OCS Study 

MMS 2003-004 

 

Dynamics of the Oil and Gas Industry 

in the Gulf of Mexico: 1980-2000 

Final Report 

U.S. Department of the Interior

Minerals Management Service 

Gulf of Mexico OCS Region 
U.S. Department of the Interior

Minerals Management Service 

Gulf of Mexico OCS Region 

OCS Study 

MMS 2003-004 

Dynamics of the Oil and Gas Industry 

in the Gulf of Mexico: 1980-2000 

Final Report 

Authors 

Barbara Wallace 

John Duberg 

James Kirkley 

Prepared under MMS Contract 

1435-01-00-CT-31058 

by 

TechLaw, Inc. 

4340 East West Highway 

Bethesda, Maryland 20814 

In cooperation with 

Energy History Research 

Midland, Texas 

Published by 

New Orleans

February 2003 
iii

OCS Study 

MMS 2003-004 

DISCLAIMER 

This report was prepared under contract between the Minerals Management Service 

(MMS) and TechLaw, Inc. This report has been technically reviewed by the MMS and it 

has been approved for publication. Approval does not signify that the contents 

necessarily reflect the views and policies of the Service, nor does mention of trade names 

or commercial products constitute endorsement or recommendation for use. 

REPORT AVAILABILITY 

Extra copies of this report may be obtained from the Public Information Office (Mail 

Stop 5034) at the following address: 

 U.S. Department of the Interior 

 Minerals Management Service 

 Gulf of Mexico OCS Region 

 Public Information Office (MS 5034) 

 1201 Elmwood Park Boulevard 

 New Orleans, Louisiana 70123-2394 

 Telephone: (504) 736-2519 or 

 1-800-200-GULF 

CITATION 

Suggested citation: 

Wallace, B., J. Duberg, and J. Kirkley. 2003. Dynamics of the oil and gas industry in the 

Gulf of Mexico: 1980-2000; Final Report. Prepared by TechLaw, Inc. U.S. 

Dept. of the Interior, Minerals Mgmt. Service, Gulf of Mexico OCS Region, New 

Orleans, LA. OCS Study MMS 2003-004. 193 pp. 

ACKNOWLEDGMENT 

TechLaw, Inc. gratefully acknowledges the significant contributions of Diana Olien and 

Roger Olien from Energy History Research who conducted the personal communication 

with industry for the study. 
v Table of Contents 

TABLE OF CONTENTS 

Page

List of Figures .................................................................................................................. vii 

List of Tables ..................................................................................................................... ix 

List of Abbreviations ........................................................................................................ xi 

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

1.1 Background and Objectives ....................................................................................1 

1.2 Findings and Implications of Industry Changes .....................................................1 

1.2.1 Oil and Natural Gas Price Change..................................................................1 

1.2.2 Corporate Organization and Strategy .............................................................2 

1.2.3 Crosscutting Themes and Implications ..........................................................2 

2.0 Introduction ...................................................................................................................5 

2.1 Background and Study Objectives ..........................................................................5 

2.2 Study Issues, Organizing Framework, and Methodology .......................................6 

2.3 Offshore Statistics, 1980-1999 ................................................................................9 

2.4 Time Line of Events Affecting the GOM Offshore Oil and Gas Industry, 

1980-2000 and Beyond..........................................................................................16 

3.0 Oil and Natural Gas Prices and Industry Ramifications .............................................33 

3.1 Time Line ..............................................................................................................33 

3.1.1 Oil Prices.......................................................................................................33 

3.1.2 Wellhead Natural Gas Prices .......................................................................33 

3.2 Economics and Finance: Oil and Natural Gas Prices ..........................................35 

3.2.1 Factors Affecting Domestic Prices ..............................................................35 

3.2.2 Price and the Global Market ........................................................................39 

3.2.3 Demand and Supply......................................................................................52 

3.2.4 Ownership Rights and U.S. Prices ...............................................................70 

3.2.5 Energy Prices and Effects on Finances and Capital Markets ......................72 

3.3 Technology ...........................................................................................................77 

3.3.1 Technology, Costs, Risk, and Oil Price Changes ........................................83 

3.3.2 Changes in Benchmark Oil Price Versus Market Prices for Oil...................87 

3.3.3 Oil Price Changes as a Driver of Technology .............................................90 

3.3.4 Prospects for Future Technology and Likely Relations to Oil Price ...........91 

3.4 Labor .....................................................................................................................95 

3.4.1 Oil Price Variability and Employment ........................................................96 

3.4.2 Natural Gas Price Variability and Employment ........................................101 

3.5 Regulatory Environment .....................................................................................101 

3.5.1 Gulf of Mexico Versus the Rest of the World ...........................................101 

3.5.2 Areas of Regulations Governing the Offshore Oil and Gas Industry ........107 

3.6 Sidebars................................................................................................................110

3.6.1 Results of Oil and Gas as a Reduced Share of Gross Domestic Product....110 

3.6.2 Oil as a Commodity ...................................................................................111 

3.6.3 Rise of Alternative Energy Sources ...........................................................112 

3.6.4 Change in “Limits to Growth” Mentality of the 1960’s and 1970’s...........113 
vi Table of Contents 

TABLE OF CONTENTS (cont’d) 

Page

4.0 Corporate Organization and Strategy ........................................................................115 

4.1 Time Line ............................................................................................................115 

4.2 Economics and Finance ......................................................................................115 

4.2.1 Traditional and Innovative Financial Methods ..........................................116 

4.2.2 Economics and Corporate Objectives: Leasing OCS Tracts, Exploration 

and Production ...........................................................................................124 

4.3 Technology .........................................................................................................127 

4.3.1 Approaches to Research and Development ...............................................128 

4.3.2 Industry-specific Technology ....................................................................131 

4.3.3 Digital Technology ....................................................................................137 

4.3.4 Technology and Its Effects on the Industry ...............................................141 

4.4 Labor ...................................................................................................................143 

4.4.1 Reduction in Force .....................................................................................143 

4.4.2 Reorganization of Work .............................................................................154 

4.4.3 Resulting Personnel Issues .........................................................................157 

4.4.4 Response to Personnel Issues......................................................................164 

4.5 Regulatory Environment .....................................................................................165 

4.5.1 Gulf of Mexico Leasing .............................................................................165 

4.5.2 Deep Water Royalty Relief Act .................................................................167 

4.6 Sidebars ...............................................................................................................168

4.6.1 Organizations Preoccupied with Consolidation .........................................168 

4.6.2 Oil Industry and the Energy Industry .........................................................168 

5.0 Crosscutting Themes and Impacts .............................................................................171 

5.1 Major Drivers of Change ....................................................................................171 

5.2 The Resurgence of the GOM ..............................................................................173 

5.3 Impacts of Change and Industry Dynamics: 1980-2000 ....................................174 

5.3.1 Industry ...................................................................................................174 

5.3.2 Socioeconomic Impacts ..........................................................................176 

5.3.3 Onshore and Offshore Impacts ...............................................................176 

Literature Cited ...............................................................................................................179 

Appendix A – Future Study Issues ................................................................................ A-1 

Appendix B – Current Dynamics of the Oil and Gas Industry: After 

September 11, 2001 ..................................................................................................B-1 
vii List of Figures 

LIST OF FIGURES 

Figure Page

1. Federal Offshore Oil Production, 1954-1999 ..............................................................10 

2. Federal Offshore Natural Gas Production, 1954-1999 ...............................................11 

3. Deepwater Oil Production, 1985-1999 .......................................................................12 

4. Deepwater Natural Gas Production, 1985-1999 .........................................................13 

5. Platform Installation and Removal, 1942-1999 ..........................................................15 

6. First Purchase Price of Petroleum and Wellhead Natural Gas Price, 1949-2000........34 

7. Simple Illustration of Market Price Determination ....................................................37 

8a. World Demand, Supply, and Price...............................................................................43 

8b. Domestic and Foreign Demand for Oil .......................................................................43 

9. Percent of U.S. Consumption Supplied by OPEC and Non-OPEC 

Nations, 1960-1999 .....................................................................................................46 

10. Nominal First Purchase Price, Crude, 1970-2000 ......................................................47 

11. Nominal Natural Gas Prices, Wellhead, 1949-2000 ...................................................50 

12. Petroleum Imports, OPEC and Non-OPEC, 1960-1999 .............................................54 

13. Percent of Crude Oil Production by Onshore and Offshore Operations, 

1954-1999 ...................................................................................................................56

14. Onshore and Federal Offshore Petroleum Production, 1954-1999 .............................57 

15. Offshore (OCS) Production and Wellhead Prices, 1954-1999 ...................................58 

16. Share of Petroleum Consumption by End-Use Sector, 1960-1999 .............................60 

17. Consumption of Petroleum and Natural Gas, 1949-1999 ...........................................62 

18. Percent of Total Natural Gas Withdrawals by Location, 1960-1999 ..........................66 

19. Natural Gas Withdrawals by Location, 1960-1999 ....................................................67 

20. Share of Sector’s Consumption of Natural Gas, 1950-1999 .......................................69 

21. Percent Distribution of Source of Cash, Majors and Independents ............................75 

22. Oil and Gas Industry Employment, 1980-2000 ..........................................................97 

23. Oil Price and Oil and Gas Extraction Employment, 1980-2000 .................................98 

24. Oil Price and Crude Petroleum and Natural Gas Employment, 1980-2000 ...............99 

25. Oil Price and Oil and Gas Field Services Employment, 1980-2000 .........................100 

26. Natural Gas Wellhead Price and Oil and Gas Extraction Employment, 1980-1999 .102 

27. Natural Gas Wellhead Price and Crude Petroleum and Natural Gas Employment, 

 1980-1999 .................................................................................................................103

28. Natural Gas Wellhead Price and Oil and Gas Extraction Employment, 

1980-1999 .................................................................................................................104 

29. Undergraduate Engineering Degrees Awarded, 1980-1997 .....................................160 
ix List of Tables 

LIST OF TABLES 

Table Page

1. Study Issues and Topics ................................................................................................7 

2. Organizing Framework for Report Topics ....................................................................8 

3. Time Line of Events Affecting the GOM Offshore Oil and Gas Industry, 

1910-2000 and Beyond................................................................................................17 

4. FERC Orders and Other Legislation Affecting the Wellhead Price of Natural 

Gas, 1980-2000............................................................................................................51 

5. Average Annual Percent of Domestic Consumption Supplied by Domestic 

Production and Imports, 1960-1999 ...........................................................................53 

6. Share of Total Petroleum Usage by Products Used in America, 1969-1999 ..............61 

7. Percent of Consumption Supplied by Imports, 1952-1999 .........................................64 

8. Imports of Natural Gas, by Nation and Year, 1952-1999 ...........................................65 

9. Major Technology Milestones for Oil and Gas Industry ............................................80 

10. Advantages/Problems of Working in the GOM ........................................................106 

11. Major Environmental Actions Affecting OCS Oil and Gas Activities .....................108 

12. U.S. Energy Expenditures as Share of Gross Domestic Product, 1970-1997 ...........110 

13. Milestones in Digital Technology, 1977-2000 .........................................................138 

14. Examples of Mergers and Acquisitions, 1980-2001 .................................................145 

15. Examples of Oil Company Restructuring Programs .................................................149 

16. Evolution of the Geophysicist’s Workplace .............................................................151 

17. Comparison of Wages ...............................................................................................162 

18. Gulf of Mexico OCS Bids, 1994-1998 .....................................................................167 
xi List of Abbreviations 

LIST OF ABBREVIATIONS 

ADL Arthur D. Little 

AGA American Gas Association 

ANWR Alaskan National Wilderness Reserve 

API American Petroleum Institute 

Bbl Barrel 

BPD Barrels per day 

BLM Bureau of Land Management 

BLS Bureau of Labor Statistics 

Btu British thermal unit 

CSR Corporate social responsibility 

CV Coefficient of variation 

DOE Department of Energy 

DOT Department of Transportation 

E&P Exploration and production 

EEC European Economic Community 

EEZ Exclusive Economic Zone 

EPA Environmental Protection Agency 

FERC Federal Energy Regulatory Commission 

FPC Federal Power Commission 

FPSO Floating production, storage and offshore loading 

FRS Financial Reporting System 

GDP Gross Domestic Product 

GOM Gulf of Mexico 

GSC Gulf Safety Committee 

IADC International Association of Drilling Contractors 

IEA International Energy Administration 

IPIECA International Petroleum Industry Environmental Conservation 

Association 

IRS Internal Revenue Service 

ISAC Information sharing and analysis center 

LDC Local distribution companies 

LNG Liquid natural gas 

LWD Logging while drilling 

Mcf Thousand cubic feet 

MMS Minerals Management Service 

MSA Metropolitan Statistical Area 
xii List of Abbreviations 

LIST OF ABBREVIATIONS (cont’d) 

NASA National Aeronautical and Space Administration 

NGO Non-governmental organization 

NGPA National Gas Policy Act 

NIPC National Information Protection Center 

NMFS National Marine Fisheries Service 

NOAA National Oceanic and Atmospheric Administration 

NPC National Petroleum Council 

NYMEX New York Mercantile Exchange 

OCS Outer Continental Shelf 

OCSLA Outer Continental Shelf Lands Act 

OOC Offshore Operators Committee 

OPEC Organization of Petroleum Exporting Countries 

PE Petroleum engineer 

PIFUA Power Plant and Industrial Fuel Use Act 

PIN Personal identification number 

PMSA Primary Metropolitan Statistical Area 

ROV Remotely operated vehicle 

SEG Society of Exploration Geophysicists 

SIC Standard Industrial Code 

SOEP Sable Offshore Energy Project 

Tcf Trillion cubic feet 

TLP Tension leg platform 

U.S. DOC U.S. Department of Commerce 

U.S. DOE U.S. Department of Energy 

U.S. DOE EIA U.S. Department of Energy, Energy Information Administration 

U.S. DOI U.S. Department of the Interior 

U.S. DOL BLS U.S. Department of Labor, Bureau of Labor Statistics 

USGS U.S. Geological Survey 

U.S. SEC U.S. Securities and Exchange Commission 

WBCSD World Business Council for Sustainable Development 

WEC World Energy Council 

WPC World Petroleum Congress 

WTI West Texas intermediate 

WWW World wide web 
1 Executive Summary 

1.0 EXECUTIVE SUMMARY 

1.1 Background and Objectives 

Sweeping changes have transformed the oil and gas industry in the United States. Perhaps 

the most obvious evidence of change is the disappearance of the “seven sisters,” the multinational, multi-division corporations that were long dominant in national and international 

trade. Of the seven, Exxon, Chevron, Shell, British Petroleum, Mobil, Gulf, and Texaco, 

only the first-four named still exist as they did in 1980. Chevron acquired Gulf and Texaco, 

and Mobil merged with Exxon. Gulf succumbed because of poor performance and Texaco 

and Mobil were acquired or merged as giant corporations sought economies of consolidation 

and scale. John D. Rockefeller’s original Standard Oil of Ohio (SOHIO) and Amoco 

(Standard Oil of Indiana) were both acquired by British Petroleum, which had acquired 

Sinclair’s down stream assets, principally gasoline stations and refineries, when Arco bought 

Sinclair in 1968. 

In 1980’s, the Gulf of Mexico (GOM) was considered a mature area for the offshore oil and 

gas industry and activity was waning. Within a few years, this situation was reversed. 

Leasing activity increased. Exploration followed. Production from deepwater began to make 

a significant contribution to total U.S. oil and gas production. When activity increased in the 

GOM, changes in the industry were evident. Some of these changes were unanticipated; 

others were slow to emerge as trends. 

To gain a better understanding of the industry changes and their implications, this study 

examined the oil and gas industry in the GOM from 1980 to 2000 and synthesized the 

implications of those changes on industry, socioeconomic, and onshore and offshore impacts 

in the Gulf of Mexico. The study focused on two issue areas, oil and gas price changes and 

corporate organization and strategy, and four crosscutting topics, economics and finance, 

technology, labor, and the regulatory environment. Changes that occurred in the issue areas 

and crosscutting topics reflect changes in industry in general, the oil and gas industry 

specifically, or individual companies or projects. The study was conducted through a review 

of industry, government, and academic publications and personal communication with 

industry representatives. 

1.2 Findings and Implications of Industry Changes 

1.2.1 Oil and Natural Gas Price Changes 

Major elements in the transformation of the oil and gas industry are price volatility and a 

general decline in the value of production, particularly of crude oil in the upstream sector. 

Oil prices declined from $31.77 per barrel (first purchase price) in 1981 to $12.51 (nominal) 

in 1986, followed by a run-up that reached $20.03 (nominal) in 1990 and a drop to $16.54 a 

year later. Thereafter, it rose to $18.46 in 1996 and fell again to $10.87 per barrel in 1998 

before it shot up to $26.73 in 2000. Restated in 2000 dollars, the swings moved from $54.46 

per barrel in 1981 to a low of $11.26 in 1998.
Findings and Implications of Industry Changes 

2 Executive Summary 

Natural gas prices similarly fluctuated in the last 20 years. In 2000 dollars, the swing of 

wellhead price moved from a high of $4.02 in 1984 to a low of $1.69 in 1995. There was a 

steady decline in price between 1985 and 1992. 

1.2.2 Corporate Organization and Strategy 

In the last 20 years, producers consolidated, restructured, implemented cost-saving 

technologies, and cost cutting programs. Companies sought economies through elimination 

of layers of management. They also re-examined properties, shedding some and acquiring 

others. Some companies reorganized to encourage effective adaptation to rapidly changing 

conditions and related opportunities. Sale of properties and company acquisitions created 

some large new independents. Large producers invested in foreign and offshore U.S. 

exploration and production. Foreign, nationally owned oil companies bought access to the 

U.S. market and took an interest in the GOM. After the introduction of areawide leasing, 

companies were able to acquire enough contiguous tracts to make billion dollar commitments 

in deepwater in the gulf. Improvements in 3D seismography and the more rapid processing 

of data have progressively supported exploration in ever-deeper water. The high costs of 

activity in deepwater have meant that seven companies (BP Amoco, Shell, ExxonMobil, 

Chevron, Total/Elf, Petrobas, and Texaco) have located most of the deepwater reserves. 

Exposure to risk was reduced through the use of joint ventures and alliances. The model of 

functional integration, from exploration to production, transportation, refining, and 

marketing, long the dominant model for large and medium sized oil companies, has 

undergone change. It has been replaced by asset management strategies, alliances, 

partnerships, and divestures. 

1.2.3 Crosscutting Themes and Implications 

The issues and topics examined, prices, corporate organization and strategy, economics, 

technology, labor, and regulation, are so interwoven in the dynamics of the industry that 

consideration of one soon involves most or all of the others. 

Drivers of Change. The following factors stand out as major forces that created change in 

the oil and gas industry between 1980 and 2000: 

 

• Increasing volatility of prices. By 2000, price volatility, uncertainty, and risk had 

become facts of life for industry companies. 

• Rising costs of oil and gas projects. In the last 20 years, OCS as a share of total domestic 

natural gas production increased modestly, while the share of total domestic oil 

production from OCS sources almost tripled. Deepwater production grew even more 

dramatically. Offshore projects, in general, and deepwater projects, in particular, are 

expensive, involving billion dollar investments. 

• Globalization of the industry. The oil industry is international in scope. In the last 20 

years, the GOM has had to compete with other areas of the world for investment by 

companies involved in projects around the world. Even independent companies that have 

traditionally restricted their activities to the gulf began to operate internationally. 
Findings and Implications of Industry Changes 

3 Executive Summary 

• Increased concern for shareholder value. In the last 20 years, the mission of oil 

companies shifted from extracting oil to providing shareholder value. 

• Ascendance of technology. Like all industries, technology has enabled change. The flow 

of information and the speed of information have been drivers of change. Technology 

specific to the oil industry has enabled the industry to work in deeper water and more 

effectively exploit existing wells. 

• Management of risk. Techniques used to manage risk represent changes in the industry. 

They include use of improved technology to increase the potential for successful 

exploration, multi-company partnering for individual projects, use of futures, options, and 

other hedging instruments to protect against drop in prices, and the shift of research and 

development to contractors or research consortia. 

Resurgence of the GOM. A convergence of factors led to the resurgence of oil and gas 

activity in the GOM. The shift to areawide leasing allowed companies to assemble a 

sufficiently large number of contiguous tracts to increase the potential for finding oil and gas 

and to justify deepwater exploration. The Deep Water Royalty Relief Act allowed MMS to 

suspend royalty payments to increase interest in deepwater exploration. Seismic imaging 

reduced the probability that exploration would be unsuccessful and that additional oil and gas 

would be found in properties being reworked. Technology also made improvements in 

production. Prices were generally improving in the mid-1990’s. Companies whose business 

focus is the GOM, with favorable technology, regulatory, and price factors, began a series of 

exploration and development activities, which resulted in the resurgence of the GOM. 

Industry, Socioeconomic, and Onshore and Offshore Impacts. Changes in the industry 

between 1980 and 2000 led to industry and socioeconomic impacts onshore and offshore. 

The industry is now a high tech, new economy industry. Risk management, corporate 

strategy, technology, and other factors have pushed the oil and gas industry in the direction 

of increasingly complex arrangements and operations. In the 20-year period, the industry 

shifted from science-based to economic-based production. Technology generally allowed the 

industry to produce more oil and gas with less infrastructure and fewer personnel. The time 

required to do work has been reduced and the amount of information to do work has 

increased. 

The industry responded to price volatility with a series of cost cutting programs that changed 

the way the industry uses personnel and how prospective workers respond to the industry. 

The cost cutting programs have left the industry with a shortage of personnel in all areas, 

reduced worker loyalty, dispelled the idea of job security, and made recruitment more 

difficult. 

The basic steps to find, produce, and market petroleum remain unchanged and involve both 

onshore and offshore activities and result in onshore and offshore impacts. Changes in the 

industry are modifying these impacts. The rise of information technology is redefining 

where work is done. The ability to transmit electronically large amounts of information with 
Findings and Implications of Industry Changes 

4 Executive Summary 

ease and monitor physical activities remotely means that workers, in many cases, can be 

physically remote from where work is done. Technology advances has meant more can be 

done with fewer people. Corporate decision-making has led to the ascendancy of Houston as 

a concentrated center of oil and gas companies and employment, shifting activities from New 

Orleans, Denver, Tulsa, and other formerly prominent oil and gas cities. 
Introduction 5

2.0 INTRODUCTION 

2.1 Background and Study Objectives 

The Gulf of Mexico (GOM) has a large share of the country’s known offshore oil and gas 

resources and dominates U.S. offshore oil and gas activity. Much of the technology needed to 

push farther into the Gulf of Mexico and other parts of the world in search of energy resources 

was initially developed by the offshore oil industry operating in the GOM. This included 

many of the support industries that service oil exploration, development, and production. The 

offshore oil and gas industry eventually expanded into other parts of the world making the 

local industry part of the global oil industry. 

The GOM offshore oil and gas industry’s role in the global oil industry has changed over 

time. Traditionally, the region supported the industry locally and as it expanded 

internationally. Personnel from the GOM went to the North Sea in the early stages of that 

area’s development and trained the local workforce. Platforms were fabricated locally until 

competition from Korea and Japan developed. During the early years of large-scale offshore 

development in other parts of the world, the North Sea notably, technology developed 

offshore Louisiana and Venezuela was applied and adapted to local conditions. In more 

recent years, the flow has been from abroad to the GOM. 

The GOM region is home to many companies operating in the region and overseas. A 

number of companies are either headquartered in or conduct GOM activities in the region. 

Many companies are located in Houston where they serve not only the deepwater of the Gulf 

of Mexico, but also the growth markets in Brazil and West Africa. Foreign oil companies 

maintain Houston offices and invest in GOM ventures. Contractors to the oil industry also 

operate locally and overseas. 

The GOM was known as the “Dead Sea” in the mid-1980’s mainly because the decline in oil 

and gas prices after 1981 made the higher cost of offshore exploration and operation 

unattractive. That changed with such things as the discovery of subsalt reservoirs in shallow 

water, the Deep Water Royalty Relief Act, production from new deepwater reservoirs, lower 

prices from service providers as a result of reduced activity, technological advances, and 

areawide leasing. When activity picked up again in the GOM, there were some changes in 

place. The surviving non-major companies (independents) emerged as more important 

players in the industry and in the GOM. Bottom line financial decisions led to a restructuring 

of the industry. 

The Minerals Management Service (MMS) is responsible for the leasing and oversight of 

mineral operations on the Nation’s Outer Continental Shelf (OCS). The dynamics of the 

industry have changed since the agency’s formation in 1982. Some of the changes in the last 

20 years were either unanticipated or slow to emerge as trends. 

MMS is charged by the National Environmental Policy Act and the Outer Continental Shelf 

Lands Act to consider the effects of its decisions on the human environment. In support of 

that charge, this study seeks to increase the understanding of the sources and forces of impacts
Background and Study Objectives 

Introduction 6

on the human environment from the offshore oil industry in the GOM and what those sources 

and forces mean for the future. To do this, the study objectives were to: 

• Gather and review the knowledge of local, national, and international changes to the oil 

industry operating in the GOM between 1980 and 2000. 

• Relate the significance and the implications of those changes to social, economic, and 

industry impacts in the GOM. 

2.2 Study Issues, Organizing Framework, and Methodology 

Given the range and complexity of issues related to offshore oil and gas development in the 

GOM, the first step of this study was to select and structure discrete research topics. The 

study began with the compilation of research issue areas organized around four headings – 

business trends and economics, corporate organization, labor and service needs, and 

regulatory environment. These issue areas were filtered through issue selection criteria and, 

in consultation with MMS, two issue areas were selected: 

• Oil and gas price change. This issue is a driving force for the industry and is overarching. 

Oil price affects companies’ business decisions on levels of activity in all areas –

exploration, production, research and development, technology, and abandonment. Price 

volatility makes these decisions more difficult. Communities with economies tied directly 

to those activities prosper in good times and suffer during industry downturns. Impacts 

occur locally in response to industry activities that are tied to oil and gas prices. 

Economic impacts result from local industry expenditures (direct impacts), local 

expenditures by businesses that supply goods and services to the oil and gas industry 

(indirect impacts), and the wages and salaries that are dependent upon the initial industry 

expenditures that are spent in the local economy (induced impacts). Expenditures relate to 

onshore facilities that support offshore activities and offshore facilities and activities. 

Examples of onshore facilities supporting offshore activities include supply and crew 

bases, onshore oil and gas processing plants, and platform fabrication yards. Offshore 

facilities include platforms and the offshore portion of pipelines. Offshore activities are 

exploration, development, and production. Economic impacts can result in population 

changes, which in turn affect housing, public services (e.g., water) and facilities (e.g., 

schools). Industry offshore activities and related onshore facilities may also affect local 

social conditions such as social problems and social systems. 

• Corporate organization and strategy. This issue addresses alternative and evolving 

approaches to business activities and how these approaches affect the companies and their 

contractors and where and how work is conducted. Impacts, social and economic, direct 

and indirect, and offshore and onshore, occur and shift in response to company decisions 

on their organization and strategy to find and produce oil and gas. 

The two issue areas are examined in terms of four topics, finance, technology, labor, and 

regulatory environment. The material covered is listed in Table 1. 
Study Issues, Organizing Framework, and Methodology 

Introduction 7

 Table 1 

 Study Issue Areas and Topics 

 Issue Areas 

Topic Oil and Gas Price Change 

Corporate Organization 

and Strategy 

Economics and Finance • Factors affecting price 

• Price and the global 

market 

• Demand and supply 

• Ownership rights and 

U.S. prices 

• Oil prices and effects on 

finances/capital markets 

• Financing methods 

• Leasing OCS tracts, 

exploration, and 

production 

Technology • Technology, costs, risk, 

and oil price changes 

• Changes in benchmark oil 

price versus market prices 

for oil 

• Oil price as a driver of 

technology 

• Prospects for future 

technology 

•Approaches to R&D 

•Industry-specific 

technology 

•Digital technology 

•Technology and its 

effects on the oil industry 

Labor • Oil price volatility and 

employment 

• Gas price volatility and 

employment 

• Reduction in force 

• Reorganization of work 

• Resulting personnel 

issues 

• Response to personnel 

issues 

Regulatory Environment • GOM versus the rest of 

the world 

• Areas of regulation 

• Gulf of Mexico leasing 

• Deep Water Royalty 

Relief Act 

The report is about the oil and gas industry and some of what is discussed relates specifically 

to that industry. The oil and gas industry has many sectors. Decisions in one of these sectors 

can have ramifications for other sectors. So, where appropriate the discussion separates the 

industry into sectors. The oil companies are the producers. They decide where and when to 

look for oil and gas and when to develop discoveries. Oil companies can be vertically 

integrated majors, meaning their operations encompass oil and natural gas production, 

transport, petroleum refining, and marketing of refined petroleum products. Nonmajors, often 

referred to as independents, are specialized oil and gas producers. The oil companies are 

supported by contractors -- drilling contractors and non-drilling or service contractors such as 

labor contractors, oil spill control companies, trucking and stocking companies, and 

fabrication, repair, and maintenance contractors. 
Study Issues, Organizing Framework, and Methodology 

Introduction 8

Some of what is discussed relates to the broader category of industry, of which the oil and gas 

industry is one part, and some of what is discussed is narrower in focus looking at company or 

project specific factors. These three categories, all industry, the oil industry, and individual 

companies or projects, provide the organizing framework for thinking about changes that 

occurred in finance, technology, labor, and the regulatory environment between 1980 and 

2000. That is, were these changes occurring across industry, within the oil and gas industry, 

or specific to a company or group of companies or individual projects? Table 2 summarizes 

this framework. 

Table 2 

Organizing Framework for Report Topics 

Topic All Industry The Oil Industry 

Individual 

Companies/Projects 

Economics and Finance X X 

Technology X X X 

Labor X X 

Regulatory 

Environment 

X X 

The study was prepared through a review of industry, business, and government documents 

and personal communication (personal or telephone conversations, and e-mail exchanges) 

with primarily oil industry representatives. Personal communications with 24 industry 

representatives from 19 companies were conducted between August 2000 and May 2001: 

Majors Independents Contractors

BP Apache Diamond Offshore 

BP Exploration Company 

Ltd. 

Devon Energy Corporation Halliburton Energy 

Services Group 

Conoco Kerr McGee Oil and Gas 

Corporation 

J. Ray McDermott 

Exxon Mitchell Energy R&B Falcon, Inc. 

ExxonMobil San Jacinto Oil Company Schlumberger 

Shell Offshore Oil 

Company 

Vastar Resources, Inc. 

Texaco Unocal Spirit 76 

The remainder of this section provides background information which is used throughout the 

report. First, background on production activities and platform installation and removal is 

presented. Then the overall time line of significant events affecting the oil and gas industry is 

presented. 
Offshore Statistics 

Introduction 9

2.3 Offshore Statistics, 1980-1999 

The following statistics set the stage for the description of changes in the oil and gas industry 

in the GOM in the last 20 years which follows in Sections 3.0 (Oil and Natural Gas Price 

Change), 4.0 (Corporate Organization and Strategy), and 5.0 (Crosscutting Themes and 

Impacts). Appendix A includes suggestions for additional research. While the period of 

interest is 1980 to 2000, a longer period of time is shown for these statistics (except the 

deepwater summary) in order to provide the context for the beginning of the study’s 

timeframe. 

• Federal offshore oil production, 1954-1999 (see Figure 1). Federal offshore oil is 

produced in the Gulf of Mexico and off California, but almost all of it comes from the 

GOM. In 1980, oil production on the OCS was at its lowest level since 1968 when the 

industry was in a growth mode. Offshore oil production peaked in 1971. Production 

declined between 1972 and 1980, with the exception of 1979. Production increased in the 

early 1980’s (1981 to 1984), followed by a steady decline, except for 1986, between 1985 

and 1990. Oil production has increased annually since 1991. In 1980, OCS oil 

production accounted for about 9 percent of total U.S. oil production. In 1999, it was 

about 25 percent of total U.S. oil production (U.S. DOI, MMS 2000). Petroleum from all 

sources accounted for an average 40.1 percent of total domestic energy consumption 

between 1949 and 1999 (U.S. DOE, EIA 2000a). 

• Federal natural gas production, 1954-1999 (see Figure 2). Like oil, almost all natural gas 

produced on the OCS comes from the GOM. Offshore natural gas production first peaked 

in 1981. Natural gas production peaked again in 1990 and 1997. During the period 

between 1982 and 1986, production fluctuated. The trend since 1986 has basically been 

increased production, with declines in 1991, 1995, 1998 and 1999. OCS natural gas 

production accounted for almost 24 percent of total U.S. natural gas production in 1980 

and about 26 percent of it in 1999 (U.S. DOI, MMS 2000). Natural gas from all sources 

accounted for 20.6 percent of total domestic energy consumption between 1949 and 1999 

(U.S. DOE, EIA 2000a). 

• Deepwater oil production in the GOM, 1985-1999 (see Figure 3). Deepwater is defined as 

water depths greater than 1,000 feet. Deepwater operations are significantly different 

from operations in shallower waters. More sophisticated technology and technical 

expertise are needed. Shell Offshore, Inc. installed the first deepwater production 

platform, Cognac, in 1978. Companies began to express greater interest in deepwater in 

1983 when the largest number of deepwater tracts were leased (see Section 3.5). 

Deepwater oil production accounted for about 6 percent of total GOM OCS production in 

1985 compared to about 45 percent in 1999 (U.S. DOI, MMS 2001b). 

• Deepwater natural gas production, 1985-1999 (see Figure 4). Deepwater natural gas 

accounted for less than 1 percent of total GOM OCS production in 1985 compared to 

about 17 percent in 1999 (U.S. DOI, MMS 2001b). 
Introduction 10 Figure 1. Federal offshore oil production, 1954-1999. - 100,000,000 200,000,000

300,000,000400,000,000500,000,000600,000,000

1954195619581960196219641966196819701972197419761978198019821984198619881990

Year

Crude Oil & Condensate Production (bbl) Federal OCS crude oil and condensate pro

Source: U.S. DOI, MMS 2000.
Introduction 11 Figure 2. Federal offshore natural gas production, 1954-1999. - 1,000,000,000 2,000,000,000

3,000,000,0004,000,000,0005,000,000,0006,000,000,000

195419561958196019621964196619681970197219741976197819801982198419861988

Year

Natural Gas Production (mcf)

Source: U.S. DOI, MMS 2000.

Federal OCS natural gas production
Introduction 12 Figure 3. Deepwater oil production, 1985-1999. - 100,000,000 200,000,000

300,000,000400,000,000500,000,000600,000,000

198519861987198819891990199119921993199419951996

Year

Oil, STB 

Total production

Deepwater production

Source: U.S. DOI, MMS 2001b.
Figure 4. Deepwater natural gas production, 1985-1999.

-

1,000,000,0002,000,000,0003,000,000,0004,000,000,0005,000,000,0006,000,000,000

198519861987198819891990199119921993199419951996

Year

Natural Gas, mcf

Total production 

Deepwater pro

Source: U.S. DOI, MMS, 2001b.

Introduction 13
Offshore Statistics 

Introduction 14

• Platforms installed and removed, 1942-1999 (see Figure 5). Platforms have been installed 

annually since 1942. The largest numbers of platforms were installed in 1984 (226) and 

1985 (212). Platforms started being removed in 1973. More platforms were removed 

than installed in 1992, 1993, 1997, and 1999 (U.S. DOI, MMS 2000).1

 It should be noted 

that horizontal drilling (see Section 4.3.2.3) has made it possible to complete more wells 

with fewer platforms. 

 

1

 A forecast of platforms in the GOM in 2023 predicts a 29 percent decline in operating structures between 1999 

and 2023, from 3,687 to 2,612; 3,543 installations in the 1999 to 2023 timeframe or not quite 142 per year; and 

4,645 removals or about 186 platforms per year. Many of the installed platforms are expected to be larger and in 

deepwater while many of those removed are forecast to be smaller platforms located in shallower waters 

(Pulsipher et al. 2001). 
Introduction 15 Figure 5. Platform installation and removal, 1942-1999. 0 100

200300

1942-521954195619581960196219641966196819701972197419761978198019821984198619881990

Year

Number of Platforms Platform installations

Platform removals

Source: U.S. DOI, MMS 2000.
Time Line of Events 

Introduction 16

2.4 Time Line of Events Affecting the GOM Offshore Oil and Gas Industry, 

1980-2000 and Beyond 

Table 3 is an overall time line of events affecting the GOM offshore oil and gas industry from 

1910-2000 and beyond. While the study period of interest focuses on 1980 to 2000, the time 

line begins in 1910. The events cover a range of topics including: 

• Laws, directives, and regulations 

• Technological advances 

• Weather 

• International events 

• Financial markets 

• Corporate decision making 
Introduction 17

Table 3

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

1910-1952 

1910 First over-water drilling along 

the Gulf coast 

On Caddo Lake near Shreveport 

1938 Discovery of the Creole Field 

1.5 miles offshore coastal 

Louisiana 

Petroleum industry’s first successful 

venture into open, unprotected waters 

1945 Proclamation No. 2667, issued 

by President Truman, declared 

that the U.S. regarded the natural 

resources of the subsoil and 

seabed of the OCS as territory 

owned by the Nation 

September. On the same day, 

President Truman also issued 

Executive Order No. 9633, reserving 

certain resources of the OCS under 

the jurisdiction of the Secretary of the 

Interior 

1947 First offshore well drilled out of 

sight of land and first well 

drilled from a mobile platform 

November 11. Discovery made by 

Kerr McGee Oil Company operating 

under state lease number 754, in the 

Ship Shoal Area, Block 32, 12 miles 

off Terrebonne Parish in 18 feet of 

water. The well produced 600 barrels 

per day, and marked the first 

commercial oil production in the 

GOM. The platform cost $230,000 

1953-1979 

1953 Submerged Lands Act passed May 22. Gives states jurisdiction 

over the lands and natural resources 

out to 3 miles seaward from the mean 

high tide line (3 marine leagues for 

Texas and the Gulf Coast of Florida) 

and also established federal 

jurisdiction over the offshore lands 

beyond those states waters 

 Outer Continental Shelf Lands 

Act passed 

August 7. Authorized the Secretary 

of the Interior to lease OCS lands for 

mineral exploration, development, 

and production. Also mandated 

development of OCS resources. 

