Mexico's environmental concerns have also mounted, leading to an increase in demand for U.S. natural gas. Although Mexico had itself been a net natural gas exporter until 1984, environmentally motivated conversions from fuel oil to natural gas increased demand during a time when, due to a lack of capital, Mexico could not develop its own reserves. Exports to Mexico from the United States have increased from about 2 billion cubic feet (bcf) per year in the mid 1980's to 95 bcf in 1992.199 Although Mexico's imports from the United States fell in 1993, a provision of the North American Free Trade Agreement (NAFTA) may help long-term prospects: specifically, Mexico agreed to phase out its 10-percent natural gas import tariff over the next 10 years. 200 Resource Development: Strategies and Results After a sharp and prolonged upswing during the period of oil price escalations, the FRS companies succeeded in dramatically reducing the cost of finding oil and gas, particularly in the United States. Domestic finding costs rose from $12.45 (in 1993 dollars) per barrel in 1978 to $21.11 per barrel in 1981, but then fell to about $5 per barrel by 1989 (Figure 12 in Part I, Chapter 3).201 Foreign finding costs, generally lower than U.S. costs, exhibited a similar pattern. For the FRS companies, finding costs of about $5 per barrel both in the United States and foreign areas have prevailed for the past 5 years. This stability largely reflected the reduced volatility of oil prices during the 1990's, with the exception of the short-lived oil price spike following Iraq's invasion of Kuwait. The dramatic decrease in finding costs reflects shifts in exploration and development strategies by FRS companies that tended to increase the productivity of drilling and other exploration and development activity. Additionally, the reduction in finding costs was strongly influenced by adjustment in markets for exploration and development inputs. Shifts in Resource Development Strategies High oil prices and concern about dependence on To cope with lower oil prices after the oil price collapse of 1986, the FRS companies shifted new oil and gas investment from the United States, where average discovery sizes tend to be small and production rates per well are low, and into regions with large fields and high rates of production (Figure 27). Larger discoveries tend to have lower exploration costs per barrel, reducing overall exploration and development costs per barrel of added reserves.202 High rates of production further reduce production costs per barrel. Tax reductions offered by foreign governments after 1986 also provided incentives to invest in foreign oil and gas reserves (Figures 25 and 26). Prospect Highgrading Expectations of high oil prices in the early 1980's encouraged the FRS companies to pursue exploration projects in difficult and expensive areas. Heightened oil price expectations also raised the expected profitability of small-pool, high-cost prospects. The fall and subsequent crash in oil prices compelled the FRS companies to become more selective in drilling. Prospect highgrading, whereby only the most promising prospects are drilled and low-performing properties are sold, became the predominant strategy. 199"NAFTA: Possible Indications for Mexico's Oil and Gas Industry," Energy Detente (December 20, 1993), PP. 7-8. 200NAFTA: Possible Indications for Mexico's Oil and Gas Industry," Energy Detente (December 20, 1993), pp. 7-8, and “Reform and Privatisation Transform Investment Scene," Petroleum Economist (June 1993), p. 18. 201 Finding costs are defined as the cost of exploration and development, excluding expenditures on proved reserves, divided by reserve additions of oil and gas, excluding net reserve purchases. Natural gas is converted to oil on the basis of 0.178 barrels of oil per thousand cubic feet of natural gas. Finding costs are calculated as 3-year weighted averages, to smooth out volatility in discoveries and reduce the lag between drilling and the associated reserve additions. Calculations of finding costs, and all calculations that contain reserve additions from revisions to previous estimates, exclude BP America's and Exxon's total 1987 downward revisions of Alaska North Slope natural gas reserves of 13.461 trillion cubic feet and ARCO's 1985 downward revisions of 8.3 trillion cubic feet. 202 Energy Information Administration, Performance Profiles of Major Energy Producers, DOE/EIA-0206(92) (Washington, DC, January 1994), P. 35. Emphasis on Development Exploration projects carry more geological risk than development projects, because of the greater probability of drilling a dry hole. Exploration also carries more financial risk, because reserves delineated by exploration efforts may take years to bring to market. High oil prices at the end of the 1970's shortened the time to "pay back" the initial exploration and development investment, thus reducing risk and increasing the attractiveness of exploration projects. In the United States, the FRS companies' exploration expenditures, as a percent of exploration and development