This is marketing research on the oil and gas drilling industry and can include information on the background, market structure, definitions, competitors, trends and developments of oil and gas drilling and is related to other topics such as petroleum, gasoline, pipelines and energy.

Table of Contents

[edit] Background

The oil and gas extraction segment produces the petroleum and natural gas that heat homes, fuel cars, and power factories. Petroleum products are also the raw materials for plastics, chemicals, medicines, fertilizers, and synthetic fibers. Petroleum, commonly called crude oil or just oil, is a liquid formed under ground from the decay of plants and animals over millions of years through extreme heat and pressure. Occasionally, this decaying material becomes trapped under a layer of impermeable rock that prevents it from dispersing and creates a pocket of oil. Similar processes also produce natural gas, which can be found mixed with oil or in separate deposits. Finding and extracting the oil and gas in these pockets is the primary function of this industry segment.

Using a variety of methods, on land and at sea, small crews of specialized workers search for geologic formations that are likely to contain pockets of oil or gas. Sophisticated equipment and advances in computer technology have increased the productivity of exploration. Maps of potential deposits now are made using remote-sensing satellites. Seismic prospecting—a technique based on measuring the time it takes sound waves to travel through underground formations and return to the surface—has revolutionized oil and gas exploration. Computers and advanced software analyze seismic data to provide three-dimensional models of subsurface rock formations. Another method of searching for oil and gas is based on collecting and analyzing core samples of rock, clay, and sand in the earth’s layers.

After scientific exploration studies indicate the possible presence of oil, a well must be drilled to prove oil is there. An oil company selects a well site and installs a derrick—a tower-like steel structure—to support the drilling equipment. A hole is drilled deep into the earth until oil or gas is found, or the company abandons the effort. Similar techniques are employed in offshore drilling, except that the drilling equipment is part of a steel platform that either sits on the ocean floor, or floats on the surface and is anchored to the ocean floor. Advancements in directional or horizontal drilling techniques, which allow increased access to potential reserves, have had a significant impact on drilling capabilities. Drilling begins vertically, but the drill bit can be turned so that drilling can continue at an angle of up to 90 degrees. This technique extends the drill's reach, enabling it to reach separate pockets of oil or gas. Because constructing new platforms is costly, this technique commonly is employed by offshore drilling operations.

Once the drilling reaches the oil or gas, extraction can begin as natural pressure forces the oil or gas up through the drill hole to the wellhead, where it enters separation and storage tanks. If natural pressure is not great enough to force the oil to the surface, pumps may be used. In some cases, water, steam, or gas may be injected into the oil deposit to improve recovery. The recovered oil is transported to refineries by pipeline, ship, barge, truck, or railroad. Natural gas usually is transported to processing plants by pipeline. While oil refineries may be many thousands of miles away from the producing fields, gas processing plants typically are near the fields, so that impurities—water, sulfur, and natural gas liquids—can be removed before the gas is piped to customers. The oil refining industry is considered a separate industry, and its activities are not covered here, even though many oil companies both extract and refine oil.

The United States produced an estimated 9 million barrels of crude oil per day in 2005 and imported 13.21 million barrels per day from other countries. This oil gets refined into gasoline, kerosene, heating oil and other products. To keep up with consumption, oil companies must constantly look for new sources of petroleum, as well as improve the production of existing wells. Due to the high demand or need for oil, this industry will only continue to grow and the major players will consolidate further with no new market entrants.

[edit] Market Structure

In the late 1990s, an over-supply of oil and natural gas that outpaced demand on the global market resulted in price declines. Consequently, many wells were idled. In the early 2000s, with demand once again pushing supply, industry players were undertaking new drilling opportunities as well as refurbishing idled drills to get them running again.

Drilling is an inherently volatile business that follows trends in the overall worldwide oil and natural gas markets. In early 2000, oil prices soared as a result of tensions in the Middle East and a workers’ strike by a Venezuelan national oil company, which provides 14 percent of U.S. petroleum imports. Venezuela's production fell from an average three million barrels a day to just 400,000 barrels per day, driving consumer prices upward. Then, the war between the United States and Iraq shot oil prices to $40 per barrel in early 2003. By March 2003, the prices had fallen into the range of the mid-$20s. Then in 2001 rising oil and gas prices led to nearly 1,300 active wells, the highest count since 1986.

Within the nine months that followed, well activity plummeted by 43 percent to 743 active wells in April 2002. By mid-2003, active well totals approached 850. Because 80 percent of all U.S. drilling is related to natural gas, natural gas prices will likely dictate drilling activity, which is primarily inland-based.

