ACCESS NUMBER: 30660-19906 

STUDY TITLE: Modeling the Structure and Performance of Integrated and Independent 

Producers in the Gulf of Mexico OCS Region 

REPORT TITLE: Modeling the Structure and Performance of Integrated and 

Independent Producers in the Gulf of Mexico OCS Region 

CONTRACT NUMBER: 14-35-0001-30660-19906 

SPONSORING OCS REGION: Gulf of Mexico 

APPLICABLE PLANNING AREA(S): Central Gulf of Mexico 

FISCAL YEAR OF PROJECT FUNDING: 1994 

COMPLETION DATE OF REPORT: July 1995 

COSTS: FY 1994: $52,744; CUMULATIVE PROJECT COST: $52,744 

PROGRAM MANAGER: Allan G. Pulsipher 

AFFILIATION: Louisiana State University Center for Energy Studies 

ADDRESS: One East Fraternity Circle, Baton Rouge, LA 70803-0301 

PRINCIPAL INVESTIGATORS*: A. G. Pulsipher, O. O. Iledare and R. H. Baumann 

KEY WORDS: Independents, Majors, Gulf of Mexico, Reserve Additions, Drilling 

Effectiveness, Performance, Drilling Effort, Hydrocarbon Model 

BACKGROUND: 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 exploration and 

production (E&P) significantly--especially on the OCS? The apprehension is 

widespread within both industry and government circles that such a shift from the 

majors to the independents could cause domestic oil and gas resources to be 

developed less from the majors to the independents could cause domestic oil and gas 

resources to be developed less aggressively and/or less efficiently. This project 

addresses such concerns by attempting to analyze the trend in domestic and foreign 

(E&P) activity and outcomes, and to discern and quantify differences in behavior and 

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

on the Gulf of Mexico OCS Region. 

OBJECTIVES: To develop econometric models capable of ascertaining if there are 

significant differences between the majors and independents as reflected in drilling 

efficiency and drilling success. To exercise these models to make estimates of the 

consequences of the shift in exploratory and development focus among firms of 
ACCESS NUMBER: 30660-19906 

different sizes. 

DESCRIPTION: 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: Majors are integrated companies with more 

than 1 billion BOE in petroleum reserves worldwide. 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. 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. 

Operating and performance data on domestic and foreign exploration and development 

expenditures (E&D), oil production, gas production, oil and gas reserve additions, 

hydrocarbon replacement ration, reserve purchase cost, finding costs and expenditure 

effectiveness for individual domestic oil and gas companies were analyzed to 

characterize the trends in domestic and foreign E&P activity and success over the 1987 

to 1992 period. In addition we derived, organized and analyzed industry activity 

indicators and performance measures to characterize the behavior and performance of 

majors and different groups of independents over the past decade. Subsequently, each 

group of operators was compared in terms of its 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. 

SIGNIFICANT CONCLUSIONS: Majors and large independents appear to have been 

about equally enamored of foreign E&P prospects and have responded to them in a 

similar way. Both descriptive and econometric analyses provided little evidence to 

support the apprehension that hydrocarbon resources would be less aggressively or 

less efficiently developed if the role of independents in resource development in the 

region increases. Empirical estimates from our hydrocarbon model suggest that the 

growing maturity of the Gulf of Mexico more negatively affected reserve additions per 

effort among the majors than it affected the independents. The results also provide 

evidence of a negatively elastic drilling response to taxes among the independents but a 

negatively inelastic drilling response among the majors. We found no evidence of 

significant differences in the responsiveness of drilling effectiveness to technical 

progress and our results indicate that the independents respond to economic incentives 

in the same way as do the majors. 

STUDY RESULTS: The trends in E&D expenditures, which have been frequently used 

to describe the apparent “take over” of domestic oil and gas activities by the 

independents seem clear and dramatic. Over the period 1987 to 1992, the domestic 

E&D expenditures by the majors declined 34 percent while those by the independents 

increased by about 12 percent. However, data on E&D spending on foreign prospects 

indicate that both the majors and the independents have responded aggressively to 
ACCESS NUMBER: 30660-19906 

opportunities abroad. Foreign E&D expenditures by the majors increased by an 

impressive 113 percent, while expenditures abroad by the independents also increased 

by a healthy 73 percent. The differences in expenditure effectiveness between the two 

groups of firms seem to narrow with time and the averages have become too close over 

the last three years to support any generalizations about differences in effectiveness--

regarding domestic and foreign activity. 

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

developed indicate that independents have been both more aggressive and more 

successful than the majors in exploration, while the majors have only 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 independents added 

265 BOE (large independents added 242 BOE while smaller independents added 312 

BOE) of hydrocarbons for every foot of successful wells drilled during the same period. 

However, 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 independents as a group added 111 BOE. But 

within the independent classification, large independents added 104 BOE per foot and 

smaller independents 125 BOE per foot drilled. 

We found that the large independent firms on average have a negatively elastic drilling 

response of -1.62 to changes in the average effective tax rate compared to negative 

inelastic drilling response of -0.86 by the majors to taxes. The smaller independents 

have a negative elastic drilling response of -1.33 to taxes. A point estimate of drilling 

elasticity with respect to economic incentives among firms of different sizes was found 

to be statistically identical (0.42) in the Gulf OCS region. The effectiveness of the 

majors in adding new reserves per drilling effort seems to be more negatively affected 

by resource depletion than is the case for either the large or smaller independents. The 

response of drilling effectiveness to depletion among the majors is significantly elastic, 

whereas the effectiveness among the large and smaller independents is significantly 

inelastic in the region. 

STUDY PRODUCTS: Pulsipher, Allan G.; Iledare, O. O.; and Baumann, R. H. (1994), 

Modeling the structure and performance of integrated and independent producers; 

implications for offshore oil and gas development. Annual Report Submitted to Minerals 

Management Service, New Orleans, LA. November 16. 

Iledare, O. O.; Pulsipher A. G.; and Baumann, R. H. (1994). Firm Size and the 

development of petroleum resources on the U.S. Gulf of Mexico. Proceeding, 16th 

USAEE/IAEE Annual North American Conference, Dallas, TX, November 6-9. 

Iledare, O. O.; Pulsipher, A. G.; and Baumann, R. H. (1995). Effects of an increasing 
ACCESS NUMBER: 30660-19906 

role for independents on petroleum resource development on the Gulf of Mexico OCS. 

Then Energy Journal 16(2), pp. 59-76. 

*P.I.'s affiliation may be different than that listed for Program Managers.