spending, peaked in 1981, the same year as oil prices (Figure 29). As oil prices declined after 1981, the FRS companies cut back on exploration, and concentrated on development. Development projects (such as production and service wells) became relatively more attractive, because they pay off sooner than exploration projects. They also carry less geological risk: more than 90 percent of the Figure 29. FRS Companies Spend Relatively Less on U.S. Exploration When Oil Prices Are Low FRS companies' development wells reach oil or gas, compared with 30 to 60 percent of exploration wells. The share of U.S. expenditures for development and proved reserves increased to 75 percent in 1993, from a low of 47 percent in 1981 (Figure 29). In foreign areas, the FRS companies' development efforts increased to 69 percent, from a low of 53 percent. Technological Improvements Adopting new technology for exploration and development was another strategy the FRS companies used to keep costs in line with falling oil prices. Adaptation of advanced computing equipment and software reduced a wide variety of costs and was used for applications as diverse as simulating the behavior of fluids in reservoirs and positioning floating structures over offshore wells.203 Advanced computers and associated improvements in software also made possible three-dimensional seismic studies. Seismic surveys measure the properties of seismic waves reflected off layers of the subsurface to determine geological structures and rock properties.204 New three-dimensional images have higher resolution than the previously available two-dimensional images, and are particularly helpful in field development. For example, after three-dimensional data delineated new reservoirs that had been hidden by complex faulting, 205 Chevron increased production from its mature Bay Marchand field in the Gulf of Mexico from 18 thousand barrels per day to 40 thousand barrels per day. In Indonesia, Unocal's three-dimensional survey helped position development wells that increased production from 9,000 to 25,000 barrels per day: Three-dimensional surveys are also becoming more common in exploration efforts. In the North Sea, where the cost of drilling a single well is very high, most exploratory seismic surveys are three-dimensional.207 206 The availability of detailed seismic surveys has fostered the use of another new technology-horizontal dril ling.208 Many reservoirs are wider than they are deep, so horizontal wells that follow the reservoir have more well bore exposed to hydrocarbons. In addition, some geological formations, such as the Austin Chalk found in Texas, trap hydrocarbons in vertical fissures that are easy to miss when drilling vertically. Drilling horizontally permits more than one fissure to be drained with a single well. The combination of using detailed three-dimensional seismic images to locate trapped oil and gas accurately, and horizontal drilling to drain these trapped areas efficiently, means fewer wells are needed to develop a field. Like three-dimensional seismology, horizontal drilling can revitalize old fields. Use of this technique increased production from Oryx Energy's Austin Chalk wells onehundredfold, from 160 barrels per day to 16,000 barrels per day.209 In 1989, British Petroleum estimated that horizontal drilling would boost North Sea production by 30 percent.210 In the North Sea, horizontal wells are doubly-effective: they increase the flow from fields otherwise too slow to be economical, and they reach reservoirs too small to justify the building of a new platform. The Danes found horizontal wells useful for a third reason-in their section of the North Sea, chalk formations trap oil vertically.2 211 Improvement in Finding Rates The new technology and drilling strategies adopted helped increase the productivity of the FRS companies' resource development efforts, particularly following the oil price collapse in 1986. Productivity is reflected in the finding rate, measured as the 3-year weighted average of crude oil and natural gas additions to reserves per well completed. The finding rate nearly doubled for FRS operations as a whole, increasing the most in highcost areas. In the United States, the onshore finding rate increased from 147,000 to 324,000 barrels per well, and in OECD Europe, from under 2 million to more than 5 million barrels per well (Figure 30). 203 Diana L. Moss, "Measuring Technological Change in the Petroleum Industry: A New Approach to Assessing its Effect on Exploration and Development," National Economic Research Associates, Working Paper No. 20 (Washington DC, October 1993), pp. 12, 14. 204 Energy Information Administration, "Three-Dimensional Seismology-A New Perspective," Petroleum Supply Monthly, DOE/EIA0109(92-12) (Washington DC, December 1992), p. xiii. 205 Studies Underscore Value of 3-D," AAPG Explorer (November 1991), pp. 17,23. 206Unocal Corp., 1991 Annual Report, p. 9. 207 Energy Information Administration, "Three-Dimensional Seismology- A New Perspective," Petroleum Supply Monthly, DOE/EIA-0109 (92-12), (Washington DC, December 1992), p. xiii. 208High Technology Helps the Oil Out," Reuters (November 12, 1992). 