground or sea floor rock is collected, it is analyzed for signs of oil or gas deposits, a process that takes several months. A likely area is then selected, and exploratory or "wildcat" wells are drilled to confirm suspicions. If the area is known to have oil, "development" wells are drilled. There are legal regulations on the number of wells that can be drilled in a given area by "infill drilling." Drilling to test the possibilities for expanding an oil field is done with "stepout" wells. Finally, wells that turn up no product, or too little to make continued drilling feasible, are called "dry holes."

While drilling, a rig (made up of a derrick and surface equipment) is set up over the target area, and a bit attached to a drill stem is lowered into the earth. In the most common setup—rotary drilling—a rotating bit connected to a hollow pipe breaks up the earth. Fluids ("mud") made up of clay, water, and other ingredients are injected through the pipe to cool the rotating bit and carry broken rock back to the surface. Often a hollow casing is placed in the well to keep the walls from caving in and to protect the contents of the well from outside influences of water or gas. Both oil and gas are removed through narrow tubing implements that bring the substances to the surface.

The crude oil that wells up without pumping is culled using primary recovery methods, during which time most of the available oil is recovered. In secondary recovery, additional effort must be expended to remove the oil. Most often, the well is flooded with water to flush out the oil. Finally, in some wells, tertiary recovery methods, such as injecting steam or gases into the well, help flush out the heaviest, most viscous oil. Wells may be "shut in," their valves closed, during the wait for a pipeline connection or even when the oil and gas market is depressed and further drilling becomes financially difficult. Once a well is dry, it is plugged—filled with cement or mud—and abandoned.

Drilling for natural gas is similar to drilling for oil, but gas must be liquefied before it can be shipped. Apart from the natural gas liquids (NGL) that occur naturally at a well, all gas obtained must be cooled and pressurized into liquid natural gas (LNG) for transportation. NGL is mainly ethane, propane, butane, and natural gasoline; the gas from LNG is mainly composed of propane, propylene, butanes, and butylenes.

The amount of oil obtained is measured in barrels (bbls.), one of which is equal to 42 U.S. gallons. Natural gas is measured in thousand cubic feet (mcf), one of which equals 1 million BTUs (British thermal unit) of energy at one atmosphere of pressure. One barrel of oil is equal to six mcf.

Background and Development

Field exploration in the petroleum industry began in earnest in 1859, when Edwin Drake drilled the first successful oil well in Titusville, Pennsylvania. Previously, oil was obtained only where it seeped from the ground. Drake's discovery went to feed the burgeoning need for kerosene for lamps; soon, lamp oil made from oil replaced that made from coal.

Among the rash of speculators who entered the exploration business was John D. Rockefeller, who soon turned away from exploration (which he considered too much of a financial risk) and moved toward refining and transporting the fuel already obtained. For the next 50 years, Rockefeller's Standard Oil Company expanded by any means necessary, engaging competitors in price wars or buying them out when they became a threat. Standard Oil remained unchallenged until exploration in Texas, Louisiana, and Oklahoma led to the rise of companies such as Gulf and Texaco. While Standard's oil fields were in the United States, it began exporting its products to the European and Far Eastern markets, competing with both Shell (then the Shell Transport and Trading Company) and the Royal Dutch Petroleum Company. Standard Oil made several unsuccessful attempts to buy or control Shell. Royal Dutch and Shell began cooperating with each other, partly in an attempt to compete with Standard Oil and eventually united into one company, today the second largest worldwide. In 1909 the Standard Oil Trust was deemed illegal under antitrust charges, and the U.S. Supreme Court ordered it to be dissolved. Broken up into over 30 companies, the offshoots of Standard Oil still retained immense industry influence, eventually spawning Jersey Standard (later Exxon), Socony and Vacuum (later Mobil), Standard of California (later Chevron), Atlantic (later ARCO), and Standard of Indiana (Amoco), among others.

