OCS Study 

MMS 95-0056 

Coastal Marine Institute 

Modeling the Structure and Performance 

of Integrated and Independent Producers 

in the Gulf of Mexico OCS Region 

Ulf of exico 

U.S . Department of the Interior Cooperative.Agreement Aft Minerals Management Service Coastal Marine Institute 

Gulf of Mexico OCS Region A* 

Louisiana State University 
OCS Study 

MMS 95-0056 

Coastal Marine Institute 

Modeling the Structure and Performance 

of Integrated and Independent Producers 

in the Gulf of Mexico OCS Region 

Author 

Allan G . Pulsipher 

Omowumi O. Iledare 

Robert H . Baumann 

Center for Energy Studies 

Louisiana State University 

Baton Rouge, Louisiana 

May 1996 

Prepared under MMS Contract 

14-35-0001-30660-19906 

by 

Coastal Marine Institute 

Louisiana State University 

Baton Rouge, Louisiana 70803 

Published by 

U.S . Department of the Interior Cooperative Agreement 

Minerals Management Service Coastal Marine Institute 

Gulf of Mexico OCS Region Louisiana State University 
111 

DISCLAIMER 

This report was prepared under contract between the Minerals Management Service (MMS) and the 

Louisiana State University's Center for Energy Studies. This report has been technically reviewed by 

MMS. Approval does not signify that the contents necessarily reflect the view and policies of the 

Service, nor does mention of trade names or commercial products constitute endorsement or 

recommendation for use. It is, however, exempt from review and compliance with MMS editorial 

standards . 

REPORT AVAILABILITY 

Extra copies of the report may be obtained from the Public Information Unit (Mail Stop 5034) at the 

following address : 

U. S . Department of the Interior 

Minerals Management Service 

Gulf of Mexico OCS Region 

Public Information Unit (MS 5034) 

1201 Elmwood Park Boulevard 

New Orleans, Louisiana 70123-2394 

Telephone Number: 1-800-200-GULF 

CITATION 

Pulsipher, A. G., O. O. Iledare, and R. H. Baumann. 1996 . Modeling the Structure and Performance 

of Integrated and Independent Producers in the Gulf of Mexico OCS Region. Prepared by the 

Center for Energy Studies, Louisiana State University, Baton Rouge, LA. OCS Study MMS 

95-0056. U.S . Department of the Interior, Minerals Management Service, Gulf of Mexico 

OCS Region, New Orleans, LA. 47 pp. 
V 

ABSTRACT 

Major oil and gas companies are shifting exploration and production (E&P) investment from the 

United States to foreign countries . As they do so, smaller companies, "independents," are expected 

to play a more prominent role in domestic E&P. Within both industry and government circles the 

apprehension is widespread that such a shift from the majors to the independents will cause domestic 

oil and gas resources to be developed less aggressively and less efficiently . 

This project addresses such concerns by attempting to discern and quantify differences in behavior 

and success among firms of different sizes (majors, large and small independents) operating in the Gulf 

of Mexico OCS region. Descriptive analysis of data on drilling effort and outcomes on the Gulf of 

Mexico indicates independents have been both more aggressive and successful than the majors in 

exploration while the majors have been only moderately more successful than independents in 

development drilling . Overall, independents appear to have been at least as successful as the majors. 

To investigate these differences more carefully, we developed a hydrocarbon model describing the 

process of adding to reserves through incremental drilling . The model was estimated using data from 

the Gulf of Mexico OCS region . The model is a combination of an econometric specification of the 

firm's drilling behavior with the firm's drilling productivity function . The model is used to analyze 

the effects of taxation, depletion and economic incentives on drilling and drilling productivity . 

Empirical estimates of the hydrocarbon model of reserve additions confirm the inferences drawn 

from descriptive analysis . Our measurements indicate that independents respond to market and 

industry conditions in the same way as do the majors . Thus, we do not believe OCS petroleum 

resources would be developed less aggressively or less efficiently if the independents were to do 

relatively more of the search for and development of hydrocarbons in the region . 
vii 

TABLE OF CONTENTS 

Page 

List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ix 

List of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi 

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii 

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

Section l . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 

Section 2. Domestic Exploration and Production : Exodus of Majors and 

and Takeover by Independents? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 

Section 3 . Comparing the Exploration and Development Drilling Records of Majors and 

Independents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 

Section 4 . Modeling Petroleum Drilling And Reserve Additions . . . . . . . . . . . . . . . . . . . . . 27 

Section s . Hydrocarbon Reserve Addition Model Simulation and Analysis . . . . . . . . . . . . . 37 

Section 6. Summary and Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 

Appendix A: List of OCS Operators Included in the Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 
ix 

LIST OF FIGURES 

Fiaure Title Page 

1 E&D Expenditures, Domestic and Foreign by Majors 

and Independents,1987to 1992. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 

2 Oil Production Replacement Ratios, Domestic and Foreign for Majors 

and Independents,1987to 1992. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 

3 Effectiveness of E&D Expenditures, Domestic and Foreign by Majors 

and Independents,1987to 1992. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 

4 Shares in Geological and Geophysical Permits Issued on the 

Gulf of Mexico OCS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 

5 Shares in Total Exploratory Footage on the Gulf of Mexico OCS . . . . . . . . . . . . 18 

6 Shares in Total Development Footage on the Gulf of Mexico OCS . . . . . . . . . . . 19 

7 Exploratory Footage as a Share of Total Footage on the Gulf Mexico OCS . . . . . 21 

8 Successful Exploratory Footage as a Share of Total Exploratory Footage on 

the Gulf of Mexico OCS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 

9 Successful Development footage as a Share of Total Development Footage on 

the Gulf of Mexico OCS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 

10 Gross Finding Rate on the Gulf of Mexico OCS . . . . . . . . . . . . . . . . . . . . . . . . . 25 
X1 

LIST OF TABLES 

Table Title Page 

1 Measures of the Operating Performance of U.S . Oil and Gas Producers . . . . . . . . 7 

(three-year averages) 

2 Share of Firms in Upstream Oil and Gas Activity on the 

Gulf of Mexico OCS, 1983-1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 

3 Performance Measures of Oil and Gas Producers on the 

Gulf of Mexico OCS, 1983-1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 

4 Descriptions of Model Variables and Data Sources . . . . . . . . . . . . . . . . . . . . . . . 32 

5 Estimated Model Equations for Drilling and Drilling Effectiveness . . . . . . . . . . . 33 

6 Estimated Elasticity of Drilling Effort and Drilling Effectiveness . . . . . . . . . . . . 36 
X111 

ACKNOWLEDGMENTS 

This report is based primarily on OCS drilling records made available to the Center for Energy Studies 

by the Minerals Management Service, New Orleans. Vicki Zatarain and Steve Patkowski of the MMS 

regional office in New Orleans were very helpful in obtaining this data. 

We acknowledge the excellent research assistance provided by Dmitry Mesyanzhinov, Digvijay 

Chowdnary, Paul Graham and Chris Pratt. Barbara Kavanaugh and Debbie Pitcher were also 

instrumental in obtaining information needed for this report . 

We also wish to express our appreciation to the participants at the 16th Annual IAEE/USAEE North 

American Conference in Seattle, Washington, and at the 1995 American Economic Association 

Annual Meeting in Washington, DC, for their valuable comments on selected sections of this report 

presented at these meetings. 
1 

EXECUTIVE SUMMARY 

Major oil and gas companies are shifting exploration and production (E&P) investment from the 

United States to foreign countries. As they do so, smaller companies, "independents," are expected 

to play a more prominent role in domestic E&P. Some have questioned whether such a shift from 

the majors to independents will cause domestic oil and gas resources to be developed less 

aggressively and less efficiently (Gachter, 1993 and Trench, 1994). This project attempts to discern 

and quantify differences in behavior and success among firms of different sizes (majors, large and 

smaller independents) operating on the Gulf of Mexico OCS and to discuss the implications of such 

differences for future OCS development and for MMS policy and planning. 

Our analysis indicates the following: 

o Majors and large independents appear to have been about equally enamored of 

foreign E&P prospects and have responded to them in a similar manner; 

o Both descriptive analysis and more discriminating regression analysis of data on 

drilling effort and outcomes in the Gulf of Mexico indicate independents have been 

both more aggressive and successful than the majors in exploration while the majors 

have been only moderately more successful than independents in development 

drilling . On an aggregate basis, independents have done better . 

Thus our summary conclusion is : 

o The data we have reviewed provide little evidence to support the speculation that the 

Gulf OCS hydrocarbon resources would be less aggressively or efficiently developed 

should independents continue to play a progressively larger role in the search for and 

development of hydrocarbon resources. 

More specifically our descriptive analysis shows : 

o If success is measured by barrels of oil equivalent (BOE) added per foot of successful 

wells drilled, on average, independents were more successful than the majors--adding 

265 BOE per successful foot drilled over the 1983 to 1992 period compared to 227 

BOE per successful foot drilled for the majors. If total footage drilled, rather than 

successful footage, is used the difference narrows but independents as a group still 

do slightly better than majors with 111 BOE compared 106 BOE for the majors. 
2 

o Over the past ten years, independent operators accounted for 53 percent of 

cumulative wildcat permits issued to search for new hydrocarbon reservoirs/fields on 

the OCS and nearly 70 percent of total exploratory wells drilled on the OCS. 

Moreover, small independents accounted for more than 40 percent of all exploratory 

wells drilled by independents and 28 percent of total exploratory wells . 

o Independents have been more willing to assume the risk inherent in exploration in 

the Gulf of Mexico than the majors. More than 50 percent of independents' total 

drilling effort was exploratory drilling in comparison to the 22 percent for the majors. 

While one in every four wildcat wells drilled by the majors was successful during the 

period 1983-1992, one in every three exploratory wells drilled by independents 

successfully found new reserves during the same period . 