209/1 "Oryx Energy Reveals Horizontal Drilling Results in Austin Chalk, Estimates Reserves at 450 Thousand Barrels per Well," PR Newswire (July 10, 1990). 210" OPEC Market Share Expected to Increase in Next Decade," The Reuter Business Report (June 27, 1989). 211"Denmark-Qatar," Platt's Oilgram News (June 29, 1992), p. 6. doubled.212 The FRS companies tend to drill wells that are deeper and therefore more expensive than the industry as a whole, and drilling costs for the FRS companies increased from $138 per foot in 1977 to $274 per foot in 1982 for onshore wells, and from $552 to $789 per foot for offshore wells. Demand for drilling was so brisk that only 2 percent of rigs in the United States stood idle in 1981.213 However, after oil prices peaked in 1981, drilling activity slowed down, and in 1986, the oil market collapse put 74 percent of rigs out of work. Rigs were resold for a small fraction of their original value, reducing capital recovery costs; those that could not be sold were scrapped. Old rigs were scrapped first, and only the most efficient rigs remained in use. With the gain in drilling time from using only the most efficient rigs, and the lower cost of rigs in general, costs (adjusted for inflation) fell to about half the levels seen during the height of the drilling boom. The boom and bust in oil prices produced similarly wide swings in employment and wages. The number of employees in oil and gas field services more tha doubled from 1977 to 1982, from 197,000 to over 406,000, but by 1987 employment was down to 167,000 people.214 More jobs were lost in the bust than were created in the boom. Wages in oil and gas field service companies fell steadily from 1982 through 1990.215 The FRS companies also benefited from reduced New technology also became less expensive. Horizontal wells drilled onshore in the United States initially cost up to three times more than conventional wells, but 212 American Petroleum Institute, Basic Petroleum Data Book (Washington DC, May 1994), Tables 9a and 10a. 213 American Petroleum Institute, Basic Petroleum Data Book (Washington DC, May 1994), Table 16. 214Oil and gas field services include Standard Industrial Classifications 1381 (Drilling Oil and Gas Wells), 1382 (Oil and Gas Field Exploration Services), and 1389 (Oil and Gas Field Services Not Elsewhere Classified). Source: Department of Commerce, Bureau of the Census, Census of Mineral Industries: Oil and Gas Field Services, MIC77-1-13C (Washington DC, April 1990), p. 13C-5. 215 Wages are measured as hourly earnings in Standard Industrial Classification 138, Oil and Gas Field Services. Source: Department of Commerce, Bureau of Labor Statistics. 216Department of the Interior, Minerals Management Service, Federal Offshore Statistics (MMS 91-0068) (Washington DC, 1991), Table 3. The strategies adopted by the FRS companies to survive the period of low oil prices (i.e., prospect highgrading, less exploration, and the shift to foreign locales) resulted in replacement of less oil and gas in the United States each year than was produced, and the production replacement ratio steadily declined after 1989 (Figure 31). However, in foreign areas, the FRS companies continued to replace more oil and gas than they produced. In particular, in anticipation of growing demand for natural gas in the Asia/Pacific region, the FRS companies have added about twice as much natural gas as they have produced in the Other Eastern Hemisphere each year since 1990. Obliged by lower oil prices to cut costs and drill more selectively, the FRS companies found fewer profitable prospects in the United States. By the end of 1993, U.S. reserves of the FRS companies were 31 billion barrels, Note: The ratio of reserve additions to production is calculated as a 3-year weighted average of oil and gas reserve additions (excluding reserve purchases) divided by oil and gas production. Gas is converted to barrels of oil equivalent based on 0.178 barrels of oil per thousand cubic feet. Source: Energy Information Administration, Form EIA-28. 24 percent lower than in 1981 (Table 41). Overseas, investment increased after 1986, and additions to oil and gas reserves generally outpaced production. Foreign reserves held by the FRS companies increased at an average rate of 3 percent per year after 1986, to 23 billion barrels in 1993. Table 41. Composition of Oil and Gas Reserve Changes for FRS Companies in the United States and Foreign Regions, 1981-1993 Notes: Gas is converted to barrels of oil equivalent on the basis of 0.178 barrels of oil per thousand cubic feet. Sum of components may not equal totals, due to independent rounding. Source: Energy Information Administration, Form EIA-28. 217Energy Information Administration, Drilling Sideways-- A Review of Horizontal Well Technology and its Domestic Application, DÓE/EIATR-0565 (Washington, DC, April 1993), p. vii. 218 8"Conoco's Horizontal Drilling Boosts Flow Rates in North Sea," Oil and Gas Journal (March 12, 1990), p. 28. |