U.S. exploration on the part of the major American oil companies (known as the Seven Sisters) produced what for a while seemed to be a never-ending stream of resources. It was not until the 1920s that they began foreign exploration and then mostly to check the power of British companies drilling in the Middle East. But foreign exploration came with a price; in the 1940s Venezuela demanded half of the income generated from drilling within its borders. Other countries followed suit, stemming in part from the huge profits flowing into U.S. companies from overseas. Challenges also came from smaller independent oil companies such as Marathon and Getty. At the same time, exploration efforts uncovered new sources of revenues in natural gas, often found with oil deposits. Once it was discovered how to trap and transport the gas, it became another focus of exploration.

Another challenge to American oil companies came with the 1960 formation of the Organization of Petroleum Exporting Countries (OPEC), consisting of eight Middle Eastern countries that were heavy producers of oil. This cartel used its power to push up the price of oil from $1.80 a barrel in the 1960s to more than $3.00 a barrel in 1973. Prices rose further when a 1973 OPEC embargo aimed at punishing U.S. support of Israel led to a national energy crisis in which America was made aware of its dependence on foreign oil. Meanwhile, American oil companies came under attack for profiting unfairly from the embargo. The state of the oil and gas exploration industry was further impacted by increased emphasis on alternative energy sources, such as hydroelectric, nuclear, and solar energy.

In the late twentieth century, the oil industry made significant cutbacks in exploration, production, and corporate staffs. Slim profits, surplus inventories, and low prices cooled the fever to explore for new oil and gas fields. In some cases, such as with the 1984 purchase of Gulf Oil by Chevron, companies were bought out or restructured. By the early 1990s, the industry had still not reattained boom status; it entered 1994 with several years of cutbacks, employee layoffs, and flat earnings behind it. By the mid-1990s, though, the downhill slump did an extraordinary turnaround. U.S. oil companies experienced strong profits during the second quarter of 1996. Compared to the same period only one year earlier, Mobil's profits were up 337 percent, Texaco's 154 percent, Chevron's 44 percent, Amoco's 13 percent, and ARCO's 11 percent. Exxon experienced a 4 percent decrease in profits, but showed a strong net income in the fourth quarter, which was 49 percent higher than the same period in 1995. For the year in total, all showed strong profits, including Exxon, whose 1996 income was up 16 percent from that reported in 1995. ARCO announced that 1996 was one of the most successful years in the company's 130-year history. The increase in profits has been credited to high crude oil and natural gas prices, and also to strong margins in refining and marketing operations. Mergers and acquisitions reached $14.5 billion in the first half of 1996, up from $11.5 billion for all of 1995. Among the largest of these moves was Tenneco's $4.0 billion sale of its pipeline to El Paso Natural Gas Co.; Mobil's planned merger of its European refining and marketing operations with British Petroleum; and Mobil's $1.4 billion takeover of Australia's Ampolex Ltd.

Natural gas prices fell to record lows in the early part of the 1990s, and oil companies spent approximately 10 percent less in 1992 on new well exploration than they had the previous year. U.S. production fell to 9.0 million barrels per day (b/d) in 1992, down from 10.0 million b/d in 1987, continuing its slow slide, as more companies pursued international drilling at the expense of U.S. based exploration. Despite the gains in the industry, U.S. production had fallen below 7.0 million b/d, a low not seen since the 1950s.

In 1996 production was 6.7 million b/d, with 1.4 million b/d from Alaska and the remainder from the lower 48. Alaska was seen as the only U.S. state with the possibility of harboring large, untapped oil and gas reserves, but new exploration on federally owned lands has been forbidden by Congress, spurred on by a growing environmental movement. The only real growth sector was offshore, primarily in the Gulf of Mexico. For example, the Federal Energy Regulatory Commission (FERC) had approved the Gulf of Mexico Discovery Project for Discovery partners MAPCO and Texaco, a 150-mile offshore Gulf pipeline accessing deepwater production from existing and planned locations. Ashland Oil began production on Vermillion Block 410 offshore Louisiana, and a second platform with four wells was scheduled for production in 1997. At the beginning of 1997, Amoco announced that it would develop the deep water Gulf of Mexico Marlin prospect with Shell Deepwater Development, Inc. It was expected to cost $500 million to develop and ultimately would produce 250 cubic feet of gas and 40,000 barrels of oil per day.