Empirical estimates made with our hydrocarbon model confirm the inferences drawn from 

descriptive analysis in the following manner. We found: 

o No statistical evidence of significant differences in the responsiveness of the gross 

find-rate of hydrocarbon-reserves to technical progress among firms of different sizes 

operating on the OCS. 

o The growing maturity of the Gulf of Mexico OCS more negatively affected reserve 

additions per foot of well completed among the majors than it affected the 

independents . The responsiveness of gross find-rate to cumulative drilling (a proxy 

for the maturity of the Gulf of Mexico OCS) is estimated, on average as -1 .12, -0 .99 

and -0 .79, respectively, for majors, large and smaller independents. 

o No differences among firms of different sizes in the responsiveness of drilling effort 

on the OCS to pre-tax net cash flow (economic incentives). Our empirical results 

suggest a negatively elastic drilling response to taxes among the independents but 

a negatively inelastic drilling response among the majors. 
1. INTRODUCTION 

The major integrated companies that explore for, produce, refine and market oil and gas, have 

historically dominated the petroleum industry in the U.S . But during the past decade these 

companies have been progressively shifting their exploration and production (E&P) focus to foreign 

countries. Whether this is the result of geologic factors, such as the maturing of the domestic oil and 

gas resource base; economic factors, such as higher returns expected from very large new foreign 

finds and increasing reserve replacement costs in the U.S . ; or policy factors, such as federal or state 

moratoria prohibiting exploration and development in many promising new areas and stricter U.S. 

environmental requirements, is a matter of considerable debate and conjecture . 

Perspectives on the magnitude and permanence--as well as the causes and effects--of this transition 

are still evolving. 

o Is the shift in E&P focus to overseas truly a transition or an illusion created by the 

major integrated companies reacting more rapidly to an overall decline in the 

profitability of domestic oil and gas production? 

o Are the independents "taking over" or does it just appear so because their share 

increases as the integrated companies leave? 

o Will the independents follow the integrated companies in their pursuit of brighter 

prospects abroad? 

o Can the independents raise the capital required to buy and develop domestic 

properties that the integrated companies want to sell? 

Speculation about the consequences of independent producers replacing integrated companies as the 

driving force in domestic E&P ranges from quite negative to fairly positive. At the negative end 

of the range of opinion the argument goes: 

o The integrated companies are able to seek higher profits abroad because they are both 

large enough to hedge the higher risks through diversification and able to wait for the 

longer payout because they are supported by profits from refining and marketing. 

o The reserves that integrated companies are willing to sell are only their least 

promising ones. They will keep (but not develop as aggressively) their best reserves 

as a hedge against political uncertainty abroad and protectionist measures that the 

U.S . Congress may enact at home. 
4 

o If major integrated companies withhold or de-emphasize the development of their 

most promising U.S . reserves, domestic supplies will decrease, import dependence 

will increase, domestic employment will decline and the U.S . trade deficit will grow. 

At the positive end of the continuum, the more optimistic scenario is : 

o Integrated companies are less efficient than independents in developing reserves and 

are being "forced" abroad because domestic development costs are rising . 

o In time, the market will work. It will allocate reserves to those who can develop 

them more profitably . 

o As the integrated companies leave, independent producers will buy their properties 

and develop them more efficiently. 

Predicting where the future will eventually appear in this range of speculation is complex but 

important from a public policy as well as a strictly business perspective. Some analysts have 

speculated that the shift from the majors to independents will slow the pace of exploration drilling 

as opposed to development drilling . And, at a more operational level, in response to concerns about 

the financial viability and stability of independents, MMS reports that it "is considering several steps 

that will insure that [independent] producers have the resources to support offshore drilling" 

(Gachter, 1993). Thus, important aspects of national energy policy will be affected by the 

consequences of this transition . Despite the prominence of these questions in both industry and 

public policy circles, they have inspired little comprehensive empirical analysis ; hence the 

motivation for this project. 

The report is organized into five sections and an executive summary. The following section presents 

indicators of domestic and foreign activity for independents and majors . The third section compares 

exploration and development drilling records of majors and independents in their search for 

petroleum resources in the Gulf of Mexico OCS region since 1978. The fourth section, develops, 

estimates and exercises an economic model of hydrocarbon reserve additions to 1) test the 

hypothesis that majors explore for and develop petroleum resources more efficiently or aggressively 

on the Federal OCS than independents and 2) study differences in the responsiveness of drilling and 

drilling outcomes among the majors and independents to changes in economic factors, depletion, and 

taxes. The final section summarizes the principal conclusions and the authors' recommendations. 
2. DOMESTIC EXPLORATION AND PRODUCTION: 

EXODUS OF MAJORS AND TAKEOVER BY INDEPENDENTS? 

How persuasive is the evidence that the majors are leaving the development of domestic oil and gas 

reserves in favor of foreign opportunities? Will the magnitude of this exodus expand the 

independents share of domestic E&P significantly--especially on the OCS? 

The data available to characterize these trends over the 1987 to 1992 period, in our view, implies that 

although the share of E&P undertaken by independent operators is growing, the heralded "take over" 

of the domestic oil and gas producing industry by the independents may be an exaggeration . 

2.1 - Classifying majors and independents 

For analytical purposes, oil and gas operators operating in the U.S . have been classified into three 

groups--the majors, large independents and smaller independents . Definitions of these groups vary 

among different sources of information, but we have used the following definitions which will be 

carried throughout the report unless otherwise indicated : 

o Majors are integrated companies with more than 1 billion BOE in petroleum reserves 

worldwide. They are engaged in several stages of exploration, production, 

transportation, refining, and marketing of oil and gas worldwide . 

o Large independents are those firms cited in the Oil and Gas Journal (OGJ) list of the 

largest 100 firms that are not majors, but have assets of at least $500 million. In 

addition, for analytical purposes, we have included in this category subsidiaries of 

large foreign companies such as Agip Petroleum, Elf Aquaitaine, and Nippon Oil 

Company even if their U.S . operations do not satisfy this criteria . 

o Smaller independent firms are those appearing on the OGJ list of the largest 300 

firms but do not have assets of $500 million or more. Data on assets are only 

available for publicly traded companies . Thus our definition, alone, would classify 

all privately held companies as "smaller independents ." We contacted several such 

companies but each said "smaller independent" was the appropriate designation. 

It should be noted that this classification is based on total--not OCS per se--activity . Some firms 

classified as "small independents" under this classification were responsible for a larger share of 

OCS production than some majors . A list of the firms included in each category is given in Appendix 

A. 
6 

2.2 - Measures of Foreign and Domestic Activity and Success 

Operating data for oil and gas firms of different sizes are presented in Table 1 . The data reported 

in the table are aggregate, national-level data, but they are useful for comparing the relative emphasis 

of foreign and domestic E&P strategies among firms of different sizes--majors and independents . 

Although these comparisons provide a useful scale and perspective, they may not be representative 

of trends in particular regions. For example, Alaska produces about 25 percent of the oil produced 

in the United States and almost no Alaskan oil is produced by independent producers. However, 

about 58 percent of the oil and 60 percent of the gas produced in Louisiana (excluding Federal OCS 

production) comes from independent producers. Thus changes in the relative shares of majors and 

independents in Gulf Coast activity may have important consequences for that region that may be 

obscured in the national data. 

Table 1 shows three-year moving averages summarizing operating and performance data on 

domestic and foreign exploration and development expenditures, oil production, gas production, oil 

and gas reserve additions, hydrocarbon replacement ratio, reserve purchase cost, finding costs and 

expenditure effectiveness for individual domestic oil and gas companies (Arthur Anderson and Co., 

1984, 1990 and 1993). The data are grouped by majors and independents and, for most categories, 

are shown separately for domestic and foreign operations. 

Figure 1, which depicts the data summarized in the first section (A) of Table 1, shows total 

exploration and development (E&D) expenditures, which have frequently been used to describe the 

apparent "take over" of domestic oil and gas activities by the independents . The trends seem clear 

and dramatic. Over the six-year period domestic expenditures for E&D by the majors declined by 

34 percent while those by the independents increased by about 12 percent. As a consequence of this 

disparity, the majors' share of total, domestic E&D expenditures declined by over 10 points, falling 

from 77 percent in 1987 to 66 percent in 1992 . 

However, data on E&D spending on foreign prospects, also shown in Figure 1, indicates that the 

majors and the independents have both responded aggressively to opportunities abroad. 

Expenditures by majors increased by an impressive 113 percent, but expenditures by the 

independents also increased by a healthy 73 percent. 

Other sections of Table 1 show trends in domestic and foreign oil and gas production and additions 

to reserves . Two useful "bottom line" measures, however, are given in sections (E) (showing the 

production replacement ratio) and (H)--recording the reserves added per $1,000--in E&D 

expenditures . 
Table 1 . Measures of the Operating Performance of U.S . Oil and Gas Producers 

(three-year averages) 

1987 1988 1989 1990 1991 1992 

A: E & D Expenditures (Billion $) 

U.S. . 

Majors 16 .4 12 .5 11 .8 12 .2 11 .8 10 .8 

Independents 5 .0 4 .2 4.6 5 .5 5 .7 5 .6 

Total 21 .4 16 .7 16.4 17.6 17 .5 16.4 

Foreign: 

Majors 12 .0 14 .3 17.5 21 .0 23 .7 25 .6 

Independents 2 .6 2 .2 2.3 3 .1 3 .8 4.5 

Total 14.6 16 .5 19.8 24.1 27.5 30.0 

B: Oil Production (Million Barrels) 

U.S . : 

Majors 2,015 1,971 1,901 1,815 1,751 1,694 

Independents 312 300 291 289 296 302 

Total 2,327 2,271 2,192 2,104 2,047 1,996 

Foreign: 

Majors 1,970 2,046 2,111 2,209 2,259 2,323 

Independents 202 206 219 250 295 328 

Total 2,172 2,252 2,330 2,459 2,554 2,651 

C: Gas Production (Bcf) 

U.S . . 

