Quest for Oil
Exploring the exploration biz

by Brian Graney (TMFPanic@aol.com)

ALEXANDRIA, VA (Dec. 7, 1998) -- Today, we begin our examination of the exploration and production end of the oil and gas business by looking at how companies actually find oil and gas around the globe (exploration). Tomorrow, we'll see how they manage to get the stuff out of the ground (production).

At this point, we're in a total learning mode, as opposed to an analysis mode. The company-by-company analysis of this industry will come later, after we build a core knowledge of our subject. We believe a key ingredient to superior stock selection is developing a solid working knowledge of a chosen industry's characteristics and moving parts. As luck would have it, the closest Jeff and I have ever come to seeing a working oil well in action has been during the opening credits of Dallas. So we are complete oil and gas neophytes here, and we have to build our working knowledge of the industry from the ground up.

However, we are not only interested oil and gas students; we're also potential investors, so our focus is on identifying trends in the industry that will likely produce outstanding investment returns for years to come. Even though our look at the inner workings of the oil and gas business is just starting, our limited initial research has led us to believe that technological innovation will be an important factor in the industry's growth over our 20-year investment time span. As we have discovered through our investments in other industries such as microprocessors, medical devices, and even financial services, technology's role cannot be overlooked. As such, it will be a constant theme through our entire study of the oil and gas sector.

Part of the rationale for this pro-technology viewpoint comes from our own personal backgrounds. Jeff and I (along with thousands of other Fools everywhere) spend a great portion of our days on the technological version of the New World, the Internet, so our respect for the far-reaching power and potential of technology is well-established. Quite honestly, if it wasn't for technology, Jeff would still be hawking fish off the back of a boat somewhere in France, and I probably would be trying to earn a living by scavenging for old soup cans to sell for scrap.

Note that these are both noble professions. However, they would probably require a great deal more creativity and business acumen than our current day jobs, so we're both probably better off rambling about financial topics and making bad jokes for the Fool.

Technology is used extensively by exploration companies to find potential oil and gas reserves beneath the earth's surface. In the early days of oil exploration, high-tech gadgets called "divining rods," which were essentially tree branches in the shape of a "Y," were used by prospectors to find underground oil deposits. Of course, these instruments were, to say the least, not very precise and setting up a well based on the twitching of a hand-held stick pretty much amounted to guesswork on the part of early oil speculators. (The verb diviner means "to guess" in French, by the way)

Today, several advanced technologies have replaced tree branches in the oil explorer's tool box. As a neat exploration primer available from Chevron's Learning Center site shows, satellites and radar are used to examine above-ground terrain that may indicate underground geological formations often associated with oil and gas reserves. Gravity meters, geophones, and even hydrocarbon "sniffers" are also used to look for clues of the existence of oil and gas deposits underneath the soil or the sea.

One of the most interesting and growing technologies in the exploration business is the use of seismic data to determine the geological structures and rock formations existing hundreds or even thousands of feet below the surface. This type of data can be collected on land by using explosives or truck-mounted vibrating devices to send acoustic waves down into the ground. Those sound waves are then reflected back to the surface by the underlying rock formations. The effect is similar to when Jeff blasts his favorite Spice Girls CD over his computer speakers late at night, shaking Fool HQ to its very foundations in the process.

Changes in the reflection time intervals and other attributes of the sound waves are collected above ground by listening instruments called geophones, producing data that can then be used to generate a 2-D or 3-D rendering of subsurface rock formations. Find the right rock formations, and you just might find a new oil and gas reserve. The same technology can work at sea, using air guns to cause the sound waves and seismic sensors towed behind boats called "streamers" to collect the data.

With much of the world's remaining oil and gas existing in hard to reach places such as deep under the ocean's surface, advances in sea-based seismic exploration technologies are becoming more important. One new technology in this area is the ocean-bottom cable survey, which is being pioneered by companies such as Baker Hughes' Western Geophysical unit and is described in a Seismic Tutorial on the firm's website. Instead of using traditional streamers to record seismic data, digital telemetry cables are laid directly on the ocean's floor (at depths of up to 600 feet) and they relay the seismic data to ships on the ocean's surface. This way, the exploration company does not need to worry about damaged or lost streamers during the data acquisition process and subtle changes in the geological formations can be more easily measured over time.

Another emerging seismic technology that potential oil and gas investors should be aware of is 4-D imaging, which adds the element of time into a standard 3-D geological model. By examining different time intervals, exploration companies can track fluid changes in a potential oil and gas reservoir. Collecting data this way can produce significant cost-savings by helping companies pinpoint the exact placement of wells so they can extract the underground fluids more efficiently.

Tomorrow, we'll continue our education with a look at some of the new technologies being used to drill for, or produce, oil and gas. Until then, oil experts and neophytes alike are sharing their thoughts on the Drip Companies message board.

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FoolWatch -- It's what's going on at the Fool today.

12/07/98 Close
Stock Close Change JNJ 81 5/8 - 1/8 INTC 118 15/16 +2 5/8 CPB 57 3/16 - 9/16 MEL 66 7/8 - 1/8
Day Month Year History Drip 0.79% 4.64% 33.56% 13.74% S&P 500 0.95% 2.06% 22.39% 24.84% Nasdaq 1.87% 4.67% 29.95% 28.04% Last Rec'd Total # Security In At Current 11/02/98 8.055 CPB $52.880 $57.188 09/01/98 9.727 INTC $80.238 $118.938 11/09/98 8.578 JNJ $74.090 $81.625 10/07/98 1.000 MEL $48.560 $66.875 Last Rec'd Total # Security In At Value Change 11/02/98 8.055 CPB $425.95 $460.65 $34.70 09/01/98 9.727 INTC $780.50 $1156.95 $376.45 11/09/98 8.578 JNJ $635.55 $700.18 $64.63 10/07/98 1.000 MEL $48.56 $66.88 $18.32 Base: $2200.00 Cash: $262.88** Total: $2647.52

The Drip Portfolio has been divided into 93.111 shares with an average purchase price of $23.628 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
10/24/98: Sent $40 to buy more INTC.
11/24/98: Sent $100 to buy more MEL