Environmental concerns had also increased the cost of local drilling, further spurring American exploration firms to turn their attention to drilling outside of the United States, where regulation was sometimes slack and the possibility of untapped reserves significant. While exploration services underwent shifts in fortune prior to the 1990s, those changes were most often due to economic or political factors (such as the OPEC oil embargo of the mid-1970s) rather than environmental ones. However, The Oil Pollution Liability and Compensation Act of 1990 and the Clean Air Act of 1990 had some direct effect on exploration practices (the latter, among other things, tightened emission standards for offshore drilling activity). But most effects on exploration remained indirect—most new regulation and fines applied to vehicles, oil refineries, ships, and pipeline operations, the costs of which would reach oil and gas companies in general and then trickle down to exploration expenditures. With government rewarding the use of diesel fuel alternatives, more energy was being put into natural gas exploration and production than into crude oil.

In the late 1990s, U.S. drilling activity took a major dive, due to plummeting world oil prices, but made a remarkable recovery by the end of 1999. Oil drilling in the United States hit an historic low in 1999, with one of the smallest number of total well completions in the modern petroleum era. Operators drilled 18,600 wells in 1999, off from an estimated 23,900 drilled in 1998, the lowest number in six decades. Slack profits in oil and gas production operations accounted for the decline in investment in U.S. exploration and development. Oil prices bottomed out at $11.26 a barrel in February of 1998, but rebounded to $25.70 a barrel in December of 1999.

In 1998 there were a total of 24,884 wells in the United States, an increase of 2,703 from 1995; of these 8,720 were completed for oil; 10,711 for gas; and 5,453 were dry holes. Baker Hughes, Inc., an oil field service company, reported a dramatic drop in domestic drilling since late 1997. The September 1997 U.S. rig count topped 1,000; by December 1998, it dropped to 647, reaching the lowest level since 1950.

After peaking in 1970, domestic crude oil production has fallen by an average of 1.5 percent per year. In 1997 crude oil production in the United States declined by 56,000 barrels a day to an average of 6.4 million barrels per day (MMb/d), down from 6.5 MMb/d during the same period in 1996. Alaska, which produced 1.3 MMb/d, accounted for 20 percent of total U.S. production in 1997. The lower 48 states averaged 5.1 MMb/d. Total natural gas production in 1997 was estimated at 19.0 trillion cubic feet (Tcf), compared to 18.7 Tcf in 1996. Domestic crude oil production was expected to increase by only 0.1 percent in 1998 and decline by 2 percent in 1999.

Since 1986, the U.S. petroleum industry has shrunk: higher-cost companies have left the industry and big-budget projects have been scrapped. Despite the slow growth, U.S. companies have made significant efficiency gains, as the cost of adding reserves (finding costs) has declined. A general reduction in activity combined with more selective drilling (often called "prospect high grading") account for this drop. Moreover, technological advances in exploration and drilling have made many projects more profitable. Finally, corporate downsizing and industry mergers have reduced operating costs by streamlining resources and eliminating redundancies.

Current Conditions

The market volatility of the 1990s saw little improvement during the early 2000s. A general strike by workers at Venezuela's national petroleum plant in December 2002 caused the country's production to fall from 3 million barrels per day to just 400,000 barrels per day. Venezuela provides approximately 14 percent of U.S. imports, and the mayhem in that country caused oil prices to spike in late 2002. On the heels of the strike came the U.S. war against Iraq, which resulted in per-barrel prices jumping briefly to $40 before dropping back to $28 in March 2003. Elevated prices put money back in the pockets of petroleum companies, paving the way for increased exploration activities.