Majors 6,703 6,516 6,565 6,612 6,660 6,649 

Independents 2,777 2,895 3,092 3,336 3,548 3,667 

Total 9,480 9,411 9,657 9,948 10,208 10,256 

Foreign: 

Majors 3,898 4,396 5,038 5,874 6,435 6,927 

Independents 714 776 929 1,095 1,237 1,324 

Total 4,612 5,172 5,968 6,969 7,672 8,251 

D: Oil and Gas Additions (Million BOE) 

U.S. . 

Majors 1,517 1,363 1,451 1,615 1,610 1,465 

Independents 553 570 640 770 765 780 

Total 2,070 1,932 2,091 2,385 2,375 2,245 

Foreign: 

Majors 1,607 1,549 1,738 2,399 2,918 3,196 

Independents 266 286 323 418 477 530 

Total 1,874 1,835 2,061 2,817 3,395 3,727 
Table 1(contd.) 

E: Oil Production Replacement 

Ratio 

U.S . . 

Majors 77 76 88 81 77 68 

Independents 62 67 95 110 98 94 

Weighted Average 75 75 89 85 80 72 

Foreign: 

Majors 100 99 118 123 117 116 

Independents 100 108 115 114 116 119 

Weighted Average 100 100 117 122 117 117 

F: Reserve Purchase Cost ($/BOE) 

U .S . . 

Majors 5.37 3 .92 4.80 5 .07 4 .82 3.37 

Independents 5.58 4 .94 4.72 4.41 4 .15 4.06 

Weighted Average 5 .12 4 .48 4.71 4.63 4.40 3.98 

Foreign: 

Majors 5 .93 5 .91 3 .37 4.29 4.44 4 .16 

Independents 5 .17 3 .92 4.78 3 .93 3 .42 2 .79 

Weighted Average 4.56 4.40 3 .71 3.89 3 .93 3 .67 

G: Finding Costs ($/BOE) 

U.S . . 

Majors 10.83 9.20 8.11 7 .54 7.31 7.37 

Independents 8.98 7.32 7.18 7.10 7.49 7.23 

Weighted Average 10.34 8.64 7.83 7.39 7.37 7.32 

Foreign: 

Majors 7.44 9 .23 10 .09 8.77 8 .11 8.00 

Independents 9.77 7 .68 7 .13 7.42 8 .03 8.42 

Weighted Average 7 .77 8 .99 9.62 8.57 8 .10 8.06 

H: Expenditure Effectiveness 

(BOE/$000) 

U.S . . 

Majors 92 109 123 133 137 136 

Independents 111 137 139 141 133 138 

Total 97 116 128 135 136 137 

Foreign: 

Majors 134 108 99 114 123 125 

Independents 102 130 140 135 125 119 

Total 129 111 104 117 123 124 
30 . _ --- 

Foreign Majors 

25 

20 

y 

o US Majors 

0 15 

V1 

W ' 

l0 

US Independents 

5 

Foreign Independents 

0 1 -4 

Note: Values are three-year moving averages 

Figure 1 . E&D Expenditures, Domestic and Foreign, by Majors and Independents, 1987 to 1992 

1987 1988 1989 1990 1991 1992 

US Majors 16.4 12.5 11 .8 12 .2 11 .8 10 .8 

US Independents 5.0 4.2 4.6 5.5 5.7 5.6 

Foreign Majors 12.0 143 17 .5 21 .0 23.7 25 .6 

Foreign Independents 2.6 2.2 23 3 .1 3 .8 4.5 
10 

The extent to which new reserve additions, domestic and foreign, have kept pace with production 

is depicted in Figure 2. On average the additions to reserves by the majors amounted to about 75 

percent of domestic production over the period, while independents, on average, replaced 87 percent 

of their production . Further, the independents' domestic replacement rate was clearly on an 

increasing trend over the period . But in the foreign sector, both the majors and the independents 

added foreign reserves more rapidly than they produced foreign oil--each showing a closely 

correlated, average replacement ratio of 112 percent increasing with time. 

Figure 3 shows trends in "expenditure effectiveness" which is simply reserve additions per $1,000 

of E&D expenditures measured in barrel of oil equivalent. Differences between the two groups of 

firms seems to narrow with time and the averages of the last three years are clearly too close to 

support any generalizations about differences in relative efficiencies--regarding either domestic or 

foreign activity. 

The data reviewed in Table 1 and illustrated in Figures 1, 2 and 3, suggest that, at least from a 

national perspective, the heralded "take over" of the domestic oil and gas producing industry by the 

independents may be an exaggeration . Independents are doing relatively more domestic E&D, but 

their increased share appears to be more reflective of the decline in E&D spending by the majors 

than of increased spending by independents. 

Moreover it is not clear how much of the apparent "take over" is a temporary or cyclical 

phenomenon rather than a longer-term, structural change in the industry . Some independents have 

announced that they have been disappointed with foreign initiatives and plan to refocus on domestic 

production (Fan, 1995) . Others believe structural change shifting the relative importance of majors 

and independents will continue (Walsh, 1994). Still others argue that more fundamental geologic 

and price concerns will perpetuate the trends of the last 25 years for the foreseeable future (Trench, 

1994) . However, all the measures we have analyzed indicate that the independents have been just 

as aggressive as the majors in pursuing reserves and production abroad . Thus, in the aggregate, the 

evidence is not very persuasive that the independents are pursuing strategies tilted toward domestic 

production while the majors shift their activity abroad. 

Finally, it is important to note that the sheer magnitude of the proportion of activity attributable to 

the majors in most of the categories reviewed, means that the majors will continue to dominate 

domestic activity for the foreseeable future . The category that comes closest to being an exception 

to this rule is domestic gas production where the majors' share of production has fallen from about 

three-fourths to two-thirds of the total. Thus, although independents are playing an increasingly 

important role in both domestic and foreign sectors, the strategies and performance of the majors will 

remain a key focus for MMS and other energy analysts for some time to come. 
130 . - 

Foreign Majors 

i 

120 II 

Foreign Independents 

110 

U 

d 

US Independents 

0 100 

7 

O 

a 90 

w 

U 

0 80 / US Majors 

70 ' 

60 - 

Note: Values are three-year moving averages Source: Table 1 

Figure 2. Oil Production Replacement Ratios, Domestic and Foreign, by Majors and Independents, 1987 to 1992 

1987 1988 1989 1990 1991 1992 

US Majors 77 76 88 81 77 68 

US Independents 62 67 95 110 98 94 

Foreign Majors 100 99 118 123 117 116 

Foreign Independents 100 108 115 114 116 119 
150 

US Indepe ndents 

140 

130 

c 

S Majors 

w 

120 

ca Foreign In dependents 

0 0 0 

110 i 

O 

m 

100 

Foreign Majors 

90 - -~- -- -~ -~ - ~- 

Note: Values are three-year moving averages Source: Table 1 

1987 1988 1989 1990 1991 1992 

US Majors 92 109 123 133 137 136 

US Independents 111 137 139 141 133 138 

Foreign Majors 134 108 99 114 123 125 

Foreign Independents 102 130 140 135 125 119 

N 

Figure 3. Effectiveness of E&D Expenditures, Domestic and Foreign, by Majors and Independents, 1987 to 1992 
13 

3. COMPARING THE EXPLORATION AND DEVELOPMENT DRILLING 

RECORDS OF MAJORS AND INDEPENDENTS 

Would the pace or efficiency of the development of oil and gas resources on the OCS in the Gulf of 

Mexico be hindered if proportionately more activity were undertaken by independents and less by 

the majors? To answer this question we first compiled and analyzed descriptive statistics on the 

relative performance of these groups over the past decade . Then, as described in the next section of 

the report, we constructed and exercised an econometric model of the hydrocarbon reserve additions 

process. 

Raw data on petroleum industry activity and outcomes, for firms searching for hydrocarbon 

resources on the Gulf of Mexico OCS were made available from the MMS data file in New Orleans. 

Using this data, industry activity indicators and performance measures were derived, organized and 

analyzed to characterize the behavior and performance of majors and different groups of 

independents over the past decade . Subsequently, each group of operators were compared in terms 

of their share in: a) permits issued, b) wells drilled, c) footage drilled, d) successful wells completed 

and e) footage of successful wells completed. Where appropriate we also compared these indicators 

by a) well category (exploration or development), and b) well type (oil or gas), to identify any 

significant differences among the groups and areas. Tables 2 and 3 present, for each group of 

operators, indicators drawn from these measures for the 10-year period 1983 to 1992. Table 2 

records the cumulative shares in permits, wells drilled, footage drilled, successful wells completed 

and footage of successful wells drilled in the Gulf of Mexico OCS region . 

3.1 - Geological and Geophysical Permits 

Data from the Minerals Management Service (MMS) of the U.S . Department of the Interior show 

a decline in the number of oil and gas firms that were issued at least one geological and geophysical 

(G&G) permit to search for new petroleum reservoirs on the OCS. In 1981, 67 operators obtained 

permits; but in 1992 the number of operators issued such permits was down by 25 percent to 50 

operators . Thirty-six of the 50 operators actively exploring for hydrocarbons were independent 

operators. As shown in Table 2, 53 percent of cumulative geological and geophysical permits issued 

to oil and gas operators over the past ten years for OCS activity were issued to independents (22.1 

percent for large independents and 31 .2 percent for smaller independents). 