Amended in 1978 and 1985 

1954 Bureau of Land Management 

opened its New Orleans OCS 

office 

The U.S. Geological Survey 

established its Gulf Coast regional 

office at about the same time 

 First OCS lease sale offering 

blocks offshore Louisiana 

October 13. Sale brought $116.4 

million in bonuses into the federal 

treasury 
Introduction 18

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

1956 First Nigerian discovery In the delta of the Niger River; 

exploration began in 1937 

1957 European Economic Community 

(EEC) formed 

1959 First North Sea discovery Production began in the 1970’s 

 Eisenhower imposes import 

quotas on oil 

1960’s Key discovery off Angola Offshore Cabunda 

1960 Organization of Petroleum 

Exporting Countries (OPEC) 

formed 

Consisted of Iran, Iraq, Kuwait, Saudi 

Arabia, and Venezuela 

1968-69 Discovery of North Slope oil and 

gas fields 

1969 National Environmental Policy 

Act passed 

Requires a detailed environmental 

review and statement before any 

major or controversial federal action 

1970’s International companies changed 

from owners to buyers of crude 

after the Libyan revolution and 

rise of OPEC 

 Diversification of some oil 

companies outside of the energy 

sector 

For example, Mobil owned 

Montgomery Ward 

1970 BP discovered the Forties field 

on the British side of the North 

Sea 

Together with Phillip’s discovery in 

the Ekofisk field drove the North Sea 

exploration in the 1970’s 

 Clean Air Act passed Regulates the emission of air 

pollutants from industrial activities 

1971 Peak oil production until 1995 

 Production started in Norwegian 

sector of the North Sea 

 Expansion of OPEC Nations By end of 1971, OPEC adds Qatar, 

Indonesia, Libya, United Arab 

Emirates, Algeria, and Nigeria 

1972 Texas Railroad Commission 

ends proratio to market demand 

and mandates production at 100 

percent of well allowables 

Shifts influence to establish world 

prices from U.S. to OPEC nations 

 Clean Gulf Associates 

established by the offshore 

industry 

A cooperative stockpiling of oil spill 

containment and clean-up equipment 
Introduction 19

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

1973 First platform removed 

 Yom Kippur War In retaliation against U.S. support of 

Israel, OPEC imposes embargo on 

export of oil supplies to the U.S. 

1974 3D seismic data acquisition 

tested in GOM 

 Key discovery off Brazil Guarroupa Field in the Campos Basin 

off Rio de Janero; went into 

production in 1981 

1975 Production started in the United 

Kingdom sector of the North Sea 

 The Energy Policy and 

Conservation Act of 1975 passed 

Mandated federal efficiency standards 

for 13 products 

1976-78 Extremely cold weather in U.S. Creates natural gas shortage relative 

to demand; prices increase 

1977 Clean Water Act passed Regulates discharge of pollutants into 

the surface waters of the U.S. 

 Apple II released Becomes the first mass produced 

computer 

1978 Natural Gas Policy Act of 1978 

passed 

Began end of federal control over gas 

prices at the wellhead 

 Power Plant and Industrial Fuel 

Use Act passed 

Discourages use of gas and oil, 

particularly in boilers 

 First deepwater production 

platform installed 

Shell Offshore, Inc.’s Cognac 

 Gas bubble emerged Excess or surplus of natural gas on 

market—called gas bubble, a result of 

users switching to alternative fuels 

and the Fuel Use Act of 1978 

Late 1970’s 

– early 

1980’s 

Capital expenditures primarily 

for buying leases and exploration 

and production (E&P) drilling 

The enormous capital expenses of 

offshore oil and gas are largely in the 

future 

 Financing largely through banks 

and based on assets in the 

ground 

Senior term-debt and revolving credit 

are principal vehicles; revolving 

credit replaces term loans 

 Anti-Shah demonstrations Iranian oil worker strike 

 Deepest offshore wells operate 

in 1,000 feet of water 

Beginning of deepwater oil and gas 

activity 

 Iranian Revolution Start of second oil crisis 
Introduction 20

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

1980 to 

2000 

1980 Commercial 3D seismology 

begins in the early 1980’s 

 Major integrated oil companies 

(e.g., Exxon, Mobil) account for 

36 percent of the Fortune 500's 

net income 

By 1990, this share dropped to 21 

percent and then to less than 8 percent 

in 2000 

 Oil and gas industry liquidity 

problems often related to bank 

debt (e.g., loans) 

 Oil industry planners forecast oil 

prices of $90 to $110 by 2000 

Forecast largely based on extending 

trend lines from 1970’s and 1980’s 

 Iran/Iraqi War U.S. imports decrease and prices 

increase 

1981 First offshore horizontal well Rospo Mare field, offshore Italy 

 Peak offshore natural gas 

production until 1990 

 Peak oil price $54.46 per barrel (2000 dollars) 

 Gasoline prices peak at $2.57 

(2000 dollars) a gallon 

Highest price ever through 2001 

 First OCS leasing moratorium 

enacted (FY 1982) 

California 

1982 Federal Oil and Gas Royalty 

Management Act passed 

Designed primarily to address issues, 

but also supports environmental 

protection and conserves federal 

resources 

U.S. DOI Secretarial Order No. 

3071 establishes the Minerals 

Management Service 

Functions previously carried out by 

the U.S. Geological Survey and the 

Bureau of Land Management 

 OPEC imposes first quota Attempt to restore petroleum prices, 

but non-OPEC production continues 

to rise 

 First 5-Year Oil and Gas Leasing 

Schedule approved which 

included areawide lease 

offerings 

July. Approved by Secretary of the 

Interior James Watts 

1983 Horizontal well drilled from 

vertical shaft 

Kern River, CA 

 GOM Sale 69 first sale which set 

minimum bid for OCS acres at 

$150 per acre 

Had been $25 per acre since 1968 
Introduction 21

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

1983 

(cont’d) 

Presidential Proclamation 

established an Exclusive 

Economic Zone (EEZ) extending 

seaward 200 nautical miles from 

the “baseline” (the legal 

coastline) of the territorial sea of 

the U.S., the Commonwealth of 

Puerto Rico, and Northern 

Mariana Islands, and other U.S. 

overseas territories and 

possessions 

March 10 

 First areawide lease sale May 25. Central GOM Lease Sale 

72; largest number of deepwater 

tracts leased up to that point; new 

records set for bonus bids offered, 

high bids, and bids accepted 

 New York Mercantile Exchange 

(NYMEX) begins to trade crude 

oil contracts 

Oil seen as “commodity;” crude oil 

contracts help to “curtail” price 

increases of 1973 and 1979, free 

market trade in oil undermines OPEC 

influence on oil prices 

 OPEC cuts benchmark price to 

$29.00 

 Spot market for natural gas 

developed 

Allows prices for spot market to be 

below those for the contract market 

 First preleasing moratorium 

enacted (FY 1984) 

North Atlantic is closed to leasing 

1984 National Fishing Enhancement 

Act passed 

Encourages the use of offshore 

platforms as artificial reefs 

 Federal Energy Regulatory 

Commission (FERC) issues 

orders to remove gas costs from 

minimum bills for consumers 

 Peak wellhead natural gas price $4.02 per mcf (2000 dollars); a spot 

market fluke, not the average 

prevailing wellhead price 

1984-88 Federal government sold 

hundreds of failed savings and 

loan banks 

1985 3D vertical seismic profiling 

developed 
Introduction 22

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

1985 

(cont’d) 

FERC Order 436 Encourages gas pipelines to become 

open access carriers of natural gas; 

permits treatment of natural gas as a 

commodity 

1981-85 Merger cluster Examples: Dupont bought Conoco, 

U.S. Steel bought Marathon, 

Mobil acquired Superior Oil, 

Chevron acquired Gulf Oil, 

Texaco bought Getty 

1984-85 Largest number of platforms 

installed 

226 in 1984; 212 in 1985 

 Saudi Arabia increases oil output 

by 44 percent to make up for 

shortfall caused by Iran/Iraqi 

War 

Petroleum prices tumble between 

1985 and 1986 

1986 Oil price crash Price drops to $17.76 (2000 dollars) 

 Major cost cutting efforts and 

layoffs begin 

Continues to present 

 FERC Order 436 implemented 

1986-89 Gas bubble Producers try to enforce take or pay 

contracts in natural gas, while buyers 

try to evade them; helps lead to 

FERC Order 436 

Late 1980’s Successful horizontal wells in 

Austin Chalk lead to general use 

of this technology; horizontal 

and multilateral wells are 

substantial part of drilling 

activity for the first time 

First modern horizontal well 

completed in 1953 by Russian 

drilling engineer; despite excellent 

production, industry takes 35 years to 

adopt technology fully 

1987 Mergers continue For example, BP acquired Standard 

Oil (Ohio) 

 Patent obtained for deepwater 

spar technology 

 First logging while drilling 

(LWD) tool 

 Minimum bid for OCS acres set 

at $25 per acre 

Had been $150 per acre since 1983 

 MMS institutes the Conservation 

Award for Respecting the 

Environment 

Special recognition given to offshore 

operators that go beyond regulatory 

requirements in protecting and 

enhancing the coastal and marine 

environment 
Introduction 23

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

1987 

(cont’d) 

FERC issues Order 500 Issued to address acute take-or-pay 

problems relative to natural gas 

1988 First horizontal well drilled from 

semisubmersible drill rig 

 Capital dries up in late 1980’s 

and early 1990’s 

Banks consolidate; oil and gas 

industry loses traditional sources of 

capital; price crash of 1986 wiped out 

many industry participants who 

bought into each other’s deals 

First OCS drilling ban enacted 

(FY 89) 

Affected 73 existing leases in the 

Eastern GOM; later expanded to 

North Aluetian Basin and leases 

offshore North Carolina 

 Amendments to Power Plant and 

Industrial Fuel Use Act passed 

Creates potential for additional use of 

natural gas 

 National Appliance and Energy 

Conservation Act passed 

Establishes minimum efficiencies for 

12 types of residential appliances sold 

in U.S. 

 End of Iran/Iraqi War Oil price is $16.77 (2000 dollars) in 

1988 and $20.36 (2000 dollars) in 

1989 

 FERC Order 490 Allowed abandonment of first sales 

contracts and allowed pipeline bypass 

 FERC Order 491 Interpreted Section 5 of the Outer 

Continental Shelf (OCS) Lands Act 

to require that OCS pipeline 

companies offer both firm and 

interruptible transportation on a 

nondiscriminatory open-access basis 

 FERC Order 493 Natural Gas Data Collection 

System—inquiry into alleged anticompetitive practices related to 

marketing affiliates of interstate 

pipeline companies 

1989 5 percent of GOM wells based 

on 3D seismic data 

 Exxon Valdez oil spill in Alaska 

 November 1989: Sabine selected 

by NYMEX as the official 

delivery mechanism for the 

world’s first natural gas futures 

contract 

Changes the way that spot and future 

prices affect wellhead prices; Sabine 

owns and operates the Henry Hub 
Introduction 24

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

1989 

(cont’d) 

Natural Gas Wellhead Decontrol 

Act passed 

Eliminates all remaining wellhead 

price controls 

 FERC Order 512 Removal of contract duration and 

right of first refusal regulations for 

certain OCS natural gas 

1990 Clean Air Act amendments 

passed 

Gives EPA jurisdiction for OCS 

facilities outside Central and Western 

GOM 

 Oil Pollution Act of 1990 

(OPA-90) passed 

Includes provisions for oil spill 

prevention, contingency planning, 

and financial responsibility for 

offshore facilities in, on, or under 

navigable waterways 

 Presidential decision withdraws 

areas for lease until 2000 

Areas offshore California, Oregon 

Washington, North Atlantic and 

Eastern GOM (south of 26 degrees N 

latitude and East of 86 degrees W 

longitude) withdrawn 

 Significance of oil and gas 

industry to U.S. economy 

diminishes over the 1980’s 

Changes from 1980 to 1990 show 

reduced role for oil industry 

• Sales as percent of total Fortune 

500 sales: 1980--31.6 percent, 

1990--18.5 percent 

• Income as percent of total Fortune 

500 income: 1980—36.4 percent, 

1990—21.1 percent 

• Employees as percent of total 

Fortune 500 employees: 1980—

8.4 percent, 1990—4.9 percent 

• Sales per employee: 1980--

$390,918, 1990--$699,377 

Houston emerges as a dominant 

American center in the oil and 

gas industry 

Houston also becomes a key center 

for research, technology and 

operation of downstream oil 

Shell does not consider GOM 

deepwater discoveries (e.g., 

Auger, Mensa, Ursa) 

economically viable because of 

low flow rates 

By 2000 all are producing profitably 
Introduction 25

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

1990 

(cont’d) 

World's 10 leading oil and gas 

companies narrowed their focus 

to the core areas of oil, gas and 

chemicals in early 1990’s 

Refocusing and an emphasis on 

improving near-term financial 

performance dramatically improve 

financial results 

Americans consumed 6 percent 

less oil than in 1978 

 Futures trading for natural gas 

begins April 3, 1990 

Allows trading at 18 months into the 

future 

 Gulf War begins Imports decrease and prices rise 

1990-91 FERC Orders 528/528A Caps recovery of take or pay costs 

through volumetric surcharges 

charged by pipeline companies 

1991 First Colloquium on Petroleum 

Engineering Education 

First of five meetings, 1991 to 2000 

of the Society of Petroleum 

Engineers, U.S. Department of 

Energy (U.S. DOE), and the 

Association of Heads of U.S. 

Petroleum Engineering Schools to 

discuss issues 

 Petroleum engineer (PE) 

undergraduates fall to about 200 

Stayed between 200 and 300 in the 

1990’s 

 Breakup of the former Soviet 

Union 

 Iraq defeated in the Gulf War Oil price declines to $19.72 (2000 

dollars) from $24.76 (2000 dollars) in 

1990 

 World Wide Web released 

 Natural gas price hits low of 

$1.96 per mcf (2000 dollars) 

1987-92 Independents expanded role in 

GOM, majors invested overseas 

1992 OPA-90 authority delegated by 

Secretary of the Interior to MMS 

Expanded MMS authority for oil spill 

contingency planning to all offshore 

facilities platforms and pipelines in 

state waters and on the OCS 

 Fast track approach to bringing a 

field onstream used to compress 

development timetable 
Introduction 26

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

1992 

(cont’d) 

Natural gas production exceeded 

crude oil production for first 

time in history (all, not just 

OCS) 

Natural gas increasingly a driver in 

North American strategies of U.S. 

petroleum companies 

 First winter of operations under 

FERC Order 636 

Reduced government oversight and 

introduced competition to the 

industry; interstate natural gas 

pipeline companies required to 

unbundled 

 PE departments considered 

diversifying programs to train 

outside the petroleum industry 

About this time University of Texas 

petroleum engineering department 

changed name to the Department of 

Petroleum & Geosystems 

Engineering 

` First time more platforms 

removed than installed 

Also occurred in 1993, 1997, and 

1999 

New mission of Chevron: “...to 

achieve superior financial results 

for our stockholders, the owners 

of our business” 

Reflected major oil company interest 

in shareholder value and growing 

importance of the stock market in 

corporate strategy for all industries 

New sources of capital emerge—

high yield bonds, private 

placement of subordinated debt 

Money is more plentiful, but more 

expensive 

 Energy Policy Act passed Promoted alternative sources of 

energy and conservation; passed to 

promote fuel diversity; diversified 

fuel supplies by promoting the use of 

alternative fuels in the U.S. 

1993 Texaco left the petrochemical 

industry 

The first international major to do so 

 Second Colloquium of 

Petroleum Engineering 

Education 

Discussed skills needed for future 

petroleum engineers 

1994 Continued internationalization of 

the oil and gas industry 

encourages exploration and 

development activity around the 

globe 

 Natural gas price hits new low of 

$1.69 per mcf 

Mild winter 1994/95 led to layoffs, 

restructuring, and mergers in gas 

sector in 1995 

 Firms still restructuring, cutting 

costs under oil price uncertainty 
Introduction 27

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

1994 

(cont’d) 

Human resources is on major oil 

industry conference agenda for 

the first time 

Offshore Northern Seas Conference 

 North American Free Trade 

Agreement goes into effect 

Opens trade between the U.S., 

Canada, and Mexico 

1995 Deepwater Royalty Relief Act 

passed 

Royalty payment relief on deepwater 

production and reduced operator 

environmental liability created better 

business climate for operations within 

U.S. 

 Federal Energy Regulatory 

Commission Order 888 

Initiated restructuring in the electric 

power industry 

 4D seismic emerges Offshore exploratory success rate for 

large producers including Exxon, 

Shell, Mobil and Texaco more than 

doubled between 1978 and 1995 

` Drilling and development 

technologies begin to emerge in 

1995 and 1996 

Examples included easier re-entries, 

multilateral completions, extended 

reach drilling, reliable subsea 

completions, floating production 

facilities 

 Cost cutting efforts have helped 

major oil companies, but placed 

financial pressures on 

contractors 

Return on equity in 1995: Global oil 

companies (11 percent), US oil 

companies (5 percent), service 

companies (8 percent), drilling 

contractors (-6 percent) 

 Third Colloquium on Petroleum 

Engineering Education 

Explored ways to increase value of 

petroleum engineering education to 

those with the degree 

 High-yield bond market became 

a significant source of capital for 

the oil industry 

1995 to 1998, E&P and service 

companies issued $20.5 billion in 

high-yield debt [i.e., debt rated lower 

than BBB by Standard & Poor’s 

Corp. (S&P) or Baa3 by Moody’s 

Investors Service] 

 Choice programs are 

implemented for natural gas 

residential customers 

Allowed consumers to select their 

own gas provider 
Introduction 28

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

1996 OPA-90 amendments passed Applied to financial responsibility for 

offshore facilities and to spill 

prevention in state waters 

 World’s first production SPAR 

installed in the Central GOM 

Neptune SPAR (Oryx Energy) 

installed in 1,851 ft of water in 

Viosca Knoll 

 80 percent of GOM wells based 

on 3D seismic data 

 4D seismic characterization 

methodology applied to 

previously recorded seismic 

surveys 

 Satellite transmitted seismic data 

from ship in GOM to shorebased supercomputer 

Public-private collaboration 

demonstrated viability of remote 

analysis of seismic data 

Time from offshore discovery in 

1996 to initial production is 

reduced to 2 years 

For offshore discoveries in 1984, 10 

years elapsed before initial 

production 

 Cambridge Energy Research 

Associates issues “The Quiet 

Revolution: Information 

Technology and the Reshaping 

of the Oil and Gas Business” 

Report estimated $6 billion annual 

spending on seismic technology, 

horizontal drilling, computers, 

graphics and futuristic visualization, 

advanced applications software, 

databases and networks, and similar 

technology. 

New discoveries confirm the 

value of deepwater GOM 

 MMS opens the Eastern Gulf 

Information Office in Pensacola, 

FL 

Opened in response to demand for 

information from Florida constituents 

concerning OCS activities in the 

GOM 

1997 Helicopter pilots consider 

unionizing 

Offshore Logistics’ pilots vote to join 

the Office and Professional 

Employees International Union; 

Petroleum Helicopters Inc. pilots vote 

not to 

 Consolidation in drilling 

contractors 

Reading Bates Corporation (offshore 

drilling) and Falcon Drilling, Inc. 

(onshore drilling) merged to become 

the R&B Falcon Corporation 

(acquired Cliffs Drilling Company in 

1998) 
Introduction 29

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

1997 

(cont’d) 

Fourth Colloquium on Petroleum 

Engineering Education 

 Employee retention program 

started at BP 

Discovery rate almost six times 

the rate of early 1980’s 

Result of better imaging technology 

Capital for exploration and 

production provided through 

banks’ syndicated loans rises to 

$55 billion 

Figures for 1995 and 1996 were $22 

billion and $36 billion, respectively 

 OPEC increases export quota on 

oil 

Underestimates impact of Asian 

financial crisis on demand for energy; 

oil prices plummet 

1998 Falling oil profits, prices, and 

mergers result in oil industry 

layoffs 

Oil price drops to $11.26 per barrel 

(2000 dollars) 

 Spar technology proves 

successful in increasingly deep 

waters 

Genesis: 2,590 feet 

Diana: 4,800 feet 

 “Truss” spar designed for use in 

5,500 feet of water 

The world's longest well with a 

horizontal reach of 6. 2 miles 

completed by BP Exploration 

Operating Co. Ltd 

The Baldpate deepwater 

production platform in GOM, 

the world's tallest freestanding 

structure 

Oil and gas industry bond prices 

dropped from high 90-cent range 

to a much lower range—some 

trade at 50 or 60 cents on the 

dollar, others at 20 to 30 cents. 

Initial industry experience with 

volatility of public debt market 

 Personnel shortages in many 

sectors 

Broadly experienced engineers, 

highly experienced engineers, and a 

cross section of drilling personnel in 

limited supply 

 OPEC pledged to cut production Purpose was to increase petroleum 

prices 
Introduction 30

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

1999 Major consolidation of drilling 

contractors 

Transocean Offshore and 

Schlumberger’s Sedco Forex 

combined to create the largest drilling 

company in the world, called 

Transocean Sedco Forex 

 Mergers continue Examples: Mobil merged with 

Exxon, 

Oryx merged with Kerr McGee, 

ARCO merged with BP Amoco, 

(announced) 

Average real cost of finding and 

producing oil dropped by an 

estimated 60 percent over past 

10 years 

Cumulative effect of incremental 

changes in technologies 

Proven reserves increased 60 

percent over past 10 years 

 OPEC and non-OPEC nations 

cut production April 1 

Petroleum price dramatically 

increases in 1999 

2000 Helicopter pilots unionized Petroleum Helicopters, Inc, pilots 

voted for union representation from 

the Office and Professional 

Employees International Union 

 American Association of 

Petroleum Geologist initiated a 

Mentor Program 

 U.S. Geological Survey (USGS) 

released 5-year study of world 

oil reserves 

USGS raised previous estimate by 20 

percent to total of 649 billion barrels, 

based on geological data, changes in 

drilling and other technologies 

 Fifth Colloquium on Petroleum 

Engineering Education 

Focused on the partnership among 

industry, education, and government 

 Personnel shortages cited as 

number one issue in a survey of 

drilling and well service 

companies 

 Further consolidation of drilling 

contractors 

Transocean Sedco Forex bought R&B 

Falcon Corp. 
Introduction 31

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

2000 

(cont’d) 

University consortium model for 

R&D no longer used; its absence 

has major impact on training the 

next generation of geophysicists 

in the U.S. 

Consortia—sponsored through oil or 

service companies' research or 

technology centers—had been the 

mainstay of exploration geophysics 

research at universities for 25 years 

Major integrated oil companies 

(e.g., ExxonMobil, Texaco) 

account for less than 8 percent of 

the Fortune 500's net income 

Sign of waning significance of oil and 

gas to U.S. economy 

Offshore well located in over 

9,000 feet of water 

At start of the 21st century, oil 

and its related products made up 

a much smaller part of the Texas 

economy 

Texas economy becomes 

considerably less sensitive to 

changing oil prices 

Overall success rate for new 

wells is 50 percent 

In 1990, success rate was 10 percent 

Exxon Mobil’s average cost for 

finding oil was $0.65 per barrel 

Cost is lower than the company’s 

long-term target of $1 per barrel 

1998-2001 Mega merger cluster Examples: Exxon acquired Mobil, 

Amoco merged with BP, 

ARCO acquired Union Texas, 

BP acquires ARCO, 

Chevron acquires Texaco, 

Anadarko and Union Pacific 

Resources 

Between 1996 and 2000, more than 

$500 billion in global oil industry 

merger transactions occurred 

Beyond 

2000 

Trends • Mergers continue 

• Personnel shortages 

• Cost management 

• Knowledge management 

There are legal (anti-trust) and 

practical (fewer companies) limits on 

future mergers, however 

2001 Offshore well cost projected to 

drop by $5 to $12 million 

through use of subsea mudlift 

(riserless) drilling 

Technology set off a series of cost 

saving opportunities and allowed for 

drilling in deeper water with greater 

production flow rates; lower costs 

open up more opportunities for 

profitable operations when oil price 

drops 
Introduction 32

Table 3 (cont’d) 

Time Line of Events Affecting the GOM Offshore 

Oil and Gas Industry, 1910-2000 and Beyond 

Year Action Comment 

2001 

(cont’d) 

Theory estimated 70 percent of 

oil in average reservoir is 

recoverable 

Typical recovery rate was about half 

of this estimate 

ExxonMobil could process as 

much seismic data in 10 days as 

would have taken 11 years in 

1990 

 Majors renewed interest in 

shallow water; large 

independents invested overseas 

Reversal of trends from late 1980’s 

and early 1990’s 

2005 Offshore costs projected to drop 

by as much as 50 percent relative 

to costs in 2000 

 BP Amoco hopes to reduce 

liquid natural gas production 

costs by 25 percent relative to 

costs in 2000 

2015 Projected date when all the 

world’s seabed will be accessible 

to offshore drilling 

Advances in platform, drilling, 

related technology will eliminate 

water depth as barrier to development 

Future Knowledge will surpass oil and 

gas reserves as companies 

number 1 asset 

Computers, telecommunications, and 

information technology seen by some 

as radically transforming the industry. 

According to one expert, 40 percent 

of oil companies will be “virtual” by 

2010 
33 Oil and Gas Price Changes 

3.0 OIL AND NATURAL GAS PRICES AND INDUSTRY RAMIFICATIONS 

3.1 Time Line 

Examination of oil and natural gas prices and their ramifications for the oil and gas industry 

begins with the time line of prices. Although the project’s period of interest is 1980-2000, a 

longer time period on prices is given in order to put the period of interest in context. 

3.1.1 Oil Prices 

The 1970’s marked a major turning point in the level of oil prices. Prior to the large shock in 

1974, which was induced by the Organization of Petroleum Exporting Countries 1973 

embargo of oil supplies to the United States, the real price (actual price adjusted for inflation) 

of oil (measured in terms of crude oil domestic first purchase price) was declining at a 

relatively modest rate (Brown and Yucel 1995) (see Figure 6). In 1949, the real price (price 

adjusted for inflation and expressed in terms of year 2000 dollars) was $15.73 per barrel; in 

1973, the real price was $12.38. Between 1973 and 1974, however, the real price increased 

62.0 percent (from $12.38 to $20.06 per barrel). From 1974 through 1981, oil prices 

increased at an increasing rate (from $20.06 to $54.46 per barrel); prices for crude peaked in 

1981. Following the 1981 peak price, however, prices began to plummet and reached a low 

of $17.76 in 1986. Oil prices between 1986 and 1999 exhibited considerable annual 

variation but an overall generally declining trend. In 2000, however, oil prices reached 

$26.73 per barrel (an increase of 68.3 percent over 1999 prices). 

There appear to be between four and six basic patterns in the price of crude petroleum. 

Between 1949 and 1972, prices were relative stable and slightly decreasing. In 1973, prices 

increased by nearly 9.0 percent over the 1972 level. The largest annual price increase 

between 1949 and 1999 occurred between 1973 and 1974—the price of crude increased by 

62.4 percent. Prices were relative stable, however, between 1974 and 1978 because of price 

control under the Nixon, Ford, and Carter administrations. From 1978 to 1981, prices 

steadily increased, with the largest annual rate of increase occurring between 1979 and 1980. 

Oil price decontrol was phased in over a 28-month period beginning in 1979. In 1982, prices 

began to drop, and they continued to decline until 1987. Between 1981 and 1986, prices 

declined by 67.4 percent. After 1986 and on through 1997, crude prices generally varied 

from year to year, but the level of variation was not as large as it had been in proceeding 

periods. In 1998, the price of crude declined by nearly 38.0 percent. The 1999 price was 

41.0 percent higher than it was in 1998. Between 1999 and 2000, the price of crude jumped 

by 68.3 percent; the largest annual rate of increase observed between 1949 and 2000. 

 

3.1.2 Wellhead Natural Gas Prices 

The trend in natural gas prices has closely tracked the trend in oil prices. Up through the 

early 1970’s, the wellhead prices received for natural gas (in year 2000 constant dollar 

values, henceforth, real prices) very modestly increased. In 1949, the real price equaled 

$0.37 per thousand cubic feet (henceforth, mcf). In contrast to petroleum whose real price in 

1999 was nearly the same as it was in 1949, natural gas prices increased to $2.11 per mcf in 

1999—an increase of 470.3 percent. Between 1972 and 1973, the real price of natural gas 

increased by 9.66 percent. In 1974, the real price increased by 25.1 percent relative to 1973 
Oil and Gas Price Changes 34 Figure 6. First purchase price of petroleum and wellhead natural gas price, 1949-2000. $0.00 $10.00 $20.00

$30.00$40.00$50.00$60.00

19491951195319551957195919611963196519671969197119731975197719791981198319851987198919911

Year

Dollars per Barrel ($2000)

Source: U.S. DOE, EIA 2001a. 

First purchase price, petroleum

Wellhead price, 
Time Line 

35 Oil and Gas Price Changes 

levels. The real price continued to increase by double-digit percentages through 1977. 

Between 1973 and 1983, the real price increased by 474.3 percent. The price rises in the 

1970’s reflect higher prices one the intrastate market and gradual regulation after 1978. 

After the peak high price of 1983, the price of natural gas declined to $1.96 per mcf in 

1991—a decrease of 51.2 percent. Since 1991, prices have widely varied but also exhibited a 

generally, but very modest, increasing trend. In 2000, the average wellhead price of natural 

gas was $3.60 per mcf; the average price for January and February of 2001 equaled $6.95 per 

mcf. 

Natural gas prices between 1949 and 2000 had patterns similar to those that characterized 

petroleum. From 1949 through 1972, the price of natural gas remained relatively stable. The 

price did, however, increase between 10 and nearly 13 percent a year between 1951 and 

1954. The first large percentage increase occurred between 1972 and 1974, when prices 

increased by nearly 10.0 percent. In 1974, the price of natural gas increased by 25.1 percent 

relative to the 1973 price level. Unlike oil prices, which dramatically increased between 

1973 and 1974, but remained relatively constant between 1974 and 1978, natural gas prices 

consistently increased through 1983, when the price reached $4.02 per mcf of natural gas. 

Prices plummeted to a low of $1.96 per mcf in 1991. From 1991 through 1999, prices 

generally increased but also varied from year to year. Between 1999 and 2000, however, the 

price of natural gas increased 62.9 percent. 

3.2 Economics and Finance: Oil and Natural Gas Prices 

3.2.1 Factors Affecting Domestic Prices 

Although it seems trivial to state, oil and gas prices are determined by demand and supply 

conditions. Demand represents the quantities demanded given different prices, incomes, and 

other factors. Supply represents the schedule of quantities supplied given different oil and 

gas prices. The intersection of demand and supply determines the market equilibrium price. 

The seemingly simple concept that price is determined by the equilibrium between demand 

and supply, however, is actually quite complicated. 

The complications arise because of the dynamics of adjustments to economic, political, and 

other changes, and the factors affecting demand and supply at all market levels. America 

needs oil and natural gas or fossil energy. Consumers demand energy, such as oil or gas for 

heating homes and hot water and gasoline. Oil and natural gas are also used for producing 

electricity. Oil and gas prices are formed as a result of thousands of daily transactions 

occurring around the world. The price of each is even formed in relation to factors 

influencing the price of the other [e.g., oil (natural gas) prices may affect natural gas (oil) 

prices)]. These transactions occur at all levels of the distribution chain from producer to 

individual consumer. 

To gain a better understanding of the factors which determine oil and gas prices, consider the 

following simple example. We have a consumer demand (D) function for energy; this is an 

aggregate demand, which represents the demand for energy by all individuals in an economy. 

This demand depicts the total demand for energy given the price of energy. It is derived, 

however, from an aggregation of individual consumer demand. The individual demand for 
Economics and Finance 

36 Oil and Gas Price Changes 

energy is the result of an individual determining what quantities of goods and services he/she 

should purchase given prices and incomes, such that his/her overall level of satisfaction is 

maximized. On the other side, we have an aggregate supply curve (S) that depicts the total 

quantity of energy supplied for distribution to final consumers given prices offered for 

energy. The aggregate or market-wide supply curve for energy is derived as the aggregation 

of individual firm level supply functions. 

The equilibrium or intersection of demand and supply determines the equilibrium market 

price (Pe) and quantity for energy (Qe) (see Figure 7). The equilibrium price is the price at 

which the market clears or demand equals supply. For points below the equilibrium, demand 

exceeds supply and prices will generally be driven upwards. For points above the 

equilibrium level, supply generally exceeds demand and prices will be driven downward. 

The determination of price, as suggested by Figure 7, is seemingly simple. Yet, thousands of 

daily decisions are made, which may affect the price of oil and natural gas. Crude oil prices 

are affected by such factors as political instability, refinery/pipeline disruptions, changing 

weather patterns, economic prosperity, clean air laws, futures and commodity markets, 

rumors, crude oil and product stocks, and numerous other factors (U.S. DOE, EIA 2001b). 

Consider two simple illustrations of how oil or gas prices might change. There is an 

unusually mild winter in the Northeastern United States. As a result, consumers do not 

demand as much energy; they experience a downward shift in demand (e.g., D1 to D2 in 

Figure 7). The downward shift in demand causes demand to decline to Q2 and the 

equilibrium price to fall to P2. Now consider a new technology, which lowers final consumer 

distribution costs. With the lower costs, distributors can now make the same supply available 

at a lower cost per unit, assuming they had no increase in other production costs. The new 

equilibrium price and quantity is P3 and Q3. In essence, any event or factor, which can shift 

or rotate demand and/or supply, can affect the market price and quantity. 

The market for oil and natural gas is highly complex. Consider the domestic supply for oil 

(i.e., we ignore imports). We start from the raw material sector, exploration and production. 

We then proceed to transporting crude to the manufacturing sector, which includes refining. 

Next, there are the primary storage and throughput activities. Subsequently, refined products 

make their way to wholesale downstream markets, which require secondary transportation. 

Prior to the end user—the consumer, there is a secondary storage and final distribution 

sector. 

Any event affecting supply or demand in any of the sectors can have ramifications for the 

domestic price. For example, an increase in the cost of labor for the exploration and 

production sector shifts that sector’s supply schedule up and prices, for a given quantity, will 

increase. It costs more to explore and produce crude or natural gas, and producers likely 

establish production levels consistent with marginal cost pricing. 
Economics and Finance 

37 Oil and Gas Price Changes 

Price 

 Supply (S1) 

 P4 Supply (S2) 

 Pe

 P2

 P3

 Demand (D1) 

 Demand (D2) 

 Q2 Qe Q3 Quantity 

Figure 7. Simple Illustration of Market Price Determination. 

What about something as innocuous as an increase in the California State excise tax on 

gasoline? Gasoline, one of the main products refined from crude, accounts for nearly 20 

percent of the energy consumed in the U.S. (U.S. DOE, EIA 2001a). Gasoline is produced 

year-round, but there are seasonal production schedules to accommodate seasonal demands 

(e.g., high use during summer). Gasoline is delivered from oil refineries mainly through 

pipelines to a distribution chain serving approximately 180,000 retail stations in the U.S. 

What happens with the excise tax? Initially, it causes the supply schedule (S2) to consumers 

to increase (S1) (Figure 7). Retailers will supply the same quantity of gasoline (Q3) as before 

the excise tax but only at a higher price (P4); the price prior to the excise tax equaled P3. 