Continued exploration will be necessary to meet future demands for both petroleum and natural gas. In 2003 global consumption of crude oil stood at 76 to 78 million barrels per day. The demand is expected to increase to 90 to 110 million barrels per day by 2025. Natural gas consumption in 2003 averaged 90 trillion cubic feet per day and is expected to increase to 135 trillion cubic feet per day by 2025. Exploration will be driven by new technology that will allow deeper wells, and in offshore locations, in deeper waters.

Whereas natural gas exploration and drilling, which accounts for 80 percent of all U.S. drilling activity, will be focused inland, petroleum exploration is shifting toward more offshore locations. In 2003, U.S. companies operated 4,194 offshore platforms. In 1984, 84 percent of acreage awarded exploration privileges was onshore, with 3 percent onshore with offshore extensions, and 22 percent offshore. By 2002 offshore exploration awards had grown to 53 percent, and onshore awards had fallen off to 42 percent. The increase in offshore exploration has not gone unnoticed or uncontested by environmental groups. For example, during 2002 Florida protested exploration releases off its coast, resulting in the federal government buying the leasing rights from oil companies to compensate them for the loss of potential oil. Likewise, California was waging a battle to keep exploration leases in water north of Los Angeles from being renewed by the federal government.

Industry Leaders

The Financial Times reported that the petroleum industry has been transformed by what it called a new order of mega-majors. Impelled by low oil prices and a desire to cut costs, petroleum corporations stepped up their merger activity in the late 1990s. The largest industry marriages occurred between BP and Amoco, Exxon and Mobil, and Total and PetroFina. In addition, on April 1, 1999, BP Amoco agreed to purchase Arco.

Exxon's merger with Mobil, completed in the third quarter of 1999, created the world's largest company, with 2002 revenues of $178.9 billion. The company has 55.7 trillion cubic feet of natural gas and 11.8 billion barrels of oil in proven reserves. The consolidation also gave the company key access to some of the world's most lucrative oil basins, including offshore West Africa and the Caspian Sea, as well as a strong position in natural gas markets in North America, Europe, and Asia-Pacific.

Smaller companies had also been gaining ground in the development of U.S. oil and gas resources. The share of oil and gas production from non-majors (also known as "independents") increased from 40 percent of total U.S. production in the late 1980s to nearly 50 percent in 1996. Non-majors accounted for 60 percent of total U.S. production of natural gas from U.S. offshore areas in 1996. Nonmajor companies tended to drill smaller fields that had faster depletion rates than those of the majors. But like the majors, the smaller companies were able to reduce their finding costs to levels equivalent to the majors'.

Workforce

Corporate mergers have not boded well for the job market in oil and gas exploration. However, streamlining has not affected skilled exploration workers. With prospects beckoning overseas, the demand for technical experts was expected to rise.

Oil and gas exploration teams require a variety of subject expertise. Geophysicists, who apply the principles of physics to the science of geology, and geologists, who study the formation of the earth, evaluate incoming data from seismic vessels and onshore data collection. Then, they use sophisticated computer systems to interpret the data and make recommendations for when and where to drill. Engineers are needed to design oil and gas rigs and to oversee their use on site. Oil rig workers, who may live for weeks at a time on offshore rigs, are needed to operate the equipment. The oil companies themselves employ executive and clerical staff on the corporate level, but in the wake of increased cutbacks in the 1990s, these jobs were increasingly difficult to obtain. Companies were relying more and more on contract or freelance workers instead of large, permanent staffs.

America and the World

The American oil and gas industry is inextricably linked to the world industry. In 1997 to 1998, financial crises spread throughout the world—from Southeast Asia to Brazil to Russia—causing a huge drop in worldwide petroleum demand; hence the collapse of oil prices.

Because decisions about exploration are linked to the proven reserves of oil and gas available, it is important to note that more than 75 percent of proven oil reserves are controlled by OPEC, although the vast majority of oil is consumed by non-OPEC nations, giving OPEC a tremendous influence on the world oil and gas market. In 1998 OPEC countries decided to raise their production quotas, flooding the market with excess supplies and driving prices downward. However, in April of 1999 the OPEC consortium agreed to cut their production to drive up world demand, and oil prices soon rebounded.

