The share of the nonmajors' combined U.S. oil and gas production has shown a fairly steady increase since 1989 (Figure 1). However, patterns over time differ considerably between oil and gas and between onshore and offshore locales. Accordingly, the review in this chapter is separated by energy source and locale.
Production may have grown through purchases of reserves from the majors. Net purchases of oil reserves from the majors (i.e., from the FRS group to nonmajors in total) totaled nearly 500 million barrels over the 1989-1993 period. However, net purchases accounted for only 14 percent of the nonmajors' total U.S. oil reserve additions in the lower 48 onshore (Table 1).
Reserves added through drilling may have outpaced production. Nonmajors added 2.9 billion barrels of oil to their lower 48 onshore reserves through extensions, discoveries, improved recovery, and revisions of earlier estimates over the 1989-1993 period. Even including net purchases, growth in the nonmajors' reserve base was insufficient to replace production. If growth in the reserve base did not offset the growth in production, then only one other source of increased production is apparent.
The nonmajors' increased extraction rate was probably a phase of their adjustment to lower oil prices. During the U.S. drilling boom of the late 1970's and early 1980's, oil and gas reserves were added which not only were costly to discover and develop but also entailed high costs of production (lifting costs). High oil prices and the expectation of rising oil prices in the future justified adding high-cost reserves to producers' books. The downside of this high-cost strategy became painfully evident when oil prices began to decline modestly at first in the early 1980's and then crashed in late 1985 and early 1986. Oil producers responded by cutting back on higher cost production, but, as long as asset values were properly adjusted (see endnote 9), there was no imperative to remove reserves from their books unless the associated field was fully abandoned. Consequently, the decline in the computed extraction rate from 1985 to 1989 may largely have reflected the combination of production cutbacks and a reluctance to remove reserves from the books.
After low oil prices were recognized as the norm, high-cost reserves were removed from companies' books altogether. However, by the late 1980's, prices of drilling and production services had declined in response to lower oil prices, making some fields again economic. Also, given lower oil prices, new production was likely to be derived from low-cost reserves. Consequently, the rise in extraction rates in the 1990's reflected the combination of removing high-cost reserves from the books and increased production in part, from new low-cost fields and, in part, from formerly subeconomic fields. Nevertheless, nonmajors' extraction rates from lower 48 oil reserves have not yet quite matched the extraction rates of the early 1980's.
In the context of reserve accounting, the increase in the nonmajors' lower 48 onshore oil production between 1989 and 1993 breaks down as follows: reserves added through drilling, 57 percent; increased extraction rate, 33 percent; and net purchases of reserves, 10 percent (see endnote 10).
Offshore locales (see endnote 11) contributed little to the growth in the nonmajors' share of U.S. oil production. For both majors and other producers, there was little overall change in offshore oil production in the late 1980's and thus far in the 1990's (Figure 2). Instead, the nonmajors directed offshore operations toward producing natural gas.
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.
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.
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.