Consumers, however, may not be willing to pay the higher price for the same quantity; the 

actual response by consumers will depend upon their demand elasticity, or how they change 

demand in response to a change in price. The final price and quantity levels will be 

determined by the equilibrium between the new supply schedule (S1) and the old demand 

schedule (D1). If demand is highly elastic, small changes in price induce large changes in the 

quantity demanded. If demand is inelastic, as has often been believed to characterize the 

demand for energy, small or large changes in price induce minimal zero changes in the 

quantity demanded. If we assume that demand is somewhat elastic, or at least it is not 

inelastic, the higher supply price by retailers will induce a reduction in the quantity 

demanded for gasoline (Qe) and a new equilibrium price (Pe) ((i.e., price level determined 

for the situation when quantity demanded equals quantity supplied). If retailers desired to 
Economics and Finance 

38 Oil and Gas Price Changes 

increase their supply of gasoline to make up for the effects of the excise tax, they might have 

to obtain additional supplies from other geographic areas. They could subsequently bid up 

the domestic crude price and possibly even the world market price. 

To better depict how prices are formed, consider that there are many consumers around the 

world and many different sectors associated with the energy industry. If we make the very 

simple assumptions that producers maximize profits conditional on their technology (the way 

in which inputs are used to produce, refine, store, or transport oil and gas products) and 

prices, we can envision some underlying profit function for each producer: 

(1) Profit = Π(P,W,Z) 

where Π represents some profit function, P represents the prices of all outputs for each 

producer, W represents the prices of all variable inputs for all producers, and Z represents all 

fixed inputs or variables believed to influence production of the firm, but which are generally 

beyond the control of the producer in the short-run (e.g., political structure). From a profit 

function (i.e., a function relating profits to input and output prices and other factors), we can 

deduce factor demands (e.g., the demand for labor) and output supplies (e.g., the supply of 

crude for a given producer): 

(2) X = F(P,W,Z) 

(3) Y = G(P,W,Z) 

where X represents the producer demand for each factor, Y represents the supply schedule of 

each product produced by a producer, and F and G are input demand and output supply 

functions. There are N factors and M outputs, and thus, there are N factor demands and M 

output supplies. 

We next consider the consumer. In theory, the consumer maximizes his/her personal utility 

subject to prices (PR) of all goods and services and income constraints (IN). This yields a 

demand schedule for the consumer, which expresses the demand for a given commodity 

(e.g., gasoline), Y, as function of prices and income 

(4) Y = H(Po,PR,IN) 

where Po is the price of the commodity demanded by the consumer, PR represents the prices 

of all other commodities purchased or desired by the consumer, and IN is the income level of 

the individual consumer. Demand could be modified to reflect additional factors influencing 

demand such as family constraints. 

The price of oil or natural gas is unlikely to be affected by actions of any single producer or 

consumer. In the aggregate, however, small changes in consumer preferences, input prices, 

or events affecting large-scale production or consumption may drastically change the market 

price of crude and natural gas. 
Economics and Finance 

39 Oil and Gas Price Changes 

When OPEC nations or any other group of oil/gas producing nations act as one entity, they 

can influence crude oil prices and the price for natural gas; their influence on natural gas 

prices, however, is considerably less than is their influence on crude prices. More than 58 

nations export crude and petroleum products to the United States (U.S. DOE, EIA 1999a); 

OPEC nations accounted for approximately 48 percent of all imports in 1999, and non-OPEC 

nations accounted for the remainder. 

In terms of total exports of crude oil and petroleum products to the United States in 1999, 

Canada exported the largest quantity (561.8 million barrels); Venezuela was next with 544.8 

million barrels; Saudi Arabia was third with 539.6 million barrels; and fourth was Mexico 

with 483.4 million barrels. The ranks of nations relative to exports of just crude oil to the 

United States is slightly different: (1) Saudi Arabia (506.3 million barrels); (2) Mexico 

(457.7 million barrels); (3) Canada (429.9 million barrels); and (4) Venezuela (419.9 million 

barrels). U.S. consumption has increasingly depended on imports. In 1980, net imports 

accounted for 37.3 percent of total consumption, and in 1999, net imports accounted for 49.6 

percent of total domestic consumption (U.S. DOE, EIA 2001d). Events affecting supply or 

demand in any of the four nations, as well as Iraq, Nigeria, Angola, Colombia, and the 

United Kingdom could influence the domestic price of crude. 

Since 1980, total imports of natural gas have increased from 984.8 to 3,585.5 billion cubic 

feet—an increase of 264.1 percent (U.S. DOE, EIA 2000b). Net imports (total imports 

minus exports) increased from 936.0 to 3,380.7 billion cubic feet or by 261.2 percent. In 

1980, net imports accounted for 4.7 percent of the total U.S. consumption of natural gas; in 

1999, they accounted for 15.8 percent. The United States imports natural gas from Canada, 

Mexico, Algeria, Australia, Malaysia, Qatar, Trinidad, and the United Arab Emirates. 

Canada has traditionally been the leading exporter of natural gas to the U.S. Events affecting 

the foreign supply or demand for imports or U.S. production and distribution could affect the 

domestic price of natural gas or crude. 

3.2.2 Price and the Global Market 

The price of crude oil is primarily established by the supply and demand conditions in the 

global market. The North American price of natural gas, however, is predominantly 

determined by demand and supply conditions in the United States. The U.S. Department of 

Energy, Energy Information Administration (U.S. DOE, EIA) in its report “Oil Market 

Basics” (1999e) indicates that the price of crude is primarily established by activities in the 

main refining centers of Singapore, Northwest Europe, and the U.S. Gulf Coast. There 

remains, however, considerable confusion about how prices of natural gas and crude are 

actually established. 

A review of publications from the U.S. DOE, EIA, International Petroleum, and other 

sources suggests differences in opinion about which factors affect prices. The U.S. DOE, 

EIA (2000c), “A Primer on Gasoline Prices,” states that crude oil prices are determined by 

worldwide supply and demand, and that OPEC has a major influence on crude prices. The 

Energy Economics Newsletter (WTRG 1998) states that prices are determined much like any 

other commodity relative to demand and supply conditions. They also state, however, that 
Economics and Finance 

40 Oil and Gas Price Changes 

the U.S. industry’s price has been heavily regulated through production or price controls 

throughout much of the 20th century. The Texas Railroad Commission in 1972 eliminated 

production quotas on the amount of oil that could be produced in Texas; the elimination of 

production quotas is believed to have shifted the dominant influence to control crude oil 

prices from the U.S. to OPEC. Hornsnell (2001) “Oil Markets and Prices” generalizes the 

notion that the Brent market generates a price for crude that is widely used by OPEC and 

other oil exporting countries. Then the oil markets for west Texas intermediate (WTI) crude 

in New York, Dubai in the Gulf (Middle East), and petroleum products in Rotterdam interact 

and determine a world price of oil. An article by two petroleum industry executives, “World 

Facing $50 Crude Oil,” states that world and domestic price of oil is largely determined by 

the “spot” (i.e., cargo-by-cargo, transaction-by-transaction arrangements) market for oil 

(Anonymous 2000). The “spot price” is, by definition, the price for a one-time open market 

transaction for immediate delivery of a specific quantity of product at a specific location 

where the commodity is purchased "on the spot" at current market rates. The spot market 

best indicates the balance or imbalance between demand and supply. A rising spot price 

indicates excess demand and a declining spot price indicates excess supply. 

The price of natural gas is determined by supply and demand. Natural gas, like oil, is 

injected into pipelines every day and makes its way to millions of U.S. consumers (U.S. 

DOE, EIA 1999b). The gas comes from domestic production, imports, or withdrawals from 

storage facilities. The price of natural gas, however, is considerably more seasonal than is 

the price of oil. During the summer months, supplies typically exceed demand and the 

excess is placed into storage facilities, which can be drawn against to supply the higher 

winter demand. During the winter, prices typically rise because of increased demand for 

heating and relatively tighter supplies. During the early 1980’s, the well price of natural gas 

was generally viewed as being relatively stable. As a result of deregulation, it quickly went, 

however, from relative stability to highly volatile.1

 In 1979, price ceilings on natural gas 

began to be removed, and by 1993, natural gas was fully deregulated. As a consequence of 

the elimination of the price ceiling and deregulation, there has been more competition in the 

supply market. Many long-term contracts were replaced by more flexible arrangements. The 

enhanced competition generated a more dynamic system that can more quickly respond to 

changes in natural gas consumption or supplies. 

It is also believed that the wellhead price is closely linked to the spot price at the market 

center in Henry, Louisiana (referred to as the Henry Hub) (U.S. DOE, EIA 1999b). Natural 

gas prices, however, are also affected by storage capability. If demand becomes sufficiently 

high so that domestic storage reserves or inventories are insufficient, supplies must be 

obtained through imports, and at usually higher prices. Alternatively, if demand is very low, 

which often occurs during years of very mild winters, inventories of natural gas accumulate 

and exert downward pressure on the wellhead price of natural gas. 

There are, however, considerable differences in how oil and gas prices are determined. The 

price of crude appears to be mostly determined by worldwide activities, particularly OPEC. 

In contrast, natural gas prices are mostly determined by North American activities (IEA 

 

1

 Price volatility describes the temporal rate of price fluctuations, and is measured by the day-to-day percentage 

difference in prices. 
Economics and Finance 

41 Oil and Gas Price Changes 

1999a). The United States has the largest gas market in the world. Prices and availability of 

substitute fuels, however, do affect the demand and price of natural gas, and therefore, global 

events affecting the demand or supply of petroleum can affect U.S. prices of natural gas. The 

U.S. produces approximately 84 percent of the natural gas consumed in the United States. In 

1999, net imports (quantity imported less quantity exported) from Canada accounted for 15.4 

percent of total U.S. consumption. 

Market structure is the thing that makes the determination of gas prices different than that of 

oil. In the gas market, there is often more control or monopoly-like practices controlling the 

distribution or transportation of natural gas to the end user (IEA 1999a). Under this situation, 

it is easier for companies to establish prices that affect the final demand quantity. Moreover, 

the demand for natural gas is likely to be highly inelastic because it is difficult for many 

consumers to easily substitute other forms of energy. Natural gas suppliers may then affect 

prices by controlling supplies. 

In considering how prices of natural gas are determined, it is important to distinguish 

between short- and long-run price determinations. At any given time, demand and supply 

determine the market price for natural gas, regardless of whether one is considering the base 

price in a long-term contract or the spot price. For the short run, there are several factors, 

which influence the wellhead demand and supply. Pipeline capacity is believed to have a 

significant influence because when the pipeline network is fully utilized, the market becomes 

disconnected and demand may not equal supply in some markets (e.g., pipeline capacity 

constraints between the East, West, and South have led to considerable differences in spot 

prices during periods of high winter demand). This imbalance may lead to changing spot 

prices and subsequently the wellhead price of natural gas. 

In general, the short-run demand for natural gas at the wellhead is a function of the demand 

curve for gas in a given market. The short-run demand for natural gas in a given market is 

determined by the following factors (IEA 1999a): (1) seasonal heating load, which is related 

to weather; (2) seasonality of demand for gas in power generation, and the degree to which 

seasonal gas and electricity demand peaks coincide; (3) shipper demand for gas to place in 

storage, prevailing storage levels, and actual and expected price levels; and (4) capability of 

final users to switch to an alternative in a short amount of time. 

The production policy of producers and the willingness of holders of gas in storage to release 

it to the market at different price levels determine the short-run supply curve. It is thought 

that the supply curve is very steep, or highly inelastic (i.e., a 1 percent change in quantity 

supplied requires more than a 1 percent change in price) because supply cannot be increased, 

regardless of the price level, as output reaches the maximum sustainable level. At very low 

levels of output, it is thought that the supply curve is relatively flat (highly elastic in which 

small changes in price induce larger percentage changes in supply) because producers will 

shut down wells rather than sell gas at very low prices. The willingness of producers to sell 

at different prices is believed to be largely a function of expected price movements and 

storage levels. In addition, interfuel competition (e.g., the use of oil, coal, or nuclear power 

rather than natural gas to generate electricity) substantially affects the price of natural gas, 

and subsequently, the supply of natural gas. 
Economics and Finance 

42 Oil and Gas Price Changes 

In the long run, wellhead (also referred to as border gas) prices should converge to the 

marginal cost of production at the wellhead for a given level of demand. This is regardless of 

the cost of competing fuels. Prices should be nearly equivalent to long-run marginal 

production costs. If productivity capacity is developed more rapidly than demand growth, 

however, natural gas prices at the wellhead will likely be lower than the long-run marginal 

production costs. Alternatively, a lack of investment in production capacity leads to prices 

that are higher than the long-run marginal costs; this occurred in the U.S. at the end of the 

1970’s. In turn, the long-run marginal production costs, which includes exploration, 

development, operation, and maintenance, are dependent upon four major factors: (1) the 

resource base [i.e., indigenous (domestic) or external (imports)]; (2) whether or not gas is 

jointly produced with oil and how revenues from one cover the various costs; (3) technology 

and technical progress; and (4) organizational efficiency and productivity. For example, 

advances in exploration, development, and offshore production technology, combined with 

organizational efficiencies increased the average reserve additions per exploratory well from 

about 9 billion cubic feet (bcf) in the mid-1980’s to nearly 20 bcf by the mid-1990’s, mostly 

associated with deepwater drilling in the Gulf of Mexico. 

Economic growth, prices of substitute fuels, end-use technology, environmental constraints, 

and other factors determine the long-run demand, the other component that determines the 

long-run price. If we consider the various demand components for natural gas, it is possible 

to understand how the final user demand helps determine price. The final user signals a 

demand for natural gas. The medium or low-pressure distributor provides the gas by 

demanding gas from downstream storage, which in turn demands gas from the transmission 

system storage. The transmission system storage sector demands gas from the high-pressure 

transmission sector, which demands from the upstream storage. The upstream storage places 

demands on the producer of natural gas—the raw material producer at the well. 

In a very simplistic framework, it is possible to illustrate how domestic and world prices of 

crude or natural gas are determined. With a world market, there is a corresponding world 

demand and a world supply (see Figure 8a). The world demand consists of domestic demand 

plus rest of world demand for oil; the world supply is determined by the domestic supply plus 

the supply of oil from the rest of the world. With trade, an equilibrium price of oil is 

established by the intersection of world demand and world supply (i.e., world price in Figure 

8a). This international price is the world price of oil. In our simple example, we do not 

consider transport costs, which is a major reason why crude prices in the U.S. are different 

than crude prices in other nations. 

To better understand the concept of exports, imports, and domestic prices, consider the 

demand and supply situation depicted in Figure 8b. On the right side of Figure 8b, the U.S. 

market for oil is depicted; the concept would be the same for natural gas. On the left side, 

demand and supply for the rest of the world is depicted (remember that the demand and 

supply curves for the rest of the world are reversed because increasing quantities are from 

right to left). The rest of the world can more cheaply produce oil; they produce a-x and 

demand b-x barrels of oil. Initially, the price of oil is higher in the United States than it is for 

the rest of the world (the price in the U.S. and the rest of the world is determined by the 

intersection of the world demand supply curves—Figure 8a). The rest of the world has a 
Economics and Finance 

43 Oil and Gas Price Changes 

 Price 

 Supply 

 World 

 Price 

 Demand 

 Quantity of Oil (Barrels-World) 

Figure 8a. World Demand, Supply, and Price. 

 Supply 

 Demand 

 a b x c d 

 Demand 

 Supply 

Quantity of Oil Quantity of Oil 

Rest of World United States 

Figure 8b. Domestic and Foreign Demand for Oil. 
Economics and Finance 

44 Oil and Gas Price Changes 

surplus of a-b barrels of oil. The U.S. has excess demand equal to c-d. At some given pricequantity combination, the excess supply of the rest of the world will equal the excess demand 

by the United States (i.e., a-b will equal c-d). This equality determines the terms of trade and 

domestic and rest of world prices. Under the situation in Figure 8b, the initial price of oil in 

the U.S., prior to trade was higher than the price of oil after trade. For the rest of the world, 

exports of oil raised the price higher than it would have been in the absence of any trade or 

exports. 

Figures 8a and 8b are, of course, extreme simplifications of how the domestic and world 

prices and quantities of oil, or natural gas, are established. Alternatively, events that affect 

the level of demand or supply response to changes in prices of major consuming or 

producing nations can also change the world and domestic prices. Changes in the level of 

demand or supply response to changes in price may be caused by shifts in demand; in this 

case, the demand curve shifts either out or in relative to its current position. If the demand 

shifts out, consumers demand the same quantity as originally demanded but at a higher price. 

A shifting out of demand can happen when the price of substitute forms of energy increase or 

consumers experience an increase in disposable income. An increase in consumer 

preferences may also shift the demand curve out and to the right. An inward shift in demand 

equates to demanding the same quantity at lower prices or a lower quantity at the same price. 

A reduction in disposable income can also shift the demand curve down and to the left of the 

original demand. Similarly, inward (up and to the left of the original supply curve) and 

outward (down and to the right of the original supply curve) shifts in supply may be caused 

by factors or events that affect costs. For example, the adoption of a new low cost 

technology could cause suppliers to offer a higher supply of petroleum products at lower 

prices. Consider, for example, the supply situation depicted in Figure 7. The original supply 

curve is S2. Because of the excise tax, however, supply shifts up and to the left (S1) of the 

original supply curve. The supply shift in Figure 7 represents a parallel shift. Shifts in either 

demand or supply, however, need not be parallel. There could be changes in the slope or 

price responsiveness of demand and supply. In this case, shifts in supply or demand would 

not be parallel to the original supply or demand curve. Events that typically affect the slope 

of the demand curve include changes in preferences, changes in habit, changes in uncertainty 

of income, and possibly changes in the price of substitute commodities. A major reason for a 

change the supply response to price (slope) is non-neutral technical change (i.e., technical 

change induces more or less use of one production factor, such as labor, than it does of other 

factors of production). 

Concerned by the limited ability to explain changes in the domestic price of crude oil, the 

U.S. DOE, EIA initiated a 2001 Analysis Agenda to examine the relationship between crude 

oil prices and petroleum market fundamentals under the analysis theme “Energy Supply, 

Consumption and Price Developments” (U.S. DOE, EIA 2001b). Given the complexity of 

precisely determining how the prices of petroleum and natural gas are determined, the next 

two sections describe events believed to have affected or been partly responsible for changes 

in the domestic prices of crude and natural gas. 
Economics and Finance 

45 Oil and Gas Price Changes 

3.2.2.1 Major Factors Affecting Crude Prices

Understanding how events taking place between 1980 and 2000 affected oil prices requires 

knowledge of how some events prior to 1980 affected world-wide demand and supply 

conditions. Although many events in the 1950’s and 1960’s affected U.S. oil prices, the 

more significant events were the Korean War (1951-1953), the formation of the European 

Economic Community (EEC) in 1957, the 1958 U.S. recession, the imposition of import 

quotas by President Eisenhower in 1959, the formation of OPEC in 1960, discovery of oil in 

the North Slope in 1968 and 1969, and the ending of U.S. market control in March 1972, 

when the Texas Railroad Commission set proration at 100 percent for the first time. The 

setting of proration at 100 percent allowed Texas producers to produce the maximum of their 

well allowables. Relative to prices between 1980 and 2000, the formation of OPEC in 1960, 

the ending of U.S. market controls in 1971, and the various Middle East wars are thought to 

have had the largest impacts on U.S. and world oil prices (WTRG, 1998). 

As stated earlier, OPEC was formed in 1960 with five member nations—Iran, Iraq, Kuwait, 

Saudi Arabia, and Venezuela and by the end of 1971, had six new members—Qatar, 

Indonesia, Libya, United Arab Emirates, Algeria, and Nigeria. In the early 1970’s, OPEC 

nations produced approximately 50 percent of the total world production of oil. In the mid1980’s, production by the OPEC nations dropped to slightly less than 30 percent. By 1995, 

their share of world production had increased to slightly more than 40 percent. In the 1960’s, 

in terms of U.S. consumption of crude oil, OPEC nations accounted for a significant and 

generally growing share of U.S. oil supplies (Figure 9 and discussion in Section 3.2.3). 

While the Texas Railroad Commission’s action allowed Texas producers to produce to 

maximum well allowable levels, it also shifted the dominant influence to control crude oil 

prices from the United States (Texas, Oklahoma, and Louisiana) to OPEC (see Figure 10). 

This was particularly evident between 1973 and 1974 or the period of the Yom Kippur War, 

which started with an attack on Israel by Syria and Egypt on October 5, 1973. The U.S. and 

several other western world nations strongly supported Israel. The Arab exporting nations, 

however, imposed an embargo on the nations supporting Israel. In just 6 months, nominal 

crude prices increased 400 percent; by the end of 1974, however, they had declined. In 1979, 

the Iranian Revolution began after the 1978 Anti-Shah demonstrations and oil workers strike, 

and prices increased. The Iranian/Iraqi War began in 1980 and U.S. imports decreased and 

domestic prices increased. Between 1981 and 1988, OPEC or OPEC nations took several 

actions which either reduced prices (e.g., cutting the benchmark to $29 in 1982) or increased 

supplies (e.g., Saudi Arabia increased production by 44 percent in 1985). The Iranian/Iraqi 

War ended in 1988, and prices declined. (It should be noted that average world oil prices fell 

by over 50 percent in 1986.) In 1990, the Gulf War started and prices again increased. Two 

major OPEC and non-OPEC nations’ actions appear to have serious ramifications for the 

current price of crude: (1) in 1998, OPEC pledged to cut production; and (2) in 1999, both 

OPEC and non-OPEC nations cut production; between 1999 and 2000, the nominal price 

increased 71.8 percent, and the real price increased 68.3 percent. Another event, which 

likely had significant ramifications for oil prices, was the windfall profits tax of 1980. 
Oil and Gas Price Changes 46 Figure 9. Percent of U.S. consumption supplied by OPEC and non-OPEC nations, 1960-1999. 0% 10% 20% 30% 40%

50%60%70%80%90%

100%

1960196219641966196819701972197419761978198019821984198619881990

Percent

Calculated OPEC Share Calculated Non-OPEC Share Calculated Domesti

Source: U.S. DOE, EIA 2000a. 
Oil and Gas Price Changes 47 Figure 10. Nominal first purchase price, crude, 1970-2000. $0.00 $5.00 $10.00 $15.00

$20.00$25.00$30.00$35.00

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

Year

Dollars per Barrel Iranian Revolution

Iran/Iraq

War Gulf War

U.S. price controls to mitigate effects of U.S. Arab oil embargo on U.S. 

Iran: anti-Shahdemonstrations, oil worker strike

OPEC's first quota

Benchmark cut to $29

NYMEX oil 

futures

Saudi Arabia increases production 

 44 %

Iraq-Iran 

War Ends

Iraq defeated 

in Gulf War

OPEC increas10%, but undimpact of Asicrisis on dem

Source: WTRG 1998.

OPEcut p

OPEC and nations cueffective A

Yom Kippur WarArab Oil Embargo 
Economics and Finance 

48 Oil and Gas Price Changes 

3.2.2.2 Major Factors Affecting Natural Gas Prices 

The price of natural gas is primarily influenced by factors affecting demand and supply in 

North America. Natural gas is the second major source of energy in the United States. It 

presently accounts for approximately 24.0 percent of all energy consumed in the United 

States, and equals 27.0 percent of all energy produced in the United States (U.S. DOE, EIA 

2001c). The major user of natural gas is the industrial sector, which uses gas for plant 

operations, cogeneration of electric power, and as an industrial feedstock. Natural gas is also 

the largest source of energy for the residential sector. It is the fastest growing energy source 

for electricity. 

In the past 20 years, numerous events have affected the domestic price of natural gas. 

Mariner-Volpe (2000) stated that the major drivers of the short-term prices of natural gas 

include weather, economic and business conditions, stock levels, pipeline capacity, operation 

difficulties, and lack of time and reliable information. There have been two other major 

factors--regulation and deregulation, particularly the various regulations either in place or 

subsequently imposed or removed between 1980 and 2000. 

Prior to 1978, gas producers explored for and produced natural gas. These producers sold 

gas to pipeline companies. The pipeline companies transported gas across the nation, and 

then sold the gas to local distribution companies (LDCs). The LDCs (e.g., gas utilities) were 

responsible for selling gas to the end user. The federal government regulated the price at 

which producers could sell their gas to interstate pipeline companies. The price at which the 

pipelines could sell their gas to the LDCs was also regulated. State or local government 

agencies typically regulated end user prices. 

In 1978, Congress passed the Power Plant and Industrial Fuel Use Act (PIFUA). This Act 

discouraged the use of natural gas in large industrial boilers and established pricing 

categories for wellhead gas production, which prevented the sending of competitive price 

signals to the marketplace. Prior to 1978, however, prices had been consistently rising; 

between 1973 and 1974, the wellhead price (in year 2000 constant dollars) increased by 25.1 

percent. The rising price of natural gas, particularly between 1973 and 1978, was primarily 

in response to a growing demand for natural gas, which was spawned by fears of diminished 

supplies of petroleum (Hutzler 2000). Between 1976 and 1978, extremely cold weather is 

believed to have been responsible for a shortage of natural gas and, subsequently, rising gas 

prices. In the late 1970’s, there was considerable concern by government that the shortages 

of 1976 through 1978 would continue into the future. In response, the Natural Gas Policy 

Act (NGPA) of 1978 was passed; the objective was to decontrol the wellhead price of natural 

gas. The NGPA placed wellhead price caps on several categories of natural gas. The NGPA, 

however, had escalation clauses to allow prices to rise to a level competitive with other fuels. 

The escalation clauses were developed believing that oil prices would continue to steeply 

increase in the future. As a consequence, price caps for the various categories of natural gas 

subject to the escalation clauses became considerably higher than the prevailing market price. 

As would be expected, the higher prices encouraged more exploration and development, and 

later, higher reserves of natural gas. Concurrently, the higher prices were decreasing the 

demand for natural gas. By the early 1980’s, there was an excess of supply of natural gas—

now often referred to as the gas bubble (IEA 1999b). 
Economics and Finance 

49 Oil and Gas Price Changes 

Examination of prices in Figure 11 suggests that changes in gas prices between the late 

1970’s and early 1980’s closely followed regulatory change. Following the NGPA of 1978, 

the wellhead price increased nearly 20.0 percent. It continued to follow double-digit 

increases through 1982. In 1983, a spot market for natural gas developed, which allowed 

prices for the spot market to be below those for the contract market; between 1982 and 1983, 

the price of natural gas increased by only 1.26 percent. In 1984, the Federal Energy 

Regulatory Commission (FERC), the successor to the Federal Power Commission (FPC), 

issued orders that removed gas costs from minimum bills for consumers. The FERC in 1985 

issued orders requiring that pipelines provide open access to transportation services; Order 

436 was implemented in 1986. Between 1984 and 1985, the price declined 8.52 percent. 

From 1984 through 1986, the consumption of natural gas declined, particularly for the 

industrial sector, the largest domestic user of natural gas. Consumption by both the 

residential and commercial sectors also declined. From 1985 to 1986, the wellhead price 

(inflation adjusted) declined by 24.4 percent, which was the largest decline in price between 

1949 and 2000. Order 500 in 1987 was implemented to address acute take-or-pay problems. 

In 1989, the FERC issued the Wellhead Decontrol Act, which specified the staged removal of 

all remaining controls on wellhead prices by the end of 1992. In 1992, the FERC issued 

Order 636 requiring interstate natural gas pipelines to unbundle products and services; the 

goal was to promote a competitive market for natural gas suppliers. In 1995, choice 

programs for residential customers were implemented. 

Since 1978, the numbers of regulatory changes, which have affected wellhead prices and the 

market, have been quite substantial (see Table 4). The initial purpose of regulation during 

the late 1970’s was to decrease reliance on natural gas and petroleum by promoting 

alternative sources of energy. At the same time, legislation, such as the Natural Gas Policy 

Act of 1978, was passed to deregulate the natural gas industry or to make it more 

competitive. From 1978 through 1983, the real wellhead price for natural gas steadily 

increased. After 1983, however, the wellhead price for natural gas began to decline. This 

was in part because of two factors: (1) there was a dramatic drop in world oil prices; and (2) 

FERC issued and implemented Order 436, respectively, in 1985 and 1986. Order 436 was 

the first of many actions to deregulate the natural gas industry. From 1987 through 1991, the 

real price of natural gas remained relatively constant. Following the Natural Gas Wellhead 

Decontrol Act of 1989, the Energy Policy Act (1992), Restructuring Act of 1992, which 

unbundled gas and related services, and other legislation and/or FERC Orders were 

implemented. Finally on January 1, 1993, all natural gas price controls were removed. 

Subsequent to these events, the wellhead price of natural gas has generally increased, but has 

also demonstrated great volatility. 

From 1988 through 1994, the market for natural gas dramatically changed. The changes 

were the result of both economic pressures and governmental initiatives. Gas production 

increased by 10.0 percent, while the real wellhead price declined by 8.4 percent. Proven 

reserves declined by only 2.0 percent (Natural Gas Council 2001). The gas supplied to 

consumers increased by 16.0 percent and equaled the highest level of consumption since 

1974. Most of the increase was driven by the increased use of natural gas for electricity 

generation by nonutility generators. 
Oil and Gas Price Changes 50 Figure 11. Nominal natural gas prices, wellhead, 1949-2000. $0.00 $0.50 $1.00 $1.50 $2.00

$2.50$3.00$3.50$4.00

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

Year

Dollars per 1,000 Cubic Feet

NGPA-1978

Order 436, creates competitive marketIssued 1985Implemented 1986

Natural Gas

WellheadDecontrol Act1989

Ael Ja

EPA

Clean Air ActAmendments 1990

Source: U.S. DOE, EIA 2000b. 
Economics and Finance 

51 Oil and Gas Price Changes 

Table 4 

FERC Orders and Other Legislation 

Affecting the Wellhead Price of Natural Gas, 1980-2000 

Year Order/Legislation Action 

1978 Natural Gas Policy Act Ends control over wellhead price of new gas 

1978 Power Plant and Industrial Fuel Use 

Act 

Discourages use of gas and oil, particularly in boilers 

1985 FERC Order 436 Voluntary program to encourage gas pipelines to 

become open access carriers of natural gas 

1987 Amendments to Fuel Use Act Creates potential for additional use of gas 

1987 National Appliance and Energy 

Conservation Act 

1987 FERC Order 500 Modified Order 426 to address pipeline companies’ 

take or pay issues 

1988 FERC Order 490 Allowed abandonment of first sales contracts and 

allowed pipeline bypass 

1988 FERC Order 491 Interpreted Section 5 of the Outer Continental Shelf 

Lands Act to require that OCS pipeline companies 

offer both firm and interruptible transportation on a 

nondiscriminatory open-access basis 

1988 FERC Order 493 Natural Gas Data Collection System—inquiry into 

alleged anticompetitive practices related to marketing 

affiliates of interstate pipeline companies 

1988 FERC Order 493 Natural Gas Data Collection System—inquiry into 

alleged anticompetitive practices related to marketing 

affiliates of interstate pipeline companies 

1989 Natural Gas Wellhead Decontrol Act Eliminates all remaining wellhead price controls 

1990’s Repeal of Power Plant/Fuel Use Act 

1990 Clean Air Act Amendments 

 Ozone Transport Rule 

1990/91 FERC Orders 528/528A Caps recovery of take or pay costs through volumetric 

surcharges charged by pipeline companies 

1992 FERC Order 636 Requires interstate gas pipelines to unbundle 

1993 Omnibus Budget Reconciliation Act 

1994 North American Free Trade Agreement 

1995 First choice programs implemented 

1995 Outer Continental Shelf Deep Water 

Royalty Relief Act 

1997 Taxpayer Relief Act 

1997 Climate Change Action Plan 

Sources: AGA 1997a, IEA 1999a, Mariner-Volpe 2000, U.S. DOE, EIA 2000d. 
Economics and Finance 

52 Oil and Gas Price Changes 

Since 1995, the wellhead price for natural gas has generally increased, but dropped sharply 

from 1997 to 1998. Between 1999 and 2000, the wellhead price increased by 62.9 percent, 

the highest observed rate of increase between 1949 and 2000. To a great extent, the large 

increase, particularly between 1999 and 2000, was associated with lower storage levels of 

natural gas. Goldsmith (2001) suggests that industrial customers, rather than gas companies, 

were largely responsible for inadequate storage of natural gas, and the subsequent large 

increase in price. In 1998 and into early 1999, the price of natural gas collapsed. In 

response, producers of natural gas cut back production. By early 2000, inadequate supplies 

caused prices to escalate. 

 

Other major factors, which influence the wellhead price of natural gas, include weather, 

storage and processing capacity, transportation, extraction and exploration costs, trading 

level on the spot market, overall demand, prices of competing fuels (primarily oil and coal), 

and competition between gas companies for supplies. The spot market developed in the early 

and mid-1980’s, when many purchasers no longer desired long-term contracts, and natural 

gas supplies were quite high. On April 3, 1990 on the New York Mercantile Exchange 

(NYMEX), trading began for natural gas futures. The futures prices and natural gas spot 

market prices jointly influence each other, and subsequently, influence the wellhead price of 

natural gas. 

In summary, the wellhead price of natural gas is predominantly determined by domestic 

demand and supply factors. In an evolutionary mode, the price has gone from being greatly 

influenced or actually established by federal and state regulations to being mostly influenced 

or determined in a relatively competitive market—demand and supply fully determine price. 

External factors that influence gas prices have mostly consisted of increasing oil prices, 

coupled with greater demand relative to supply of natural gas. It is too early to determine 

how the residential customer choice programs have affected the wellhead price of natural 

gas. By allowing customers to choose from whom they buy their natural gas, much like 

individuals select their long-distance telephone company, competition should increase; 

increased competition should reduce prices consumers pay to providers of natural gas, which 

in turn, should reduce wellhead prices. If consumers select non-utility suppliers of natural 

gas, however, it is possible that residential and wellhead prices will rise (AGA 1997b). 

Presently, the most important factor that determines the natural gas wellhead price is the 

competitive marketplace. 

3.2.3 Demand and Supply 

The fact that price is determined by demand and supply was discussed in previous sections. 

In this section, changes in demand and supply are described for years between 1980 and 

2000. Although the focus of the report is on the extraction and related service industries, it is 

necessary to also discuss general patterns in consumption and supply. Changes in any given 

market level activity may influence production activities, the demand for petroleum and 

natural gas, and related prices. 
Economics and Finance 

53 Oil and Gas Price Changes 

3.2.3.1 Demand and Supply: Petroleum 

During the 1960’s, the United States produced 81.4 percent of its total petroleum need (see 

Table 5). OPEC provided 11.6 percent of the domestic need. Non-OPEC nations provided 

7.0 percent. During the 1970’s, the percent of consumption supplied by domestic production 

declined to 64.8 percent; the percent of consumption supplied by imports increased to 35.2 

percent. U.S. share of consumption first fell below 70.0 percent in 1973. It was also in 1973, 

the year of the Arab Oil Embargo, that U.S. dependency on foreign oil increased to over 30.0 

percent of total consumption. During the 1990’s, U.S. producers of petroleum provided just 

over 50.0 percent (54.7 percent) of U.S. consumer needs. Starting in 1997, U.S. producers 

were supplying only about 50.0 percent of U.S. petroleum needs. 

Table 5 

Average Annual Percent of Domestic Consumption 

 Supplied by Domestic Production and Imports, 1960-1999 

Period Domestic OPEC Non-OPEC All Imports 

1960-1969 81.4 11.6 7.0 18.6 

1970-1979 64.8 21.5 13.7 35.2 

1980-1989 66.7 17.6 15.7 33.3 

1990-1999 54.7 24.2 21.1 45.3 

Source: U.S. DOE, EIA 2000a. 

In the past 40 years, the United States has become increasingly dependent upon imports for 

petroleum. Up until 1981, OPEC nations routinely accounted for about 60.0 percent of all 

imports. In terms of petroleum products supplied to U.S. consumers, imports accounted for 

approximately 21.8 percent between 1949 and 1981; between 1982 and 1999, imports 

accounted for 39.8 percent of total petroleum products supplied to U.S. consumers. Between 

1982 and 1988 and since 1993, non-OPEC nations accounted for more than 50.0 percent of 

total imports. Since 1996, Canada has become the leading non-OPEC exporter of petroleum 

to the United States. Although Saudi Arabia had traditionally been a major source of foreign 

supplies for petroleum and an OPEC nation, the United States presently imports more 

petroleum from Venezuela. 

In 1980, the United States imported 6.91 million barrels of oil a day (see Figure 12). 

Approximately 4.3 million barrels were obtained from OPEC nations and 2.61 million barrels 

were obtained from non-OPEC nations. Saudi Arabia accounted for 1.3 million barrels of 

imports per day. Between 1981 and 1986, imports from Saudi Arabia and OPEC nations 

substantially declined. In 1985, OPEC nations provided 36.1 percent of total imports, and 

Saudi Arabia accounted for only 3.3 percent of total imports. Imports from the non-OPEC 

nations accounted for 63.9 percent of total imports. In 1999, petroleum products from 

foreign sources accounted for 49.6 percent of total domestic petroleum products supplied. 
Oil and Gas Price Changes 54 Figure 12. Petroleum imports, OPEC and non-OPEC, 1960-1999. 0 2,000 4,000 6,000

8,000

10,00012,000

1960196219641966196819701972197419761978198019821984198619881990

Barrels per Day (thousands)

Total Imports

OPEC

Source: U.S. DOE, EIA 2000a.
Economics and Finance 

55 Oil and Gas Price Changes 

The U.S. DOE, EIA in its annual report (2000a) provides information indicating the percent 

of total domestic production from the OCS areas has steadily increased since 1954 (see 

Figure 13). In 1954, OCS production accounted for only 2.1 percent of total domestic 

production of crude. From 1967 on, OCS production accounted for double-digit shares of 

total production, and in 1997, accounted for as much as 25.5 percent of total production. 

