Oil and Gas Development in the United States in the Early 1990's
October 15, 1995
Since the oil price collapse of late 1985 and early 1986, the U.S. oil and gas industry has changed dramatically. The major oil companies have shifted much of their exploration and development efforts to targets outside the United States. Although hundreds of nonmajor oil and gas producers were casualties of the price collapse, the survivors became more important players in the industry. Investment by the nonmajors in U.S. oil and gas resource development increased from about 33 percent of total U.S. exploration and development expenditures in 1988-1990 to nearly 50 percent in recent years.
The increasing dependence of U.S. oil and gas development on the typically much smaller nonmajor companies raises a number of issues, which are analyzed in this report. Did those companies gain prominence by default, or have they been significantly adding to the U.S. reserve base? What are the characteristics of surviving producers compared with companies that exited the industry? Do the nonmajors add reserves at higher cost than the majors, or possibly pay more for borrowed funds?
To identify areas of growth of nonmajor oil and gas producers in the context of the entire U.S. industry, this analysis first distinguishes companies as major versus nonmajor petroleum companies. The analysis draws heavily on data from the Energy Information Administration's (EIA) Financial Reporting System, as well as relying on data from EIA's oil and gas reserves report series.
In order to further analyze the corporate features of the nonmajors, the companies are further classified by characteristics such as degree of specialization and corporate structure. In particular, the companies specializing in oil and gas production, generally termed the "independents,"? were the ones mainly responsible for the nonmajors' growth in oil and gas production. This report uses publicly available company data to evaluate financial results and arrive at conclusions about the independents' standing in the capital markets.
The oil price collapse provides a backdrop to assess the effectiveness of corporate strategy and the influence of investor evaluations on independent oil and gas producers. The analysis highlights the differences in resource development and financial results for firms that survived the oil price collapse and firms that did not survive. Comparison to the majors offers an additional benchmark of financial and operating performance
Chief findings of this report include:
- Offshore Gas Led Upswing in Nonmajors' Production Post-1986. The nonmajors' production of natural gas from offshore locales more than doubled in absolute terms, from 741 billion cubic feet in 1986 to 1,526 billion cubic feet in 1993. This mainly reflected reserve additions, but stepped-up depletion rates also contributed to increased production.
- Onshore Oil Focus of Growth for Nonmajors. The nonmajors' share of U.S. oil production from the onshore lower 48 increased from 45 percent (835 million barrels) in 1989 to 54 percent (935 million barrels) in 1993, due to increased production and exit of the majors from these areas.
- Surviving Independents' Reserve Replacement Costs are Now Similar to Majors. The cost of reserve replacement (including purchases) for the surviving independents decreased over the 1986-1993 period, and by the 1990's was almost equal to that of the majors at about $5 per barrel. However, the overall cost of exploring for and developing oil and gas reserves (which does not include purchases) was higher for the surviving independents than for the majors, even into the 1990's.
- Capital Markets Primarily Value Low Cost Reserve Replacement. The publicly traded independent producers that survived through 1993 tended to incur lower costs in replacing reserves than those companies that exited the U.S. oil and gas industry. And, in spite of greater reliance on debt and lower returns than the majors, the publicly traded independents' cost of capital is comparable to the majors'. This finding indicates that the market has tended to value low cost resource development more than conventional measures of financial performance.