Figure 4 shows the three-year moving average trend in the distribution of geological and geophysical 

permits issued to oil and gas producers in the Gulf of Mexico OCS region. The share of permits 

issued to majors declined from a peak of 59 percent in 1980 to a low of 41 percent in 1986. Since 

1986, however, the majors's share of permits has increased and in 1992 was about 50 percent of the 

total permits issued in the region. 
14 

Table 2. Share of Firms in Upstream Oil and Gas Activity on the Gulf of Mexico OCS 

1983-1992 

Independents Total 

OCS Activities Majors Small Large Total OCS 

Percent: 

Total Permits Issued 46.7 31 .2 22.1 53.3 100.0 

Wells Drilled: 

Exploratory 30.6 27.7 41 .7 69 .4 100.0 

Development 57.8 13.1 29.1 42 .2 100.0 

Total 48.9 18.1 33.0 51 .1 100.0 

Footage Drilled: 

Exploratory 43 .6 21 .4 35.0 56.4 100 .0 

Development 61 .3 11 .8 26 .8 38 .7 100 .0 

Total 53 .1 16 .3 30 .6 46.9 100 .0 

Successful Wells: 

Exploratory 24.0 28 .6 47 .4 76.0 100.0 

Development 60.0 12.9 27 .1 40.0 100.0 

Total 54.1 15 .5 30.4 45.9 100.0 

Successful Footage: 

Exploratory 27.9 27.6 44.4 72.1 100.0 

Development 62.4 11 .7 25 .9 37 .6 100.0 

Total 55.8 14.7 29.4 44 .2 100.0 
15 

Table 3. Performance Measures of Oil and Gas Producers on the Gulf of Mexico OCS 

1983-1992 

Independents Total 

OCS Indicators Majors Small Large Total OCS 

Exploratory Effort : 

Wells 22.3 54.4 44 .9 48 .3 35 .5 

Footage 37.8 60.5 52 .7 55 .4 46 .0 

Success Ratio: Wells 

Exploratory 25.5 33 .6 37 .0 35 .6 32 .5 

Development 77.1 73 .5 69 .1 70 .5 74.3 

Total 67.6 52.4 56 .2 54 .9 61 .1 

Success Ratio: Footage 

Exploratory 11 .8 23 .8 23 .4 23 .6 18 .4 

Development 68.5 66.4 65 .0 65 .4 67.3 

Total 46.7 40.2 42 .8 41 .9 44.4 

Drilling Productivity : 

Oil (Million Bbl) 1,547 293 473 766 2,314 

Gas (Bcf) 18,632 8,237 12,676 20,913 39,544 

Drilling Effectiveness: 

Oil (Bbl/Ft) 103 131 143 138 112 

Gas (Mcf/Ft) 1,281 1,093 1,083 1,087 1,171 

Hydrocarbon (BOE/Ft) 227 312 242 265 244 
100 - i -----

80 

60 

Independents 

a 

U 

a 

40 

20 

0 

78 9 80 81 82 83 84 85 86 87 88 89 90 91 92 

0 

Majors 

Figure 4. Shares in Geological and Geophysical Permits Issued on the Gulf of Mexico OCS 
17 

3.2 - Drilling Activity 

Over the 10-year period 1983 to 1992, independent operators accounted for nearly 70 percent of the 

exploratory wells drilled on the OCS. The major oil and gas operators drilled more development 

wells on the OCS than the independents within the last 10 years and were slightly more successful 

than independent operators--accounting for 58 percent of the total development wells drilled and 60 

percent of successful development wells. 

If drilling records are compared on the basis of footage drilled, then 1) the majors' share in 

exploratory drilling activity increases from 31 to 44 percent--reflecting the fact that exploratory wells 

drilled by the majors, on average, were deeper than independents' wells during this period ; and 2) 

the majors' advantage in development drilling increases modestly as well. Trends in the shares of 

independents and majors in total exploratory footage and development footage are presented in 

Figures 5 and 6. 

As evident in Figure 5, at least in relative terms, the independents have become more willing to 

undertake exploratory drilling than the majors since 1987. Prior to 1987, the majors' share in 

exploratory footage drilled averaged above 50 percent, compared to their less than 40 percent share 

from 1989-1992. We should emphasize that exploratory effort is credited to the designated operator 

when more than two operators are jointly involved to avoid double counting. Figure 6 shows that 

the majors' share of total footage for development wells drilled in the Gulf OCS peaked in 1988 at 

68 percent and had fallen to about 56 percent by 1992. 

3.3 - Drilling Performance 

The performance of each group of operators is measured by : 1) exploratory effort as percent of total 

drilling effort, 2) wildcat success rates, 3) drilling effectiveness (finding rate) and 4) drilling 

productivity (recoverable reserves added due to new drilling). The 10-year performance measures 

for each group of operators are summarized in Table 3 . 

3.3 .1 - Exploratory Effort: The term "exploratory effort" here means the ratio of exploratory 

drilling to total drilling in a given period . In the 10-year period 1983-1992, approximately one in 

every three hydrocarbon wells drilled on the Gulf OCS was an exploratory well . The major oil and 

gas operators made less of an exploratory effort during the period than either of the two categories 

of independent operators. If exploration effort is measured by exploration footage drilled as a 

fraction of total footage drilled, the major's effort improves from 22 percent to 38 percent, but is still 

below the 55 percent level achieved by independents as a group. 
00 

100 

I ~I 

80 

Independents 

60 

U 

~. 

a 

40 

20 

0 

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 

. Majors 

Figure 5. Shares in Total Exploratory Footage on the Gulf of Mexico OCS 
100 ~ -

gp Independents 

60 

U 

a 

40 

20 

0 

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 

. Majors 

Figure 6. Shares in Total Development Footage on the Gulf of Mexico OCS 

1-A 
20 

Figure 7 shows that the trend in majors' exploratory effort--exploratory footage drilled as a fraction 

of total footage--follows a similar pattern to that of the independents prior to 1983 . However, since 

1983, the independents effort has increased far more than the majors' . In fact, from 1985 to 1992 

independents' effort doubled in relative terms, increasing from 30 percent to a peak of more than 60 

percent in 1989, whereas the majors' effort only increased from 20 percent to a peak of less than 40 

percent during the period . 

3.3 .2 - Exploratory Success: Not only have independents been willing to assume the higher risks 

inherent in exploration, independents also have enjoyed more success over the past decade in their 

search for new hydrocarbons in the Gulf of Mexico. As shown in Table 3, whereas approximately 

one in every four exploratory wells drilled by majors were successful in adding new reserves, one 

in every three exploratory wells drilled by independents were successful during the 1983 to 1992 

period . 

Trends in successful footage as a share of total exploratory footage are presented in Figure 8 . Prior 

to 1985, majors were relatively more successful than the independents in exploratory drilling . 

However, since 1985 independents have not only had more exploratory successes than the majors, 

but the independents' success rate seem to have improved significantly relative to the majors. 

3.3 .3 - Development Success : Figure 9 shows the majors have been marginally but consistently 

more successful in development drilling than independents considered as a group . Although in the 

final part of the period the success rate for the majors was rising while the overall success rate among 

the independents was declining, since 1987 both have risen more or else in tandem. Over the period, 

the major's success rate for development drilling on average was approximately 77 percent compared 

to the 71 percent success rate for independents as shown in Table 3 . It is also evident from the table 

that large independents had a higher success rate in development drilling than the smaller 

independents. 

3.3 .4 - Drilling Effectiveness : The lower part of Table 3 reports drilling effectiveness (additions 

to reserves per foot of successful wells drilled) for oil, gas and total hydrocarbons. On average, for 

every foot of successful wells drilled by the majors on the OCS, 227 barrels of oil equivalent (BOE) 

of new hydrocarbons were added to original recoverable hydrocarbons in-place during the period 

1983-1992. Whereas 265 BOE of hydrocarbons were added for every foot of successful wells drilled 

by all the "independents" during the same period . The two independent operator categories were 

more successful than were the majors, with the independents as a group adding about 18 percent 

more hydrocarbons per foot of successful well drilled than the majors over the 10-year period . But 

while independents in each category were more successful than the majors in adding oil reserves, 

the majors were more successful at adding gas reserves . 
70 - . 

60 

50 

40 

c 

U 

N 

a' 3 0 

20 

10 

0 1 L[ 

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 

. Majors 

El 

Independents 

Figure 7 . Exploratory Footage as a Share of Total Footage on the Gulf of Mexico OCS 

N 

N 
40 j 

30 

20 

a 

10 

i 

I 

0 

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 

. Majors 

El 

Independents 

N 

N 

Figure 8 . Successful Exploratory Footage as a Share of Total Exploratory Footage 

on the Gulf of Mexico OCS 
80 ,-

70 

60 

50 

.. 

°J 

04 40 

VI 

VI 

N 

U 

U 

7 Col 30 

20 

10 

0 ~ -+ - 

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 

. Majors 

1

I Independents 

Figure 9. Successful Development Footage as a Share of Total Development Footage 

on the Gulf of Mexico OCS 

N 

W 
24 

The time path of drilling effectiveness --gross finding rate--is presented in Figure 10. The figure 

shows that independents have generally added more reserves per successful well-footage drilled than 

the majors every year since 1981 . However, the figure also shows a declining overall trend in gross 

finding rate among both the majors and the independents since 1979, despite the rising success rates 

shown in Figures 8 and 9. The fact that success rate rises and gross find rate declines is indicative 

of the fact that the size of new finds is getting smaller as large and easy to find reserves are normally 

expected to be discovered earlier in the exploration and development process. 

3.4 - Implications 

The data we have reviewed provide little evidence to support the apprehension that the Gulf OCS 

hydrocarbon resources would be less aggressively or efficiently developed should independents--

even smaller independents--continue to play a progressively larger role in the search for and 

development of hydrocarbon resources on the Gulf OCS. 

Simple descriptive analysis of upstream oil and gas industry activity indicators suggests 

independents are doing more exploration on the OCS than the majors by nearly a 2 :1 ratio. 

Independents are also more successful in exploratory drilling on the Gulf than the majors especially 

since the collapse of the world oil prices in 1986. Although not as effective as the majors at adding 

new gas reserves, independents discovered as many reservoirs as the majors and discovered about 

the same amount of hydrocarbon reserves as the major operators on the OCS since 1983 . 
400 -

350 

I 

300 / 

250 ; Independents 

O 

200 

150 

Majors 

100 

50 -- ~ -~-r--~-- ~-~-- 

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 

Figure 10. Gross Finding Rate on the Gulf of Mexico OCS 

N 
27 

4. A MODEL OF HYDROCARBON RESERVE ADDITIONS 

The comparison of the behavior and performance of firms of different sizes operating on the Gulf 

OCS presented earlier in Section 3 are quite broad and cover a period of major structural change 

within the industry, both domestically and internationally. Thus, in this section we present a 

hydrocarbon model of reserve additions that is capable of quantifying the significant differences in 

the way each group of operators' drilling activity and the subsequent drilling outcomes respond to 

changes in the determinants of reserve additions--drilling effort, technology change, changes in the 

economic, market and regulatory environments. 