Generally, onshore production has tended to decrease since 1985, while offshore production 

has increased (see Figure 14). 

Examination of the potential relationship between OCS offshore production and wellhead 

prices does not indicate the expected economic relationship between output prices and 

commodity production (see Figure 15). As prices increase, production would normally be 

expected to increase. There is often, however, a long time between price signals and actual 

production. Even considering lags in how producers respond to prices, there is no apparent 

relationship between offshore OCS production and output prices. For example, prices were 

increasing between 1978 and 1981 and OCS production was decreasing. Between 1981 and 

1984, the real wellhead price decreased by 28.9 percent; OCS production increased by 24.1 

percent.2

 From 1990 through 1999, the wellhead price generally decreased, and OCS 

production dramatically increased in part because of the opening of deepwater production 

and the impact of technology. There is, however, a more pronounced relationship between 

total domestic production and wellhead prices between 1985 and 19993. In general, as 

wellhead prices decline, so does the total domestic production. 

The United States is the largest oil consuming and oil importing country in the world; it ranks 

second, after Saudi Arabia, in the production of oil (IEA 1999a). Between 1949 and 1999, 

total U.S. energy consumption, from all sources, increased from 32 quadrillion British 

thermal units (Btu) to nearly 97 quadrillion Btu. Petroleum has accounted for an average 

40.1 percent of total domestic consumption of energy. Natural gas has accounted for 20.6 

percent of total consumption. Electricity generated from oil, gas, coal, non hydrorenewables, nuclear, and hydroelectric sources has accounted for an average of 7.7 percent of 

total energy needs (U.S. DOE, EIA 2000a). 

Petroleum’s share of total domestic energy needs was nearly the same in 1999 as it was in 

1949 (38.0 percent in 1999 vs. 35.8 percent in 1949). From 1954 to 1980, however, 

petroleum’s share of domestic energy consumption regulatory exceeded 40.0 percent each 

year; the annual share varied between 40.3 in 1980 and 43.3 in 1958. Since 1980, 

petroleum’s share of total annual domestic energy needs has been less than 40.0 percent. 

Of the four major sources of energy (i.e., coal, natural gas, petroleum, and electricity) only 

per capita consumption of coal has declined. Between 1949 and 1999, the average annual 

per capita consumption of natural gas, petroleum, and electricity increased, respectively, 1.7, 

1.5, and 12.3 percent. Petroleum consumption exhibited the lowest rate of increase in per 

capita utilization. Relative to the years between 1950 and 1979, the per capita consumption 

of petroleum has been declining. Per capita consumption declined from 1980 through 1995; 

 

2

 Areawide leasing, which relies on oil company geological assessments for tracts offered, began in May 1983. 3

 This period was post areawide leasing. 
Oil and Gas Price Changes 56 Figure 13. Percent of crude oil production by onshore and offshore operations, 1954-1999. 0.0 10.0 20.0 30.0 40.0 50.0

60.070.080.090.0

100.0

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

199

Percent ofTotal Domestic Production

Onshore

Offshore

Source: U.S. DOE, EIA 2000a.
Oil and Gas Price Changes 57 Figure 14. Onshore and federal offshore petroleum production, 1954-1999. 0 1,000 2,000 3,000 4,000

5,0006,0007,0008,0009,000

19541956195819601962196419661968197019721974197619781980198219841986198819901992

Year

1,000 Barrels per Day--Onshore

Onshore

Offshore

Source: U.S. DOE, EIA 2000a. 
Oil and Gas Price Changes 58 Figure 15. Offshore (OCS) production and wellhead prices, 1954-1999. 0 200 400 600 800

1,0001,2001,4001,6001,800

19541956195819601962196419661968197019721974197619781980198219841986198819901992

Year

1,000 Barrels per Day

Source: U.S. DOE, EIA 2000a. 

Offshore

Price
Economics and Finance 

59 Oil and Gas Price Changes 

from 1996 forward in time, however, the annual per capita consumption has marginally 

increased—from 132.1 million Btu’s to 134.7 million Btu’s. 

In general, there are three major energy-using sectors: (1) residential and commercial, (2) 

industrial, and (3) transportation. In terms of total energy consumed in America, the 

industrial sector has traditionally had the highest consumption; residential and commercial 

users ranked second in consumption; and the transportation sector ranks third. Relative to 

petroleum, the transportation sector is the largest consumer; the industrial sector is second; 

residential and commercial users rank third in terms of consumption (see Figure 16). While 

total petroleum usage has dramatically increased since 1949, its use in the residential and 

commercial and industrial sectors has generally declined since 1980. Between 1980 and 

1999, petroleum usage by the residential and commercial sector declined from 3.04 

quadrillion Btu’s to 2.08 quadrillion Btu’s. In the industrial sector, usage declined from 9.53 

to 9.46 quadrillion Btu’s, but usage was also well below 9.0 quadrillion Btu’s between 1981 

and 1995. Usage of petroleum by the transportation sector, however, has continued to 

increase. Between 1980 and 1999, usage of petroleum by the transportation sector increased 

by 31.6 percent. 

The major petroleum-based commodity is, of course, gasoline (see Table 6). Motor gasoline 

accounts for approximately 40.0 percent of total domestic petroleum use. Distillate fuel oil 

and jet fuel account for approximately 25.0 percent of total domestic petroleum use. 

Residential fuel oil, which historically accounted for 14.0 or more percent of total petroleum 

usage, substantially declined in usage between the late 1960’s and the 1990’s. Between 1969 

and 1982, residual fuel oil typically accounted for between 11.0 and 17.0 percent of total 

petroleum usage. During the 1980’s, the residential fuel oil share of total petroleum usage 

declined to between 7.0 and 9.0 percent; by the late 1990’s, residential fuel oil accounted for 

less than 5.0 percent of total petroleum usage. Between 1980 and 1999, each product’s share 

of total petroleum usage changed as follows: (1) asphalt and road oil—21.4 percent; (2) 

distillate fuel oil—8.9 percent; (3) jet fuel—37.3 percent; (4) liquefied petroleum gas—30.4 

percent; (5) motor gasoline—12.1 percent; (6) residential fuel oil—(-70.9 percent); and (7) 

other products—(-9.2 percent). 

3.2.3.2 Demand and Supply: Natural Gas 

Between 1949 and 1999, America’s consumption of energy tripled, increasing from 32.0 to 

96.6 quadrillion BTUs or by approximately 4.0 percent per year. Between 1949 and 1999, 

domestic consumption of petroleum energy increased 220.3 percent or at an annual rate of 

4.4 percent. In contrast, domestic consumption of natural gas-based energy increased 298.5 

percent or at an annual rate of nearly 6.0 percent per year. Since 1980, consumption of 

energy increased by 23.2 percent or by only 1.2 percent per year. Since 1980, the 

consumption of petroleum-based energy has increased 16.3 percent, while the consumption 

of natural gas-based energy increased 14.6 percent. When examined together, the overall 

trend in consumption is quite similar for the two sources of energy (see Figure 17). 

 
Oil and Gas Price Changes 60 Figure 16. Share of petroleum consumption by end-use sector, 1960-1999. 0.00 10.00 20.00 30.00 40.00

50.0060.0070.0080.00

1960196219641966196819701972197419761978198019821984198619881990

Percent

Transportati

Industrial

Commercial and Reside

Source: U.S. DOE, EIA 2000a. 

Year
Oil and Gas Price Changes 61

Table 6 

Share of Total Petroleum Usage by Products Used in America, 1969-1999 

 Asphalt and Distillate Liquefied Petroleum Gases Motor Residual Other 

Year Road Oil Fuel Oil Jet Fuel Propane Total Gasoline Fuel Oil Products 

1969 2.97 17.47 7.00 5.52 8.63 39.11 14.00 10.81970 3.06 17.28 6.60 5.31 8.30 39.32 14.97 10.41971 3.02 17.49 6.64 5.19 8.22 39.51 15.12 9.91972 2.87 17.78 6.41 5.44 8.67 38.97 15.46 9.91973 3.00 17.85 6.12 5.03 8.38 38.53 16.29 9.71974 2.88 17.72 5.95 4.98 8.47 39.28 15.86 9.91975 2.57 17.46 6.13 4.78 8.15 40.87 15.07 9.61976 2.35 17.93 5.67 4.75 8.02 39.98 16.04 10.01977 2.39 18.18 5.64 4.45 7.70 38.96 16.66 10.51978 2.55 18.20 5.62 4.14 7.48 39.31 16.02 10.71979 2.59 17.88 5.83 4.59 8.59 37.98 15.29 11.81980 2.34 16.82 6.27 4.40 8.62 38.57 14.71 12.71981 2.12 17.62 6.29 4.79 9.15 41.03 13.01 10.81982 2.22 17.45 6.60 5.23 9.80 42.75 11.24 9.81983 2.43 17.66 6.89 4.92 9.91 43.47 9.32 10.31984 2.61 18.05 7.50 5.28 9.98 42.53 8.71 10.51985 2.73 18.25 7.76 5.59 10.17 43.42 7.63 10.01986 2.76 17.87 8.05 5.10 9.28 43.18 8.72 10.11987 2.82 17.88 8.28 5.52 9.66 43.25 7.56 10.51988 2.72 18.06 8.39 5.32 9.61 42.48 7.99 10.81989 2.60 18.23 8.60 5.71 9.64 42.30 7.91 10.71990 2.83 17.78 8.95 5.41 9.18 42.55 7.24 11.41991 2.63 17.47 8.80 5.86 10.11 43.03 6.94 11.01992 2.64 17.50 8.51 6.05 10.33 42.69 6.40 11.91993 2.73 17.63 8.53 5.86 10.03 43.39 6.26 11.31994 2.71 17.83 8.63 6.09 10.61 42.89 5.76 11.51995 2.77 18.12 8.52 6.21 10.72 43.96 4.80 11.11996 2.62 18.41 8.63 6.23 10.98 43.09 4.64 11.61997 2.74 18.47 8.59 6.28 10.96 43.07 4.30 11.91998 2.75 18.29 8.56 5.92 10.31 43.60 4.70 11.71999 2.84 18.31 8.61 6.45 11.24 43.22 4.28 11.5

Source: U.S. DOE, EIA 2000a. 
Oil and Gas Price Changes 62 Figure 17. Consumption of petroleum and natural gas, 1949-1999. 051015

2025303540

194919511953195519571959196119631965196719691971197319751977197919811983198519871989199

Year

Quadrillion Btu--Petroleum

Source: U.S. DOE, EIA 2000a. 

Gas

Petroleum
Economics and Finance 

63 Oil and Gas Price Changes 

Prior to 1952, America produced enough natural gas to satisfy all of the domestic demand 

(see Table 7). Starting in 1952, the United States began to import natural gas. Initially, the 

quantities of natural gas imported into the U.S. were extremely small, typically less than 0.01 

trillion cubic feet (tcf). Between 1952 and 1957, the U.S. had a positive balance of trade in 

the quantity of natural gas; the U.S. exported more than it imported. It was not until 1972 

that the U.S. started importing more than 1.0 trillion cubic feet of natural gas. Since 1949, 

the supply of natural gas available for domestic consumption has generally increased. There 

have been periods, however, when the supply of natural gas decreased; this was most notable 

between 1979 and 1988 when the supply of natural gas available for domestic consumption 

decreased by 18.3 percent. 

To date, the largest exporting nation of natural gas to the United States has been Canada (see 

Table 8). Imports from Canada dramatically increased in the late 1980’s, and remained 

relatively high through 1999. Moreover, it was in 1999 that Canada completed the Maritimes 

and Northeast Pipeline. This pipeline established a direct link between the Sable Offshore 

Energy Project (SOEP) and New England markets (U.S. DOE, EIA 2000b). The Energy 

Information Administration reports imports from Algeria, Australia, Canada, Indonesia, 

Mexico, and the United Arab Emirates. Starting in 1999, the EIA also reports imports from 

Malaysia, Qatar, and Trinidad and Tobago. Although the U.S. has imported natural gas since 

1952, the U.S. dependency on foreign suppliers did not exceed 5.0 percent until 1983. From 

1983 through 1999, the percent of U.S. consumption provided by imports increased from 5.1 

percent to 15.8 percent. In quantity terms, imports increased by 293.2 percent between 1983 

and 1999. 

Natural gas supplies provided from federal offshore (OCS) withdrawals have traditionally 

been dwarfed by onshore production. From 1960 through 1965, less than 1.0 trillion cubic 

feet of natural gas came from offshore production (see Figure 18). Between 1960 and 1999, 

however, OCS offshore withdrawals increased 1,848.1 percent or at an annual rate of 47.4 

percent. Prior to 1970, withdrawals from offshore areas were less than 10.0 percent a year. 

In 1970, withdrawals from the OCS areas equaled slightly more than 10.0 percent of total 

U.S. withdrawals. In 1978, OCS withdrawals equaled 20.5 percent of total withdrawals. 

Since 1978, the percentage of total withdrawals from both onshore and offshore sources has 

remained relative constant–approximately 78.0 and 21.0 percent, respectively. 

Concurrently, while the percent of withdrawal has remained relatively constant from both 

sources, the quantity withdrawn has not (see Figure 19). Between 1960 and 1970, the level 

of withdrawal from both sources increased. After 1970, however, the level of withdrawal 

from the onshore sources substantially declined; at the same time, however, the withdrawal 

rate from offshore sources continued to increase, and did so until 1981. Between 1981 and 

1983, there was a very moderate decrease in the quantity withdrawn from offshore sources. 

Since 1985, there has been a small, but generally increasing, trend in the annual rate of 

withdrawal from both onshore and offshore sources. 

There are some emerging concerns, however, about natural gas, as well as petroleum, 

production on the U.S. Gulf of Mexico shelf (Dodson 2001). Natural gas production in the 

OCS areas of the U.S. Gulf of Mexico is in a state of decline. Annual gas production on the 

shelf and in less than 1,000 feet of water reached its highest level in 1981 (4.75 tcf). After 
Economics and Finance 

64 Oil and Gas Price Changes 

Table 7 

Percent of Consumption Supplied by Imports, 1952-1999 

 United Arab Percent of U.S.

Year Algeria Australia Canada Indonesia Mexico Emirates Consumption 

1952 0.00 0.00 0.11 0.00 0.00 0.00 -0.27

1953 0.00 0.00 0.12 0.00 0.00 0.00 -0.25

1954 0.00 0.00 0.09 0.00 0.00 0.00 -0.27

1955 0.00 0.00 0.13 0.00 0.00 0.00 -0.23

1956 0.00 0.00 0.11 0.00 0.00 0.00 -0.28

1957 0.00 0.00 0.21 0.00 0.17 0.00 -0.04

1958 0.00 0.00 0.87 0.00 0.45 0.00 0.94

1959 0.00 0.00 0.73 0.00 0.45 0.00 1.02

1960 0.00 0.00 0.91 0.00 0.39 0.00 1.20

1961 0.00 0.00 1.34 0.00 0.42 0.00 1.67

1962 0.00 0.00 2.64 0.00 0.38 0.00 2.91

1963 0.00 0.00 2.55 0.00 0.36 0.00 2.78

1964 0.00 0.00 2.64 0.00 0.36 0.00 2.86

1965 0.00 0.00 2.65 0.00 0.34 0.00 2.81

1966 0.00 0.00 2.61 0.00 0.30 0.00 2.77

1967 0.00 0.00 2.95 0.00 0.29 0.00 2.78

1968 0.00 0.00 3.24 0.00 0.25 0.00 3.00

1969 0.00 0.00 3.39 0.00 0.23 0.00 3.37

1970 0.00 0.00 3.68 0.00 0.19 0.00 3.55

1971 0.00 0.00 4.19 0.00 0.10 0.00 3.92

1972 0.01 0.00 4.57 0.00 0.04 0.00 4.26

1973 0.01 0.00 4.66 0.00 0.01 0.00 4.34

1974 0.00 0.00 4.52 0.00 0.00 0.00 4.16

1975 0.03 0.00 4.85 0.00 0.00 0.00 4.50

1976 0.05 0.00 4.78 0.00 0.00 0.00 4.51

1977 0.06 0.00 5.11 0.00 0.01 0.00 4.89

1978 0.43 0.00 4.49 0.00 0.00 0.00 4.65

1979 1.25 0.00 4.95 0.00 0.00 0.00 5.92

1980 0.43 0.00 4.01 0.00 0.51 0.00 4.71

1981 0.19 0.00 3.93 0.00 0.54 0.00 4.36

1982 0.31 0.00 4.35 0.00 0.53 0.00 4.90

1983 0.78 0.00 4.23 0.00 0.45 0.00 5.13

1984 0.20 0.00 4.21 0.00 0.29 0.00 4.39

1985 0.14 0.00 5.36 0.00 0.00 0.00 5.17

1986 0.00 0.00 4.62 0.01 0.00 0.00 4.25

1987 0.00 0.00 5.77 0.00 0.00 0.00 5.46

1988 0.09 0.00 7.08 0.00 0.00 0.00 6.77

1989 0.22 0.00 7.12 0.00 0.00 0.00 6.78

1990 0.45 0.00 7.74 0.00 0.00 0.00 7.73

1991 0.34 0.00 8.98 0.00 0.00 0.00 8.63

1992 0.22 0.00 10.72 0.00 0.00 0.00 9.83

1993 0.40 0.00 11.18 0.00 0.01 0.00 10.90

1994 0.25 0.00 12.39 0.00 0.03 0.00 11.89

1995 0.08 0.00 13.05 0.00 0.03 0.00 12.45

1996 0.16 0.00 13.12 0.00 0.06 0.02 12.67

1997 0.30 0.05 13.20 0.00 0.08 0.01 12.92

1998 0.32 0.06 14.36 0.00 0.07 0.02 14.08

1999 0.35 0.06 15.59 0.00 0.26 0.01 15.85

Source: U.S. DOE, EIA 2000a. 
Economics and Finance 

65 Oil and Gas Price Changes 

Table 8 

Imports of Natural Gas, by Nation and Year, 1952-1999 (billion cubic feet) 

Year Algeria Australia Canada Indonesia Mexico United Arab Emirates 

1952 0 0 8 0 0 0

1953 0 0 9 0 0 0

1954 0 0 7 0 0 0

1955 0 0 11 0 0 0

1956 0 0 10 0 0 0

1957 0 0 21 0 17 0

1958 0 0 90 0 46 0

1959 0 0 83 0 51 0

1960 0 0 109 0 47 0

1961 0 0 167 0 52 0

1962 0 0 350 0 51 0

1963 0 0 356 0 50 0

1964 0 0 391 0 53 0

1965 0 0 405 0 52 0

1966 0 0 430 0 50 0

1967 0 0 513 0 51 0

1968 0 0 604 0 47 0

1969 0 0 680 0 47 0

1970 1 0 779 0 41 0

1971 1 0 912 0 21 0

1972 2 0 1,009 0 8 0

1973 3 0 1,028 0 2 0

1974 0 0 959 0 0 0

1975 5 0 948 0 0 0

1976 10 0 954 0 0 0

1977 11 0 997 0 2 0

1978 84 0 881 0 0 0

1979 253 0 1,001 0 0 0

1980 86 0 797 0 102 0

1981 37 0 762 0 105 0

1982 55 0 783 0 95 0

1983 131 0 712 0 75 0

1984 36 0 755 0 52 0

1985 24 0 926 0 0 0

1986 0 0 749 2 0 0

1987 0 0 993 0 0 0

1988 17 0 1,276 0 0 0

1989 42 0 1,339 0 0 0

1990 84 0 1,448 0 0 0

1991 64 0 1,710 0 0 0

1992 43 0 2,094 0 0 0

1993 82 0 2,267 0 2 0

1994 51 0 2,566 0 7 0

1995 18 0 2,816 0 7 0

1996 35 0 2,883 0 14 5

1997 66 10 2,899 0 17 2

1998 69 12 3,052 0 15 5

1999 75 12 3,340 0 55 3

Source: U.S. DOE, EIA 2000a. 
Oil and Gas Price Changes 66 Figure 18. Percent of total natural gas withdrawals by location, 1960-1999. 0.0 10.0 20.0 30.0 40.0 50.0

60.070.080.090.0

100.0

1960196219641966196819701972197419761978198019821984198619881990

Year

Percent

Source: U.S. DOE, EIA 2000a. 

Onshore

Offshore
Oil and Gas Price Changes 

67

Figure 19. Natural gas withdrawals by location, 1960-1999.

05

10152025

19601962196419661968197019721974197619781980198219841986198819901992

Year

Trillion Cubic Feet

Onshore

Offshore

Source: U.S. DOE, EIA 2000a. 
Economics and Finance 

68 Oil and Gas Price Changes 

1981, gas production declined, but varied between 3.8 and 4.6 tcf. In 1999, sub 1,000-foot 

gas production was 3.8 tcf. Following a low and stable level of production between 1986 and 

1990, gas production escalated rapidly in deepwater (i.e., greater than 1,000 foot depth). 

 Production increased from 45 billion cubic feet (bcf) in 1990 and grew by nearly 80.0 

percent per year until 1996. Much of the gas produced was derived from wells on the slope, 

which are close to the shelf and where pipelines are available. Between 1997 and 1999, 

deepwater gas production increased by more than 125.0 percent. In general, it has been 

production from other sources that has maintained supplies for natural gas. 

In terms of natural gas consumption or demand by sector, the EIA provides information on 

the following sectors: (1) residential, (2) commercial, (3) industrial, (4) transportation, and 

(5) electric utilities. The primary user of natural gas has historically been, and is also 

currently, the industrial sector (see Figure 20). The residential sector has been, and is, the 

second leading user of natural gas. The transportation sector accounts for the smallest share 

of natural gas consumption. Until 1988, the electric utility industry was the third highest user 

of natural gas. Since 1988, however, the commercial sector has used about the same level of 

natural gas as has the electric utility sector. 

Important determinants of the demand for natural gas are weather and prices of substitute 

fuels. The price of substitute fuels, however, plays a lesser role than does weather in 

determining price; equipment purchased to operate on natural gas is quite expensive and 

usually cannot be converted to run on other fuels (U.S. DOE, EIA 2000a). Examination of 

the recent situation in weather in relation to gas use indicates just how significant weather is 

in determining demand. Temperatures were relatively mild between 1999 and 2000 (3,351 

heating degree-days or 457 fewer heating degree-days than normal). For the 2000-2001 

period, which was a particularly cold period, there were 4,048 heating degree-days or 270 

more heating degree-days than normal. In 2000, the consumption of natural gas reached the 

all time high of 22.8 tcf, 4.8 percent higher than in 1999. 

The U.S. DOE, EIA (2000c) in its report “U.S. Natural Gas Markets: Recent Trends and 

Prospects for the Future” predicts that natural gas will be the key fuel required for economic 

growth for the next several years. The industry, in order to meet supply, however, will have 

to replenish natural gas storage to normal levels. Projections for demand by the industrial, 

residential, commercial, and electricity generating sectors suggest a very strong short-run 

future demand (through 2004). Industrial sector demand for natural gas is expected to 

increase by about 2.5 percent. Residential demand is expected to decline by about 0.8 

percent over the next few years, primarily because of high natural gas prices. The 

commercial sector will likely increase demand by about 1.1 percent. Growth in demand for 

natural gas by the electricity generation sector is expected to be low. 

Most of the current imbalance between demand and supply for natural gas is believed to have 

been caused by limited capacity and low storage levels. The capacity problem has been 

caused mostly by inadequate productive capacity, but also by inadequate interstate and 

intrastate pipeline systems. Most notable, these bottlenecks occurred in California and other 

western market areas. Prior to the 1990’s, production plus drawdowns from storage and 

imports were generally sufficient to satisfy domestic demand. Because of low profits and 

returns, however, in the late 1990’s, gas companies decreased drilling activities. As a 
Oil and Gas Price Changes 

69

Figure 20. Share of sector's consumption of natural gas, 1950-1999.

0.0

10.020.030.040.050.060.070.0

195019521954195619581960196219641966196819701972197419761978198019821984198619881990

Year

Percent

Industrial

Residential

Electric Utilities

Commercial 

Source: U.S. DOE, EIA 2000a. 
Economics and Finance 

70 Oil and Gas Price Changes 

consequence, drilling was insufficient to convert proven natural gas reserves into increased 

productive capacity. In 1994, domestic production increased by 0.74 tcf. In every other year 

of the 1990’s, however, production increased by less than 0.3 tcf per year. In 2000, domestic 

production increased by 0.7 tcf, which was sufficient to meet the major portion of demand 

growth experienced in 2000. Meeting this growth, however, required a large net drawdown 

of gas in storage and an increase in imports. 

3.2.4 Ownership Rights and U.S. Prices 

The U.S. upstream energy sector is quite different from the rest of the world’s main 

producing areas. An International Energy Agency report “Energy Policies of IEA Countries 

– The United States 1998 Review” classifies the upstream sector as being highly “atomistic,” 

in which there is a large number of parties making independent decisions across a wide array 

of geological and economic situations. There are highly dispersed holdings of land and 

associated mineral rights, and therefore, exploitation of U.S. oil and gas resources has 

followed a patchwork pattern throughout history (IEA 1999a). In more recent periods, new 

gas and petroleum provinces have moved into federal lands in the west, Alaska, and federal 

offshore waters. 

In stark contrast to many nations, the U.S. exploration and extraction sector is an openmarket system. Free-market incentives and disincentives drive domestic oil and gas 

exploration activities. Private investors either own the rights to drill and produce oil and gas 

or they have been granted the rights to do so on federal lands, as well as in the federal OCS 

areas. In contrast, much of Canada’s energy sector is at least partly government owned. 

Canada, however, does appear to be increasingly moving in the direction of privatization. 

The state-owned oil company in Mexico (Petróleos Mexicanos, referred to as Pemex) also 

still dominates domestic energy resources at all Mexican market levels. Ecuador and Peru 

have a monopoly energy policy; both nations, however, are examining options for 

privatization. 

Prior to 1978, the U.S. oil and gas producing sectors were heavily regulated, but they were 

open-access segments of the energy industry. That is, if investors had sufficient capital and 

satisfied regulatory requirements, they could explore for and produce oil and natural gas. 

The fact that industry was open-access, however, did not mean that producers could do 

whatever they wanted. They were subject to price and production limits and regulations, 

usually at the state level. After 1978, major initiatives were introduced to restructure the oil 

and gas segments. The industry, however, remained open-access. Price and quota or output 

limits were subsequently removed, but the federal government retained regulatory authority 

for interstate activities, while the states retained authority for intrastate activities. 

Oil and natural gas can be bought and sold like most other goods, but in some cases, 

particularly natural gas, the transportation component may be a natural monopoly. This is 

because it is generally inefficient to build competing pipeline networks, particularly for local 

distribution. The supply of, at least, natural gas to end users will in most cases always 

involves some element of monopoly—even in a competitive market. 
Economics and Finance 

71 Oil and Gas Price Changes 

With a competitive market system, there tends to be more variability in the wellhead prices 

of natural gas and oil. In fact, this has been the case for the U.S. Not long after the Texas 

Railroad Commission initiated a total pro-allocation of oil in 1972, which basically 

eliminated production constraints, prices of crude and gas became highly variable or volatile. 

Price determination shifted mostly from the U.S. to OPEC. Even OPEC, however, does not 

have the complete power to set prices. Between 1986 and 1996, OPEC’s attempts to set 

prices and coordinate volumes failed. OPEC’s mission of controlling prices became a 

mission of crisis management. Between 1949 and 1973, the coefficient of variation (cv) for 

the real price of oil was only 0.09; from 1974 though 1999, the cv for the wellhead price of 

oil was 0.44. In contrast, the cv for natural gas declined—from 1.50 for the 1949-1973 

period to 0.34 for the 1974 to 1999 period. The cv for natural gas prior to the 1978 FERC 

Order 436, which initiated the unbundling of services and products of natural gas, equaled 

0.43; after Order 436, the cv for the wellhead price of natural gas declined to 0.28. What is 

so odd about the cv patterns for the wellhead prices of natural gas is that the wellhead price 

was heavily regulated during the early period; regulating prices, however, apparently led to 

supply shortages and gross market distortions (IEA 1999a). 

The history of the structure and organization of the oil and gas industry has dramatically 

changed over time. It has gone from near monopoly in the 1800’s to open markets and mega 

majors (e.g., BP/Amoco/ARCO and ExxonMobil). Yet, the United States is unique in 

several respects. In contrast to most major producing nations, producers have private 

ownership of resource rights—a requirement for technical and economic efficiency. Under a 

full-open access regime, with no private rights, technical and economic inefficiency typically 

occur. In the U.S. the decision to explore for and produce oil is between the landowner and 

the producing company. The producing company subsequently pays the landowner a royalty 

on each barrel of oil produced. Presently, there are no restrictions to production by any 

government agency (U.S. DOE, EIA 1999e). 

The private ownership of resource rights permits the active participation of thousands of 

independent producers and the prevalence of the stripper well, or one producing less than 10 

barrels of oil a day. At the same time, the fact that there are many producers of oil and 

natural gas results in producers being mostly price-takers. That is, they have little influence 

over the wellhead price of either petroleum or natural gas. Even with the mega mergers and 

the fact that many domestic companies have become active in energy production in other 

nations, they still lack the ability to establish wellhead prices for oil and natural gas. 

Consider that the two mergers—BP/Amoco/ARCO and Exxon/Mobil—will produce only 7.5 

percent of the world’s petroleum. 

Currently, the U.S. permits the production of natural gas and petroleum within a private or 

quasi-private property rights regime. That is, the United States, as a nation, does not specify 

the quantities that may be produced or the prices that producers may receive, nor does the 

United States own the resource rights, except for offshore deposits. This production 

arrangement differs from many other nations, which control the ownership, access, and 

production of petroleum or natural gas. For most major petroleum producing nations, the 

government owns the rights to develop resources. For privately owned property in the 

United States, decisions about exploration and production are between the landowner and the 
Economics and Finance 

72 Oil and Gas Price Changes 

producing company. The private ownership rights in the U.S. also contribute to the existence 

of independent producers and production by “stripper” wells, those that typically produce 

less than 10 barrels a day (U.S. DOE, EIA 1999e). 

Under this private property regime and given the size of the world petroleum market, U.S. 

producers are primarily price-takers (i.e., they cannot influence the price of petroleum). 

They have little or no ability to influence the wellhead prices of either petroleum or natural 

gas. In many of the major oil producing nations, however, prices may be established for 

petroleum or natural gas. In addition, U.S. deregulation and unbundling of products and 

services have created a competitive market in the United States for oil and gas. Deregulation 

and an increasing global market, however, have forced producers to substantially alter their 

production strategies. Producers, who in the past might have attempted to produce as much 

as possible in as short amount of time as possible, now develop production strategies based 

on the dynamic aspects of economics. Producers focus more on developing long-run 

strategies to maximize expected net returns (revenues less costs) over time subject to 

technological (the underlying method of production) and other constraints. Under such a 

strategy, oil producers attempt to develop decision rules about exploration, production, and 

related activities based on long-run expectations about prices, demand, costs, and technology. 

Alternatively, producers have changed their planning horizon and production activities from 

maximizing production over a short time to maximizing net returns over a longer time 

horizon. 

Consider a producer that attempts to maximize output or the level of crude over as short 

amount of time as is possible given the existing technology. In this case, the production 

technology (i.e., the way inputs are used to produce outputs) may be represented by 

Q=f(X,R) where Q is output in barrels of oil, X is a vector of the factors of production, R 

indicates the initial reserves, and f characterizes the production technology or how output is 

related to X and R. Under the case of maximizing output, the producer does not consider the 

costs of production. Instead, the producer determines a path of extraction over time that 

exhausts the initial reserves. Demand or the price of petroleum and the technology determine 

the time path of extraction such that the rate of extraction maximizes output for each 

production period. Next, introduce costs and uncertainties about demand and output prices, 

and consider that the producer is now concerned with maximizing net returns over time or a 

longer time horizon. To realize this objective, the producer must consider what prices and 

costs will be in the future (expectations). The producer now produces up to the level that the 

price net of marginal cost equals the private rate of interest (i.e., the level at which the 

producer values $1.00 in the future vs. $1.00 in the present time period). 

3.2.5 Energy Prices and Effects on Finances and Capital Markets 

Data necessary for examining the potential relationships between oil and natural gas 

wellhead prices and their potential influences on corporate/company finances and capital 

markets are extremely limited. The Energy Information Administration maintains a 

Financial Reporting System (FRS), which requires companies that are either U.S.-based 

publicly-owned companies or U.S.-based subsidiaries of publicly-owned foreign companies 

that had at least 1.0 percent of either production or reserves of oil or gas in the United States, 
Economics and Finance 

73 Oil and Gas Price Changes 

or 1.0 percent of either refining capacity or petroleum product sales in the United States to 

routinely report their financial performance to the EIA. The program began in 1977 and the 

criteria and format for reporting has changed numerous times since 1977. In 1999, EIA 

identified 48 companies as FRS companies. Thirty-two companies filed the necessary 

financial statements with EIA in 1999. Total sales of these companies equaled 

approximately 9.0 percent of the $6.3 trillion in sales of the largest Fortune 500 corporations. 

In addition, the EIA examines the financial performance of the independent producers, 

companies that are not part of FRS. Data are provided to EIA from Arthur Andersen and 

Co., Oil and Gas Reserve Disclosures Database (Arthur Andersen 1999). 

In general, investor willingness to provide funds to oil and gas companies, like any other 

company, is reflected in the market’s evaluation of the financial performance of the 

company. The perceptions of performance by investors are based on the financial 

performance, and financial performance reflects cash flow, profitability, and cost. Changing 

oil prices can have significant influences on cash flow, profitability, and cost. For example, 

the U.S. DOE, EIA (1995) states that “the oil price collapse of 1986 was the defining event in 

shaping the financial factors.” 

Although detailed data on source of funds for each major energy-producing sector are 

unavailable, EIA does provide aggregate summary statistics on source of operating funds for 

three energy-producing sectors and one nonenergy sector. The three energy-producing 

sectors are petroleum, which includes oil and gas, coal, and other energy. The nonenergy 

sector includes chemicals. 

Historically, the energy producing FRS companies have relied mostly on funds provided by 

operations, with income earned being the largest single contributor to funds. Over time, 

however, there has been a general trend for these energy companies to increasingly rely on 

long-term debt for corporate funds (U.S. DOE, EIA 2000e). For example, the FRS 

companies in 1998 increased their long-term debt to help close the gap between capital 

expenditures and cash flow—a record $27 billion. They also resorted to issuing more stock; 

sold a record amount of assets; reduced cash payouts to shareholders; and drew down their 

cash balances by $4 billion (U.S. DOE, EIA 2000e). Oil prices were up nearly 50.0 percent 

in 1999 relative to 1998 wellhead prices. Cash flow realized from oil and gas production 

also increased by 50.0 percent. Yet, the FRS companies decreased their worldwide 

expenditures on oil and gas exploration and development by $19 billion—a 38.0 percent 

reduction relative to 1998. In 1999, the FRS oil and gas companies increased their cash 

outlays for debt reduction, and reduced dividends and share purchases. They also reduced 

capital expenditures. In the context of volatile economics, corporate budgets necessarily 

reflect conditions that existed at the time of allocations. Thus, capital expenditures for a year 

can be down, even when market conditions improve. 

Prior to the collapse of world oil prices in 1986 and the bottoming out of domestic gas prices 

in 1991, many companies engaged in exploring, drilling, and production mostly financed 

their own operations. They had a relatively low dependence on long-term debt, particularly 

from financial lending institutions. Independents, who accounted for 85.0 percent of the 

country’s drilling activity, however, borrowed heavily in what was viewed as a “no-lose” 
Economics and Finance 

74 Oil and Gas Price Changes 

future (Niering 1987). During the period preceding the collapse of prices, prices and 

revenues of the majors and independents were soaring. Between 1978 and 1985, lending by 

the oil-state banks, mainly in Texas and Oklahoma, increased by as much as 20.0 percent 

each year. With the price collapse, however, independents experienced large losses (e.g., a 

survey by the Oil and Gas Journal of 170 independent producers revealed that they had a 

combined loss of $3.45 billion in the first half of 1986). The downgrading of the value of the 

petroleum reserves caused consolidations and bankruptcies, which rendered many 

outstanding loans unserviceable. 

Loans during this period, and prior to 1978, were typically structured on the basis of 50.0-

60.0 percent of the value of proven oil and/or gas in the ground; it also was typically assumed 

that oil prices would not drop much below $20 a barrel. Moreover, loan portfolios applying 

directly to energy projects usually did not exceed 20 percent of the total loan amount. After 

the crash, the oil-state banks began looking for new business from non-oil sectors. The 

banks also developed alternative procedures for granting loans and determining loan 

amounts; they particularly focused on strategies that would protect them from downward 

price swings. 