American oil exploration, and that of other non-OPEC countries, has slowed in contrast to OPEC exploration. With the end of the Gulf War, members of OPEC followed the lead of relatively moderate Saudi Arabia and stabilized their pricing while increasing both exploration and production.

Meanwhile, the major U.S.-based petroleum companies were becoming increasingly involved in foreign exploration. In the early 1990s, money allocated to foreign exploration and development topped 50 percent of all exploration spending, as compared to 27 percent in the mid-1980s. In 1996 Exxon spent twice as much on foreign exploration as for domestic. Mobil Co. spent $830 million on domestic exploration and $1.8 billion on overseas. In addition to the many reasons for decreasing domestic exploration mentioned earlier, world political and economic developments of the 1990s made it more feasible and profitable to increase American investment in foreign exploration. Along with maintaining an already strong presence in the Mexican and Latin American markets, U.S. companies have increased investments in other areas of the world.

The dissolution of the Soviet Union provided increased opportunities for investment in that area's oil reserves. The Commonwealth of Independent States (CIS) has seen the rise of joint exploration and drilling ventures, especially between U.S. and Russian companies. The Caspian Sea, which borders Russia, Azerbaijan, Iran, Turkmenistan, and Kazakhstan, is one of the world's hottest new investment zones, with estimates of oil reserves ranging from 30 billion barrels to 200 billion barrels, according to Steve LeVine of the New York Times . Another area of increasing American investment is Southeast Asia, where U.S. exploration spending grew the most from the mid-1980s to the mid-1990s. The economies of Asian countries have become increasingly industrialized in recent years, and many governments in Asia, including China and Vietnam, have actively courted foreign investment and participation in local drilling by outside companies.

However, U.S. companies do not have a free rein to invest anywhere they choose. Politics trumps economics in petroleum-rich countries whose governments have offended the United States. Sanctions continue to Iran and Libya, putting U.S. companies at a disadvantage to their foreign competitors. U.S. companies must also adhere to relatively stringent environmental and labor codes compared to their competitors.

Research and Technology

Fortune magazine reported on the dramatic strides in oil exploration technology. In 1965 drillers could only operate in water up to 300 feet deep. By the late 1990s, Chevron was leasing blocks of land in the Gulf of Mexico 9,000 feet underwater. Some experts said that drilling in 10,000 feet was imminent. Chevron and other companies were developing a technique called subsea mud-lift drilling, which enabled drillers to leave residue on the ocean floor instead of sucking it up through a pipe. This method could save drillers $5 million to $10 million per well.

New tools like three-dimensional seismic analysis allow oil companies to bounce sound waves off oilbearing deposits and translate the patterns into 3-D models. Drilling rigs using the technique find productive wells more than 70 percent of the time, compared to a 40 percent success rate with conventional seismic analysis, according to Fortune . In addition, producers could extract more oil from existing wells. Oil & Gas Journal reported on a new fracturing technique that allowed gas drillers to stimulate existing wells rather than drilling new wells. Major U.S. producers could pump as much as 50 percent of the oil from a given pool, compared to a worldwide average of less than 35 percent.

As the large oil companies cut back on domestic exploration through the 1990s, it became even more important to make as certain as possible the profitability of those explorations that were undertaken. Technology for assessing the shape of underground earth formations, and oil and gas deposits was introduced as early as 1927 by Schlumberger Ltd., which maintained a hold on the industry through 1996, with nearly $9 billion in annual revenues. Schlumberger's Maxis service, which assesses the characteristics of earth around a well, was introduced in the early 1990s. At a time when profits were flat and downsizing common, Schlumberger doubled its jobs in 1992, testament to the industry's ever-increasing reliance on high technology.

