Drilling for Dollars
Adding the "P" to E&P

by Brian Graney (TMFPanic@aol.com)

ALEXANDRIA, VA (Dec. 8, 1998) -- A lot has changed during the past century in the production end of the oil and gas business.

The first oil wells were wooden derricks that often spouted oil over the surrounding landscape, producing a vision of untold fortunes for legions of wildcatters and speculators in the early days of the industry (and coating trees, houses, small animals, and everything else in the vicinity of a well with a nice coating of black gunk). Just imagine what those early prospectors would think of today's advanced oil production facilities, such as the 1,400 foot tall, nearly 1 million ton Troll offshore gas rig operated by Shell in the North Sea. For a truly amazing view of just how far oil and gas production has come this century, check out this photo of the Troll platform from Shell's website, provided courtesy of A/S Norske Shell.

As we described yesterday, finding potential oil and gas deposits is a complex and technologically sophisticated endeavor. The same can be said about the many processes involved in the actual extraction of oil and gas, called production. The upfront costs and time commitments associated with bringing oil and gas out of its natural resting place in underground reservoirs and to the surface are substantial. For example, Shell expects the Troll platform will ultimately produce up to 100 million cubic feet of gas per day for decades to come. The company is hoping that in time, the total value of the gas produced will eventually eclipse the $15 billion it spent to erect the platform and build a related pipeline and onshore gas treatment plant.

Once a potential oil and gas reservoir is located using seismic data, production companies can start drilling a well with the hope of a making a discovery. Even with today's advanced 3-D and 4-D modeling techniques, not every new well will hit an oil or gas deposit. In fact, Shell's website notes that a well drilled in a previously unexplored area (typically known as a wildcat well) only has roughly a 1 in 10 chance of producing any oil or gas. Luck is still a big factor in this area of the business, despite recent technological advances.

Today, oil producers can drill in any number of ways in various geographical locations. Land-based wells are typically still drilled vertically, just like in the old days, using metal bits often studded with diamonds to drill through the hardest rock formations. At sea, wells are sometimes placed at angles to the ocean floor -- a technique known as directional drilling -- so that several wells can emanate from a single fixed platform. Drillers are also creating horizontal wells, which can tap into reserves by deviating up to 90 degrees from a vertical well. Sometimes these wells can extend horizontally for 1,000 feet or more, enhancing the amount of oil and gas that can be drawn from a reservoir by as much as tenfold. So-called "extended reach" drilling is allowing some producers to tap reserves up to three miles away from a single drillsite. These technologies boggle the mind and were virtually unthinkable just a short time ago.

Deep-sea drilling is the final frontier for oil and gas production. Ever since Kerr-McGee established the first offshore rig in 23 feet of water in the Gulf of Mexico more than 50 years ago, scores of companies have been investing heavily to draw an increasing amount of oil and gas from the ocean's floor. Scientists cited by Exxon predict as much as 100 billion barrels of oil remain undiscovered in the world's deep waters, a term that normally refers to waters at depths of 1,300 feet or more. And there is definitely no shortage of deep water, considering the world's oceans average a depth of around 10,000 feet. Companies like Exxon are currently snatching up potential deep water reserves located at depths of 10,000 feet or more, even though today's most advanced offshore rigs are only capable of drilling at depths of about 5,000 feet or so.

Since oil and gas is often under a great deal of pressure in reservoirs, special fluid control systems are needed to regulate the flow of a producing well so that its contents can be properly stored for further processing, which typically takes place close to the well. But sometimes, the oil and gas needs to be coaxed to the surface. One technique, called thermal enhanced recovery, is being used by Arco to produce oil in California's San Joaquin basin. Some 86,400 barrels of steam are injected daily into the ground to free-up trapped oil, forming a combination of water and oil which is then pumped to the surface using a typical well. Once recovered, the oil is separated and transported to a processing facility. Meanwhile, the left-over hot water and steam is sent to a cogeneration plant to produce electricity. About 32,900 barrels of oil per day are recovered using the process, which Arco intends to improve in order to recover an additional 50 million to 80 million barrels from the same field in the future.

Over the course of the next 20 years, we expect to see the technologies involved in extracting oil and gas change regularly, with a new technique developed one year being replaced the following year by an even more advanced and efficient production process. Until the day when oil producers can say Shazamm and prompt oil and gas to magically leap from its underground hiding places and into awaiting tanker ships, production companies large and small will continue to innovate. We look forward to charting their progress and being amazed by their advances in the years ahead.

Next week, we'll complete our look at the E&P business with some general looks at the types of companies working in the sector, the business' economics, and how the outsourcing or "contracting" trend is affecting the marketplace. These topics are not set in stone, of course (I'm much too lazy to write columns a whole week in advance). So feel free to offer suggestions about what other oil and gas subjects you would like to see addressed by Jeff or myself on the Drip Companies message board.

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12/08/98 Close
Stock Close Change JNJ 79 9/16 -2 1/16 INTC 120 1/16 +1 1/8 CPB 57 - 3/16 MEL 65 11/16 -1 3/16
Day Month Year History Drip (0.36%) 4.27% 33.08% 13.33% S&P 500 (0.53%) 1.52% 21.74% 24.18% Nasdaq (0.29%) 4.37% 29.57% 27.67% Last Rec'd Total # Security In At Current 11/02/98 8.055 CPB $52.880 $57.000 09/01/98 9.727 INTC $80.238 $120.063 11/09/98 8.578 JNJ $74.090 $79.563 10/07/98 1.000 MEL $48.560 $65.688 Last Rec'd Total # Security In At Value Change 11/02/98 8.055 CPB $425.95 $459.14 $33.19 09/01/98 9.727 INTC $780.50 $1167.89 $387.39 11/09/98 8.578 JNJ $635.55 $682.49 $46.94 10/07/98 1.000 MEL $48.56 $65.69 $17.13 Base: $2200.00 Cash: $262.88** Total: $2638.08

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**Transactions in progress:
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