There are several aspects to consider when determining the possible relationships between 

finance, capital markets, and oil prices. Both investment decisions and financial aspects of 

exploration and production activities are based on expectations about rates of return on 

investment, profits, and reserve values. Revenues and costs define profits, in turn. Oil prices 

and demand drive revenues. The reserve value equals the amount of reserves (i.e., quantity 

of oil or gas that can be extracted) by year-end crude prices (Perkins 1999). In fact, the 

reserve values of oil and gas may be the most important financial aspect relative to 

investment and financing decisions. A low reserve value affects the producers’ stock value 

and financing opportunities. Both publicly owned major and nonmajor oil and gas 

companies (mostly independents) annually report reserve values to the shareholders and the 

U.S. Securities and Exchange Commission. A low reserve value makes it difficult for majors 

and nonmajors to obtain loans. Moreover, if the reserve value falls below a certain level, a 

lending institution, which issued existing loans, may call the loans due immediately. 

There are substantial differences between the independent oil and gas producers and the 

majors relative to financing and expenditures. In general, the independents have tended to 

rely more on external funds (e.g., issues of long-term debt and equity securities) to fund 

operations. Between 1986 and 1990, the independents realized approximately 43.0 percent 

of their funds from long-term debt; the majors received approximately 25.0 percent from 

long-term debt (see Figure 21). Between 1991 and 1993, the independents increased their 

dependence of long-term debt; nearly 50.0 percent of their operating funds was financed via 

long-term debt; the majors also followed suit by increasingly relying on long-term debt. 

Between 1991 and 1993, the majors received 27.1 percent of their total cash from long-term 

debt arrangements. 

Profitability or expected profitability is an important determinant of investors’ perceptions of 

a company. Profitability in previous years is typically regarded as a useful indicator of future 

profitability. Profitability is closely related to oil and gas prices (Perkins 1999). One widely 
Oil and Gas Price Changes 75 Figure 21. Percent distribution of source of cash, majors and independents. 0.0 10.0 20.0 30.0

40.050.060.070.0

1986-1990 1991-1993 1986-1990 199

Percent

Operations Long-term Debt Disposal of Assets Equity Security O

Majors Independents

Source: U.S. DOE, EIA 1995. 
Economics and Finance 

76 Oil and Gas Price Changes 

used measure of profitability is net income as a percent of stockholders’ equity—the rate of 

return, expressed in percentage terms, on equity. Examination of profitability for investment 

decisions, however, can be misleading when examining independents vs. the majors. The 

major oil and gas companies engage in both upstream (exploration and production) and 

downstream activities (refining and marketing). During low oil price years, the majors may 

have poor profitability in the upstream sectors, but use earnings from the downstream sector 

to offset the low upstream earnings. The independents primarily engage in exploration, 

drilling, and production. They do not have downstream earnings to offset upstream losses. 

The lack of vertical integration is a major reason why the independents were more devastated 

by the oil price collapse of in the mid-1980’s. 

Although wellhead prices for petroleum and the profit rate followed nearly identical patterns 

between 1981 and 1998 (Perkins 1999), investors also consider the ratio of market value of a 

company’s shares to the book value of a company’s net assets (i.e., stock-holders’ equity) 

(U.S. DOE, EIA 1995). An oil or gas company’s current share price is an indication of 

investors’ expectations of profitability at the time the shares are purchased; the book value 

indicates the future expected profitability of productive assets when the assets were 

purchased. 

The cost of capital for oil and gas producing companies is directly related to risk. If the risk 

of loss is high, investors require a higher rate of return in order to induce them to purchase 

stock or assume debt. A risky firm must offer greater returns to attract capital. During the 

1990’s, however, an interesting pattern emerged relative to risk and the cost of capital and 

whether or not an oil/gas firm was an independent or one of the majors. During the 1980’s, 

independents had a higher risk of loss and lower returns relative to the majors. It would be 

expected that the independents would have to pay higher rates of interest on debt. This was 

not the case in the 1990’s. In fact, the rate of interest paid by independents for loans was 

often lower than the rate paid by the majors (U.S. DOE, EIA 1995). 

One method often used to measure systematic risk, defined as the probability of loss, is to 

assess a company’s “beta.” Beta is the mathematical value of the regression coefficient 

obtained from a regression of stock value of a company against the value of the market. A 

value of beta equal to one implies that the stock value of company and the value of the 

market move together. If the market goes up 1.0 percent, the stock will increase by 1.0 

percent. A stock with a value of beta less than one is less volatile than the market. For 

example, a beta of 0.8 implies that as the market decreases (or increases) by 1.0 percent, the 

value of the stock will decrease (or increase) by 0.8 percent. A stock with a value of beta 

less than 1.0 is regarded as a valuable defense against a declining market (U.S. DOE, EIA 

1995). 

The beta values for the independents have tended to be lower than the values for the majors. 

This was the case until 1992. In the latter part of the 1980’s, the beta values for the majors 

were typically less than one, but ranged between 0.51 and 0.97. In contrast, the beta values 

for the independents ranged from 0.39 to 0.80 between 1986 and 1991. The finding of the 

low beta values for the independents relative to the majors indicates that investors have been 
Economics and Finance 

77 Oil and Gas Price Changes 

able to diversify away a substantial portion of the risk of investing in the independent 

companies. 

The fact that the beta values for the independents have been somewhat lower than the beta 

values for the majors can be explained by several factors. Although the independents are 

generally more debt-dependent than the majors, the independents have been quite 

conscientious in reducing their dependence upon debt. In turn, the independents have 

become lower leveraged producers or firms (i.e., a firm with less debt than its peers). A low 

leverage firm would likely be able to better cover its interest payments with its operating 

cash flow, and thus, be less prone to default on debt. Since 1986, the independents have 

allocated about 44 percent per year of their cash for debt reduction; the majors have allocated 

only 27 percent of funds to reduce debt. The independents are, thus, viewed as less likely 

than the majors to default on loans. The independents also devote the bulk of their cash to 

reinvestment in their own operations, which is also viewed as lowering the probability of a 

loss. Profitability by the independents has also increased, particularly since 1986. 

Reductions in debt and improved profitability have reduced the cost of capital to the 

independents, and both the majors and independents have approached the yield on low risk 

corporate bonds. These factors have further reduced the probability of loss by the 

independents. 

In summary, wellhead prices affect profitability of oil and gas production activities. In turn, 

price changes affect revenues and profits. Price changes also affect investor expectations. 

The major source of cash for the majors is the cash flow from operations; the primary source 

of cash for the independents is long-term debt or loans. Over the 1980 to present period, the 

manner in which investors and lending institutions invested or made loans to producers has 

changed. Investment and lending decisions have increasingly emphasized risk in more recent 

years, particularly with respect to the value of reserves. The major oil and gas companies 

have disproportionately relied on cash received from the disposal of assets for funds. Both 

segments have increasingly used long-term debt to finance operations. 

3.3 Technology 

Technology has made a significant contribution to the relationship between the oil and gas 

industry and the market price for oil and gas. Over the 20-year period 1980 to 2000, the 

prices of oil and gas have gone through several cycles and have shown an increasing 

tendency towards volatility. While oil and gas prices have always moved up and down, the 

frequency of these changes and the extent of changes has increased dramatically over the past 

two decades. (See Section 3.1 for discussion of oil and natural gas price changes.) 1981, gas 

production declined, but varied between 3.8 and 4.6 tcf. In 1999, sub 1,000-foot gas 

production was 3.8 tcf. Following a low and stable level of production between 1986 and 

1990, gas production escalated rapidly in deepwater (i.e., greater than 1,000 foot depth). 

Technology’s role in the relationship between the oil and gas industry and changes in oil and 

gas prices might be characterized as being a buffer or shock absorber. Over the past 20 

years, technology has lowered costs for the oil and gas industry significantly. Thus, in the 
Technology 

78 Oil and Gas Price Changes 

broadest terms, the steady lowering of costs resulting from the application of various 

technologies has allowed companies to operate profitably at progressively lower prices. This 

ability to continue profitable operations has given the industry more flexibility to absorb 

more easily the inevitable shocks of dramatic drops in prices. 

As has been noted earlier, the oil and natural gas industry is complex, comprises many 

segments, and covers a wide array of activities. The industry’s activities range from the 

initial efforts to discover significant volumes of hydrocarbons through the extraction of those 

resources to their final delivery as numerous different products to a variety of customers. 

Necessarily, the industry uses a vast number of technologies to accomplish these activities. 

Over the last two decades, the kinds of technology that have had the greatest impact on the 

oil and natural gas industry can be grouped either as industry-specific technology or other, 

more generic technology. Industry-specific technology of principal interest to this study 

includes the following. 

• Seismic imaging. This group of technologies provides information on the location of 

hydrocarbons within the earth. Through the application of increasingly refined 

techniques, seismic imaging can generate the equivalent of three-dimensional pictures of 

geological formations which include the identification and location of oil and natural gas 

reservoirs. This so-called 3D imaging can also be produced over time to create so-called 

4D images. 

• Platforms. The structures that house drilling, production, and/or storage equipment and 

facilities have been transformed by the requirements of offshore oil and natural gas. As 

the industry moves into increasingly deeper waters, platforms have had to solve 

fundamental problems of supporting these functions in depths that preclude rigid 

connections to the seabed. 

• Drilling. The creation of wells has become more sophisticated as the ability to drill in 

virtually any direction has evolved. Standard vertical drilling was first changed by the 

addition of horizontal drilling, and has since evolved by the use of increasingly flexible 

drilling techniques that allow bits to be steered through geological formations. 

Drilling technology includes a host of other applications of which the most important are 

termed measurement while drilling. These technologies provide a real-time stream of 

information on the progress of drilling and conditions downhole and have replaced earlier 

techniques that required the cessation of drilling in order to send instruments down the 

well hole to collect data. Detailed production monitoring has tended to produce sharp 

cuts in both drilling and production down time, improving the economics of production. 

• Deepwater technologies. The increasing depths at which offshore activities occur create 

a set of problems that industry must solve. In several thousand feet of water, it is no 

longer feasible to attach a platform to the seabed with rigid legs. Water temperatures at 

the seabed are cold enough (about 32 degrees) to inhibit the flow of oil in pipelines. At 

more remote deepwater locations, pipelines and other infrastructure are not available, 

making the handling of natural gas particularly difficult. Technologies, such as 
Technology 

79 Oil and Gas Price Changes 

subfloor/subsea completions and robotics, have been created or are evolving to deal with 

many, but not all of these problems. 

The second broad category of technology for the oil and natural gas industry is not industry 

specific. Within this generic category are two related groups of technologies: information 

technology and telecommunications/the internet. 

• Information technology. The continuing evolution of computers and software has 

transformed the oil and gas industry as it has transformed most U.S. industries. This 

technology is intertwined with much of the industry-specific technology listed above. 

Seismic imaging, for example, is dependent upon the processing of enormous amounts of 

data using complex software and the display of that data on highly sophisticated 

computer monitors. 

• Telecommunications/the Internet. In tandem with the development of computers, 

telecommunications and the internet have also had fundamental impacts on all industries 

including the oil and natural gas industry. These technologies include e-mail, intranet, 

and internet capabilities and have created opportunities that range from simpler 

transmission of electronic data and documents to what is often termed e-commerce. 

The total impact of technological change on the oil industry has been dramatic, particularly 

in more recent years. Moreover, it is possible to identify a relatively small number of 

technologies that most observers credit with the majority of these impacts—seismic imaging, 

drilling technologies, deepwater platforms, for example. Closer examination of these 

technological breakthroughs, however, tends to disclose a pattern of relatively small 

incremental changes. Frequently these changes have been bundled together or have 

accumulated over a period of years or even decades. Horizontal drilling, for example, was 

successfully accomplished in 1939; and the first modern horizontal well was completed in 

1953. This technology did not gain wide acceptance by the industry, however, until the late 

1980’s (Chambers 1998). 

Rather than benefit from a few dramatic changes, the oil and gas industry has typically 

implemented many improvements affecting virtually every part of the industry. The results 

of this embody the concept of synergy—the total impact of these small and diverse changes 

is greater than sum of each individual impact. 

Being incremental, technological change often does not demonstrate dramatic effects at 

specific points in time. Nevertheless, there have been many milestones that mark important 

progress in the application of technology in the oil and gas industry. These are summarized 

in Table 9. 
Technology 

80 Oil and Gas Price Changes 

Table 9

Major Technology Milestones for Oil and Gas Industry 

Year Action Comment 

1974 3D seismic data acquisition tested in 

GOM 

1978 First deepwater production platform 

installed 

Shell Offshore Inc.’s Cognac 

1979 Deepest offshore wells operate in 1,000 

feet of water 

1980 Commercial 3D seismology begins in the 

early 1980s 

 Oil industry planners forecast oil prices 

of $90 to $110 by the year 2000 

Forecast is largely based on 

extending trend lines from 

1970’s to 1980’s 

1981 First offshore horizontal well Rospo Mare field, offshore Italy 

1983 Horizontal well drilled from vertical 

shaft 

Kern River, CA 

 New York Mercantile Exchange begins 

to trade crude oil contracts 

Oil seen as “commodity;” crude 

oil contracts help to “curtail” 

price increases of 1973 and 1979 

1985 3D vertical seismic profiling developed 

Late 

1980’s 

Successful application of horizontal wells 

in Austin Chalk leads to general use of 

this technology; horizontal and 

multinational operations substantial part 

of drilling activity for the first time 

First modern horizontal well 

completed in 1953; despite 

excellent production, industry 

takes 35 years to adopt 

technology fully 

1987 Patent obtained for deepwater spar 

technology 

 First logging while drilling (LWD) tool 

1988 First horizontal well drilled from 

semisubmersile drill rig 

1989 5 percent of GOM wells based on 3D 

seismic data 

1987-

1992 

Independents expand role in GOM; 

majors invest overseas 

1992 First time more platforms removed than 

installed 

Also occurred in 1993, 1997, and 

1999 

1995 4D seismic emerges Offshore exploratory success rate 

for large producers more than 

doubled between 1978 and 1995 

 Drilling, development technologies begin 

to emerge in 1995 and 1996 

Examples: easier re-entries, 

multilateral completions, 

extended reach drilling, reliable 

subsea completions, floating 

production facilities 
Technology 

81 Oil and Gas Price Changes 

Table 9 (cont’d) 

Major Technology Milestones for Oil and Gas Industry 

Year Action Comment 

1996 World’s first production SPAR installed 

in the Central GOM 

Neptune SPAR (Oryx Energy) 

installed in 1,851 feet of water in 

Viosca Knoll 

 80 percent of GOM wells based on 3D 

seismic data 

Up from 5 percent in 1989 

 4D seismic characterization methodology 

applied to previously recorded seismic 

surveys 

 Satellite used to transmit seismic data 

from ship in GOM to shore-based 

supercomputer 

Public-private collaboration 

demonstrates viability of remote 

analysis of seismic data 

 Time from offshore discovery (in 1996) 

to initial production reduced to 2 years 

For offshore discoveries in 1984, 

10 years elapsed before initial 

production 

 Cambridge Energy Research Associates 

issues “The Quiet Revolution: 

Information Technology and the 

Reshaping of the Oil and Gas Business 

Report estimates $6 billion 

annual spending on seismic 

technology, horizontal drilling, 

computers, graphics and 

futuristic visualization, advanced 

application software, databases 

and networks, and similar 

technology 

1997 Discovery rate almost six times the rate 

of early 1980’s 

Result of better imaging 

technology 

1998 Spar technology proves successful in 

increasingly deep waters 

Genesis: 2,590 feet 

Diana: 4,800 feet 

 “Truss” spar designed for use in 5,500 

feet of water 

 World’s longest well with a horizontal 

reach of 6.2 miles completed by BP 

Exploration Operating Co. Ltd 

 Baldplate deepwater production platform 

in the GOM, world’s tallest freestanding 

structure 

1999 Average cost of finding, producing oil 

drops by an estimated 60 percent in real 

terms over past 10 years 

Cumulative effect of incremental 

changes in many technologies 

 Proven reserves increase 60 percent over 

past 10 years 

Better seismic imaging, drilling, 

and recovery technologies 

critical to this increase 
Technology 

82 Oil and Gas Price Changes 

Table 9 (cont’d) 

Major Technology Milestones for Oil and Gas Industry 

Year Action Comment 

2000 U.S. Geological Survey (USGS) releases 

5-year study of world oil reserves 

USGS raises previous estimate 

by 20 percent to total of 649 

billion barrels, based on 

geological data and changes in 

drilling, other technologies 

 Offshore well located in over 9,000 feet 

of water 

 50 percent overall success rate for new 

wells 

In 1990, success rate was 10 

percent 

 Exxon Mobil’s average cost for finding 

oil - $0.65 per barrel in 2000 

Cost even lower than the 

company’s long-term target cost 

of $1 per barrel 

2001 Offshore well cost projected to drop by 

$5 to $12 million through use of subsea 

mudlift (riserless) drilling 

Technology eliminates mud from 

drilling riser which sets off a 

series of cost saving 

opportunities and allows for 

drilling in deeper water with 

greater production flow rates; 

lower costs open up more 

opportunities for profitable 

operations when oil price drops 

 Theory estimates 70 percent of oil in 

average reservoir recoverable 

Typical recovery rate about half 

of this estimate 

 Exxon Mobil processes as much seismic 

data in 10 days as would have taken 11 

years to process in 1990 

2005 Offshore costs projected to drop by as 

much as 50 percent relative to costs in 

2000 

 BP Amoco hopes to reduce liquid natural 

gas production costs by 25 percent 

relative to costs in 2000 

2015 Projected date when all the world’s 

seabed will be accessible to offshore 

drilling 

Advances in platform, drilling, 

related technology will eliminate 

water depth as barrier to 

development 

Future Knowledge surpasses oil and gas 

reserves as number one asset of 

companies 

Computers, telecommunications, 

and information technology seen 

by some as radically 

transforming the industry 

Sources: Bohi 1998, Chambers 1998, Huber and Mills 1998, Kennedy 1999, Le Blanc 

1997b, Porubon 2001, Skaug 1998, Staff 2000h, Taylor 2001. 
Technology 

83 Oil and Gas Price Changes 

3.3.1 Technology, Costs, Risk, and Oil Price Changes 

The discussion of technology and oil price changes should begin with a brief 

acknowledgement of the stakes. Oil and natural gas companies are capital-intensive 

businesses, which routinely undertake projects of enormous expense. While this is true 

across the industry, high cost is more true when projects are undertaken offshore, and, by the 

time projects occur in deepwater, the costs involved are spectacular. Commitments of $400 

million to $500 million are not uncommon (Van Wie 2000). And commitments at such 

levels do not necessarily encompass an entire project or, of course, assure production. Shell 

invested $3 billion in deepwater GOM before this investment began to generate income 

(Pattarozzi 2001). 

If money is a challenge, so also is time. The planning horizon for projects is measured in 

years. Early deepwater GOM projects required 8 or 9 years of effort to move from searching 

for oil and natural gas to being able to start production (Pattarozzi 2001). Currently, time 

requirements have been substantially reduced, but project phases are still measured in years. 

Thus, a new deepwater project may require 2 years for appraisal, then 3 years to construct the 

necessary equipment and infrastructure (Bell 2000). As a result, companies have to think 

ahead. Any major decision for a given project would have to have been made at least 2 to 3 

years prior to undertaking action (Van Wie 2000). With these long time periods for 

developing oil and natural gas resources, it is difficult to make reliable and accurate 

economic forecasts given the price volatility experienced over the last 20 years. No company 

or government agency has accurate tools for economic forecasts in this area. Consequently 

price volatility is an important problem (Bell 2000). 

Against this background of great expenses committed years in advance and incurred over 

long periods of time, the industry has had to respond to changes in oil and natural gas prices 

that have become more volatile over time, particularly in the case of oil prices. Because 

prices are set by markets operating nationally or globally and are outside the control of any 

given company, the industry does not have the option of influencing prices. The principal 

response of the industry has been to control costs. 

The control of costs is a fundamental strategy of the oil and gas industry. Since the collapse 

of oil prices in the mid-1980’s, companies have used various strategies to manage and reduce 

the costs of finding, producing, and marketing oil and natural gas. (See Section 4.4 for 

discussion of cost cutting as part of corporate organization and strategy.) 

In controlling costs, a major weapon available to the oil and gas industry has been improved 

technology and the changes that this technology has made in the process of finding, 

producing, and marketing oil and natural gas. Business goals for change usually fall under 

the headings of better, cheaper, or faster. As an important driver of change, technology has 

often been able to achieve each of these goals. Each of these goals ultimately has the effect 

of reducing industry’s costs for doing any of the almost countless individual tasks required to 

bring oil and natural gas out of the ground and to consumers. 
Technology 

84 Oil and Gas Price Changes 

For a decade or more prior to the mid-1980’s collapse of oil price, cost reduction through the 

application of technology was not a critical industry strategy. With record high prices and an 

expectation that prices would steadily climb even higher, there was little incentive to manage 

costs. Indeed, in the early 1980’s, platform production costs increased 85 percent and still 

fabrication yards were backlogged with demand (Le Blanc 1997b). In the North Sea and 

elsewhere in the early 1980’s, the focus was on getting oil to market as fast as possible, 

rather than on costs (Bishop 2000). One estimate of the cost of finding new oil in the 1970’s 

and 1980’s was $12 to $16 per barrel (in 2000 dollars). Today that figure is $4 to $8 per 

barrel (Rauch 2001). The most efficient companies today find oil at even lower prices. 

Exxon Mobil spent only 65 cents to find a barrel of oil in 2000 (Taylor 2001). 

In the early 1980’s, much of the technology that would later have major impacts on the 

industry’s costs was in place, but was not making a substantial difference to operations. 

Seismic imaging with three-dimensional capabilities was tested in the GOM as early as 1974 

and was considered commercial by the early 1980’s. By 1989, however, 3D seismic imaging 

could claim to have been used to locate only about 5 percent of the GOM’s wells. Horizontal 

drilling, which can trace its modern history to 1953, was first used offshore in 1981 and did 

not gain widespread acceptance until the late 1980’s. Deepwater production platforms were 

first installed in the GOM in 1974 and were operating in 1,000 feet of water by 1979, but 

deepwater production remained a modest, even declining part of overall production in the 

1980’s. In the 1980’s, deepwater oil contributed no more than 6 percent to total U.S. 

production and deepwater gas no more than 1 percent (U.S. DOI, MMS 2001b). 

The sense that technology failed to make a significant difference in the early 1980’s is 

supported by a U.S. Department of Energy analysis. This study examined the impact of 

technology on the oil and gas industry success rate and estimated the effects of the major 

variables thought to affect the offshore success rate. The analysis estimated that the offshore 

success rate is positively impacted by price, drilling depth, and gas intensity. The results also 

suggested that the impact of technological change was somewhat negligible over the 1978-

1985 period. Alternatively, technological progress increased the success rate at an estimated 

average annual rate of 8.3 percent over the period 1986-1995 (Forber and Zampelli 2000). 

The oil price crash of 1986 was a wake-up call for the oil and gas industry. Projections of 

$100 per barrel oil evaporated in the face of the precipitous fall in oil and natural gas prices. 

To survive, companies turned their focus to reducing costs. (See Section 4.4 for discussion 

of cost cutting programs.) 

In the late 1980’s, more technology began to emerge. A patent for spar technology 

permitting platforms in heretofore-unknown depths was issued in 1987. That same year, the 

first spar platform was installed in almost 2,000 feet of water in the GOM. Also in 1987, the 

first logging while drilling tool was used, allowing real-time transmission of data from the 

well bore. The following year the first horizontal well was drilled from a semi-submersible 

drill rig. 

While this technology opened up new options in the GOM, it was not the salvation of the 

industry. Costs were still high, particularly in deepwater GOM, where major reservoirs had 
Technology 

85 Oil and Gas Price Changes 

been found. Moreover, many of the major oil companies had an international perspective 

and found opportunities overseas more appealing. In the GOM, the independents became the 

dominant players in near-in production over a period stretching from the late 1980’s to the 

early 1990’s. By some accounts, the industry had concluded that high prices, large 

discoveries, and even tax relief would not offset increased costs experienced in the late 

1980’s. For some in the industry, the questions were whether oil was still undervalued and 

whether it was still considered a strategic commodity (Le Blanc 1997b). 

By the mid-1990’s, several factors helped to turn technology into a major driving force in the 

oil and gas industry, in the GOM, and around the world. With time, technologies that had 

been in place for years began to mature; other complementary technologies came online. 

Thus, 3D imaging was augmented by using time series data for the same location to create 

4D images. A host of drilling and production technologies were commercialized. (See 

Table 9 for examples.) Independents, by then the dominant players in the GOM, had greater 

incentives to operate there successfully. These companies were often not comparing GOM 

opportunities to those in other areas of the world. Capital, constrained by the real estate and 

savings and loan crisis that hit banking in the late 1980’s and early 1990’s, became more 

available from newer financial instruments (Brown et al. 1998). Some in the oil and gas 

industry also worried that the reserves of the more shallow water GOM were declining or 

those obscured by salt formations were too hard to find. Without breaking into the new 

frontiers of deepwater or subsalt, the GOM would no longer be an actively developed area 

(Staff 1996). 

The impacts of technology since the mid-1990’s have been remarkable. In 1996, the world’s 

first production spar platform was in place in the GOM. By that year, 80 percent of GOM 

wells were developed using 3D imaging. Using old seismic data, 4D imaging was finding 

recoverable oil and natural gas in old reservoirs. One result of this was that the U.S. 

Department of Energy estimated that 89 percent of the “new oil” being produced in the U.S. 

was from existing fields that had been re-explored and exploited with improved technology. 

Current theory now estimates that 70 percent of the oil in an average reservoir is 

recoverable—about twice what is typically recovered (Rauch 2001). By 1998, the discovery 

success rate was six times better than it had been in the early 1980’s; platforms were 

operating in almost 5,000 feet of water; extended reach drilling had completed a horizontal 

well over 6 miles in length. By the year 2000, an offshore well was operating in over 9,000 

feet of water; overall success for new wells was 50 percent versus 10 percent in 1990. 

This industry-specific technology has been supported and complemented by the increasing 

application of more generic technology—computers, software, telecommunications, and the 

internet. These technologies have driven certain other technologies, particularly seismic 

imaging, and have also been applied in the oil and gas industry as they have by almost every 

other industry. 

The overall result of the application of this array of technology has been to lower the cost of 

finding, producing, and marketing oil and natural gas while increasing the quality of work 

done and increasing the rate at which work is accomplished. The oil and gas industry has 

been singularly successful in executing its strategy to respond to oil and gas price changes by 
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86 Oil and Gas Price Changes 

controlling costs with technology. For some observers, the oil and gas industry has in fact 

evolved from the epitome of the old economy—extractive, low-tech, heavy industry—to a 

model of the new economy—high-tech, knowledge-based, and increasingly “virtual.” And, 

the future is likely to bring more of these cost reductions as new technologies continue to 

emerge (see Section 4.3.4.). 

The lowering of costs, increase in quality, and reduction in time also represent a leap forward 

in risk management for the oil and gas industry. The industry’s concern with lowering risk is 

a direct result of the huge investments and long time frames required for most major 

projects—particularly in deepwater—and the inevitable price volatility of oil and gas. Risk 

for the industry and for individual companies is essentially the probability that the money 

spent to bring oil and gas to market will fail to produce an adequate return. In a world where 

most companies are highly attuned to the concept of shareholder value and the need to satisfy 

Wall Street’s expectations, oil and gas companies want to maximize the return they receive 

for the investment and effort they make. 

Because the industry cannot control prices, they have turned to controlling costs. Because 

the history of oil and gas prices is one of sudden and dramatic increases and decreases, 

companies look for ways to mitigate the financial damage of sudden drops in prices and 

revenues. This volatility required the refinement of risk analysis and the development of 

additional strategies for resource optimization because of the likelihood that narrow margins 

will always be a part of the reality of oil and gas (Cunningham 2000). By allowing 

companies to operate profitably when prices fall, technology has been a major tool in 

allowing the oil and gas industry to manage risk and respond to price changes. 

The success of technology as a risk management strategy can be seen in the lack of 

sensitivity of major projects to what are considered short-term price swings. Companies, 

particularly the majors, do not stop and start activities as quickly as they did in the past. In 

2000 when prices shot up, there was no great surge in investments, as there might have been 

in response to high prices back in the 1980’s (Bishop 2000). BP, for example, is not likely to 

write-off its deepwater plays, even in the presence of price volatility, although sharp declines 

in the price of oil will slow the pace of project development (Farnsworth 2000). Price 

volatility did lead companies to seek more economical means to undertake and complete 

projects; but has not affected their basic commitment to such projects (Pattarozzi 2001). 

Technology, however, is maturing for deepwater and other frontier areas. As a result, time 

horizons are shrinking. The technology, which has allowed companies to be less sensitive to 

price shocks, increasingly also makes these projects like other less risky efforts. Thus, there 

are signs that the buffering quality of technology-driven cost reductions is waning. More 

recently, deepwater has grown more sensitive to price shifts as this part of the industry 

matures and production cycle times decrease (Bell 2000, Bishop 2000, Farnsworth 2000, 

Jeppesen 2000, Cunningham 2000, Plaisance 2000). 

There are several kinds of risk that oil and gas companies must manage. In the GOM, these 

are largely technical, relating to the ability of companies to find and develop oil and gas 

reservoirs within the set budget. In other areas of the world, the technical issues are 
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87 Oil and Gas Price Changes 

compounded by what might be considered political risks. Technology can play a role in 

helping oil and gas companies manage these kinds of risks as well. Thus, given the longterm decline in costs and in technical risks (e.g., finding oil, recovering most of a deposit), 

these other risks may be more acceptable. This can be seen in the recent interest that 

companies based in the U.S. and other Western countries have in oil in high-risk areas like 

the Russian Arctic, one of the last unexplored areas of the world with the potential for 

yielding substantial quantities of oil and gas. There the risks include significant technical 

challenges, but the more important risks are legal, financial, and political. The technical risks 

of working in extreme cold are compounded by the general difficulties that Western 

companies have had in working in Russia because of its history of political instability, 

shifting tax laws, reneging on debt, and canceling contracts. Past efforts of a consortium of 

Russian and Western firms to develop the Russian Arctic have also ended in failure. The 

surge in oil and gas prices in 2000 began to offset these risks. The incentives can be 

explained by the estimate that the Timan Pechora area within the Russian Arctic has reserves 

of 126 billion barrels of oil, valued at over $4 trillion at 2000 prices (Varoli 2000). 

Given the volatility of oil and gas prices since 1980, it not surprising that what industry 

would prefer is stable and predictable prices (Van Wie 2000, Bishop 2000, Bell 2000). In the 

absence of such a perfect world, technology has proven to be a critical tool for industry to 

manage risks and maintain operations in the face of inevitable and even increasing price 

volatility. 

3.3.2 Changes in Benchmark Oil Price Versus Market Prices for Oil 

Given the magnitude of investment and the long planning horizons for oil and natural gas 

projects, planning is crucial. As noted in Section 3.3.1, oil companies are making decisions 

about billions of dollars when they are deciding where to put new deepwater platforms and 

related infrastructure. Successful projects will produce oil for 20 to 30 years (Bell 2000). 

Thus, it is only reasonable that major oil companies have planning horizons of 20 years 

(Taylor 2001). 

When trying to make investment decisions, industry planners are faced with a major 

dilemma. Given the volatility of oil and natural gas prices, what assumptions should 

planners make for the future price of oil and natural gas? 

These assumed prices, typically called benchmark prices, can serve at least two purposes. 

One, benchmark prices can be used to predict the most likely prices that will prevail over the 

planning period. Two, benchmark prices can be used to determine the lowest prices that will 

still allow companies to make an acceptable return on investment. The two purposes are 

distinct. The benchmarks based on most likely prices constitute what amounts to a best guess 

as to what the future holds. Alternatively, benchmarks based on lowest prices that allow 

acceptable profits can be used to decide when a company has to make strategic decisions on 

resource allocation or other risk management issues. 

Current thinking about price benchmarks and planning is done in the context of 

fundamentally flawed planning in the not too distant past. Twenty years ago, the industry’s 
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88 Oil and Gas Price Changes 

planners looked to the future after a decade of unprecedented increases in prices that had 

enormous impacts on economies around the world. In the early 1980’s, industry planners 

were projecting oil prices of $90 to $110 a barrel oil by the year 2000 (Le Blanc 1997b). 

Based on a simple extrapolation of the price increases of the 1970’s and early 1980’s, the oil 

and natural gas industry was able to justify many business decisions that only worked with 

oil at very high prices. As noted in Section 3.3.1, given the high prices of the early 1980’s 

and the expectation that these prices would continue to rise over many years, cost control was 

not an issue. In effect, planning for the longer-term future was not even an issue. Getting oil 

to market as soon as possible was the motivating force for the industry. 

The oil price collapse of the mid-1980’s rewrote the assumptions about the future price of oil 

and the basic assumptions that the industry needed to make in order to plan for the future. It 

has been easy in hindsight to see that decisions based on $100 per barrel oil were poor ones 

that opened companies to major risks. The lessons of the mid-1980’s have not been 

forgotten. In fact, they are routinely cited by industry representatives and observers as the 

reason that oil and gas planners are much more conservative when setting benchmark prices 

and planning for the future (Bell 2000, Cunningham 2000, Knight 2000, Von Flatern 1997a, 

Van Wie 2000). 

The problems of planning for the future can be seen in the costs of deepwater development in 

1993, a few years before production from this frontier began to increase dramatically. At 

that time, oil prices were in the $14 to $16 range (unadjusted), barely above deepwater costs. 

Because costs were barely covered and deepwater was very much a frontier (i.e., relatively 

high risk) area in the early 1990’s, deepwater development could not proceed. The 

benchmark price for planning was essentially the same as the market price (Le Blanc 1997b). 

By the end of the 1990’s, the benchmark prices used by industry planners had begun to come 

down in real terms. There is, however, no consensus on planning benchmark prices. Most 

companies use a range of prices. For BP Amoco, the mid-point of this range from 1994 to 

1998 was $16 (unadjusted). By 1999, this mid-point was down to $14. Even more 

interesting, in 1999, the company was basing its financial planning on the “challenging” 

assumption of oil at $11 a barrel (Gibson-Smith 1999). These benchmarks probably 

represent the low end of the spectrum for the industry. Another perspective on mid-1990’s 

benchmarks found them above BP Amoco’s figures. In 1997, industry executives were 

reported to have used price scenarios in their planning for projects of $2 and $18 

(unadjusted), for gas and oil respectively. Although the figures were considered conservative 

(i.e., low), technology and a low cost structure was allowing operators to gain profits at these 

price levels (Von Flatern 1997a). 

In trying to determine the benchmark related to the most likely future price of oil and natural 

gas, the industry’s conservatism has now pushed most planners to an oil price somewhere in 

the mid to high teens. In the year 2000, this price seems to average $18 per barrel, and was 

only recently raised to that level. It would probably take relatively high prices for a few 

years to nudge the benchmark higher (Cunningham 2000). For Conoco, planning is done on 

the basis of long-term prices between $16 and $18 per barrel (Bishop 2000). In remarking 

that all companies operate with benchmarks, an industry official noted that perhaps the most 
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89 Oil and Gas Price Changes 

current (i.e., in 2001) was $18 per barrel in constant dollars (Griffith 2001). A major 

investment bank had a somewhat different perspective seeing the planning benchmark for oil 

continuing to be in the mid-teens (Staff 2000f). 

Technology plays an important role in establishing benchmarks of future prices, at least those 

concerned with the lowest prices that allow companies to make an acceptable return on 

investment. By lowering costs with technology, companies also lower the threshold at which 

adequate financial returns can be realized. 

This other type of benchmark price—the lowest price at which companies can continue to 

operate projects profitably—has undergone change in the last two decades. Thus by 1997 

lower costs were allowing companies to make profits at prices of $15 a barrel or lower (Coy 

and McWilliams 1997). As noted above, BP Amoco has set a goal of being profitable with 

oil at $11 (Gibson-Smith 1999). 

Anything significantly below $10 per barrel is not sustainable, however, as the fundamentals 

of supply and demand are disrupted by lack of investment. Somewhere around $8 to $9 per 

barrel, disinvestment by the industry begins, leading to tighter supplies and higher prices 

(Gibson-Smith 1999). The Federal Reserve Bank shares this view. If oil prices fall below 

$10 and remain in those levels, Texas producers will have difficulty covering costs, and 

would have to cede production to lower cost areas of the world (Gunther et al. 1999). 

Changes have not only been reflected in lowering this “worst case” benchmark price, but also 

in how companies respond to changes in oil prices. The use of conservative benchmarks 

allows companies to survive periods of lower prices that would have been disastrous in the 

past although it also tempers new activity when prices increase dramatically (Coy and 

McWilliams 1997). Conservative benchmarks used by operators have kept oil price 

increases from translating into a rush of drilling contracts (Plaisance 2000). Despite the 

surge upward in prices for oil and gas in 2000, people in the industry are expected to remain 

cautious. Especially for deepwater projects, companies are not expected to reap significant 

economic advantage from reacting precipitously to near term price rises (Bell 2000). 