4.1 - Modeling Literature 

A variety of crude oil and natural gas supply models have been formulated and implemented since 

the early 1970s using the theoretical and analytical methods of several disciplines including 

petroleum engineering, economics, geology, operations research, and management science. The 

more prominent of these models and studies may be loosely classified as either geologic-engineering 

(G-E)--life cycle, rate-of-effort, play analysis and discovery process--or econometric models 

(Adelman et al ., 1983). Walls (1992) provides a thorough survey of existing petroleum and natural 

gas supply studies and modeling approaches. 

The basic premise of most G-E models is that the rate of petroleum discovery in a petroleum region 

or district tends to decline as exploration and development drilling proceeds . These models do not 

have much economic content, but use geological and engineering information extensively to try to 

capture the subtleties of petroleum engineering and geological characteristics of petroleum 

exploration, development and depletion processes. Examples of the early G-E models include: Arps 

and Roberts (1958), Hubbert (1974), Drew et al . (1980), Attanasi et al . (1981) . Cleveland and 

Kaufmann (1991) made a more recent effort to include economic factors in the Hubbert (1974) 

modeling framework. 

Econometric models and studies, on the other hand, rely on the reasoning that higher economic 

incentives will lead to more new drilling, which will consequently lead to more new reserve 

additions at a decreasing rate, in part, ceteris paribus, due to diminishing returns. The more widely 

cited oil and natural gas supply studies and models include Erickson and Spann (1971), Khazzoom 

(1971), MacAvoy and Pindyck (1973), Pindyck (1978a), Kim and Thompson (1978), and Eckbo 

et al . (1978) . Nearly all of these econometric models are national in scope (or at best have very 

broad regional divisions), use aggregate annual data to estimate model equations, and yield 

unreliable predictions of future regional drilling activity and drilling outcomes in terms of new 

reserve additions. 

Pindyck (1978b) attributed the weakness of the traditional aggregate approaches to modeling the 

supply of oil and gas to the fact that aggregation of oil and gas data across distinctive geologic 

provinces may obscure the effects of economic and policy variables on the pattern of E&D activities . 
28 

Pindyck suggested that it would be more fruitful to model E&D outcomes at the micro level of 

individual pools, fields, or geological provinces. Such models would be able to capture not only the 

petroleum engineering and geological characteristics of petroleum supply process, but also the 

economic and policy incentives motivating producers to search for and development petroleum 

resources. 

4.2 - Model Framework 

The hydrocarbon modeling framework adopted in this study is a combination of an econometric 

model of drilling effort with a drilling process model that determines the corresponding drilling 

outcomes. This approach is similar to the one proposed in Walls (1992) and used in Walls (1994) 

to model oil and gas supply on the Gulf of Mexico OCS using aggregate OCS data. Here, we 

estimate model parameters using pooled data organized by type of firm--major, large independents 

and smaller independents--across time. 

Conceptually, the hydrocarbon model begins with an identity that defines drilling productivity (gross 

hydrocarbon reserve addition) in a given period as the product of the probability of a successful 

drilling effort (success rate), incremental drilling effort during that period, and the effectiveness of 

a successful drilling effort at adding new reserves (find rate). That is, 

where 

G t _ X< < xt (1) 

G, = hydrocarbon reserve additions at time t; 

yt = effectiveness of drilling in adding new reserves, measured in terms of recoverable 

reserves, divided by exploratory and development footage drilled (finding rate), 

xt = incremental drilling effort (annual drilling rate); and 

It = the proportion of drilling effort that is successful in finding new reserves . 

The theoretical specification of the drilling effectiveness function is based upon the assumption that 

the larger deposits in a mature petroleum basin are discovered first, and that cumulative new 

reserves, in such mature basins, tend to decline non-linearly as cumulative drilling increases . A 

plausible functional specification of this non-linear process is 

Yt = * e °`'T f 1 - 

where 

t(r and aK (k =1, 2) are constant parameters ; 

T = a proxy variable for technical progress ; 

tar = ultimate discoverable reserves (i .e . cumulative new reserves as t becomes large) ; and 

Xt = cumulative drilling effort at the beginning of time t. 
29 

By differentiating equation (2) with respect to X, we obtain a simple mathematical specification of 

drilling effectiveness equation in the following estimable form (Porter, 1992 and Walls, 1994) : 

yt = aoe a' e a2X' (3) 

where : 

ao,a,, and a2 are constant parameters to be estimated. 

a, = a measure of increases in drilling effectiveness due to changes in technical progress 

a2 = a measure of the responsiveness of the effectiveness of drilling at adding new reserves 

to changes in cumulative effort--a proxy for the maturity of the geologic basin. 

y = drilling effectiveness, the ratio of recoverable hydrocarbon reserve additions and the 

corresponding incremental footage of successful hydrocarbon wells drilled. 

The functional form of drilling equation may be derived by solving the producers' investment 

decision problem of choosing, simultaneously, the optimal time-paths of both drilling and production 

activities to maximize the present value of expected net benefits, subject to the following constraints: 

(1) Expected new reserve additions decline as drilling effort and cumulative new reserves 

increase over time. In other words, the rate of change of cumulative new reserves depends 

on both the cumulative amount of effort expended and cumulative new reserves from past 

efforts. 

(2) Production from new reserves declines exponentially in accordance with the basic 

petroleum engineering principle, the constant-decline production mechanism. 

(3) The rate of change of the stock of proved reserves must be equal, at all time t, to gross 

new reserves minus current rate of output . 

The general solution to the above decision problem is quite complex. However, from the body of 

the of literature' on this subject, we may specify that drilling demand will vary with net economic 

value of reserve additions and the cumulative drilling effort--a proxy variable for the maturity of 

the geological region. Specifically, more effort will be put into the search for and development of 

hydrocarbon reserves if the discounted net benefit per discovery increases. More knowledge about 

the region--or increased maturity of the geologic region--may or may not lead to more drilling, 

depending on the nature and quality of the geological information available from past drilling 

activity . 

See Porter (1992), Deacon et al . (1990), Iledare (1990) and Walls (1994) . 
30 

An estimable drilling demand function can be specified as 

Xt = Pont RZ 

where : 

(30, P,, and P2 are constant parameters 

7tt = net economic value of new reserve additions from incremental drilling effort 

X, = cumulative drilling effort 

(3, = percent change in drilling footage given a percent change in expected net economic 

value of new reserves 

P2= a measure of the effect of resource depletion on drilling effort . 

4.3 - Model Specification 

The theoretical model equations (3) and (4) describe the relationships to be estimated and used to 

evaluate the supply response of hydrocarbon reserve additions to economic incentives, taxation 

policy and resource depletion factors. The identity relationship in equation (1) defines gross 

hydrocarbon reserve additions as the product of drilling effectiveness and drilling effort . 

Equation (3) describes drilling effectiveness (y) as a function of cumulative drilling footage (X)--a 

proxy variable for the maturity of the Gulf of Mexico--and a technical progress variable (T). A log 

linear specification of equation (3) for statistical and empirical analysis takes the form : 

In y

.r - aoIDr ajit azXIr 

for i = 1, 2 . . .I (firms) and t = 1, 2 . .N (time periods), and where e = the random error term and D 

represents a firm-size dummy variable. 

Equation (4) relates drilling effort (x) to the expected net economic value of new reserves (n) and 

cumulative drilling effort (X). Cumulative drilling effort is a proxy variable capturing the effects 

of the maturity of the Gulf OCS on drilling . To facilitate hypotheses testing about the effects of 

changes in economic and taxation policy variables on drilling behavior among firms of different 

sizes, we assumed that the expected net economic value of new reserves is some function of the 

discounted present value of expected future tax rate (z) and expected pre-tax net cash flow per 

BOE (v) . Thus, drilling behavioral equation is approximated with the following log-linear equation 

(6) for i= 1, 2, 3 (firms) and t= 1, 2, . . .N (time periods), and p represents the random error term. 
31 

127 Xit - ROA + r' liln X~t + P2i1n zit + P3i1n vac + pit 

4.4 - Model Estimation 

The databases we developed to estimate the equations (5) and (6) contain pooled observations over 

the period 1978-1992 for the Gulf of Mexico OCS region . Three categories of firms were used--

majors, large and smaller independents--to form the cross-section. Data sources and description of 

model variables are summarized in Table 4. Given the panel nature of the database developed, 

equations (5) and (6) cannot be estimated unless a variety of restrictive assumptions regarding the 

disturbance terms and regression coefficients are invoked. Such restrictions form the basis of the 

special pooling techniques and procedures discussed extensively in Pindyck and Rubinfeld (1991), 

Madalla (1977) and Gujarati (1988) . 

4.4.1- Empirical Results and Analysis: Pooled ordinary least squares (OLS) estimates of equation 

(5) using the covariance pooling technique (CAT)2 are presented in Table 5 for the Gulf of Mexico 

OCS region. Column A in Table 5 represents OLS estimates of an unrestricted version of the loglinear approximation of equation (3), which is equivalent to estimating a separate equation for each 

firm. 

The empirical equation presented in column (A) of Table 5 which describes the effectiveness of 

drilling in adding new reserves in the Gulf of Mexico OCS region has satisfactory descriptive 

statistics . More than 75 percent of the variation in the effectiveness of drilling at adding new 

reserves is explained by the equation. The coefficients of firm-size/resource-depletion interaction 

in the find-rate equation have the expected signs, and are statistically significant. The standard error 

of the regression is less than three percent of the mean of the dependent variable. 

Several hypotheses were performed on the regression results including a F-test for homogeneity of 

the regression--a common intercept and common slope test : 

HO :a,=a =a,2=a,3;a2=a2,=a22=a23 ;a,=aI I -CC 1z-(X 13 

There is enough statistical evidence to reject the null hypothesis of homogeneity in the regression 

equation . The intercept dummies are statistically significant and are different for firms of different 

sizes. 