The North American Industry Classification System defines industry No. 213111 Drilling Oil and Gas Wells as that which comprises establishments primarily engaged in drilling oil and gas wells for others on a contract or fee basis. This industry includes contractors that specialize in spudding in, drilling in, redrilling, directional drilling and directional drilling of oil and gas wells on a contract basis.

This industry includes the following indices:

Drilling directional oil and gas field wells on a contract basis Drilling for gas on a contract basis Drilling for oil on a contract basis Drilling gas and oil field wells on a contract basis Drilling oil and gas field service wells on a contract basis Drilling water intake wells, oil and gas field on a contract basis Gas well drilling on a contract basis Oil and gas well drilling services (redrilling, spudding, tailing) on a contract basis Oil well drilling on a contract basis Reconditioning oil and gas field wells on a contract basis Reworking oil and gas wells on a contract basis Service well drilling on a contract basis Spudding in oil and gas wells on a contract basis Tailing in oil and gas field wells on a contract basis Water intake well drilling, oil and gas field on a contract basis Well drilling (i.e., oil, gas, water intake wells) on a contract basis Workover of oil and gas wells on a contract basis

Production and Distribution

[edit] Industry Definitions

The Oil Drilling and Services industry is highly fragmented but can be broken down into two major areas, drilling and oilfield services.

Drilling - these are the companies that physically drill and pump the oil out of the ground. Because the drilling industry requires highly skilled individuals, those with the skills and expertise to operate drilling equipment are in high demand. As a result, for an oil company to have these people on staff all the time can cost a lot. For this reason, most drilling companies are simply contractors who are hired by oil and gas producers for a specified period of time.

In the drilling industry there are several different types of rigs, each with a specialized purpose. Some of these include the following:

• Land Rigs - drilling depths ranges from 5,000 feet to upwards of 30,000 feet.

• Submersible Rigs - used for ocean, lake, swamp drilling. The bottom part of these rigs is submersed to the sea's floor and the platform is on top of the water.

• Jack-ups - this type of rig has three legs and a triangular platform which is 'jacked-up' above the highest anticipated waves.

• Drill Ships - these look like normal tankers/ships, but they travel the oceans in search of oil in extremely deep water.

• Oilfield Services - these are the companies that assist the drilling companies in setting up oil and gas wells. Oilfield service companies mainly manufacture, fix, and maintain equipment used in the oil extraction and transport. Specifically these services can include:

• Seismic Testing - this involves mapping the geological structure beneath the surface.

• Transport Services - both land and water rigs need to be moved around at some point in time.

• Directional Services - believe it or not, all oil wells are not drilled straight down, some oil services companies specialize in drilling 'angle' or 'horizontal' holes.

• Whipstock - An inclined wedge placed in a wellbore to force the drill bit to start drilling in a direction away from the wellbore axis. The whipstock must have hard steel surfaces so that the bit will preferentially drill through either casing or rock rather than the whipstock itself.

[edit] Market Metrics

It is anticipated that the U.S. oilfield chemical demand will grow 5.4 percent annually through 2009. The large drilling fluids segment will lead gains based on robust drilling activity, driving consumption of barite, clays, surfactants and polymers. Efforts to boost production from maturing reservoirs will benefit stimulation and enhanced oil recovery (EOR) products.

Crude petroleum drilling is anticipated to account for the gradual increase in oil production through 2007, before levels begin to decline. Most of the new growth in petroleum drilling will occur offshore, most often coming from existing idled platforms that could come back on-line as the economy recovers. Many of these platforms will have received upgrades during recent periods of downtime. Technological advances will provide advances in automation, as well as increase the speed and depth of the drilling.

Moreover, much of the growth well drilling industry will stem from the natural gas sector. In the early 2000s the high levels of reserves and unusually warm winters kept natural gas prices down, which directly impacted the utilization of drilling rigs. As supply tightened during 2002 and prices edged up, the drilling industry was looking hopefully toward recovery.

Meanwhile, 2001 the U.S. Department of Labor, Bureau of Labor Statistics, reported that the oil and gas field services industry employed 204,010 people. More than half of the jobs were related to construction and extraction. The mean annual salary for a drill operator was $36,790.

[edit] Industry Players

Contract Drilling

In September 2007, Transocean Inc. cleared a major regulatory hurdle in its proposed $15 billion deal to combine operations with GlobalSantaFe Corp. after the antitrust waiting period ended early. Both are two of the world’s leading oil drillers.

