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| The oil and gas industry in the United States
began in the early 1860’s. So, how can there still be oil and
gas prospects that merit investment 140 years later? If there
were not, then a giant industry would, in effect, be phasing
out of our economy. But this is not the case. And here’s why. |
| If the oil and gas industry had explored
and developed the entire United States at a constant pace since
it began, there would of course be far fewer attractive properties
available now for investment. This did not happen. The oil and
gas business is extremely capital intensive – new capital must
constantly be invested to replace depleted reserves. But new
capital is available only when market prices provide adequate
returns – in periods when prices are in decline, the rate of
development slows down. |
| The result is that development has proceeded
in waves rather than at a steady pace, so that many areas have
remained undeveloped or not fully developed. |
| Another reason that not all areas have been
fully developed is that for decades, the major oil and gas companies
have been steadily pulling out of the United States, where most
known productive basins are considered mature, in search of
huge new reservoirs of oil in other countries. They must do
this in order to bear their high-overhead method of operating,
and because their base of business is so huge that they need
very large discoveries to maintain their growth rates. |
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| The result was that exploration and development
was left to the small and medium size companies. These firms
could not mobilize capital on the scale necessary to continue
to develop the country at a constant rate. Further, the smaller
firms spent much of their capital in buying up the producing
fields that the majors sold off, using funds that might have
been spent in drilling. The state of oil and gas technology
has sometimes limited development. Often, early drilling and
completion techniques were extremely primitive. When the operators
had exhausted the areas that were easily accessible and easily
drilled, they moved to other areas, leaving huge areas undeveloped. |
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| Similarly, in a given area, there may be
a lack of infrastructure for producing and transporting natural
gas to market or at the time a well was drilled, those prices
were so low that it was not economical to produce the gas. In
many cases, when gas was found with oil in a new well, the gas
was simply burned (“flared”) or vented to the atmosphere. When
only gas was encountered in a well rather than oil, the operator
abandoned the well and went elsewhere. As an infrastructure
of pipelines and gas gathering lines gradually evolved, the
development of natural gas became increasingly attractive. It
should be noted that records showing these abandoned wells still
exist and can often point the way to successful re-development.
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| Major new advances in technology may also
affect development by focusing the attention of the industry
on particular areas. The new 3-D seismic technology, for example,
has focused a great deal of attention in basins where there
may be deep accumulations of oil and gas that have great productive
potential. Since there is a limited “pie” of capital available
at any one time, increased investment in a “hot” area means
less investment in other areas. Companies looking for these
deep reservoirs – with the high risks involved – simply bypass
other areas. |
| On the other hand, as new technology comes
on stream, operators may go back to certain areas and begin
a wave of new development and re-development, leaving other
areas for another time. This is happening right now in the Barnett
Shale formation in Texas. New completion techniques and higher
gas prices have suddenly made that area attractive. |
| The end result of all these factors is that
there are many areas ripe for development, further development,
or re-development. And in each case, investors can participate
handsomely in the rewards along with the operators. |
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