Z The covariance analysis technique (CAT) is the oldest method of allowing for cross-sectional differences or 

intertemporal differences when pooling cross-section time series data . The restrictive assumptions underlying this 

procedure for pooling are 1) some of the slope coefficients are equal and stochastic and 2) the intercepts are different 

(at least for one of the individual cross-section) and stochastic . Usually the CAT estimator is unbiased and consistent, 

but it may be inefficient if the error term is correlated over time and/or over the cross section. See Madalla (1977), 

Gujarati (1988) and Pindyck and Rubinfeld (1991) for discussions of pooling techniques and procedures . 
32 

Table 4. Descriptions of Model Variables and Data Sources 

x Total exploratory and development footage drilled (000 Ft.) . Source : Computed for firms 

of different sizes from MMS Borehole data file . 

X Proxy variable for resource depletion. Measured as previous year-end cumulative total 

footage drilled (Million Ft.) . The series is calculated as the sum of past years' total footage 

drilled since 1978 . 

y Drilling effectiveness (find rate), BOE/FT ( 1 Mcf = 0.18 BOE). Calculated as the three-year 

moving average of recoverable-hydrocarbon-reserve-additions per foot of successful wells 

completed lagged one year. 

v Pre-tax cash flow, $/BOE. The series is calculated for firms of different sizes from several 

issues of the Arthur Anderson's survey of reserve disclosure. We measured "v" as the 

discounted future pre-tax net cash flows of recoverable reserves. The series is deflated using 

the PPI (1982=100). 

z Proxy variable for cash flow reduction to operators, $/Mcf. The series is calculated as the 

difference between discounted pre-tax net cash flows and discounted post-tax net cash flows. 

The series is deflated using PPI (1982=100) . 

T Percent of total drilling effort that successfully adds new reserves--a proxy variable for 

technical progress . Measured as a three-year moving average of successful drilling footage 

divided by a three-year moving average of total drilling footage. 

D, Dummy variable (intercept) for major operators on the Gulf OCS. 

DZ Dummy variable (intercept) for large independent operators. 

D3 Dummy variable (intercept) for smaller independent operators. 
33 

Table 5 . Estimated Mode Equations for Drilling and Drilling Effectiveness a 

Parameters 

Drilling 

Effectiveness 

(A) =1n y 

Drilling 

Effort 

(B) = In x 

D, 7 .246 32.681 

(8 .468) (4 .209) 

D2 5 .403 21 .526 

(4 .844) (3 .455) 

D3 7 .016 28.042 

(27.12) (3 .619) 

D,X -0 .015 

(4 .152) 

DZX -0 .040 

(3 .595) 

D3X -0 .078 

(2 .832) 

D, In X -2.171 

(3 .377) 

DZ In X -1 .271 

(2.269) 

In X -2.221 

(3 .010) 

D,T -2.199 

(1 .322) 

DZT 1 .991 

(0.769) 

D3T -1 .868 

(1 .488) 

D, In z -0.856 

(1 .737) 

D, In z -1 .620 

(2.958) 

D, In z -1 .333 

(2 .146) 

In v 0.417 

(1 .750) 

Descriptive Statistics : 

Degrees of Freedom 21 17 

Adjusted RZ 0 .762 0 .925 

S.E.R 0 .156 0 .222 

Error of the Mean 0 .028 0 .032 

aThe absolute t values are in parentheses below the regression coefficients. 
34 

The negative and significant coefficients of cumulative drilling footage--a proxy variable for 

resource depletion facing each firm size--provide a strong statistical evidence of diminishing returns 

in drilling outcomes as drilling progresses . A Wald test of coefficient restrictions indicates 

statistically identical (99 percent confidence) effects of resource depletion on the hydrocarbon 

finding rate for large independents and smaller independents . But the test indicates that the effects 

of resource depletion on find rate for all independents and the majors are not statistically identical. 

The majors are more negatively affected by resource depletion in their search for petroleum in 

mature petroleum basins like the Gulf of Mexico than are the independents. 

Statistical tests on the individual coefficients of the total success ratio--the proxy for technical 

progress--show the three coefficients to be insignificant at the 5 percent level. However, a Wald test 

of coefficient restrictions on equation (5) shows some statistical evidence to reject the null 

hypothesis : 

Ho: a =a,2=a,3=0 

That is, there is some statistical evidence to suggest that changes in technology affects the find rate 

of new reserves among firms of different sizes operating on the Gulf of Mexico OCS. In addition, 

the test also shows we cannot reject the null hypothesis of equality in the coefficients of technical 

progress among firms of different sizes. Thus, there is no statistical evidence that the effect of the 

aggregate success ratio on the hydrocarbon find rate differs among firms of different sizes operating 

on the Gulf OCS. 

The second column in Table 5 presents estimates of a restricted version of equation (6) which relates 

firms' drilling effort to economic incentives--pre-tax net cash flow, effective tax rate and resource 

depletion. The restricted OLS estimates of equation (6) reported in column B of Table 5 show good 

statistical properties . The adjusted RZ is 0.922. The standard error of regression, 0.227, represents 

3 percent of the mean of the dependent variable. All the estimated coefficients have the expected 

signs, and are statistically significant at a 5 percent level, with the exception of the coefficient of the 

pre-tax cash flow which is only significant at the 10 percent level. 

Several hypotheses were tested using the unrestricted OLS estimates of equation (6). The null 

hypothesis of common slopes and common intercept at the 5 percent level of significance is rejected. 

There is strong evidence to reject homogeneity of the regression using the F-test . A Wald test of 

coefficient restrictions on the estimated equation shows no statistical evidence, at 95 percent 

confidence level, to reject the null hypothesis : 

H0: F'31 - I'32 - P33 - 1'3 

Thus, the test results suggest some statistical evidence that drilling responsiveness to pre-tax cash 

flows may be the same for firm of different sizes. The test also shows a dissimilarity in the 

responsiveness of drilling effort to the average tax rate among firms of different sizes in the 1980s. 
35 

The large independent firms on average have a more negatively elastic drilling response to average 

effective tax rate than the majors which have a negative inelastic drilling response to taxes and the 

smaller independents . It is noted, however, that the drilling response to economic incentives among 

firms of different sizes is only marginally significant at the 10 percent level in the Gulf OCS region 

according to our empirical results. The empirical results further suggest a rather striking difference 

in the negative response of drilling to resource depletion among the majors and large independents 

than the statistical difference observed between the smaller independents and the majors . In general, 

however, drilling responsiveness among firms of different sizes is negatively elastic to recoverable 

resource depletion. 

4.4.2 - Economic Interpretation of the Empirical Results : The relative importance of the effects 

of economic incentives, taxation policy and resource depletion on drilling effort by firms of different 

sizes operating on the Gulf OCS can be compared using the concept of elasticity. Elasticity, by 

definition, is simply a measure of the effect of a percent change in one explanatory variable on a 

dependent variable, ceteris paribus. Table 6 presents empirical estimates of the elasticity of drilling 

and find rate with respect to economic incentives, taxes and depletion in the Gulf of Mexico OCS 

region. 

In general, if a variable Y is log-linearly related to an independent variable X such that : In Y = a + 

c In X. then, the elasticity of Y with respect to X equals c. Thus, the coefficients of the three drilling 

regression results presented in Column B of Table 6 provide a direct measure of drilling elasticity 

for firms of different sizes operating on the Gulf OCS. The large independent firms on average has 

a more negatively elastic drilling response to average effective tax rate than the majors which has 

a negative inelastic drilling responsiveness to taxes and the smaller independents with a negative 

elastic drilling response to taxes on the Gulf OCS. Estimates of drilling elasticity with respect to 

economic incentives among firms of different sizes were found to be statistically identical, whereas 

Table 6 shows a statistically significant drilling elastic response to depletion for firms of different 

sizes in the Gulf region . 

The estimated responsiveness of find-rate to the growing maturity of the Gulf of Mexico in Table 

6 is derived as the product of the coefficient of the majors' cumulative drilling effort in the estimated 

find-rate regression times the current cumulative effort for the period . In other words, if a variable 

Y is related to another variable X such that Y = aepX, then the elasticity of Y with respect to X equals 

(3*X. 

As shown in Table 6, the effectiveness of the majors in adding more new reserves per drilling effort 

seem to be more negatively affected with cumulative drilling than it is for either the large or smaller 

independents . The majors' effectiveness in adding new reserves is significantly elastic with respect 

to cumulative drilling--a proxy for basin maturity, whereas the large and smaller independents' 

effectiveness is significantly inelastic in the Gulf OCS. 
36 

Table 6 . Estimated Elasticity of Drilling Effort and Drilling Effectiveness 

Firm Type/ Drilling Drilling 

Exogenous Effectiveness Effort 

Variable 

MAJORS: 

Economic Incentives n/a 0 .417 

Effective Tax Rate n/a -0.856 

Depletion -1 .117 -0.457 

LARGE FIRMS : 

Economic Incentives n/a 0 .417 

Effective Tax Rate n/a -1 .620 

Depletion -0.985 -1 .271 

SMALLER FIRMS : 

Economic Incentives n/a 0.417 

Effective Tax Rate n/a -1 .333 

Depletion -0.794 -2 .974 
37 

5. SUMMARY AND CONCLUSIONS 

The primary objective of this project is to discern and quantify any differences in the performance 

of firms of different sizes (majors, large and smaller independents) in their search for and 

development of petroleum resources on the Gulf of Mexico OCS. The motivation for the project 

is to evaluate the widespread apprehension that if the independents were to play a larger role in the 

search for and development of hydrocarbon resources on the OCS, resources would be less 

aggressively and less efficiently developed. 

The simple descriptive statistics of upstream oil and gas industry indicators we developed indicate 

that independents have been both more aggressive and successful than the majors in exploration, 

while the majors have been moderately more successful than independents in development drilling 

on the OCS. In the aggregate, both the large and smaller independents have been at least marginally 

more effective than the majors in adding hydrocarbon reserves per successful foot drilled. 