But Maxis was only one of many high-technology innovations that reduced oil exploration costs and more than halved finding costs for natural gas in the late 1980s and early 1990s. Other innovations included horizontal drilling, three-dimensional (3-D) seismography, and improvements in drilling in light sands. The majority of innovation was in offshore drilling, which required much technological innovation in both the exploration and drilling stages. The Machar project in the North Sea used both advanced technology and an innovative system to tap a difficult oil well. Discovered in 1972 and estimated to hold 55 million barrels of recoverable oil, the reservoir was too complex to confidently evaluate with the technology of the day and considered too marginal economically. In 1994 British Petroleum enlisted what became the Turnkey Additional Production (TAP) alliance, which drew together contractors to supply the best possible solutions, one of them being Schlumberger Integrated Project Management (IPM), managing well engineering and well construction. All parties participated in risk and reward, so all focused on reducing risk, maximizing efficiency, and maximizing return. Decisions were made rapidly by those nearest the action, instead of relying on a chain of management. The results were quick and impressive; instead of the usual one to two years typical when using the conventional approach, appraisal oil flowed in just 19 weeks. At the end of the 25-month project, there had been no work loss due to accidents, no leaks or spills, and an overall efficiency 7 percent above plan.

Although invented in the 1960s, three-dimensional (3-D) seismography only became viable in the 1980s with advances in the computer and acoustical industries. Ships equipped with two cables each carrying two source arrays (or "seismic streamers") cruise areas of suspected undersea oil and gas deposits. The streamers give off electric or air detonations, whose waves are reflected off underwater rock formations below the level of the sea floor. Data is then processed onshore and the undersea floor mapped. Although ships covered much terrain, it could take as much as a year and a half to interpret the data gained from 100 square miles. Because of the presence of aboveground structures, 3-D seismography was impractical on land. Instead, trucks called "thumpers" sent sonic waves through the ground by hammering the earth at specific sites; the wave data was then collected and interpreted.

Data interpretation is highly technical and involved; it uses excessive amounts of computer storage space, plus specialized computer software that sorts and analyzes the streams of incoming data. However, advances in proprietary hardware and software were speeding up the process.

Further Reading

American Petroleum Institute. Petroleum Facts at a Glance, April 2003. Available from http://api-ec.api.org .

Durgin, Hillary. "Merger of Giants Rewrites Rules for the Oil Business." Financial Times, 23 November 1999.

"Energy Plan Urges Exploration." National Driller, July 2001,57.

"Frequently Asked Questions." Washington, DC: Independent Petroleum Association of America. Available from http://www.ipaa.org .

Jones, Dow. "Oil Companies Line Up to Drill in Gulf of Mexico." Daily Business Review (Miami, FL), 31 January 2003, A3.

LeVine, Steve. "A Cocktail of Oil and Politics; U.S. Seeks to End Russian Domination of the Caspian." New York Times, 20 November 1999.

"Northeast/Southeast: Exploration Highlights." Oil and Gas Investor, March 2002, 74-75.

Perin, Monica. "Energy Industry Not Immune to Volatility in the Stock Market." Houston Business Journal, 21 September 2001, 6.

Petzet, G. Alan. " U.S. Drilling at Historic Low, Canada's Drop Not So Severe." Oil & Gas Journal, 26 July 1999.

"Plugged: Offshore Oil Drilling." The Economist (US), 7 December 2002.

Reeves, Scott R., Lawrence J. Pekot, James R. Ammer, and George J. Koperna Jr. "Novel Fracturing Enhances Deliverability." Oil & Gas Journal, 15 November 1999.

"State of the U.S. Oil and Natural Gas Industry." Washington, DC: Independent Petroleum Association of America. Available from http://www.ipaa.org .

Taylor, Alex, III. "Oil Forever." Fortune, 22 November 1999.

Tubb, Rita. "Halliburton Energy Sets Wells Test Record." Pipeline & Gas Journal, January 2003, 78.

U.S. Department of Energy, Energy Information Administration. Crude Oil and Natural Gas Wells Drilled, 2002. Available from http://www.eia.doe.gov .



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