It is useful to note that different segments of the oil and natural gas industry view 

benchmarks differently. Most of the material above applies best to the major oil companies. 

Independents that rework properties already exploited by the majors will need higher 

benchmarks. An official at such a firm noted that a workable benchmark price range for 

crude oil would be $20 to $26 and for gas about $3. This would permit effective planning 

and allow projects to go forward. Lower prices—perhaps $18 for oil and $2 for gas—make 

it hard to complete projects and discourage capital expenditure (Jeppesen 2000). 

If the benchmark prices used by oil industry planners are compared to the actual world price 

over time, what may emerge is a general tendency for the gap between the benchmark price 

and the actual world price to increase over time. That is, because costs are dropping at a rate 

faster than any long-term decline in prices, the benchmark price tends to be increasingly 

lower than the actual world price. While this pattern holds over longer periods of time, it is 
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90 Oil and Gas Price Changes 

clear that during shorter periods, this gap may grow dramatically when actual prices spike or 

may disappear completely when world oil prices collapse as happened in 1998 and 1999. 

Ultimately much of what allows industry to plan for the future using lower benchmark prices 

is technology. By increasing productivity, technology tends to lower the costs of finding and 

producing oil and natural gas. 

3.3.3 Oil Price Changes as a Driver of Technology 

In the simplest terms, there is no direct, immediate link between oil price changes and 

technology. Interest in technology does not rise or fall with changes in the prices of oil and 

natural gas. If this were the case, investment in technology, application of technology, and 

creation of technology-based companies would show a stop-and-start pattern. If price were 

a driver of technology, one would expect to see a volatile interest in technological 

development that tracked oil or gas prices. This does not appear to be the case. Indeed, it is 

difficult to imagine the requisite continuous application of research and development effort 

that is the hallmark of the recent success of technology in the context of a volatile and 

unpredictable driving force (i.e., oil or gas prices). 

Since 1980, technological development and its application in the oil and gas industry has 

shown three broad trends. The first is a period of high prices and little impact from 

technology. This period ended around 1985. For the next 10 years or so, technology began 

to have a more distinct effect on overall industry success with annual increases at an 

estimated average rate of 8.3 percent over the period 1986-1995 (Forber and Zampelli 2000). 

Prices were relatively low in this period although there were sharp increases and decreases. 

Finally, since 1995, technology seems to have had a sharply increased effect on the oil and 

gas industry. Over the past 5 to 6 years, prices have both collapsed and sharply risen. 

These three broad trends and the behavior of prices may suggest an inverse correlation 

between oil prices and the effects of technology. That is, lower prices may tend to encourage 

technological development as a way to lower costs. In periods of higher prices, technologydriven cost cutting may seem less important. 

This relationship, however, does not seem to comport with industry’s own view of its 

responses to oil and gas price changes and the role of technology. That view, discussed in 

the previous two sections, suggests that the experience of collapsing oil prices in the mid1980’s was a turning point for the industry overall, leading to a permanent concern with cost 

reduction, efficiency, and productivity. 

Thus, instead of a more dynamic relationship between oil and gas price changes and 

technology, there is a more static relationship. Changes in oil prices—particularly the 

increased volatility in prices that has marked the last 20 years—have been instrumental in the 

oil and natural gas industry’s embrace of technology because of its ability to lower costs and 

help to manage risks. As noted earlier, the oil and gas industry is well aware of its inability 

to influence the course of prices, especially when oil and gas prices are low. With the 

revenue side under the control of national or world markets, industry did what it could and 
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91 Oil and Gas Price Changes 

chose to control costs. One way has been through implementation of technology (Le Blanc 

1997b). 

This concern with cost reduction and risk management is insufficient to explain the 

application of technology. Another necessary driver is the nature of technology itself. 

Technology seems to be largely driven by its own internal momentum that seeks greater 

effectiveness, efficiency, productivity, or speed. For generic technology such as information 

technology or telecommunications, advances are created by technology companies—large 

and small—that are always interested in new product development. The ongoing 

competition between Intel and Advanced Micro Devices for ever-faster computer chips is an 

example of product driven technological improvement. 

The development of more industry-specific technology such as seismic imaging is also 

largely driven by the desire to increase effectiveness, efficiency, productivity, or speed. In 

many of these cases, the driver of technological development can be defined as specific 

problems the industry faces. These include the need to identify hydrocarbon reservoirs, to 

operate in deep water, or to increase the portion of hydrocarbons extracted from known 

reservoirs. Many of these advances are incremental, known as next-step technologies, that 

are focused on whatever is the most immediate barrier to success in the field. Most 

technological advances either reduce costs directly or lead to other advances that reduce 

costs. Better seismic imaging reduces the chances that a new well will produce nothing and 

increases the production from known reservoirs. Both consequences reduce the costs of 

finding and producing a barrel of oil. 

From an economic perspective, cost management is then a more direct driver than price. The 

ability of technology to reduce costs is clearly proven and relatively predictable. This is a 

benefit to oil and gas companies regardless of oil prices. When prices are high, profits are 

greater. When prices drop, the window of opportunity for profitable operations is greater. A 

fuller explanation of what drives technology combines the advantages of lower costs with 

technology’s long track record of always striving for the next new (and improved) product. 

3.3.4 Prospects for Future Technology and Likely Relation to Oil Price 

As has been true of technology development over the past 20 years, the relationship between 

future technology and the price of oil and gas will be strong, but indirect. Given the 

industry’s inability to control prices and the well-established history of price changes and 

volatility, the desire to control and lower costs will remain a major force behind the 

introduction of new technology. 

Closely linked to cost reduction is the idea of next-step technology. The industry is 

constantly facing technical challenges that constitute the next incremental step in improving 

any number of processes involved in finding, producing, and bringing to market oil and 

natural gas. Solving these kinds of problems is in fact the principal goal of most industry 

research and development. 
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A third factor driving future technology is the desire of individual companies to create new 

products. This is particularly true for the newer, still evolving technologies such as 

computers and telecommunications where the rush to market the next, even more powerful, 

service or machine has been the overriding motivation for the past two decades. 

With these factors in play, the oil and natural gas industry fully expects technology to 

continue to lower costs (Loth et al. 1999, Van Wie 2000). BP Amoco, for example, looks to 

technology to reduce liquid natural gas (LNG) production costs by 25 percent within 5 years, 

and to reduce onshore pipeline costs by a similar amount over 5 to 10 years (MacKenzie 

2000). An article looking at future technology found some experts estimating that offshore 

technology could be 50 percent cheaper by 2005 and that by 2002 offshore well costs could 

drop $5 million to $12 million (Staff 2000h). 

Despite this optimism, others are concerned that the oil and natural gas industry’s ability to 

lower costs will be thwarted by the major technical challenges posed by deepwater and other 

frontier areas. As the more easily developed areas are exploited, the industry has always 

searched in more difficult areas. Whether cost saving technologies can keep pace with these 

challenges or fulfill their expectations are major uncertainties. Thus, some observers have 

estimated that, relative to the mid –1990’s, finding and development costs have not 

decreased. This reflects in part the greater costs of development in deepwater where there 

may be a trend to higher capital costs early in projects’ lives because of greater initial drilling 

activities. Deepwater projects could reverse the trend of lower costs, and will also lead to 

more cost management challenges. Companies may struggle to maintain profits in the future 

as more projects take place in deepwater or are related to stranded gas (Traynor 2000). For a 

more specific view, one expert noted that dual rig drill ships are expected to become efficient 

and economical, although major problems in managing two strings of pipe below a ship 

remain. The 40 percent savings forecast when dual-ships were introduced has not yet been 

realized (Ellis 2001). 

While most industry experts and observers anticipate change in industry-specific 

technologies, a few look to information technology and related technologies as the sources of 

future changes. The ability to complete business transactions on the internet, for example, 

has radically reduced the time and effort required to complete sales of energy contracts for 

companies like Enron (Porubon 2001). This same technology opens up the possibility of 

electronically buying and selling oil and gas assets. This would allow companies to manage 

their portfolios of oil and gas producing properties in a fundamentally new manner by 

reducing the time required to complete transactions and by opening the market to any 

company with access to the internet. One ultimate outcome of this technology may be a 

“virtual” company that delivers energy to customers, but never actually finds, produces, or 

owns the energy. These e-commerce changes may provide another level of protection from 

the vagaries of oil and gas price changes, allowing companies to adjust to such changes 

almost instantaneously. 

The range of technological improvements and challenges that industry experts and observers 

anticipate is vast and relates to seemingly every activity that industry undertakes. The 
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93 Oil and Gas Price Changes 

following is a brief list of these areas of or opportunities for future technological 

development. 

Exploration 

• Increased computing power and speed will reduce the time required to interpret 

seismic data, thereby further lowering costs and risks significantly (Cunningham 

2000). 

• Opportunities exist for improvement in using seismic data to assess sub-salt 

formations. Salt deflects seismic energy in irregular patterns, making less 

accurate images. Longer seismic cables have helped capture more of the 

deflected seismic energy, getting more data that can eventually go to make up a 

3D picture (Van Wie 2000, Knight 2000). 

• Improved interpretation and additional experience with seismic imaging 

technology will help to identify next-step solutions and responses. Interpretation 

of the older formations, for example, could advance and support fresh approaches 

to even deeper exploration (Griffith 2001). 

Drilling 

• The loop current and eddy phenomena in the GOM deepwater are not well 

understood. The difference between pore pressure and fracture gradients is very 

narrow in GOM compared to other areas; there is also a lack of overburden to 

give formations strength. At present, these problems drive up costs for drillers 

(Plaisance 2000). 

• Expandable casing, not now available, will permit much faster drilling (Knight 

2000). 

• Improvements in drilling technologies will be important because the major capital 

expenditure item is still drilling. Lower drilling costs will encourage the 

development of smaller prospects (Cunningham 2000). 

• Companies are still learning a great deal about drilling deep wells in deepwater. 

The next year or so should be important learning time in this area (Farnsworth 

2000, Van Wie 2000). 

• Logging technology will continue to improve, cutting drilling time and making it 

possible for drillers to avoid potentially costly errors and accidents (Mitchell 

2000). 

• A focus for change is drilling technology resulting in higher efficiencies and 

improved reservoir drainage. Cost-reducing technology could make offshore 

technology 50 percent cheaper by 2005. By 2002 well costs could drop $5 to $12 

million (Staff 2000h). 
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94 Oil and Gas Price Changes 

• A major challenge is the ability to drill horizontally in soft offshore formations, 

while keeping the hole open and free of sand. It is hard to gravel pack such 

horizontal wells and eliminate void spaces where sand will come through and 

rapidly stop flow. The industry is still experimenting with gravel packing on 

horizontal wells (Utsler 2001). 

• Increasing experience with deepwater formations and characteristic low fracture 

gradients is improving flow rates, making projects more economical for operators. 

Expandable casing has made fracturing more efficient. Dual rig drill ships will 

probably become efficient and economical (Ellis 2001). 

Production 

• The same kind of technology surge that pushed North Sea development to 

develop will likely occur in deepwater GOM. The major unresolved production 

problem in deepwater GOM is storage of natural gas (Taylor 2000). 

• Another bottleneck area is gas-to-liquids technology. To avoid flaring gas, and in 

the absence of pipelines, some sort of compact gas-to-liquids plant that one could 

install on a floating facility is needed. Improvements in gas-to-liquids technology 

would allow deepwater to take off (Plaisance 2000, Van Wie 2000). 

• With respect to deepwater activity, the big area in which there could be 

breakthrough is in handling gas. The rough topography of parts of the deepwater 

GOM sea floor presents special problems to pipelines, and there are problems 

with respect to size of lines and high pressures encountered. The bottleneck in 

handling gas is a challenging one, and the breakthrough would be in the area of 

gas-to-liquids conversion (Bishop 2000). 

• Current technological bottlenecks in deepwater GOM are largely related to flow 

assurance and storage. Incremental improvements in production technologies will 

probably continue to cut costs in the future (Cunningham 2000, Farnsworth 

2000). 

• Further development of “intelligent wells,” with onshore monitoring and control 

through fiber optical connection has important possibilities (Farnsworth 2000). 

• Water depth limitations still need to be overcome. Petrobras has made some 

advances in this area. In approximately 15 years (i.e., by 2015), the oil industry 

will be capable of reaching all of the world's seabed (Bell 2000, Staff 2000h). 

• Tension Leg Platform and drill ship technology will advance incrementally to 

facilitate operation in progressively deep water (Pattarozzi 2001). 

• The future of the industry will include floating and subsea production as the 

industry moves into deeper waters. Floating production systems will be 

interchangeable, units will act as drilling and production vessels, and mobile 
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95 Oil and Gas Price Changes 

production systems will demand more flexibility. Success resulting from these 

advances, however, may lead to new technology challenges related to transporting 

oil long distances in deepwater pipelines (Staff 2000h, Loth et al. 1999). 

Other 

• One industry expert believes breakthroughs will chiefly come in applied computer 

technology. Improvements are expected in automation systems or in tracking data 

and capturing gas flow measurement, but there are other areas where applied 

computer technology may create substantial breakthroughs (Kappmeyer 2001). 

• Speakers at an offshore technology conference believed that e-commerce 

technology had the promise to revolutionize the oil and gas business (Wetuski 

2000). 

Finally, much of the focus for future technological change may shift from oil to natural gas. 

Upstream capital spending should rise in the 2001-2005 period compared to 1990-1999. 

Much of this spending will be aimed at gas, not oil (Traynor 2000). BP Amoco thinks gas 

will be the fuel choice of the 21st century and customers are seeking cleaner transport fuels 

and petrochemicals. One response to this is to synthesize more hydrogen-rich clean fuels 

from natural gas. BP Amoco is currently focused on gas-to-liquids technologies. BP Amoco 

looks to technology to reduce LNG production costs by 25 percent within 5 years, and to 

reduce onshore pipeline costs by 25 percent over 5 to 10 years. The next step is gas for 

chemicals in 5 to 10 years time followed by gas for transport fuels in 10 to 15 years 

(MacKenzie 2000). 

3.4 Labor 

People with many different skills work in the oil and gas industry – geophysicists, petroleum 

geologists, petroleum engineers, rotary drilling crews, general laborers called roustabouts, 

welders, pipe fitters, electricians, and machinists, to name a few. Offshore work also 

requires cooks, radio operators, and helicopter and marine transportation support. No single 

source provides employment estimates in the oil and gas industry. Not only are there many 

different skill sets involved but the workers in the oil and gas industry are employed by oil 

companies, and drilling contractors, transportation companies, and service companies and 

other vendors, depending on the nature of their work. Those working for the oil companies 

are direct labor. Those working for companies providing a service to the oil companies are 

indirect labor. 

For purposes of this discussion three categories of oil and gas workers will be used. 

The first is oil and gas extraction (SIC 13) which includes oil and gas exploration, drilling, 

well operation and maintenance activities, and the operation of natural gasoline and cycle 

plants. The second is crude petroleum and natural gas (SIC 131) which includes 

establishments engage in activities such as petroleum and natural gas exploration, drilling, 

completing, and equipping wells, and activities in preparation of oil and gas up to the 

shipment from the producing property. The third is oil and gas field service (SIC 138) which 

includes establishments that primarily drill wells for oil or gas field operations for others on a 

contract or fee basis. The crude petroleum and natural gas and oil and gas field service
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96 Oil and Gas Price Changes 

sectors are subsets of the oil and gas extraction category. All three sectors include workers in 

the entire oil and gas industry, that is, they are not limited to the offshore portion. 

Employment in these three sectors between 1980 and 2000 is shown in Figure 22. The trends 

seen in employment in these sectors are compared below to oil and natural gas prices 

between 1980 and 1999 for gas and 2000 for oil. 

3.4.1 Oil Price Variability and Employment 

Employment in oil and gas extraction peaked in 1982 at 708,300, a year after the peak in oil 

price during the period 1980 to 2000. Between 1970 and 1981, the sector created 438,000 

jobs (U.S. DOL, BLS, 2001d). In 1982, larger volumes of oil became available from oilproducing countries around the world causing oil prices to collapse by 1985. Oil prices 

declined between 1982 and 1986, rose in 1987, declined in 1988, rose in 1989 and 1990, then 

declined annually between 1991 and 1995, rose in 1996, declined annually between 1997 and 

1999, and then rose again in 2000. Oil prices between 1982 and 2000 never came close to 

the high of $54.46 (2000 dollars) per barrel in 1981, and reached a low for the period under 

discussion of $11.26 (2000 dollars) in 1998. Employment in oil and gas extraction declined 

beginning in 1983, a year after the peak employment and 2 years after the peak oil price and, 

expect for 1984 and 1990, declined every year between 1983 and 1995. Employment rose 

between 1996 and 1998, declined in 1999 and then rose again in 2000. Employment in 2000 

was estimated at 304,400 compared to 559,700 in 1980 (U.S. DOL, BLS, 2001a). So, while 

oil prices rose and declined between 1981 and 2000, employment essentially fell. Figure 23 

shows oil prices and oil and gas extraction employment between 1980 and 2000. 

Figure 24 shows oil prices and crude oil and natural gas production employment between 

1980 and 2000. Like oil and gas extraction employment, crude petroleum and natural gas 

employment peaked in 1982, the year following the peak oil price. Employment in the sector 

then declined annually, except for 1991, through 2000. Employment in 2000 was estimated 

at 127,400 compared to 219,600 in 1980 (U.S. DOL, BLS, 2001b). 

Employment in oil and gas field services and oil prices between 1980 and 2000 are shown in 

Figure 25. In general, employment in this sector closely follows the increases and decreases 

of oil price. Price tends to affect upstream oil and gas industry jobs through effects on 

drilling and production, that is the jobs in this sector. There tends to be an immediate effect 

on exploration activities. Higher prices result in increased drilling. However, the impact of 

price on production is smaller. Employment increases when oil prices increase, but not as 

much as oil prices (Kendall, 1999). Oil and gas field service employment was estimated at 

172,200 in 2000 compared to 333,800 in 1980. Employment in the sector peaked in 1982, 

the year following the peak oil price (U.S. DOL, BLS 2001c). 

A number of factors contribute to overall employment declines in oil and gas industry sectors 

between 1980 and 2000, a time when oil prices experienced some volatility. The factors 

included corporate strategies to reduce costs and technological advances which reduced the 

need for oil and gas platforms on the one hand and created jobs in data processing and 

interpretation on the other. See Section 4.3 for a discussion of technology and labor needs 

and location and Section 4.4 for a discussion of labor and corporate strategy. 
Oil and Gas Price Changes 

97

Figure 22. Oil and gas employment, 1980-2000.

0

100200300400500600700800

19801981198219831984198519861987198819891990199119921993199419951996

Year

Employment (in thousands) Oil and gas extraction employment, SIC 13 Oil and gas field services employment, SIC 138

Crude petroleum andnatural gas employment, SIC 131

Sources: U.S. DOL, BLS 2001a, b, and c.
Oil and Gas Price Changes 

98

Figure 23. Oil price and oil and gas extraction employment, 1980-2000.

$0

$10$20$30$40$50$60

198019811982198319841985198619871988198919901991199219931994199519961997

Year

Oil Price ($2000)

Oil price Oil and gas extraction employment, SIC 13

Sources: U.S. DOE, EIA 2001a, U.S. DOL, BLS 2001a.
Oil and Gas Price Changes 

99

Figure 24. Oil price and crude petroleum and natural gas employment, 1980-2000.

$0

$10$20$30$40$50$60

198019811982198319841985198619871988198919901991199219931994199519961997

Year

Oil Price ($2000)

Oil price

Crude petroleum and natural gas employment, SIC 131

Sources: U.S. DOE, EIA 2001a, U.S. DOL, BLS 2001c.
Oil and Gas Price Changes 100 Figure 25. Oil price and oil and gas field services employment, 1980-2000. $0 $10 $20

$30$40$50$60

198019811982198319841985198619871988198919901991199219931994199519961997

Year

Oil Price ($2000)

Oil price Oil and gas field service employment, SIC 138 

Sources: U.S. DOE, EIA 2001a, U.S. DOL, BLS 2001b.
Labor 

101 Oil and Gas Price Changes 

3.4.2 Natural Gas Price Variability and Employment 

Natural gas wellhead prices (real prices) between 1980 and 2000 peaked in 1983, a year after 

the peak oil price during the period. Between 1984 and 1991, natural gas prices declined as 

did oil and gas industry employment. The price then increased between 1992 and 1994 

before falling to the low for the period in 1995. It then increased in 1996 and 1997, 

decreased in 1998, and increased in 1999. The price in 1999 was the same as it was in 1990 

and below the price in 1980. As show in Figure 26, employment in the oil and gas extraction 

sector declined over the period. Between 1980 and 1990 employment and natural gas prices 

fell. In the 1990’s, natural gas prices rose and fell while oil and gas extraction employment 

did not experience the same increases and decreases. 

Figure 27 compares the trends in natural gas wellhead price to employment in the crude 

petroleum and natural gas sector. The employment in this sector declined fairly steadily over 

the period and did not experience increases in the 1990’s at the time that natural gas prices 

experienced volatility. 

As show in Figure 28, employment in the oil and gas field services sector tracks fairly 

closely with natural gas wellhead prices. Employment, however, did not experience the same 

volatility as price in 1990’s. In 1999, the price of natural gas went up while oil and gas field 

service employment went down. 

3.5 Regulatory Environment 

The regulatory environment of offshore oil and gas activity as it related to oil and gas price 

change is addressed in two ways. First, the work environment of the gulf is compared to that 

of the rest of the world. Some companies have the option to work outside the gulf, so that 

when conditions change they can shift their investments geographically. Other companies 

focus their activity on the gulf or North America. Second, the major regulators and the major 

environmental regulations affecting offshore oil and gas activities are discussed. Cost of 

compliance with regulations adds to the costs of doing business and, therefore, is a 

component in oil and gas prices. The regulators also affect access to search for oil and gas 

and, therefore, affect access to potential supplies of oil and gas. (Also see Section 3.2.1.2 for 

a discussion of legislation and FERC orders affecting the wellhead price of natural gas.) 

3.5.1 Gulf of Mexico Versus the Rest of the World 

The offshore oil and gas industry grew from the Gulf of Mexico. The first well drilled from 

a fixed platform almost out of sight of land in federal waters occurred in 1947 south of 

Terrebonne Parish, La. Since then, the industry has expanded to the North Sea, West Africa, 

South America, Asia Pacific, the former Soviet Union, Australia, and Canada. The Gulf of 

Mexico competes with basins around the world for development capital. After the collapse 

of oil price in 1986, exploration budgets increasingly shifted to overseas so in 1988 more 

investment was made outside the U.S. than within it (Staff 1992a). 
Oil and Gas Price Changes 102 Figure 26. Natural gas wellhead price and oil and gas extraction employment, 1980-1999. $0.00 $0.50 $1.00 $1.50 $2.00

$2.50$3.00$3.50$4.00$4.50

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

Year

Natrual Gas Wellhead Price ($2000)

Natural gas wellhead price

Oil and gas extraction employment, SIC 13

Sources: U.S. DOE, EIA 2000b, U.S. DOL, BLS 2001a.
Oil and Gas Price Changes 103 Figure 27. Natural gas price and crude petroleum and natural gas employment, 1980-1999. $0.00 $0.50 $1.00 $1.50 $2.00

$2.50$3.00$3.50$4.00$4.50

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

199

Year

Natural Gas Wellhead Price ($2000)

Natural gas wellhead price

Crude petroleum and natural gas employment, SIC 131

Sources: U.S. DOE, EIA 2000b, U.S. DOL, BLS 2001c.
Oil and Gas Price Changes 104 Figure 28. Natural gas wellhead price and oil and gas field services employment, 1980-1999. $0.00 $0.50 $1.00 $1.50 $2.00

$2.50$3.00$3.50$4.00$4.50

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

Year

Natural Gas Wellhead Price ($2000)

Natural gas wellhead price

Oil and gas field services employment, SIC 138

Sources: U.S. DOE, EIA 2000b, U.S. DOL, BLS 2001b.
Regulatory Environment 

105 Oil and Gas Price Changes 

Table 10 highlights some of the advantages and problems of working in the GOM articulated 

in discussions with industry representatives for this study. The advantages tend to focus on 

the existing infrastructure and the low political risk. The regulations and the regulators are 

known and viewed as fair. The disadvantages range from natural characteristics which make 

drilling challenging to unresolved technology problems in deepwater. 

The alternatives to the GOM for companies that work outside the gulf, that is overseas 

locations, offer challenges that are not captured in Table 10. The North Sea, for example, has 

harsher environmental conditions than the gulf, which affects platform design and safety 

systems. Portions of the North Sea have a unionized labor force which add to project costs. 

Political instability and terrorism is a fact of life in some areas. For example, more than 200 

employees and contractors of Chevron Nigeria Ltd, a subsidiary of Chevron Corporation, 

were taken hostage by youths armed with machetes, knives, and clubs on an offshore 

platform in 1998. Nigerian law enforcement lacked helicopter transportation and expertise to 

land on an offshore platform so Chevron had to supply transportation for law enforcement 

(Staff 1998a). Another problem sometimes encountered in lesser-developed areas of the 

world is unstable local banking institutions. Logistical challenges can also be present. 

Remote areas without medical infrastructure offer special challenges in providing health care. 

Shifting tax laws, cancelled contracts, and a history of reneging on debt has made business in 

post-Soviet Russia unacceptably risky in the absence of very high oil and gas prices (Varoli 

2000). 

For some companies, the rest of the world is limited to the gulf or North America because the 

companies are structured to only work in those areas. These companies do not have the 

option of shifting their exploration budgets overseas if price conditions change. Limitations 

on leasing areas in the gulf restrict the options of these companies more than those that work 

internationally or globally. Beginning in 1983, Congress imposed a series of annual leasing 

moratoria in the Eastern Gulf of Mexico Planning area, south of 26 degrees north latitude and 

east of 86 degrees west longitude (Gachter 1994). President George Bush, in 1990, imposed 

an administrative moratorium on leasing in several areas through 2002 (Owen, 1993). In 

1998, President Bill Clinton extended these for 10 years to 2012 (Staff 1998b). 

For foreign companies, the gulf is part of the rest of the world. Non-U.S. companies are 

attracted to the gulf for many of the same reasons that U.S. companies are. They have 

expertise amassed in producing basins around the world that is being applied in GOM 

deepwater. Paris-based Elf Aquitaine through various oil and gas subsidiaries has had a 

presence in the U.S. for over 30 years, working initially in Alaska and the Lower 48 before 

refocusing on the gulf in the early 1990’s. It has followed a dual track approach in the gulf -- 

selective leasing of high quality prospects in OCS lease sales and aggressively seeking 

partnering and alliance opportunities. Elf maintains a Houston office. Australia’s BHP 

Petroleum Americas, Inc. started in the gulf in 1994 with a few blocks and through a lease 

sale and strategic alliances increased its inventory. The gulf is expected to continue to be 

attractive to non-U.S. companies because of growth opportunities through application of 

technology and the many opportunities for partnerships and alliances (Staff 1997b). 
Regulatory Environment 

106 Oil and Gas Price Changes 

Table 10 

Advantages/Problems of Working in the GOM 

Advantages Problems 

Proximity to supplies, staging areas, and 

market; skilled labor force; access to 

major contractors and services; 

concentration of technology development 

Federal government opened an area via 

lease sale, permitted bidding and then 

closed it to exploration (e.g., North 

Carolina) 

Regulatory compliance costs, except for 

environmental regulations, slightly less 

than North Sea, which along with the 

GOM are the highest in the world 

Floating Production Storage Offloading 

vessels not permitted (but under 

consideration) 

Accessibility of service and supply 

companies; long term experience working 

with same companies cuts delivery time; 

easiest place in world for drilling 

contractors 

Loop currents and eddies in deepwater 

cause difficulties for drilling contractors 

Easier processes to show regulatory 

compliance compared to other parts of the 

world 

Personnel and equipment, including those 

needed for deepwater, drawn from GOM 

when other areas are active 

Low political risk High entry costs of leases 

Systematic development of infrastructure Storage of deepwater natural gas is an 

unresolved production problem 

Proximity and completeness of 

infrastructure for operations 

Potential for increased pressure on support 

services if deepwater exploration is 

successful 

Can use accumulated experience 

Stable, consistent lease terms 

Reasonably competitive based on fiscal 

considerations 

Ease of forming alliances in Houston 

because of the concentration of firms in 

the area 

Sources: Bell, 2000, Cunningham 2000, Ellis 2001, Farnsworth 2000, Griffith 2001, Hasan 

2001, Holleck 2000, Jeppeson 2000, Taylor 2000, Verrett 2001. 
Regulatory Environment 

107 Oil and Gas Price Changes 

3.5.2 Areas of Regulations Governing the Offshore Oil and Gas Industry 

OCS oil and gas operations and related onshore facilities are subject to stringent oversight by 

many federal regulations, and in the case of onshore facilities, by state and local regulations. 

The cost of compliance with regulations adds to the cost of finding and producing oil and 

gas. A survey of oil companies doing business in the gulf in the mid 1990’s identified the 

federal agencies having the greatest impact on oil and gas exploration and production 

activities in the gulf as (Seydlitz et al. 1995): 

1. U.S. Department of the Interior, Minerals Management Service 

2. U.S. Environmental Protection Agency 

3. U.S. Coast Guard 

4. U.S. Department of Transportation 

5. U.S. Department of Labor, Occupational Safety and Health Administration 

MMS was cited as the federal agency with the most effect on their operations most often and 

by all types of companies (i.e., majors, large integrated, small integrated, large nonintegrated, and small non-integrated). Other agencies mentioned, but much less frequently 

than the top five were: Coastal Zone Management, U.S. Army Corps of Engineers, U.S. 

Department of Commerce, Federal Communication Commission, Federal Energy Regulatory 

Commission, Internal Revenue Service (IRS), National Marine Fisheries Service (NMFS), 

National Oceanic and Atmospheric Administration (NOAA), and the U.S. Department of 

Labor, Office of Central Compliance. (It should be noted that organizationally NMFS is part 

of NOAA, and both are part of the U.S. Department of Commerce.) This array of federal 

agencies includes those that regulate more than the oil and gas industry (IRS), those with oil 

and gas industry-specific regulations (e.g., the U.S. Coast Guard), and those which regulate 

at least in part on a project specific basis (e.g., MMS). 

Another way to slice the examination of the regulatory environment is by the area of concern. 

Table 11 summarizes major environmental actions affecting OCS oil and gas activities. 

The list of legislation and Presidential directives in Table 11 makes several points about the 

regulatory environment of offshore oil and gas exploration and development. First, there is 

legislation in place and amended over the years that provides for the procedural steps to 

finding and production offshore oil and gas, although these caused compliance costs. 

Second, there are a number of environmental concerns that are addressed in specific 

legislation (e.g., clean air, clean water, wildlife). Third, beginning in the early 1980’s and 

carrying forward to 1998 a series of restrictions were placed on where offshore oil and gas 

activities could take place. These limit access to the potential supplies of offshore oil and 

gas. Since 1990, most of the coastal waters have been off limits to oil and gas activity. 

Therefore, the supply of uncontracted drillable GOM leases is relatively low. 
Regulatory Environment 

108 Oil and Gas Price Changes 

Table 11

 Major Environmental Actions Affecting OCS Oil and Gas Activities 

Year Action Comment 

1953 Outer Continental Shelf Lands Act 

passed 

Provides for federal jurisdiction over 

the OCS and authorizes the Secretary 

of the Interior to lease those lands for 

mineral development 

1969 National Environmental Policy Act 

passed 

Requires a detailed environmental 

review and statement before any major 

or controversial federal action 

1970 Clean Air Act passed Regulates the emission of air pollutants 

from industrial activities 

1972 Coastal Zone Management Act 

passed 

Requires state review of federal action 

that affects the land and water use of 

the coastal zone 

 Marine Mammal Protection Act 

passed 

Provides for the protection and 

conservation of all marine mammals 

and their habitats 

1973 Endangered Species Act Requires a permit to take an 

endangered species and that all federal 

agencies must ensure that federal 

actions will not significantly impair or 

jeopardize protected species or their 

habitats 

1977 Clean Water Act passed Regulates discharge of pollutants into 

the surface waters of the United States 

1981 First OCS leasing moratorium 

enacted (FY1982) 

In central and northern California OCS. 

Later extended to six other OCS 

planning areas 

1982 Federal Oil and Gas Royalty 

Management Act passed 

Designed primarily to assure proper 

and timely revenue accountability from 

production and leasing of federal lands 

1983 First preleasing moratorium enacted 

(FY 1984) 

North Atlantic 

1984 National Fishing Enhancement Act 

passed 

Encourages using offshore platforms as 

artificial reefs 

1988 First OCS drilling ban enacted 

(FY1989) 

73 existing leases in the Eastern GOM, 

south of 26 degrees N Latitude. 

Drilling moratoria later expanded to 

include North Aleutian Basin and 

leases offshore North Carolina 

1990 Amendments to the Clean Air Act 

passed 

Give EPA jurisdiction for OCS 

facilities outside Central and Western 

GOM 
Regulatory Environment 

109 Oil and Gas Price Changes 

Table 11 (cont’d) 

 Major Environmental Actions Affecting OCS Oil and Gas Activities 

Year Action Comment 

1990 

(cont’d) 

Oil Pollution Act of 1990 passed Among other provisions, addresses 

areas of oil-spill prevention, 

contingency planning, and financial 

responsibility for all offshore facilities 

in, on, or under navigable waterways 

 North Carolina Outer Banks 

Protection Act passed 

Includes moratorium language for areas 

offshore North Carolina 

Presidential decision to withdraw 

areas from leasing until after the year 

2000 

Areas offshore California, Washington, 

Oregon, North Atlantic, and Eastern 

GOM (south of 26 degrees N Latitude) 

affected 

1994 Presidential Executive Order No. 

12898, Federal Actions to Address 

Environmental Justice in Minority 

Populations and Low Income 

Populations signed 

February 11. Requires each federal 

agency, to the extent practicable and 

permitted by law, to make achieving 

environmental justice part of its 

mission 

1995 Deep Water Royalty Relief Act 

passed 

Expands MMS’ discretionary authority 

to grant royalty relief and mandates 

royalty relief (under certain conditions) 

for GOM leases in 658 ft or greater 

water depth 

1996 OPA-90 Amendments passed Applied to financial responsibility for 

offshore facilities and to spill 

prevention within state waters 

 Section 6003 of OPA-90 repealed Resulted in repeal of North Carolina 

leasing and drilling moratorium 

1998 Presidential directive under OCS 

Lands Act to prevent leasing any area 

under moratorium before 2012 

Extended by 10 years the protection 

provided by DOI’s leasing plan 

Sources: U.S. DOI, MMS 2001c, U.S. DOE, EIA, 1999c. 
Sidebars 

110 Oil and Gas Price Changes 

3.6 Sidebars 

Changes in the dynamics of the oil and gas industry over the past 20 years are reflected in 

phenomenon not directly related to this study’s main concerns. These side issues, however, 

provide some worthwhile insights into the changes the industry has undergone since 1980. 

3.6.1 Results of Oil and Gas as a Reduced Share of Gross Domestic Product 

Oil and gas as reduced share of Gross Domestic Product (GDP) leads to diminution of impact 

of price changes on overall economy and greater willingness of consumers to pay high prices 

or buy SUVs. As the U.S. economy becomes more service-oriented, the volatility of oil and 

gas prices becomes less important economically. 

In the 1970’s and 1980’s the oil crises were a major disruption to the U.S. economy and to 

the everyday lives of Americans. Long lines at gas stations and a sense of panic among 

consumers were emblematic of the impacts of sharply higher energy prices. Prices also had 

the effect of restructuring the U.S. automobile industry, national energy policies, and 

practices of virtually every sector of the economy. Thus, compact, fuel-efficient cars—many 

from Japan—became a major share of the total U.S. vehicle fleet. The federal government 

was able to create an increasingly stringent set of fuel efficiency standards for passenger 

vehicles. Industry invested billions in energy efficiency improvements—from retrofitting 

fluorescent lighting to installing more efficient electrical motors. 

A simple indicator of the importance of oil and gas to the overall economy is a comparison of 

U.S. energy expenditures and gross domestic product. In 1980 at the height of oil prices, 

total U.S. energy expenditures were equal to roughly one-seventh of the nation’s economic 

output. By 1990, this ratio had dropped to about one-twelfth of the gross domestic product, 

roughly the same as in 1970, well before the first oil crisis. By 1997, the latest year for 

which data are available, total energy expenditures were about one-fifteenth of the gross 

domestic product, less than half the proportion of 1980. Current energy expenditures now 

constitute a smaller share of our economy than in the years before gas lines first became a 

part of the energy history of the country (see Table 12). 