On average, for every foot of successful well drilled by the majors on the OCS 227 barrels of oil 

equivalent (BOE) of new hydrocarbon reserves were added to original recoverable hydrocarbons 

in place during the period 1983-1992. Whereas the large independents added 242 BOE while 

smaller independents added 312 BOE of hydrocarbons for every foot of successful wells drilled 

during the same period. If drilling effectiveness were calculated using total footage drilled in the 

denominator rather than successful footage drilled, the difference narrows. Majors added 106 BOE 

per foot drilled while large independents added 104 BOE per foot and smaller independents 125 

BOE per foot drilled. 

To investigate these differences more carefully, we developed a hydrocarbon model of reserve 

additions on the Gulf of Mexico OCS. The hydrocarbon model views drilling as the primary means 

of generating new reserve additions, subject to resource availability, economic and policy incentives, 

cumulative geological knowledge, and technical progress . The model is estimated using pooled, 

cross-section (majors, large and smaller independents) and time series data (for the period 1978 

through 1992) . 

Empirical estimates of the hydrocarbon model confirm the inferences drawn from descriptive 

analysis of MMS data on drilling effort and outcomes and do not support the expectation that 

hydrocarbon resources in the Gulf OCS would be developed less aggressively or less efficiently if 

independents were to play a progressively larger role . Our results provide no statistical evidence to 

suggest any differences among firms of different sizes in the effect of technical progress--measured 

by movements in aggregate success ratio--on the gross find-rate on new hydrocarbon reserves on the 

Gulf OCS. 

Moreover, there is no statistical evidence of any significant difference in the responsiveness of the 

gross find-rate of new reserves to technical progress for majors and independents in their search for 

hydrocarbon. But the growing maturity of the Gulf of Mexico OCS) affects more negatively the 

majors' effectiveness in adding new reserves than it affects the large and smaller independents . 
38 

According to our empirical results, there is no statistical difference among firms of different sizes 

in the responsiveness of drilling effort on the OCS to pre-tax net cash flow (economic incentives) . 

However, the OLS estimates of the hydrocarbon drilling equation suggest a negatively elastic 

response of drilling to higher effective tax rates among the independents and an inelastic drilling 

response to taxes among the majors. There is a strong evidence in the empirical results to support 

expectations of a positively inelastic response of drilling effort to an increase in economic incentives . 

In addition, the results show that drilling response to resource depletion is more negatively elastic 

for the majors than it is for the independents . 
39 

REFERENCES 

Adelman, M., J Houghton, G. Kaufmann, and M. Zimmerman. 1983 . Energy resources in an 

uncertain future . Cambridge, Massachusetts: Ballinger Publishing Co. 

Arps, J. J. and T. G. Roberts. 1958 . Economics of drilling for cretaceous oil on east flank of 

Denver-Julesberg basin. Bulletin of the American Association of Petroleum Geologists . 

42 (11):2549-2566. 

Arthur Anderson and Co. 1984, 1990 and 1993 . Oil and gas disclosure reports. Some interpolation 

by authors to adjust for changes in the reporting format . 

Attanasi, E. D., L. J. Drew, and D. H. Root. 1981 . Physical variables and the petroleum discovery 

process. In: Ramsey, J., ed. The economics of exploration for energy resources . Greenwich, 

Connecticut: JAI Press. 

Cleveland, C. and R. Kaufinann. 1991 . Forecasting ultimate oil recovery and its rate of production : 

incorporating economic forces into the models of M. King Hubbert. The Energy Journal . 

12 (2) : 17-46. 

Deacon, R. T., S . DeCando, H. Frech, III, and M. Johnson. 1990. Taxing energy : Oil severance 

taxation and the economy, New York, New York: Holmes and Meier. 

Drew, L. J., J . H. Schuenemeyer, and D. H. Root. 1980. Petroleum-resource appraisal and 

discovery rate forecasting in partially explored regions - An application to Denver Basin. 

Geological Survey Professional paper 1138-A . Washington, DC : U.S . Government 

Printing Office . 

Eckbo, P., H. Jacoby, and J. Smith. 1978 . Oil supply forecasting: A disaggregated approach. 

Bell Journal of Economics and Management Science. 9 (1):218-35. 

Erickson, E. W. and R. M. Spann. 1971 . Supply response in a regulated industry : The case of 

natural gas. Bell Journal of Economic and Management Science . 2 (1) :94-121 . 

Fan, A. 1995 . Oryx plans to slash $400 million in debt, switch focus to domestic production. The 

Oil Daily. 45 (13):1 . 

Gachter, R. A. 1993 . Gulf of Mexico update : August 1989-June 1992. Gas Energy Review. March 

14-19 

Gujarati, D. 1988 . Basic econometrics . New York, New York: McGraw Hill, Inc. 
40 

Hubbert, M. K. 1974. Energy resources--A review as of 1972 . Committee on Interior and 

Insular Affairs. U.S . Senate, Serial No.93-40 (92-75) . Washington, DC : U.S . Government 

Printing Office . 

Iledare, O. 1990. Modeling the supply response of energy resources : The Case of non associated 

natural gas in West Virginia . Unpublished Ph.D. dissertation . West Virginia University, 

Morgantown, West Virginia. 

Khazzoom, J. D. 1971 . The FPC staffs econometric model of natural gas supply in the U.S . Bell 

Journal of Economics and Management Science. 2 (1): 51-93. 

Kim, Y. Y. and R. Thompson. 1978 . An economic model--new oil and gas supplies in the lower 

48 states . Houston, Texas : Gulf Publishing Co. 

MacAvoy, P. W. and R. S. Pindyck. 1973 Alternative regulatory policies for dealing with the 

natural gas shortage . Bell Journal of Economics and Management Science. 4 (2): 454-98 . 

Madalla, G. S. 1977. Econometrics. New York, New York : McGraw-Hill Book Co . 

Pindyck, R. S. 1978a. Higher energy prices and the supply of natural gas. Energy Systems and 

Policy . 2 (2):177-207 . 

Pindyck, R. S. 1978b. The optimal exploration and production of non-renewable resources . 

Journal of Political Economy. 86:841-862. 

Pindyck, R. S. and D. L. Rubinfeld . 1991 . Econometric models and economic forecasts (3rd 

edition). New York, New York: McGraw Hill Publishing Co. 

Porter, E. D. 1992. U.S . petroleum supply : History, prospects, and policy implications . Research 

Study #064. Washington, DC: American Petroleum Institute (API) . 

Trench, C. 1994 . The future of U. S . oil and gas . Oxford Energy Forum. August 1994. pp . 2-4 . 

Walls, M. A. 1992. "Modeling and forecasting the supply of oil and gas : A survey of existing 

approaches. Resources and Energy. 14:287-309. 

Walls, M. A. 1994. Using 'hybrid' approach to model oil and gas supply : Case study of the Gulf 

of Mexico Outer Continental Shelf. Land Economics. 70 (1):1-19 . 

Walsh, C. 1994. Independent oil firms to take lead as new round of acquisitions begins . The Oil 

