Natural Gas Production

Offshore locales, mostly in the Gulf of Mexico, have been the most important source of gains by the nonmajors in U.S. natural gas production. Onshore, growth in the majors' natural gas production outpaced that of other producers (Figure 4), reducing the nonmajors' share of Lower 48 onshore natural gas production from 56 percent in 1986 to 54 percent in 1993. By contrast, the nonmajors' offshore natural gas production more than doubled between 1986 and 1993, with their associated share rising from 20 percent to 38 percent.

Two distinct phases in the nonmajors' offshore ascendence are evident (Figure 4). Between 1986 and 1989, their offshore natural gas production increased 120 percent, but, during the 1990's, production fell slightly. Exploration and development strategies and performance differed markedly between the two periods.

Large Offshore Gains in the 1980's

Offshore drilling activity by the nonmajors nearly tripled in the late 1980's, with drilling for natural gas accounting for most of the growth (Figure 5). Over the same span, Federal Outer Continental Shelf (OCS) acreage awarded to nonmajors registered substantial growth as well. Part of this surge in activity was attributable to the change in Federal OCS leasing policy. Area wide leasing, which was instituted by the U.S. Department of the Interior in the early 1980's, made much more acreage available. In 1983, for example, 120 million acres in the OCS were offered for bid compared with 8 million acres the year before (see endnote 12). In particular, the generally smaller, more proximate pools favored by the nonmajors were in abundance. Technological improvements also contributed to the growth in drilling activity. Some developments, such as three-dimensional seismic techniques, benefitted both the majors and other companies, while other developments, such as "off-the-shelf" platforms, were boons especially to the smaller companies.

The upswing in the nonmajors' offshore gas drilling activity in the late 1980's added considerably to their reserve base and production capability. Over the 1986-1989 period, the nonmajors more than replaced their production with reserve additions gained through drilling.

Purchases of offshore gas reserves from the majors, on balance, were practically nil over this period. Adding reserves at a pace that exceeded production was a key source of the nonmajors' height- ened role in offshore gas production in the 1980's.

Offshore Gains Wiped Out in the 1990's, Smaller Fields Predominate

The 1990's present a much different picture. Offshore gas reserves added by the nonmajors through drilling replaced only 22 percent of their production over the 1990-1993 period. Reserve additions were only a quarter of the level achieved in the prior 4 years. The sharp falloff in reserve additions reflected the plunge in the nonmajors' offshore drilling activity, led by cutbacks in gas well completions (Figure 5). However, reserve purchases from the majors became an important source of added production in the 1990's, and exceeded reserve additions gained through drilling by a considerable margin. Nevertheless, even with this increase in reserve purchases, the nonmajors replaced only 49 percent of their offshore gas production in the 1990-1993 period.

With this sort of performance, and with reserves falling by nearly 40 percent, how did the nonmajors maintain only a slightly diminished level of offshore gas production in the 1990's (Figure 4)? Again, reserve accounting reveals a rise in the rate at which offshore gas reserves were drawn down (Figure 6). In contrast, the majors' extraction rate was up less than half a percentage point between 1986 and 1993. Unlike the rise in the nonmajors' extraction rate for lower 48 onshore oil reserves, which was mainly interpreted as a return to pre-oil price collapse rates of extraction, the sharp upswing in offshore gas extraction rates probably reflects smaller field sizes.

Generally, smaller oil and gas deposits entail higher production costs. Among the majors, a one-percent reduction in field size corresponds to a 0.18-percent increase in direct lifting costs (see endnotes 13 and 14). With higher (per-unit) production costs, more rapid rates of extraction are usually required in order for smaller fields to be economic.

Rising rates of extraction probably reflect, in part, smaller offshore gas fields for the nonmajors. Average discovery size offshore for the nonmajors fell from 1.3 million barrels (COE) per well completed, in 1988-1990, to 1.1 million barrels in 1991-1993, a 21-percent decline (see endnote 15). In contrast, the majors' average offshore discovery increased from 1.5 million barrels to 2.0 million barrels over the same period.

Area wide leasing has caused marked changes in the nonmajors' involvement in offshore activity. In 1983, the first year of area wide leasing, about 30 nonmajors were producing from the Federal OCS. By 1993, nearly 100 nonmajors were OCS producers (see endnote 16). Field sizes changed dramatically, as well. Offshore reserves added per well in 1980-1982, prior to area wide leasing, for nonmajors averaged 3.9 million barrels, compared with 1.1 million barrels in 1991-1993. The majors, by contrast, appeared to go further offshore seeking ever larger fields: their average offshore discovery size more than doubled over the same period.

Statements made by the president of a nonmajor company "... that has as its primary objective developing already discovered [offshore] reserves that were uneconomic to previous operators..." are also instructive (see endnote 17): ...Control over timing is the most important factor. We can push development at every stage and get a quick pay out, and this is vital to smaller independents. ... We force projects through very small hoops. They have to pay for themselves very quickly.