Table 12 

U.S. Energy Expenditures as Share of Gross Domestic Product, 1970-1997 

 (in billions of current dollars) 

Year Energy Expenditures 

Gross Domestic 

Product 

Energy Expenditures 

as Share of GDP 

1970 83 1011 8.2% 

1975 172 1635 10.5% 

1980 374 2708 13.8% 

1990 469 5546 8.5% 

1997 567 8318 6.8% 

Sources: U.S. DOE, EIA 1997, U.S. DOC 2000. 
Sidebars 

111 Oil and Gas Price Changes 

The declining role of oil can also be seen in the prominence that major oil companies have 

among the nation’s leading companies. In 1980 after two major increases in oil prices in the 

previous decade, the Fortune 500 petroleum-refining group, which includes the major 

integrated oil companies like Exxon and Mobil, accounted for 36 percent of the Fortune 500's 

net income. By 1990, this share had declined to 21 percent; and by the year 2000, major oil 

companies accounted for less than 8 percent of the Fortune 500’s net income (Nulty 1991, 

Staff 2001c). 

This sense that oil is less important to the economy is part of mainline thinking. The Federal 

Reserve Bank of Dallas estimated that by 2000 the U.S. economy was about one-third less 

sensitive to oil-price fluctuations than it was in the early 1980’s. Even Texas, the ultimate oil 

and gas state, now depends much less on the oil and gas industry which comprises a smaller 

part of the Texas economy, making it considerably less sensitive to changing oil prices than it 

was in previous decades. Although Texas is not immune to oil price shocks, the Federal 

Reserve Bank’s economists estimate that prices would have to fall below $10 and remain at 

those levels to disrupt the Texas economy. Even then, unless sustained low oil prices were 

accompanied by other negative shocks, the Texas economy should continue to grow 

(Gunther et al. 1999). 

This reduced significance of energy to the nation’s economy and to the average consumer’s 

pocketbook has various implications. 

• It helps to explain why consumers for the most part shrugged off recent high gasoline and 

fuel prices. Few people sharply cut back on their driving or considered more fuelefficient cars (Leonhardt and Whitaker 2000). 

• The one exception to this indifference is the impact of higher oil prices on the poor who 

heat with oil (Anderson 2000). 

• There has been little indication that overall oil demand in the U.S. has decreased in 

response to high prices (Leonhardt and Whitaker 2000). 

• High oil prices in 2000 have raised global inflation rates, but only moderately slowed 

economic growth. This results in part from the reduced dependence of the global 

economy on oil and the global rise of the service sector (Staff 2000f). 

3.6.2 Oil as a Commodity 

The term commodity has come to mean any good that is produced in large quantities by a 

relatively large number of companies and that has become a staple or common item in the 

economy. Historically, commodities referred to agricultural or mining products. More 

recently, the term has been applied to a broader range of products including computers and 

other types of manufacturing goods. 
Sidebars 

112 Oil and Gas Price Changes 

One general trend for commodities is that they become less expensive over time. Mass 

production whether of agricultural, mining, or manufactured products tends to lower the costs 

of producing items and thus leads to lower prices. 

This trend may apply to oil as it has to other products. This is in contrast to other models that 

see oil as a finite natural resource that will become increasing costly as that resource is 

depleted. (See limits to growth discussion in Section 3.6.4 below.) According to one 

analysis, oil prices showed real declines in price from the 1860’s to the 1970’s except for two 

periods of rapid price increases followed by rapid price decreases (Wardt 1996). From the 

late 1940’s to the early 1970’s, real oil prices gradually declined despite a number of modest 

increases. This quarter century of gradual decline was overturned by the oil crises of the 

1970’s and 1980’s that radically raised prices and led to sharply increased volatility of world 

oil prices (Brown and Yucel 2000). 

The trend over the past quarter century is difficult to discern. Since 1973 prices have been 

highly volatile, but without sustained direction. In inflation-adjusted 2000 dollars, peak 

prices were $67 a barrel for crude in 1980 and $2.57 a gallon for gasoline in 1981. Prices 

have come down sharply from those levels, but have remained volatile (Anderson 2000). 

While the period since 1986 has seen real prices approach or even drop below pre-1973 

levels, it is not possible to predict whether prices will return to what is considered the longterm trend to lower prices in evidence prior to 1973. 

Even with the increased volatility and reduced predictability of the last 20 to 25 years, 

technology has consistently proven wrong predictions of oil scarcity and extraordinarily high 

oil prices. Despite repeated forecasts of these events, the total effect of technology has been 

to find and produce oil in excess of world demand at relatively consistent prices. Although 

prices have fluctuated over time and supplies have not always matched demand, technology’s 

impact on oil and gas has been similar to its effects on other commodities. In the long run, 

through the application of small and large technological change, costs and prices may indeed 

tend to decline while supplies tend to increase (Huber and Mills 1998). That is, in the future, 

oil and natural gas may behave the way commodities typically do—growing cheaper and 

more plentiful over time. 

3.6.3 Rise of Alternative Energy Sources 

In the 1970’s, many assumed that the demand for oil and other natural resources would soon 

outstrip the supply. Only a few years ago, the scarcity of oil was considered an important 

limit to growth of the economy and society as a whole. The increase in productivity of the 

oil and gas industry has now changed conventional wisdom so that some believe the demand 

for oil will wither away before this resource is depleted. In this view, the advent of new 

power technologies (e.g., hydrogen-based fuel cells) will overtake oil and natural gas-based 

technologies reducing and finally eliminating demand for these hydrocarbons. 

In the oil and gas industry, however, this is a minority view. The leadership of Exxon Mobil, 

for example, sees no market demand over the next 20 years for the range of possible 

alternatives to current oil and gas-based technologies including cars powered by battery or 
Sidebars 

113 Oil and Gas Price Changes 

fuel cells or the general use of photovoltaics, wind, solar, and biomass. While Exxon Mobil 

supports R&D related to global warming, cleaner cars, and similar efforts and monitors 

alternative energy development, the company is not convinced that any of these alternative 

energy sources have any real prospects of replacing oil and natural gas (Raymond 2000). An 

alternative to this is the idea that the major oil and gas companies will evolve into companies 

providing energy from a variety of sources in addition to oil and gas. Even in this case, 

where there is more acceptance of alternative energy, there is a core belief in the long-term 

viability and necessity of oil and gas (Davies 1999). 

Thus, there seems little support in the oil and gas industry for the basic premise that oil and 

gas supplies will be unavailable in the foreseeable future. With this view, it follows that the 

industry does not foresee the replacement of oil and gas-based technologies with alternative 

technologies. 

3.6.4 Change in “Limits to Growth” Mentality of the 1960’s and 1970’s 

In the 1960’s and 1970’s a general theory that oil and natural gas, as finite resources, would 

pose severe limits to economic growth was proposed and widely accepted. One aspect of this 

theory held that the price of oil would rise inexorably as supplies shrank (Meadows 1972). 

The general notion of limits to growth and the particular idea that prices would soar was 

reinforced by the price increases associated with the oil crises of the 1970’s and 1980’s. As 

has been noted several times, the oil and gas industry was sufficiently convinced of the 

inexorable rise in prices that projections of oil rising to $100 a barrel by the year 2000 

became conventional wisdom. This view has continued to have some adherents who predict 

that economic growth is outstripping oil supplies (Helyar 2001). 

Nonetheless, the history of the last 15 to 20 years has tended to overturn this view. While oil 

and natural gas remain finite resources, our capacity to identify and extract these resources 

has usually outpaced our increased demands. Technology has reduced costs of delivering 

these products to customers4

. As a result, oil and gas have become more like traditional 

commodities, which become less expensive over time as production becomes more efficient 

and effective. While prices have changed precipitously in the past two decades, there is no 

evident long-term trend towards higher prices. In real terms, the world price for oil reached 

its lowest level over the last 30 years in 1998. Even after tripling between early 1999 and the 

fall of 2000, real oil prices were not much higher than they were in 1970. (See Figure 6 in 

Section 3.1.1). 

For the present, there appears to be little evidence that the “limits to growth” view of oil and 

natural gas will hold. More likely from the perspective of the last 20 years, is the idea that 

oil and natural gas will tend to act like many commodities where, over the long-term, prices 

will remain at levels in the low to mid $20 range (in 2000 dollars) or decline. Short-term 

 

4

 It should be noted that Catton in his 1982 work, Overshoot: The Ecological Basis of Revolutionary Change, 

argues that it is a delusion to think that new technologies will always allow us to either avoid depleting natural 

resources or to wholly replace them. 
Sidebars 

114 Oil and Gas Price Changes 

factors (e.g., war, recessions) will always drive prices up or down, but this will not change 

the long-term pattern of level to declining prices. 

Reserves are no longer an estimated fixed number of barrels, currently, they are seen as a 

dynamic estimate that grows as a function of technology. This estimate grows as new 

sources of oil are found, and more oil is extracted from existing fields (Coy and McWilliams 

1997). In the year 2000, estimates of reserves issued by the U.S. Geological Survey were 20 

percent higher than the previous 1995 estimate. This latest estimate includes reserves in 

areas such as Greenland that have never been developed (Niiler 2000). By one estimate, by 

the year 2015, technology will allow oil production from the seabed anywhere in the world. 

Thus, at least for the medium term, there should continue to be opportunities to add reserves 

from previously undeveloped areas as technology allows development in progressively 

deeper waters. 
115 Corporate Organization and Strategy 

4.0 CORPORATE ORGANIZATION AND STRATEGY 

4.1 Time Line 

The time line of events affecting corporate organization and strategy is made of milestones in 

a variety of areas: factors affecting price, management techniques, technology advances, 

legislation and regulations, and industry restructuring. See Table 3 in Section 2.4 for the 

time line of events affecting the GOM offshore oil and gas industry from 1980-2000 and 

beyond. As seen in the table some of the events affecting the industry in the last 20 years 

occurred prior to 1980. 

Trends or changes in corporate organization and strategy in the last 20 years overlay on the 

periods of oil prices identified in Section 3.1. The general patterns are: 

• 1971-1981: expanding 

• 1982-1986: downturn 

• 1987-1992: downsizing and restructuring 

• 1993-1997: increasing price volatility I 

• 1998-2000 and beyond: increasing price volatility II 

In response to changes in oil and gas prices, changes in philosophy on oil and gas extraction, 

technological needs and advances, and a host of other factors, the oil and gas industry in the 

last 20 years adjusted how, when, and where it does business. Key events related to 

economics and finance, technology, labor, and the regulatory environment are described in 

the remainder of this section. 

4.2 Economics and Finance 

It would be difficult to overstate the significance of finance and access to capital to the 

overall strategy of the oil and gas industry as a whole or to individual companies. While the 

availability of investment funds has always been critical, as the industry has moved 

progressively farther from shore and into deeper waters, the costs involved in individual 

projects have grown enormously. Hundreds of millions of dollars or even billions of dollars 

are necessary to move from the identification of deepwater resources with commercial 

potential to the beginning of production when investments will finally create income. 

These projects are also developed over a span of at least a few years and then may produce 

oil and gas for decades. Money is thus committed for exceedingly long periods of time. 

Given these conditions, it is not surprising that when drilling prospects are attractive and oil 

and gas prices are favorable, the availability of capital and access to financing are critical 

(Arthur Andersen 1999). When companies are ready to make capital spending decisions, 

they need ready access to substantial amounts of money. 

For larger and more successful companies, retained earnings and cash flow are the first and 

most common source of capital (see discussion in Section 3.2.5). For the most successful 

firms, like ExxonMobil, retained earnings may run to tens of billions of dollars (Taylor 
Economics and Finance 

116 Corporate Organization and Strategy 

2001). The majority of oil and gas companies, however, will also need outside sources of 

capital. These outside sources have included wealthy private investors. 

In finding the necessary capital to support new projects, acquisitions and divestitures, or 

other major expenses, the oil and gas industry has become increasingly creative. Traditional 

sources of funds have been supplemented by an array of financing options. Some of these 

have been created by the oil and gas industry itself; but the majority began in other 

industries. Oil and gas has thus tended to be a laggard in adopting these financial strategies 

for access to capital. 

In addition to finding diverse routes to capital funds, the oil and gas industry over the past 20 

years has plunged into the market for future contracts of oil and natural gas. These contracts 

are the foundation of hedging strategies which have become increasingly common and 

complex as the industry tries to manage risk in the face of inevitable swings in price and 

other factors that influence the course of the business. 

Another trend underscoring the significance of financing has been the redefinition of the 

basic mission of the major oil companies. Throughout the long economic expansion of the 

1990’s and the bull market that has defined Wall Street for most of the past 20 years, the 

sensitivity of major oil companies to shareholders has grown sharply. Investors began to 

voice demands for better returns for their investments by the late 1980’s (Le Blanc 1997b). 

In the more distant past, oil and gas companies may have seen their jobs as finding these 

resources and selling them to customers. That is no longer true. Thus, Chevron in 1992 

made public its new corporate mission: “... to achieve superior financial results for our 

stockholders, the owners of our business” (Crain 1993). 

This trend of shareholder value driving corporations is a reflection of changes in almost all 

industries and among seemingly all publicly traded companies. We have become a nation 

where the state of the stock market is front-page news and the so-called wealth effect of 

individuals’ stock portfolios is considered a fundamental force in helping or hurting the 

national economy. In this climate, the oil and gas industry is unlikely to diminish the 

significance of financing as a strategy for corporate success. 

4.2.1 Traditional and Innovative Financial Methods 

In addition to cash flow and retained earnings, the oil and gas industry relies on an array of 

financial instruments and financial strategies to generate the capital required by investments 

in oil and gas assets, equipment, and other high-cost items and activities. It appears that over 

the past two decades the number of financial instruments and options has increased 

significantly. Moreover, the industry may be adopting fundamentally new financial 

strategies and shedding or at least downgrading some of the financial instruments, which it 

has traditionally used. 

The use of new financial instruments and strategies stems both from the industry’s internal 

efforts as well as through changes that have affected many industries. In some cases, the oil 

and gas industry has adopted financing methods (e.g., high-yield bonds) that were initially 

employed by other industries. In others, the oil and gas industry has been among the first to 
Economics and Finance 

117 Corporate Organization and Strategy 

utilize some of the more innovative instruments such as syndicated loans and hedging 

instruments. 

Discussing the oil and gas industry as a monolith entity is misleading. As with other aspects 

of the industry, the distinctions between the major companies, independents, and smaller 

industry segments (e.g., the oil service companies) can be important. Similarly the size of 

companies within segments can also be important. 

For example, as companies have grown larger through merger and acquisition, internal 

growth, or other means, they have tended to increase their financial resources. When these 

reach a certain threshold, a company may be able to enter financial markets that were 

previously closed. As a result these large companies (e.g., majors and super independents) 

may be able to issue and sell high-yield bonds or may be of interest to institutions interested 

in private equity placements. Larger companies may also benefit from the stock market’s 

perception that they are more diversified and have greater liquidity. Conversely the market 

may “punish” smaller companies that are seen as too narrowly focused or lacking in liquidity 

(Hackett 1999). 

The prospects for continued success in the natural gas business in the GOM are largely 

dependent on proper management of financing and capital expenditures. The GOM is seen 

as the backbone of U.S. oil and gas supplies, but in the 1990’s initial project costs often rose 

dramatically as production entered the frontiers of deepwater and subsalt formations. 

The financial stakes for the oil and gas industry can be seen in a recent assessment of the 

global industry’s capital spending in the mid-1990’s in comparison to projected needs for the 

10-year period starting in 1997. From 1992 to 1996, publicly traded oil companies spent an 

estimated $279 billion (unadjusted) on exploration and production to increase production by 

3.2 million barrels per day, while national oil companies spent an estimated $500 billion 

(unadjusted) to increase production by 5.1 million barrels per day. Over the period 1997 

through 2006, demand was projected to increase 42 million barrels per day. If the 1992-1996 

relationships hold, the required investment to achieve that increase in production has been 

estimated at $2.5 trillion (Staff 1998d). 

4.2.1.1 Reserves-based Financing 

In the 1930’s, banks first began lending to the oil and gas industry. Initially, lending capacity 

was determined through a multiple of a company’s monthly oil and/or gas revenues from 

existing wells. Over time, banks developed their own expertise in evaluating oil and gas 

properties and the future income they could produce. This allowed banks and companies to 

develop a financial relationship based on the value of assets owned by companies. This was 

the basis for reserve-based lending. 

For roughly 40 years, reserve-based loans were the industry’s financial instruments of choice. 

Some changes slowly evolved. Term loans were eventually replaced by revolving credit 

agreements. These allowed a company a line of credit that could be used as needed and then 

repaid. The limits for these agreements were typically reviewed at 6-month intervals and 

adjusted as the value of owned reserves changed. 
Economics and Finance 

118 Corporate Organization and Strategy 

4.2.1.2 Limits of Traditional Methods 

While reserve-based financing worked reasonably well for decades, the soaring of oil prices 

in the 1970’s began to unravel this arrangement. As prices soared, so did demands for capital 

to buy new properties and to support new drilling. Favorable tax policies further increased 

the level of oil and gas activity. 

Banks that specialized in the oil and gas industry generally thrived in the 1970’s and into the 

1980’s, carried along by high prices and thus highly valued reserves. The demands for 

capital, however, began to tax the lending limits of banks. Simply put, the banks could not 

keep up with the industry’s need for new capital as new projects were developed. 

These good times attracted other sources of capital (e.g., limited partnerships, private drilling 

funds). Unlike the financial instruments of banks, these new financial mechanisms tended to 

rely on equity stakes in projects or companies, not loans (Helm 1998). 

The disadvantages of traditional banking financing of the industry first manifested 

themselves through the limits on the lending capacity of the banks themselves. Other limits 

became clear when the good times of the 1970’s and early 1980’s came to an end. Reserve 

values plunged as prices collapsed; revolving credit lines were progressively lowered; access 

to banks was reduced. 

Coincidentally with the collapse of oil prices, the U.S. banking industry was undergoing a 

crisis generated by poor real estate lending practices. By 1988, due in part to the collapse of 

oil prices, half of all Texas banks were rated as “problem banks” and the government was 

restructuring the banking and savings and loan industry. From 1985 to 1991, the volume of 

loans made by Texas banks shrank by 50 percent. The number of banks also declined, 

including many that specialized in lending to the oil and gas industry, as problem banks were 

absorbed by stronger institutions. 

The limits to this traditional source of capital had become clear by the late 1980’s: 

• Asset-based financing is restricted by the value of the assets themselves. When these 

values decrease so does credit. As prices become more volatile, the underlying security 

of bank loans also becomes less predictable and thus less secure. 

• This credit is limited by the requirement that the assets be owned. Companies not 

owning such assets have no basis for financing capital needs. 

• The health of banks is crucial to the availability of credit. “Sick banks” cannot be 

reliable sources of capital. 

4.2.1.3 Equity Instruments 

In contrast to standard bank loans, equity instruments cover a broad range of arrangements 

which involve ownership of the enterprise. Shares of stock in publicly traded companies are 

a common example. Such shares need not be publicly traded, but can also be sold privately 
Economics and Finance 

119 Corporate Organization and Strategy 

usually to investors with especially favorable standing. Partnerships constitute another form 

of ownership that typically involves a smaller number of owners in comparison to owners of 

shares of stock. 

An equity interest (i.e., ownership) provides the investor with an opportunity to share in the 

earnings of a company. It creates no requirement, however, that the company provide a 

return on that investment. Thus, unlike a loan, with equity investments, there is no 

requirement that a company make a specified payment to the source of capital. 

Selling shares of stock to the public or to other owners is a long-standing means of raising 

capital for the major U.S.-based oil companies. Exxon Mobil, Texaco, and other well-known 

oil companies were formed as publicly owned companies decades ago. 

For smaller companies, however, including some independents and more oil service firms, 

“going public” has been a more recent strategy to raise capital through the sale of stock. 

Thus, Burlington Resources—the second largest independent U.S. oil and gas company—

was spun off of the railroad, Burlington Northern Incorporated, in 1988 and raised over $500 

million (unadjusted) with an initial public offering of stock. Global Industries, Limited, 

began providing diving services to the oil and gas industry about 1980. By 1993, it had 

grown internally and through acquisitions to a size that warranted conversion to a publicly 

traded company. In that year, Global Industries raised about $30 million in an initial public 

offering of stock (Value Line 2001a). 

The case of Global Industries illustrates the financial benefits of size. In 1993, the company 

had sales of $81 million. While this is trivial relative to the $32 billion of sales made by 

Chevron in that year, Global Industries was large enough to attract the interest of investors 

and successfully raise funds in the public capital market (Value Line 2001b). 

The public offering of stock continues to be important to the industry, particularly 

independents. The usefulness of this strategy can be directly tied to investor sentiment and to 

the price of oil and gas. In the early 1990’s, rising prices created new value for independent 

production companies, which drove energy industry activity in U.S. equity markets. In 1993 

energy industry companies raised $4.2 billion (unadjusted) of equity from investors outside 

the industry through initial public offerings; this was a 258 percent increase from 1992 (Koen 

1994a). In the several years prior to 1997, oil and gas stocks outperformed the S&P 500. In 

1997, oil service stocks continued to outperform, although exploration and production 

companies lagged the market. Consequently, at that time, there was a dramatic increase in 

oil and gas stock public offerings, driven largely by the perception that the industry’s 

prospects were quite favorable (Staff 1998d). 

As noted above, the 1970’s huge increases in oil prices and demands for capital attracted 

sources of capital other than traditional bank loans. In the 1970’s and early 1980’s, limited 

partnerships first became an important source of capital to invest in specific projects or in 

companies. These partnerships tend to involve a relatively limited number of individuals 

able to invest large sums of money (Helm 1998). 
Economics and Finance 

120 Corporate Organization and Strategy 

In this same time period, private drilling funds also became significant capital sources (Helm 

1998). These funds were harbingers of other pooled investment vehicles that focused on the 

oil and gas industry. By 1984, major mutual fund companies were creating funds that 

specialized in investments in the oil and gas industry (T. Rowe Price 2001, Vanguard 2001). 

Mutual funds are considered institutional investors. That is, they are investors with assets 

well in excess of those available to almost all private individuals. By virtue of their size, 

institutional investors (e.g., endowments, foundations, and pension funds) are often able to 

gain access to investment opportunities unavailable to the general public on terms that may 

be more favorable than those available to the general public. For companies, the advantages 

of institutional investors include the large amounts of capital they may be able to invest, the 

long-term perspective (e.g., up to 10 years) they have on their investment, and in some cases 

other benefits they will bring to the table. These investors support new ventures or projects 

as well as divestitures of noncore business units. In the mid-to-late 1990’s, this was one of 

the fastest growing sources of capital for the industry and was expected to continue to grow 

rapidly (Staff 1998d). As these investments are typically made directly with the relevant 

company, not through the public stock markets, they are also considered private equity. 

A specialized type of private equity is venture capital. Of particular note in support of hightechnology companies, venture capital generally provides early stage investments when 

companies are relatively new and their products or services are not fully developed and 

tested. In return for favorable terms, venture capitalists provide funds well before many 

other investors are willing to commit. Because these investments are frequently made for 

start-up or relatively new firms, venture capitalists may also provide management and other 

expertise to support the firm and protect their investment. As with other private equity 

sources, venture capital became prominent in the 1990’s and is expected to continue to be a 

significant and growing of investment in the industry (Staff 1998d). 

4.2.1.4 Debt Instruments 

Loans and bonds are the main types of debt-based instruments used by the oil and gas 

industry. These instruments operate in different manners, but both create debt and interest 

charges that companies are obliged to pay. 

Unlike equity instruments, debt-based financing does not provide the lender an ownership 

stake in the earnings or stock performance of the company. By the same token, debt-based 

financing is a higher financial priority than providing returns to equity. As a consequence, 

loans and debt tend to be a lower-risk, lower-cost source of capital, than equity investments. 

Banks loans, as discussed in Section 4.2.1.1, are the most traditional source of capital for the 

oil and gas industry. These are debt instruments, traditionally created by a single bank. 

With the unraveling of this traditional capital source in the 1980’s and the upheaval in the 

banking industry, banks sought ways to continue to service the oil and gas industry while 

distributing risk. One response to this need was syndicated loans, a significant and growing 

source of capital to the industry. Loans are originated by approximately 200 major banks and 

are sold to approximately 500 institutions, mostly banks, but also investment companies, 
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121 Corporate Organization and Strategy 

mutual funds, and insurance companies. While they are similar in their origination to 

traditional bank loans, by selling portions of each loan to other financial institutions, the 

originating bank spreads the risk among all participants in the syndication. By tapping the 

financial resources of other institutions, the originating bank is also available to overcome 

any obstacles posed by its own lending limits (Staff 1998d). 

Syndicated loans are intermediate term (5 to 7 years) instruments generally providing more 

flexibility and significantly lower costs than notes or bond issues. They have frequently been 

used to support exploration and production activities. Syndications totaling $22 billion 

(unadjusted) were used for these purposes in 1995; this figure grew to $55 billion 

(unadjusted) by 1997 (Helm 1998). 

Despite this growth, syndicated loans are not a universal source of funds within the industry. 

Oil service firms reportedly receive little capital in this manner and are served by only a 

fraction of the universe of major banks involved in originating syndicated loans. (Staff 

1998d). 

Bonds are another debt instrument that have proven increasingly valuable as a source of 

capital. Like stocks, bonds have been a source of capital for the larger companies in oil and 

gas industry for decades. Also like stocks, bonds are sold in public markets or private 

markets. The significance of bonds as a capital source began in the early 1980’s as the 

capital requirements of the oil and gas industry outstripped the capacity of banks to meet 

those needs. Bonds were one means of meeting those needs (Helm 1998). 

In the mid-to-late 1980’s, the issuance of high-yield bonds (so-called junk bonds) expanded 

dramatically. These instruments allow companies with less than investment-grade bond 

ratings to issue bonds by paying higher yields than those paid by more financially sound 

firms (T. Rowe Price 2001). Although the interest rates on these bonds are relatively high, 

they still are frequently attractive to companies. 

By the early 1990’s, bonds including high-yield bonds and other debt instruments were 

instrumental in filling the void left by the banking industry’s inability to meet the oil and gas 

industry capital needs. This source of capital continues to help to fuel the consolidation of 

different segments of the industry and supports a range of oil and gas projects. 

In the 1990’s, the industry found access to funds greatly improved, but the cost of capital 

rose sharply. The higher cost did not discourage use, however. In the 1970’s and 1980’s, the 

oil service industry raised an annual average of almost $240 million through bonds. From 

1991 to 1997, the annual average capital raised by oil service companies through issuing 

bonds of all grades increased to roughly $1.2 billion, a fivefold increase (Staff 1998d). From 

1995 to 1998, the period in which the high-yield debt market first became a significant 

source of cash for the industry as a whole, oil and gas exploration and production companies 

issued $20.5 billion in high-yield debt (Haines 2000). 
Economics and Finance 

122 Corporate Organization and Strategy 

While high-yield bonds have been of great benefit, they also pose risks if conditions 

influencing the public debt markets change1

. In early 1998, oil and gas-related bond prices 

started to drop from the high 90-cent range. By 1999, some were trading at 50 or 60 cents on 

the dollar, others at 20 to 30 cents. This collapse in bond prices was attributed to 

deteriorating industry conditions and a negative near-term forecast for U.S. gas prices. As a 

result, companies issuing these bonds experienced eroded financial flexibility, difficulty in 

selling assets, adverse loan redeterminations, and reduced access to capital in general. Some 

companies took drastic steps to reduce their debt and live within their vastly reduced means. 

These factors all but temporarily closed public debt markets for the oil and gas industry. 

Companies that needed capital turned to the private markets and became more creative in 

their financial arrangements (Haines 2000). 

 

4.2.1.5 Hedging Instruments 

In addition to accessing capital through various equity and debt instruments, the oil and gas 

industry also routinely employs hedging instruments as a financial strategy. Typically, 

hedging is an attempt to provide the equivalent of financial insurance against the risk that 

prices will fall precipitously or rise sharply from current levels. 

In 1983, the New York Mercantile Exchange began selling crude oil contracts and created 

the first opportunities for sellers and buyers of crude oil to hedge. Today light, sweet (i.e., 

sulfur-free) crude is the most actively traded commodity in the world and the light, sweet 

crude oil futures contract is considered the easiest way to trade crude in the world. Contracts 

of 1,000 barrels of crude are agreements by sellers to deliver that volume of crude to the 

buyer for a specific price at a specified future date. That future date typically is 1 to 30 

months in the future, but may be as long as 84 months into the future (New York Mercantile 

Exchange 2001). 

 

1 High-yield bonds (also known as junk bonds) offer investors relatively higher interest payments to offset the 

presumed risk of default (i.e., not paying the interest or principal of the bonds) associated with the company 

issuing the bonds at the time the bonds are issued. Risk may be associated, for example, with a new company 

with a limited financial track record or with an established company that is in financial difficulties. Bonds are 

issued by a specific company at a specific interest rate (e.g., 10 percent) on the quoted face value of $1.00 and 

are then traded on the bond market. Interest rates will vary over time as various factors affect the financial 

conditions of industries (e.g., a drop or rise in the price of oil or natural gas) or individual companies (e.g., 

Company A fails or succeeds in discovering new reserves). Once bonds have been issued, their interest rates 

are fixed; their prices, on the other hand, will vary to accommodate market-based changes in interest rates. If 

Company A issues bonds at an interest rate of 10 percent and then suffers from a loss of reserves and a decline 

in prices, investors may perceive a higher risk in buying Company A’s bonds. The price of Company A’s 

bonds could drop to $0.50. As a result, because Company A will continue to pay 10 percent interest on the face 

value of the bonds, the actual interest paid on these bonds rises from 10 percent to 20 percent. That is, a bond 

which originally cost $1.00 and paid $0.10 in annual interest (10 percent), now costs only $0.50, but still pays 

$0.10 in annual interest (20 percent). If Company A then wants to issue new bonds, it will be forced to pay 

much higher interest costs (i.e., 20 percent) on those new bonds. Company A’s cost of money has then 

increased dramatically and its ability to raise money has been reduced. As risk declines this process is reversed 

and bond prices rise, lowering interest rates, and making it easier for Company A to borrow money.
Economics and Finance 

123 Corporate Organization and Strategy 

The major advantage of these contracts is that they provide a fixed future price for oil, 

natural gas, or other oil and gas products. Thus, instead of using the daily market price, 

buyers and sellers can agree on prices for large quantities of oil or gas. 

For the producers of energy, futures contracts provide an opportunity to manage their 

revenues, locking in prices that will provide an acceptable profit and reducing the uncertainty 

associated with the unpredictable swings in market prices. For some energy producers, 

futures are seen as a way to avoid being passive in the face of the inevitable volatility of the 

market. The major disadvantage of futures contracts for sellers is that the future market price 

may be higher than the contract price. In such cases, sellers would have lost the opportunity 

for even more revenues and profits (Hackett 1999). 

For buyers, the advantage of futures contracts is securing a known supply of oil or gas at a 

known price. The possibility that the buyer will need to pay sharply higher prices or will be 

unable to find adequate supplies of oil or gas is eliminated. As with sellers, this certainty 

allows buyers to plan financially with the knowledge of what future costs will be. 

Hedging began with the selling of relatively straightforward contracts. Over time these have 

multiplied as different types of risks are identified and the imagination of financial markets 

has been sparked. Options may be sold or purchased that give the owner the right (but not 

obligation) to buy (i.e., a call option) or sell (i.e., a put option) an asset such as oil contracts 

at an agreed upon price on or before a specified future date. Other variations on hedging 

include instruments known as straddles, where the investor buys a call or a put with the same 

strike price and expiration date, and strangles, where the strike price for the call is higher 

than the strike price for the put (Hughes and Negus 1999). 

Among the most recent of these hedging instruments are weather derivatives, financial 

instruments used to manage risk associated with change in weather. They cover against a 

drop in profits caused by weather, thus reducing earnings volatility. Exceptionally warm or 

cold winters can push natural gas prices up or down significantly. Trading of weather 

derivatives began in 1997 and sales exceeded $2 billion (unadjusted) in the first 2 years of 

trading (Hughes and Chen 1999). The payout is often based on exceeding either heating or 

cooling degree days, that is, the deviation of a day’s average temperature from 65°. They can 

also be embedded in physical delivery contracts. In this situation, suppliers structure 

delivery contracts so that prices are adjusted if certain temperatures or other weather 

conditions occur. Weather derivatives might be purchased by utilities and would provide 

benefits, for example, if winter weather were warmer than usual, thereby reducing a utility’s 

sales of natural gas. The creators of weather derivatives include some major integrated oil 

and gas companies (e.g., Enron) that sell energy to the utility industry and are seeking new 

ways of generating business ultimately based on the sale of oil and natural gas products 

(Hughes and Chen 1999). 

The proliferation of hedging instruments is a measure of the interest that the oil and gas 

industry and the financial services industry have in trying to manage financial risk in the face 

of inevitable price swings of oil and gas. While most hedging involves contracts for future 

delivery of oil and gas at fixed prices, this area of financial strategy has been among the most 

creative in the past 20 years, generating new products to cope with the range of risks oil and 

gas companies face. 
Economics and Finance 

124 Corporate Organization and Strategy 

4.2.2 Economics and Corporate Objectives: Leasing OCS Tracts, Exploration, and 

Production 

Oil and natural gas extraction once emphasized removing the maximum level of the resource 

in as short amount of time as possible (U.S. DOE, EIA 2000e). In essence, oil production 

companies attempted to maximize output conditional on the existing technology. This 

strategy generally characterized production activities prior to the elimination of production 

quotas by the Texas Railroad Commission in 1972. Prices were relatively constant and 

predictable from year to year. Although not apparently ever empirically assessed, it appears 

that many production decisions made prior to 1971 were based mostly on static expectations 

(i.e., production decisions affecting current production are made without respect to the 

future). Alternatively, the private rate of time preference or the discount rate (the rate at 

which an individual or producer values the future today) for oil production was 

approximately equal to infinity, which implies that the producer has a zero value on future 

returns. This also suggests that the producer should maximize production in the current 

period. Pesaran (1990) suggested, however, that the discount rate between 1978 and 1986 

for producers was between 0.0 and 1.0 percent. Hendricks and Porter (1996) estimated the 

discount rate for drilling activities on offshore OCS tracts to be approximately 5 percent 

between 1980 and 1995. 

In the 1970’s and 1980’s, the decision-making framework for exploration and production 

activities, particularly relative to offshore OCS entities, changed (Bolton and Harris 1993, 

Epple 1985, Reiss 1990). Decisions became based more on long-run concerns rather than 

mostly short-run. The bidding process for OCS tracts also changed in the 1980’s. 

Companies began to increasingly bid on tracts with high expectations of petroleum and 

natural gas; they became less interested in the wildcat tracts (i.e., those areas where there has 

not been prior exploratory drilling). Offshore OCS exploration and production firms 

developed delay strategies, or delaying the drilling decision to avoid circulation of 

information about the potential production of the tract. The majors also changed corporate 

strategies. They increasingly focused on optimizing earnings of the corporation rather than 

earnings from individual enterprises (e.g., petroleum and natural gas production, gasoline 

sales, and other product sales). In this latter case, firms increasingly recognized the joint 

product nature of production (i.e., decisions about one product affect production about other 

products) rather than viewing their production activities as non-joint inputs (i.e., decisions 

about production of one product are independent of the decisions about production of other 

products). 

 

4.2.2.1 Profits, Costs, and Other Financial Aspects: Leases and Joint Ventures 

Of the many changes affecting profits and costs of OCS activities during the past 20 or so 

years, changes in the bidding process for OCS leases are thought to have had substantial 

affects on profits and overall financial health of the oil and gas industry (Paddock et al. 

1988). Prior to 1978, firms offered sealed bids on OCS tracts. A tract is typically a block of 

5,000 or 5,760 acres (Porter 1995). The bid is a dollar figure and referred to as a bonus. The 

firm reimburses the government on the sale date if it is awarded the tract. The government, 

however, may reject a bid, even if it is the highest bid. Once production begins, the firm 

must reimburse the government a fixed proportion of the revenues—one sixth, which is a 

royalty payment. 
Economics and Finance 

125 Corporate Organization and Strategy 

In 1978, the OCS Lands Act Amendments specified that the Secretary of the Interior offer at 

least 20.0 percent of the offshore oil and gas leases through alternative bidding systems to the 

cash-bonus method. This requirement was implemented with the belief that it would better 

enable independent firms to participate in OCS lease sales; it was thought that capital 

markets were incapable of efficiently supplying funds for oil and gas exploration (Rockwood 

1983). The alternative bidding system was eliminated in 1984 and replaced with the bidding 

system used prior to 1978. 

Under the current bidding system (the system used between 1954 and 1978 and 1984 to 

date), a participating bidder submits a separate bid on each tract it has an interest in 

acquiring. The bid may be for a wildcat site, a drainage site, or a development site. For a 

wildcat site, firms are permitted to gather only seismic information prior to the sale; no onsite drilling is permitted. Drainage and development sites consist of tracts in areas where 

deposits have been discovered. On-site drilling is not permitted but firms owning adjacent 

tracts can conduct off-site drilling. Development leases are often re-offerings of previously 

sold tracts with leases, which were relinquished because no exploratory drilling was ever 

conducted, or they are re-offerings of areas where previous bids were rejected, as inadequate. 