Daily. 14 (3):3 . 
41 

Appendix A. List of OCS Operators Included in the Report 

MMS Code Operator Name Classification 

1 Conoco Inc . Major 

2 Atlantic Richfield Company Major 

3 Union Oil Company of California Major 

5 Four Star Oil & Gas Company Small 

8 Ocean Drilling & Exploration Company Large 

12 Freeport Minerals Company Large 

23 Homestake Sulphur Company Small 

35 Kerr-McGee Corporation Large 

39 Mobil Oil Corporation Major 

40 Texaco Inc. Major 

47 The Superior Oil Company Major 

48 Forest Oil Corporation Small 

56 Phillips Petroleum Company Major 

59 Amerada Hess Corporation Major 

64 Hunt Oil Company Large 

66 Placid Oil Company Small 

70 CSX Oil & Gas Corporation Small 

71 Pennzoil Producing Company Major 

73 General American Oil Company of Texas Small 

78 Chevron U.S .A . Inc. Major 

81 Tenneco Oil Company Major 

83 The Louisiana Land and Exploration Company Large 

105 Apache Corporation Large 

112 Gulf Oil Corporation Major 

114 Amoco Production Company Major 

115 Marathon Petroleum Company Major 

117 Shell Oil Company Major 

128 Elf Aquitaine, Inc. Large 

131 Southland Royalty Company Small 

134 General Crude Oil Company Small 

144 Diamond Chemicals Company Large 

148 Union Pacific Resources Company Large 

161 Hamilton Brothers Oil Company Small 

162 Agip Petroleum Co. Inc. Large 

167 Pennzoil Company Major 

170 Anadarko Production Company Large 

185 Samedan Oil Corporation Large 

222 Columbia Gas Development Corporation Large 

227 Belco Petroleum Corporation Small 
42 Appendix A (contd .) 

231 Pogo Producing Company Small 

232 Odeco Oil & Gas Company Large 

233 Mesa Petroleum Co. Large 

236 SONAT Exploration Company Large 

240 ANR Production Company Large 

245 C & K Offshore Company Small 

250 ORYX ENERGY COMPANY Large 

274 Transco Exploration Company Large 

276 Exxon Corporation Major 

278 Texas Pacific Oil Company, Inc . Small 

282 CNG Producing Company Large 

295 Koch Industries, Inc. Large 

298 Quintana Offshore, Inc. Small 

333 Enron Corp. Large 

334 Houston Oil & Minerals Corporation Small 

346 Oxy Petroleum, Inc. Major 

353 Eason Oil Company Small 

362 BHP Petroleum (Americas) Inc. Large 

369 CanadianOxy Offshore Production Co. Large 

376 Pelto Oil Company Small 

403 Challenger Minerals Inc. Large 

407 Santa Fe Minerals, Inc. Small 

415 Energy Development Corporation Large 

418 AminoilInc . Small 

420 Rutherford Oil Corporation Small 

428 McMoRan Oil & Gas Co. Large 

457 Ashland Exploration, Inc. Large 

464 Zapata Exploration Company Large 

477 McMoRan Offshore Production Co. Large 

479 Natomas Offshore Exploration, Inc. Small 

481 Petrofina Delaware, Incorporated Large 

491 Coastal Oil & Gas Corporation Large 

538 Corpus Christi Oil and Gas Company Small 

539 MidCon Exploration Company - Gulf Coast Small 

540 MOBIL OIL EXPLORATION & PRODUCING SOUTHEAST INC . Major 

560 Seneca Resources Corporation Large 

565 Mobil Producing Texas & New Mexico Inc. Major 

582 PG&E Resources Offshore Company Large 

583 BelNorth Petroleum Corporation Small 

593 BP Exploration Inc. Major 

623 MTS Limited Partnership Small 

641 Tomlinson Offshore, Inc. Small 
Appendix A (contd .) 

644 C & K Offshore Company Small 

655 Ranger Oil Company Small 

659 Mark Producing, Inc. Small 

672 Seagull Energy E&P Inc. Large 

677 Howell Petroleum Corporation Small 

683 Union Texas International Corporation Large 

687 CXY Energy Inc. Large 

689 Shell Offshore Inc. Major 

722 Koch Exploration Company Large 

724 Marathon Oil Company Major 

730 Walter Oil & Gas Corporation Small 

748 DelMar Operating, Inc. Small 

762 Genesis Petroleum Corporation Small 

768 BHP Petroleum Company Inc. Large 

771 Texaco Exploration and Production Inc. Major 

774 Taylor Energy Company Small 

777 OXY USA Inc. Major 

780 Quintana Petroleum Corporation Small 

784 Santa Fe International Corporation Large 

788 Phillips Oil Company Major 

800 TXP Operating Company Large 

803 Hunt Petroleum Corporation Large 

805 Rosewood Resources, Inc. Small 

818 Hardy Oil & Gas USA Inc. Small 

822 Maxus Exploration Company Large 

828 Cockrell Oil Corporation Small 

846 Hall-Houston Oil Company Small 

888 KIRBY EXPLORATION COMPANY OF TEXAS Small 

898 TOTAL MINATOME CORPORATION Small 

915 Mitchell Energy Corporation Large 

926 LLOXY Holdings, Inc. Small 

962 EP Operating Limited Partnership Small 

963 FMP Operating Company, a Limited Partnership Large 

967 Atlantic Richfield Company Major 

968 Union Texas Petroleum Corporation Large 

981 Anadarko Petroleum Corporation Large 

985 Union Exploration Partners, Ltd. Major 

986 Japex (U.S .) Corp. Large 

992 Diamond Shamrock Offshore Partners Limited Partnership Large 

1001 IP Petroleum Company, Inc. Small 

1006 Hughes-Denny Offshore Exploration, Inc. Small 

1022 Sun Operating Limited Partnership Large 

43 
44 Appendix A (contd .) 

1023 Adobe Resources Corporation Large 

1026 Mesa Operating Limited Partnership Large 

1029 TXO Production Corp. Small 

1035 Santa Fe Energy Operating Partners, L.P . Large 

1046 Brooklyn Union Exploration Company, Inc. Large 

1055 Mobil Exploration and Producing North America Inc. Major 

1071 Conn Energy, Inc. Small 

1072 Cliffs Oil and Gas Company Small 

1082 Freeport-McMoRan Resources Partners, Limited Partnership Large 

1089 Norcen Explorer, Inc. Small 

1091 Gulfstream Resources, Inc. Small 

1099 Torch Operating Company Small 

1102 Century Offshore Management Corporation Small 

1103 Enron Oil & Gas Company Large 

1104 Wintershall Corporation Small 

1108 Sandefer Offshore Operating Co. Small 

1112 Ampolex (Texas), Inc . Small 

1116 Conquest Exploration Company Small 

1123 Raintree Resources, Inc. Small 

1131 American Exploration Company Small 

1138 Zilkha Energy Company Small 

1139 King Ranch Oil and Gas, Inc. Small 

1143 Offshore Development Interests Inc. Small 

1151 NCX Company, Inc. Small 

1154 Partners Oil Company Small 

1158 Gas Transportation Corp. Small 

1160 Nippon Oil Exploration Offshore U.S ., Ltd. Large 

1173 Wolverine Exploration Company Small 

1185 Aviva America, Inc. Small 

1187 Great Western Offshore Inc. Small 

1194 Pel-Tex Oil Company Small 

1207 Petrobras America Inc. Large 

1210 Wacker Oil Inc. Small 

1211 Aquila Energy Corporation Small 

1217 AEDC (USA) INC. Small 

1225 Wayman W. Buchanan, Inc. Small 

1226 The Stone Petroleum Corporation Small 

1241 Washington Energy Exploration, Inc . Small 

1245 Hughes Eastern Petroleum, Inc . Small 

1246 Senior - G & A Operating Company, Inc. Small 

1247 Aran Energy Corporation Small 

1254 Pilgrim Exploration Corp. Small 
Appendix A (contd .) 

1257 Neomar Resources, Inc. Small 

1259 First Energy Corporation Large 

1279 Gulfstar Operating Company Small 

1283 Offshore Energy Development Corporation Small 

1284 W & T Offshore, Inc. Small 

1291 Pennzoil Exploration and Production Company Major 

1295 Falcon Offshore Operating Company Small 

1316 Flash Gas & Oil Southwest, Inc. Small 

1324 B T Operating Co. Small 

1334 NERCO Oil & Gas, Inc. Large 

1344 Seastar Energy Corporation Small 

1351 General Atlantic Resources, Inc. Small 

1364 Newfield Exploration Company Small 

1370 TransTex Resources, Inc. Small 

1374 Transco Exploration and Production Company Large 

1376 Linder Oil Company, A Partnership Small 

1379 Brock Minerals Corporation Small 

1385 Chieftain International (U.S .) Inc. Large 

1405 Pogo Gulf Coast, Ltd. Small 

1407 Tatham Offshore, Inc. Small 

1444 Torch Oil & Gas Company Small 

1482 Nippon Oil Exploration U.S .A . Limited Large 

1489 BG Exploration America, Inc. Small 

1500 Elf Exploration, Inc. Large 

1509 Global Marine Oil & Gas Company Large 

1512 Aquila Energy Resources Corporation Small 

1523 Levinson Partners Corporation Small 

1531 Freeport-McMoRan Oil & Gas Company Large 

1548 Tana Oil and Gas Corporation Small 

1550 Unocal Exploration Corporation Major 

1551 Santa Fe Energy Resources, Inc. Large 

1570 Greenhill Petroleum Corporation Small 

1578 British-Borneo Exploration, Inc. Large 

1586 Petsec Energy Inc. Small 

1597 Freeport-McMoRan Inc. Large 

1601 Gulfstar Energy, Inc. Small 

1605 SEKCO Energy, Inc. Small 

1624 Trade & Development Corporation Small 

1626 Pan Petroleum Master Limited Partnership Small 

1643 UMC Petroleum Corporation Small 

1663 Ivory Production Co Small 

1673 SCANA Petroleum Resources, Inc. Small 

45 
46 Appendix A (contd .) 

1674 Louis Dreyfus Reserves Corp. Small 

1680 BP Exploration & Oil Inc. Major 

1687 Matrix Oil & Gas, Inc. Small 

1689 Murphy Exploration & Production Company Large 

1701 Midcon Offshore, Inc. Small 

1728 Shell Frontier Oil & Gas Inc. Major 

1750 Pennzoil Petroleum Company Major 

1758 Offshore Production & Salvage, Inc. Small 

1759 Forcenergy Gas Exploration, Inc. Small 

1764 Energy Resource Technology, Inc. Small 

1767 OEDC Exploration & Production, L.P . Small 

1777 Flores & Rucks, Inc. Small 

1787 Entre Energy Corporation Small 

1815 Santa Fe Minerals, Inc. Small 

1818 Ashlawn Energy, Inc. Small 

1819 ATP Oil & Gas Corporation Small 

1832 Forcenergy Gas Exploration, Inc. Small 

1855 Vastar Resources, Inc. Large 
QPQS~ENT OFTy~' The Department of the Interior Mission 

Z 

As the Nation's principal conservation agency, the Department of the Interior has responsibility for 

most of our nationally owned public lands and natural resources. This includes fostering sound use 

of our land and water resources; protecting our fish, wildlife, and biological diversity; preserving the 

_ a9 environmental and cultural values of our national parks and historical places; and providing for the 

4ACH 3 ~9 enjoyment of life through outdoor recreation . The Department assesses our energy and mineral 

resources and works to ensure that their development is in the best interests of all our people by 

encouraging stewardship and citizen participation in their care. The Department also has a major 

responsibility for American Indian reservation communities and for people who live in island territories 

under U.S . administration . 

The Minerals Management Service Mission 

` As a bureau of the Department of the Interior , the Minerals Management Service's (MMS) p rima ry 

res p onsibilities are to ma nage th e m i nera l resources l oca t e d on th e N at i on ' s Outer Continental Shelf 

(OCS), collect revenue from the Federal OCS and onshore Federal and Indian lands, and distribute 

s 's c4' ~ ~ ~ those revenues . 

Moreover, in working to meet its responsibilities, the Offshore Minerals Management Program 

administers the OCS competitive leasing program and oversees the safe and environmentally sound 

exploration and production of our Nation's offshore natural gas, oil and other mineral resources. The 

MMS Royalty Management Program meets its responsibilities by ensuring the efficient, timely and 

accurate collection and disbursement of revenue from mineral leasing and production due to Indian 

tribes and allottees, States and the U.S . Treasury . 

The MMS strives to fulfill its responsibilities through the general guiding principles of: (1) being 

responsive to the public's concerns and interests by maintaining a dialogue with all potentially affected 

parties and (2) carrying out its programs with an emphasis on working to enhance the quality of life for 

all Americans by lending MMS assistance and expertise to economic development and environmental 

protection.