Transocean, Inc. provides offshore contract drilling services for oil and gas wells. It contracts drilling rigs, related equipment, and work crews primarily on dayrate basis to drill oil and gas wells with a focus on deepwater and harsh environment drilling services. As of February 2007, the company owned and operated 82 mobile offshore and barge drilling units, including 33 high-specification semisubmersibles and drillships, 20 floaters, 25 jackup rigs, and 4 other rigs. The company also provides other integrated services. Transocean primarily operates in the Far East, India, U.S. Gulf of Mexico, United Kingdom, Nigeria, the Mediterranean and Middle East, Brazil, Norway, other West African countries, Australia, Canada, the Caspian Sea, and Venezuela. The company was founded in 1953 and is based in Houston, Texas. In 2006, the company posted sales of USD $3.88 billion.

Houston-TX-based GlobalSantaFe Corporation, through its subsidiaries, operates as an offshore oil and gas drilling contractor. It provides offshore oil and gas contract drilling services to the oil and gas industry on a daily rate basis primarily in the U.S. Gulf of Mexico, the North Sea, West Africa, the Mediterranean Sea, Southeast Asia, South America, the Middle East, and eastern Canada. In 2006, the company owned and operated a fleet of 59 marine drilling rigs, including 43 cantilevered jackup rigs, 11 semisubmersible rigs, three drillships, and two additional semisubmersible rigs. It also provides a range of drilling management services that include design and execution of a well; and planning, engineering, and project management services. In addition, the company explores, develops, and produces oil and gas. GlobalSantaFe Corporation was founded in 1946 and posted revenues of USD $3.3 billion in 2006.

Oil Field Services

Schlumberger is one of the world's largest oil field services companies, along with Halliburton. The company provides a full range of oil and gas services, including seismic surveys, drilling, wireline logging, well construction and completion, and project management. Organized into 29 geographic teams, Schlumberger's Oilfield Services unit provides reservoir evaluation, reservoir development, and reservoir management services. The company acquired Baker Hughes' 30 percent stake in WesternGeco in 2006 for USD $2.4 billion. In 2006, Schlumberger posted sales of USD $19 billion.

Halliburton Energy Services is a multinational corporation operating in more than 120 countries. Halliburton operate The Energy Services Group, which provides technical products and services for oil and gas exploration and production. Its former subsidiary KBR subsidiary, a construction company of refineries, oil fields, pipelines, and chemical plants was spun off in April 2007. Halliburton had revenues of USD $22 billion in 2006.

[edit] Recent Trends and Developments

While the U.S. oilfield chemical demand will grow 5.4 percent annually through 2009; industry analysts predict that the following issues will affect the industry in the upcoming years.

Threat of New Entrants There are thousands of oil and oil services companies throughout the world, but the high barriers to enter this industry will most likely limit the number of major players. Barriers can vary depending on the area of the market that the company is situated in. For example, some types of pumping trucks needed at well sites cost more than $1 million each. Other areas of the oil business require highly specialized workers to operate that equipment and determine key drilling decisions, companies in industries such as these have higher barriers to enter than other simply offering drilling services or fairly simple support services.

Power of Suppliers While there are plenty of oil companies in the world, much of the oil and gas business is dominated by a small handful of powerful companies. The large capital investment necessary tends to weed out a lot of the suppliers of rigs, pipeline, refining, etc. There isn't a lot of cut-throat competition among them; but they have significant power over smaller drilling and support companies.

Power of Buyers The balance of power is shifting towards buyers. Oil is a commodity and so one company's oil or oil drilling services is much different from another's. This translates into buyers seeking lower prices and better contract terms.

Availability of Substitutes Substitutes for the oil industry in general include alternative fuels such as coal, gas, solar, wind, hydro, and even nuclear energy. Remember, oil is used for more than just running our vehicles; it is also used in plastics and other materials - when analyzing an energy company it is extremely important to take a close look at the specific area in which the company is operating. Also, companies offering more obscure or specialized services such as seismic drilling or directional drilling tools are much more likely to withstand the threat of substitutes.

Competitive Rivalry Slow industry growth rates and high exit barriers are a particularly troublesome situation facing some firms. Oil refineries (until quite recently) were a particularly good example. For a period of almost 20 years, no new refineries were built in the US. Refinery capacity exceeded the product demands as a result of conservation efforts following the oil shocks of the 1970s. At the same time, exit barriers in the refinery business are quite high. Besides the scrap value of the equipment, a refinery that does not operate has no value adding capability.

[edit] Sources

• Oil and Gas Journal
• Most current U.S. Government Sources
• Forbes.com
• Baker-Hughes
• Washington Post
• Schlumberger

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