Once a firm acquires a tract, the firm usually has 5 years to explore it. If exploration and 

production activities are not conducted within 5 years, the lease reverts to the government. A 

nominal rental fee per acre is typically paid to the government; the fee varies by type of tract, 

with wildcat tracts having the lowest rental fees. If oil or gas is discovered and extracted, the 

lease is automatically renewed, and the firm pays a royalty rate of approximately one sixth of 

the revenues for each tract. 

Bid prices offered for tracts are based on expected net returns (i.e., expected revenues less 

expected costs) (Hendricks and Porter 1996). Costs expectations are highly related to water 

depth, the depth of the formation, and uncertainty of information about the tract. Although 

drilling costs have substantially declined in the past 20 years, the potential losses from dry 

holes are quite expensive. Given the potential for large losses, it is only natural that bidding 

and exploration activities would increasingly involve joint ventures. 

A joint venture provides an arrangement for sharing the financial burden and risks of leasing 

tracts and exploring for oil and natural gas. In 1980, Superior Oil Company, Pennzoil Oil 

Company, and Standard of Ohio submitted a record bid of $52,457.81 (unadjusted) per acre. 

As demonstrated by Hendricks and Porter (1996), however, joint ventures seldom involve 

several firms actively engaged in exploratory drilling. Instead, it is common for firms 

actively engaged in exploratory drilling to turn to outside partners to raise capital. Firms 

engaged in joint ventures have unitization agreements, which allocate revenues from a 

common pool according to a pre-specified rule. 

The increasing use of joint ventures is believed to have affected the timing and incidence of 

exploratory drilling. In the past when there were fewer joint ventures, there was a tendency, 

and there still is, for firms not involved in joint ventures, to delay exploratory drilling until 

other firms had drilled and obtained more information. For those firms involved in joint 

ventures or collaborating with other firms (cooperative behavior), drilling occurs earlier after 

obtaining the lease. 
Economics and Finance 

126 Corporate Organization and Strategy 

Even though joint ventures reduce risk for individual firms, the quarterly hazard rate (i.e., the 

fraction of tracts that had not previously been drilled but where exploratory drilling began in 

that quarter) for joint ventures is U-shaped or the same as it is for activities not involving 

joint ventures. Even though there appears to be little difference in the time it takes to explore 

or drill a lease between joint and non-joint venture firms, joint ventures have helped reduce 

the time it takes to discover oil in the OCS areas of the Gulf of Mexico (Westwood 2001). In 

the early 1980’s, development times for deepwater prospects were about 10 years for a 

discovery; by 1996, the development time was about 2 years. 

4.2.2.2 Profits, Costs, and Other Financial Aspects: Technology and Business Practices 

After the 1986 oil price slump, oil and natural gas companies began to adopt a wide range of 

cost-cutting strategies. Concurrently, there were several major technological advances which 

helped reduced capital and operating expenditures in deepwater areas. Companies also 

adopted new approaches in project management. There are now more partnerships and 

strategic alliances between key players. These changes all contributed to reducing project 

timescales. (Also see Section 4.4.2.) 

A major business-practice change by the exploration and production companies is the 

undertaking of major reviews of their business practices. Companies now examine every 

facet of company operations looking for new ways of conducting business. There has been a 

tendency to eliminate many in-house services such as accounting and field operations, and 

contract these activities out to third parties. Field development methods have changed to 

single product alliances formed between oil companies and major contractors to reduce risk 

and share return. 

The number of changes in corporate strategy by exploration and production companies, 

particularly since the oil price crash of 1986, is substantial (Baxter 1993). Major 

restructuring led to new standards to evaluate assets and investment opportunities with the 

desired objective of improving short-term profitability and reducing risk. The majors 

intensified their long-term planning process and increased headquarters control of capital 

outlays. Companies have increasingly focused on the underlying economic aspects of 

exploration, development, and production rather than science. Adelman (1986) offers that a 

Marxian perspective explains industry restructuring as the concentration and centralization of 

capital as a response to excess production problems associated with competition among firms 

and nation-states. Managerial control has changed from an emphasis on operations to an 

emphasis on finance. 

In contrast to many nations, which control the exploration and production of oil and natural 

gas, exploration and production decisions in the United States are made by the private sector. 

The private sector may be divided into integrated multinational oil companies and nonintegrated domestic oil companies. The large integrated companies have their own reserves, 

but they are experiencing difficulty replacing them. They have increasingly relied on the 

purchase of existing reserves, improved recovery methods, and exploration for high cost 

reserves, particularly deepwater Gulf of Mexico. These large firms have also increasingly 

explored for reserves overseas rather than exploring for less promising domestic reserved. 
Economics and Finance 

127 Corporate Organization and Strategy 

The non-integrated companies may be divided into those that concentrate on exploration and 

production and those that focus on refining and marketing. The non-integrated companies 

have generally consolidated since 1986, which has reduced the number of independent oil 

firms. At the same time, the independent firms drill a larger percentage of wells in the Gulf 

of Mexico. The large integrated companies tend to subcontract more leases to the 

independent operators for drilling and exploration. 

Other major changes in business practices, particularly for the integrated multinational oil 

companies, include mergers, stock repurchase strategies, asset purchases, and internal 

reorganization. Mergers are used to accomplish a number of goals, including improving 

reserve position, reducing overhead, diversifying geographically, sharing risk and technical 

expertise, and for speculation in oil reserves. Speculation is the purchasing of existing 

reserves at a price less expensive then drilling for new reserves. Many of the major oil 

companies engaged in a stock repurchase strategy to defend themselves against unfriendly 

mergers. A stock repurchase increases stock prices and improves a company’s balance sheet, 

and it removes stock from the market to protect from a takeover by other firms. The 

purchase and sale of assets has also increased as one way to affect the overall financial 

performance of a company. 

4.3 Technology 

By the year 2000, technology had become a driver, in some ways, the key driver in the 

ongoing development of the oil and gas industry. As a corporate strategy, technology had 

shown an ability to solve a wide array of technical problems while delivering increasing 

volumes of oil and gas at lower costs in shorter time frames. Technology was meeting the 

goals of better, cheaper, and faster that industry frequently sets for any change or the 

introduction of new processes. 

As discussed in Section 3.3, the ascendance of technology as a major force in the oil and gas 

industry is a relatively recent phenomenon. Although technology has always been an 

important part of the industry, the period starting from the mid-1990’s has seen the 

maturation or emergence of technologies that have had substantial effects on the overall 

industry. The simplest demonstration of this impact may be the steep rise in deepwater 

production of oil in the U.S. starting roughly in 1995 (see Figure 4 in Section 2.3). 

With such dependence on technology, the role of research and development (R&D) is crucial 

to long-term industry success. Investing in R&D, however, presents industry with a classic 

dilemma. Not putting funds into R&D, the industry compromises its future; yet, with an 

increasingly competitive marketplace that demands financial performance on a quarter-byquarter basis, funding R&D detracts from present profitability. 

This dilemma is complicated by the shifting strategies the oil and gas industry has employed 

in the organization of work. The increasing use of multi-employer teams, alliances, 

partnerships, and other forms of cooperation and collaboration means that ideas circulate 

within the industry rapidly. (See Section 4.4.3 for a discussion of the reorganization of 

work.) Thus, many firms choose to save the R&D costs of developing new technology and 

plan instead to be “fast followers” that will quickly capitalize on the efforts of others (Knight 

2000). 
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128 Corporate Organization and Strategy 

While technology touches a broad range of processes, technology can also be grouped into a 

handful of categories that follow the basic steps in finding, reaching, producing, and finally 

delivering oil and natural gas to customers. Moreover, the enormous strides that have been 

made in the past few years are typically attributed to a relatively short list of technologies—

seismic imaging, drilling, and platforms are at the top of most lists. Given the increasing 

importance of deepwater deposits, the technologies that have opened this frontier are also 

critical. 

In some ways, the greatest technological strides have been made with entirely different 

clusters of technology. Computers, software, telecommunications, the Internet, and other 

facets of digital technology suffuse virtually every activity undertaken by the oil and gas 

industry. These technologies support, enable, or enhance almost all industry-specific 

technologies. As with all other parts of the economy, these technologies have also 

transformed the most basic work tasks undertaken by the industry’s workers. 

The impacts of technology can be felt from the boardroom to the drilling rig. The effects can 

be seen in what, how, and where work is done. While the effects have sometimes been 

remarkable, some observers feel the changes in the future will dwarf those seen in past 20 

years. 

4.3.1 Approaches to Research and Development 

For the oil and gas industry, as for many industries, there are three traditional sources of 

R&D—the industry itself, academia, and government. Each of these has had a role in 

generating new technology for the oil and gas industry although the role of government has 

been relatively small. 

Within industry the range of models for R&D is relatively broad. This range is influenced by 

the segment of the industry, the time horizon of research, the price of oil and gas, and the 

status and strategies of individual companies. Certain segments of the industry, especially 

the major international oil companies, have tended to have a substantial role while smaller 

service companies have tended to conduct no R&D. Most, but not all, industry research is 

targeted to immediate short-term issues. 

While R&D might be reasonably considered an “investment” in the future, R&D expenses 

are paid out of cash flow. Thus, when prices drop and revenues are curtailed; R&D can 

suffer. Some companies are more committed to R&D than others. This is true within the oil 

and gas industry as well as within industries that provide technology to the oil and gas 

industry. The computer and software industries are famous for devoting time and effort to 

R&D; their products are also increasingly important to the oil and gas industry.2

Academia and government have also played a role in oil and gas industry R&D. For 

academia, the most prominent model is the research consortium. Government has been a 

funder of research by the oil and gas industry and has conducted some independent research. 

 

2 It should be noted that this discussion of R&D is restricted to the oil and gas industry. The efforts of hightech industries that heavily influence the oil and gas industry (e.g., information technology, 

telecommunications) are not considered.
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129 Corporate Organization and Strategy 

The approach to R&D has changed over the period 1980 to 2000. The basic change has been 

from simpler to more varied models. As technology has grown more important through this 

20-year period, commitment to R&D has in many ways grown more uncertain.

4.3.1.1 Industry-based R&D: In-house Versus Outsource 

In 1980, R&D was largely a function of the major oil companies. These firms had internal 

R&D staffs responsible for the development of research and the refinement of technology. 

About 1990, as financial performance was becoming a more critical issue for publicly traded 

companies, a basic shift in research and technology development occurred. The major oil 

and gas companies began to downgrade their internal R&D efforts, reducing spending in this 

area by about one-fourth in the mid-to-late 1990’s. At the same time, the oil service 

companies began to increase technology development spending and increased funding in this 

area by 50 percent in the late 1990’s (Staff 2000a). 

This shift in emphasis resulted in a number of changes at the major companies. Lower 

spending meant fewer R&D facilities and the delegation of more testing to manufacturers 

and service companies, which may not have fully equipped facilities. For manufacturers and 

service companies, the concern is typically next-step technology or product refinement, 

rather than more fundamental and far-reaching change (Loth et al. 1999). While many 

majors tended to keep some R&D functions, these were often downsized, rightsized, and 

restructured. Thus Chevron in 1992 reduced five R&D centers to one and cut R&D staff by 

about one-third (Staff 1992d). While this strategy may have reduced short-term costs for the 

major oil and gas companies, it may also have come at the cost of a less coherent approach to 

overall R&D (DeGuzman 1999). 

The increasing use of contractors for R&D tended to place this effort on more uncertain 

footing. Cash flow for contractors tends to be more uncertain and any downturns resulting 

from lower oil and gas prices tend to reduce R&D funding disproportionately. This funding 

uncertainty also tends to put an emphasis on short-term, incremental improvements, rather 

than longer-term, more basic changes (Taylor 2000). Other concerns that have arisen from 

this trend to outsourcing focus on reduced quality control and a general slowing of new 

technology development (Wetuski 2000, Ellis 2001). Nonetheless, the major oil companies 

may feel that these disadvantages are more than offset by the improvements made by 

contractors and services companies and by the savings derived from not funding their own 

R&D shops (Knight 2000). 

Critics also point to the limited scope of much industry R&D, particularly that effort done by 

cash-strapped contractors and service companies. In this view, a distinction should be made 

between technology development and more basic research. The former is the typical strategy 

of most oil and gas industry effort. The latter, however, is seen as crucial to understanding 

how to operate in the increasingly complex or hostile environments that the industry will face 

in the longer run (Staff 2000a). 
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130 Corporate Organization and Strategy 

Despite the general trend away from basic research and participation by the majors, some 

large oil companies are still committed to this kind of research. Shell is continuing with 

more basic research, believing that its success in the deepwater GOM has relied on just this 

kind of effort (Hasan 2001). Similarly, Exxon Mobil is focusing substantial resources on 11 

areas of breakthrough technologies (e.g., less expensive ways to deliver natural gas from 

remote areas and new ways to detect oil and gas in the earth from the surface), rather than the 

incremental, next-step changes characteristic of much of the industry’s R&D (Taylor 2001). 

Exxon Mobil, a company with a 20-year planning horizon, not surprisingly continues to see 

R&D as a core function of oil companies (Raymond 2000). 

The shift out of R&D by the major oil and gas companies was also supposed to have shunted 

a greater share of the research effort to academia. Research consortia, sponsored by the oil 

and gas industry, would be housed and conducted at university-based research centers. Such 

consortia have in fact been created at a number of leading universities with ties to the 

industry (Van Wie 2000). Participants in these consortia run from the major oil companies to 

independents to some of the larger service companies (Verrett 2001, Van Wie 2000). 

While these consortia have continued to generate new technologies, they have not been 

universally successful. For the last quarter of the 20th century, consortia were the mainstay of 

exploration geophysics research at universities. Currently, this consortium model no longer 

exists; and its demise has reportedly had a major negative impact on training the next 

generation of geophysicists in the United States (Marfurt et al. 2000). 

Other R&D alternatives have also recently emerged. The Gas Research Institute (GRI), 

which has always had a role in the development and commercialization of new technologies, 

has decided to transform itself from an industry-funded research and development 

management firm to a self-sustaining service-based enterprise providing technology to the 

E&P industry (Gavin 2000). 

By the year 2000, substantial R&D was still being conducted by some of the major oil and 

gas companies. Yet, much of the R&D effort had been pushed out to contractors, service 

companies, and university-based, industry-sponsored consortia. This trend has also 

transformed other industry groups. Overall, R&D models have proliferated while the focus 

of this R&D has seemed more concentrated on incremental, next-step technology rather than 

more basic or more long-term concerns. 

These trends for R&D are set within a context that would appear to encourage greater R&D 

efforts—more difficult problems faced in deepwater and other extreme conditions, recent 

dramatic improvements in productivity attributable to technology, and the continuing pace of 

development of technology in general. This context, however, also includes more pressure 

for financial results for shareholders, competitive pressures on the profits of contractors and 

service companies, and other disincentives to fund R&D. While technology seems to be an 

increasingly important part of the oil and gas industry, the R&D effort to sustain 

technological excellence seems a less certain part of the industry. 
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131 Corporate Organization and Strategy 

4.3.1.2 Role of Government 

Historically, government has tended to support research (as opposed to R&D) in areas that 

were not well supported by industry. These would include more basic, longer-term research 

without good promise of commercialization or more risky technologies. 

Government’s role in oil and natural gas R&D has been relatively limited. Typically the 

federal government has provided funding to test very new technologies or the use of existing 

technologies in new applications. For example, the development of light sand fracturing 

technology by Halliburton and Mitchell was underwritten in part by funding from the U.S. 

Department of Energy (U.S. DOE) (Mitchell 2000). Another common area of interest that is 

supported by the federal government is technology that can help compliance with 

environmental or other types of regulation (Utsler 2001). 

A review of U.S. DOE-sponsored research supports the idea that the federal role in R&D 

focuses on long-term issues and regulatory concerns. Federal support of measurement-whiledrilling technology dates back to the 1970’s. In the 1990’s, work on high-technology 

drilling, innovative fracturing, and various “smart well” technologies has been supported. 

The U.S. DOE has also funded any number of small, highly focussed projects that have 

applied existing technologies to novel situations. This work has involved support not only to 

individual oil and gas companies, but also research at the national laboratories and at 

universities (BDM-Oklahoma, Inc. 1998, U.S. DOE 2001). 

4.3.2 Industry-specific Technology 

A handful of technologies specific to the oil and gas industry have made remarkable 

improvements in the productivity and effectiveness of the industry. While technologies 

related to seismic imaging, drilling, platforms, completion and production, and deepwater 

activities can be seen as separate and distinct, they are intimately linked. It is in fact the 

synergy among these technologies that has produced some of the more dramatic 

improvements in finding and producing oil and gas. 

The objectives of the technology that has come on line since 1980 are little different from the 

challenges seen for technology today (Watts 2000). These include the following. 

• Recovering more from mature reservoirs 

• Accessing more difficult resources 

• Achieving higher operating standards 

• Profiting in highly competitive environments 

• Finding new cost reduction opportunities 

• Coping with volatile prices 

For a chronology of the most significant technological milestones of the past 20 years, see 

Table 9 in Section 3.3. As noted there, many of the technological advances since 1980 have 

been incremental and the milestones in Table 9 represent a selected group of general markers 

for technological change. 
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132 Corporate Organization and Strategy 

4.3.2.1 Seismic Imaging 

By most accounts, 3D seismic imaging is the most important technology of the last 20 years. 

It has revolutionized the identification of oil and gas deposits. By more precisely locating oil 

and gas within geological formations, 3D seismic imaging is also used to assess reservoir 

characteristics, guide drilling, and then monitor reservoir depletion for better management of 

oil recovery. By adding 3D images of the same formation over time, so-called 4D imaging 

results. This is particularly useful in managing production activities and determining the best 

strategies for optimal depletion. 

Seismic imaging began in the 1920’s with so-called 2D images. Although initial experience 

with 3D imaging can be traced to the mid-1970’s, this technology did not begin to become 

important in the GOM until the mid-1980’s (Bohi 1998, Van Wie 2000). 

The development of seismic imaging has been particularly dependent on the development of 

computing power and software. As these technologies have become more powerful, they 

have enabled seismic imaging to be based on the analysis of increasingly large volumes of 

data, creating increasingly information-rich images of subsurface rock formations and the oil 

and gas deposits within those formations. Thus, in 1993, an industry veteran estimated that a 

computer could process 100 times the volume of seismic data that could be processed in 

1957 when he started in the industry (Crain 1993). The volumes of data that can be 

processed have only gone up since that comparison was made in 1993. In 2001, Exxon 

Mobil processes as much seismic data in 10 days as would have taken 11 years to process in 

1990 (Taylor 2001). 

The application of 3D imaging has had three fundamental applications. One, it can be used 

to rework existing reservoirs either using existing data or using newly created data. This was 

in fact the first application of 3D images and it has continued to be an important tool for 

independents and others interested in reworking previously found deposits (Bishop 2000, 

Bohi 1998, Jeppesen 2000). This application has been found to be the overwhelming choice 

for explaining success in getting more natural gas from existing deposits onshore and 

offshore in Louisiana, where other reserves growth activities had proved fruitless (Staff 

1997a). 

Two, as an exploratory tool, 3D imaging has transformed the discovery process for oil and 

gas companies. Information from these kinds of images was, for example, a precondition to 

the development of deepwater leases by Shell in the mid-1980’s (Pattarozzi 2001). This kind 

of information has also been credited with the increase in GOM activity from the mid-1990’s 

to the present (Jeppesen 2000). 

Three, 3D and 4D imaging can greatly improve ongoing production from reservoirs. Thus, 

3D helps guide drilling activities to both large and small deposits and facilitates so-called 

smart wells (Watts 2000). This has led to both higher discovery rates and reduced costs for 

well development (Huber and Mills 1998, Bishop 2000). 
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133 Corporate Organization and Strategy 

4.3.2.2 Platforms 

In the GOM, the story of oil and gas development and production is basically a story of going 

into deeper and deeper waters. This posed a basic problem for the industry in creating 

structures that could house the necessary drilling and other production equipment and 

facilities. Platforms to support all these activities successfully had been devised for the 

shallower waters of the near shore Continental Shelf. The challenges of these waters 

requiring operations in several hundred feet of water could be met by platforms rigidly 

connected to the seabed. As water depths grew progressively deeper, new solutions were 

required. 

At the end of the 1970’s and very early 1980’s, platforms in the GOM were operating in 

1,000 feet. This was beginning to draw close to the limit of what steel jacket platforms can 

accommodate. These platforms connect steel to the seabed and can work in water up to 

about 1,500 feet in depth (Bohi 1998). 

Beginning in the 1970’s, technology for tension leg platforms (TLPs) began to emerge. 

These platforms are anchored to the seabed with hollow steel tubes and can be used in waters 

several thousand feet deep. This capability was essential to the strategies of Shell and others 

desiring to develop deepwater projects. Bullwinkle was an early TLP platform operating in 

1,300 feet. Progressive improvements pushed applications of this technology to near 3,000 

feet with Auger and are moving toward capacity for about 10,000 feet (Pattarozzi 2001). 

As an alternative to TLP technology, spar technology applies to deepwater drilling and 

production platforms. In 1987, spar technology for deepwater operations was patented; and 

the first spar was installed at 1,930 ft. of water in the Gulf of Mexico. In 1998 two others 

were installed at 2,590 and 4,800 ft. This demonstrated the extension of the spar concept into 

deeper waters. By 1998, advances in spar technology included a platform designed 

specifically for drilling in waters over 8,000 ft. (Skaug 1998). By 2000, spar designs for 

operations in waters to 10,000 feet were being published. These designs were modular, 

lighter in weight than previous, re-usable from site to site, and cheaper (Staff 2000e). 

The rapid pace of change can be seen in the conventional wisdom of 2000 and 2001 that sees 

capacity for operating in 10,000 feet of water developing in the near term. Only two years 

earlier, in 1998, Exxon set a new depth record at less than half that depth with an 83-story 

floating platform in 4,800 feet of water in the GOM. This platform was scheduled to start 

operating in the year 2000 (Huber and Mills 1998). 

Platform design seems to be rising to the challenge of progressively deeper waters. Not all 

deepwater platforms are successful, however. In March of 2001, a Brazilian floating 

platform sank in waters 120 miles off the coast (Muello 2001). Nonetheless, industry 

optimists have predicted that by 2015, platforms and other technology will permit operations 

offshore anywhere in the world. The world’s entire seabed will then be accessible to the oil 

and gas industry (Staff 2000h). 
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134 Corporate Organization and Strategy 

4.3.2.3 Drilling and Smart Wells 

Advances in drilling technology have focused on two capabilities: control of the direction of 

the drill bit and gathering information about conditions as the drill bit is operating. The 

former is variously termed horizontal, multilateral, or directional drilling while the latter 

generally falls under the heading of measurement while drilling or logging while drilling. 

Drilling exemplifies the type of technology that develops over very long periods of time and 

then suddenly becomes a dramatically successful technology. Horizontal drilling was tried 

unsuccessfully in the 1920’s, was successfully applied in the 1930,s, and then in a modern 

version was again demonstrated successfully in the 1950,s. More recently, the early 1980’s 

saw the first horizontal wells drilled offshore, in waters off the coasts of Italy and California. 

Despite this history, only the success achieved with horizontal drilling in the Austin Chalk 

formation in the late 1980’s produced industry-wide acceptance of this technology 

(Chambers 1998). 

Since its overnight success in the late 1980’s, horizontal drilling has gained progressively 

more capabilities that allow even greater remote control over the direction of the drill bit. By 

2000, drilling could be “steered” in virtually any direction. With 3D imaging available to 

show where oil and gas can be found, directional drilling can more easily access these 

deposits. The result has been improved efficiency in drilling and greater effectiveness in 

recovering oil and gas from subsurface rock formations (Moritis 1996, Coy and McWilliams 

1997). This has been true for existing projects as well as new discoveries (Caldwell and 

Heather 1992). Speed has also been a benefit as drilling technologies have reduced well 

completion times by as much as 75 percent compared to the 1950’s (Mitchell 2000). 

The impact of horizontal and directional drilling can be seen in the increasing areas that are 

accessible from one drilling site. In 1970, a 5-acre drill site could access a subsurface area 2 

miles in diameter. By 1999 the drill site had increased 160 percent to 13 acres, but the 

accessible subsurface area that could be drilled had increased 1,500 percent to an area 8 miles 

in diameter (Revkin 2001). This drilling reach will likely continue to increase. In 1998, a 

horizontal well just over 6.2 miles was completed (Kennedy 1999). Such a well would allow 

for access to an area almost 13 miles in diameter from a single drilling site. 

 

Parallel with the improvements in controlling the direction of drilling operations have been 

advances in the collection of data during the drilling operations. Sensors are now located 

near the drill bit and these transmit data in real time. These technologies allow drill operators 

to monitor such essential information as bottom hole temperature and pressure, drill rotation 

speed, and physical characteristics of the surrounding rock. The first logging-while-drilling 

tool was used in 1987 about the time that industry realized that horizontal drilling was 

valuable. Since then, numerous incremental improvements have advanced this cluster of 

technology adding more types of data and greater volumes of data to the technology (Bohi 

1998). 

The data available from measurement-while-drilling systems is coupled with computer 

capability to provide additional analytical power. This information can then be used to guide 

the drilling operation, avoid difficult conditions in formations, better manage drilling muds, 
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135 Corporate Organization and Strategy 

compare the well under development with other nearby wells, and other activities (Knight 

2000). 

In addition to these major drilling technologies, other more incremental improvements have 

improved drilling over the past 20 years. Drilling fluid and mud systems, which are used to 

cool the drill bit, maintain pressure on the bit, remove cuttings from the well bore, and other 

essential functions have improved over time. Drill bits have also improved with the use of 

harder abrasives and better adhesives to keep the abrasives on the bit face. Other systems 

result in faster drill speeds (Kappmeyer 2001, Jeppesen 2000). 

All of these and other related improvements are sometimes termed “smart wells.” This 

bundle of technologies has resulted in improved effectiveness and efficiency, cutting costs 

and the time required to accomplish work (Watts 2000, Staff 2000h, Verrett 2001). 

4.3.2.4 Completion and Production Technologies 

Once wells are drilled and deposits of oil and natural gas have been reached various 

technologies are employed to complete the well structure and to initiate and maintain 

production. Unlike the use of seismic imaging or drilling technologies, these technologies do 

not stand out as breakthrough or even remarkable advances for the oil and gas industry. 

Nonetheless, they have often made substantial differences in the effectiveness of operations. 

Most of these technologies advance incrementally. So, for example, Shell developed a 

second-generation underwater manifold center in 1982 that was modeled on submerged 

production technology developed by Exxon. This technology was progressively improved 

and simplified, reducing its cost, and modified on a case-by-vase basis. This is a 

demonstration of next-step technology repeatedly applied. When the technology was 

sufficiently defined, the American Petroleum Institute (API) worked with various 

manufacturers to standardize the equipment, thereby lowering costs again. 

Technology to control the intrusion of sand into the well bore is another example of steady 

incremental progress. Sand can clog wells, stopping production, and forcing time consuming 

and expensive work to reopen wells. In 1980, plasticized resins were used to try to keep sand 

from the well bore. The next step was screens with prepacked resins. Gravel packs were the 

next advance. By the mid-1990’s, the technology had moved to frac packs, which do an even 

better job of keeping sand from the well bore. The results of this progression of sand control 

technologies can be dramatic. Without any control system, flow from a gas well might be 2 

mcf/day. With gravel packs, the flow might increase to 14 mcf/day. Using frac packs, flow 

could increase to 80 mcf/day—40 times higher than a well without any control system 

(Utsler 2001, Jeppesen 2000). 

Another production technology that has improved production results is the manner in which 

the formation is fractured to encourage flow into wells. Recently, foam-fracturing materials 

have been replaced in many cases by water-soluble gels. Older formations have been 

reworked with the new fracturing technology and consequent production has exceeded the 

production achieved when the formation was first developed (Kappmeyer 2001). 
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136 Corporate Organization and Strategy 

While “smart wells” technology often refers to the technology in use during drilling, other 

“smart well” technology helps manage and increase the effectiveness of production. Thus, in 

the mid-1990’s, technology was coming on line that allowed operators to monitor the 

pressure and temperature of oil coming from two different pools in a single well. The “smart 

valve” device permits monitoring multiple oil reservoirs from one shaft, allowing operators 

to control the pressure and production from different pockets of oil simultaneously, and thus 

obtain a vast increase in economically recoverable oil (McWilliams 1996). 

4.3.2.5 Deep-water Technologies and Strategies 

Much of the technology discussed above applies to deepwater and other locations. 

Deepwater, however, provides particular challenges: the weight of fluid columns on unstable 

formations, remote intervention, subsea flowlines and assuring flow in extremely cold 

environments, and ultra deep platform design. Costs and risks rise as water depth increases, 

as does the potential for damage to equipment from rough seas. Distance from shore can also 

mean distance from pipelines and other infrastructure (Skaug 1998, Watts 2000). 

The response to these issues has been to look at deepwater requirements as an integrated 

system of technologies, developed within a broad framework. Thus, the Auger discovery in 

the mid-1980’s was followed by the identification of perhaps 10 other large prospects. 

Collectively, the potential of these deepwater deposits could justify Shell’s development of 

deepwater facilities. The basic Shell strategy begun in the 1990’s was to create a hub and 

satellite system, first developing the larger hub properties then developing smaller fields that 

could be tied into the larger hub. By sharing infrastructure, the total system would lower 

costs and optimize the use of technology. Experience of the late 1990’s has borne out Shell’s 

expectations of this strategy (Pattarozzi 2001). 

The systems that are employed in deepwater depend on the utilitization of 3D and 4D seismic 

imaging, platforms capable of operating in increasing deepwater, new drilling systems, 

horizontal and directional drilling, and the host of completion and production technologies 

discussed immediately above. In addition, deepwater relies on other technologies for its 

success. 

• Drill ships are necessary for extreme deepwater locations. These ships house the drilling 

systems used to find oil and gas. Advances in telemetry and ship control have made 

significant improvements in this technology in recent years (Bell 2000, Ellis 2001). 

• Remotely operated vehicles (ROV) have been developed from early models resembling 

flying basketball-sized eyeballs to single-arm vehicles, then two-arm vehicles, and finally 

grabbers and more sophisticated manipulator arms. ROV technology eliminates the need 

for human divers in waters deeper than 300 feet and greatly facilitates deepwater 

activities while lowering costs (Rickey 2000, Taylor 2000, Plaisance 2000). 

• As projects move into deeper waters, the pressure on equipment increases making certain 

technologies (e.g., hydraulic systems) that work in less hostile conditions ineffective. 

New electronic controls and fiber-optic based technologies have been developed to 

address these concerns (Von Flatern 1997b). 
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137 Corporate Organization and Strategy 

• Much of the production equipment that traditionally was located on platforms has in 

recent years been modified so that it can be located on the seabed. This subsea 

technology is evolving rapidly and will likely incorporate subsea processing of produced 

oil and gas sometime in the near future (Loth et al. 1999). 

• Of particular concern in extreme deepwater is assuring that oil will flow in pipelines. 

The technology to assure flow is also recently emerging and includes insulated pipe and 

vacuum-packed tubing. Here the issue is mostly cost and the expectation is that either 

costs will declince or other more cost-effective technologies will emerge (Utsler 2001). 

4.3.3 Digital Technology 

Computers, software, telecommunications, and the Internet—sometimes called digital 

technologies—have had a remarkable effect on the oil and gas industry as they have had on 

all industries. A selective listing of major events related to these technologies is presented in 

Table 13. This table begins with the introduction of the first commercially successful 

personal computer in 1977 just before the period of interest to this study. 

The change that has occurred in the 20 years from 1980 to 2000 is astonishing. In 1980, the 

predecessor to the Internet in popular use today comprised a network of about 200 host 

computers with registered addresses. By the end of 2000, approximately 100 million host 

computers were connected to the Internet. In 1980, IBM was still a year away from 

introducing its first personal computer, a machine that set the standard for the computers that 

have transformed working and personal life. 

Rather than discuss the particular aspects of digital technology and its evolution in the 1980-

2000 period, the following sections introduce the major applications of this technology and 

the resulting benefits for the oil and gas industry. 

4.3.3.1 Information and Computer Technology 

The adoption of computers, software, and other information and computer technology by the 

oil and gas industry has had two broad categories of effects. The first is a generally 

acknowledged impact on overall productivity as the computer became a commonplace tool 

for oil and gas industry workers. The ability of the average worker to use a computer has 

allowed that individual to produce more output over time than would be otherwise possible. 

“Teamware” software has allowed, for example, locationally and technically diverse groups 

to work together (Barton and Ritter 2000). In this way, the effects of computers and related 

technology mirrors those in virtually every U.S. industry. For some observers, this broadly 

distributed benefit has in fact been the major change brought by this technology 

(Cunningham 2000, Verrett 2001). 

The other area where these technologies have been applied is in the enhancement or enabling 

of more industry-specific and focused technologies. The capacity of computers to store, 

manage, and analyze ever larger quantities of data at ever greater speeds has made many 

technologies better and allowed some to exist that otherwise could not. 
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138 Corporate Organization and Strategy 

Table 13 

Milestones in Digital Technology, 1977-2000 

Year Milestone 

1977 • Apple II released and becomes first mass produced personal computer 

1980 • About 200 computers are connected to predecessor of the World Wide 

Web 

1981 • IBM PC is released 

1982 • Compaq introduces its first computer, stimulating the production of 

PC-compatible machines by companies large and small 

1983 • Lotus 123 becomes standard for spreadsheet software 

• IBM XT computer, first with hard drive, is introduced 

1984 • Hewlett-Packard ships first laser printer 

• National Science Foundation joins the Internet and creates standards 

followed over the next several years by NASA, National Institutes of 

Health, other federal agencies 

1985 • Intel introduces first 32-bit processor (80386) 

• Microsoft introduces first version of Windows 

1987 • Internet computers exceed 10,000 

1990 • Vastly improved version of Windows is released 

• Internet computers exceed 350,000 

1991 • World wide web (www) first released 

1992 • Internet host computers exceed 1 million 

1993 • Intel manufactures first Pentium chip containing 3 million transistors 

• Internet growing 20 percent a month 

• White House comes online 

1994 • Early version of Netscape, Internet browser, created 

1995 • Microsoft releases Windows 95 and Internet Explorer 

1996 • First commercial successful Personal Digital Assistant introduced 

1998 • Two million domain names have been issued for the WWW 

2000 • Intel introduces Pentium chip with processing speed of 1.5 GHz 

• Roughly 100 million computers are linked to WWW 

• Wireless access to internet becomes more common 

Sources: pcbiography 2001a, pcbiography 2001b. 
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139 Corporate Organization and Strategy 

• Design processes have been speeded up by standardization and the application of 

computer technologies and can be completed in less time, improving economics and the 

competitive advantage of those at the leading edge of development. Modeling and 

preliminary testing have benefited vastly from increasing capacities of computers and 

sophistication of software (Taylor 2000). 

• Computer applications have speeded up imaging and visualization work, reducing time 

required for analysis and coordination from months to hours. Real-time drilling 

monitoring enables rapid mid-course adjustments on projects, saving time and money 

(Farnsworth 2000). 

• Computers are the crucial component of subsalt exploration. What might have taken 6 

months in the 1980’s, now may be done overnight (Van Wie 2000). 

• The technology to control sand is not new, but what has made application feasible is the 

ability to use computer technology to process data. This is an almost universal problem 

with GOM; thus, managing sand is a vital step in optimizing production (Utsler 2001). 

• The greatest reduction in cycle time for moving from idea to execution is data 

management and data quality control driven by ever increasing computer processing 

speed. An estimated 60 percent of the pursuit of hydrocarbons is driven by data 

acquisition and quality control of that data, all enabled by computer and software 

technology (Utsler 2001). 

• The fundamental breakthroughs of 3D and 4D seismic in the last 20 years rest on 

enormous improvements in applied computer technology. Computers have also made a 

great difference in production technology (Kappmeyer 2001). 

While computers have had an enormous effect on the industry in the past 20 years, some 

consider these changes modest in comparison to what the future holds. Moreover, these 

future changes are felt to be most likely in the general application of this kind of information 

technology, not in industry-specific technologies (Barton and Ritter 2000, Perdue 2000). 

4.3.3.2 Telecommunications, the Internet 

Like computers and software improvements, the changes that have been made in 

telecommunications technology and the extraordinary changes in the Internet have had both 

general and particular applications and benefits for the oil and gas industry. E-mail and the 

Internet have fundamentally changed how many employees work each day. In particular 

applications, these technologies have begun to transform the oil and gas industry, according 

to some observers. 

Communication over the Internet tends to increase the volume and speed of information flow 

among workers. Using the Internet to communicate Royal Dutch Shell teams were credited 

with a “light touch” discovery method that successively found significant quantities of oil 

(Reingold et al. 2000). Internet-based communications has helped create “virtual” teams that 

are not constrained by the physical location of team members (Barton and Ritter 2000). By 
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140 Corporate Organization and Strategy 

eliminating the need to meet in a single location, the Internet allows these virtual teams to 

operate less expensively and with greater time efficiency (Staff 2000c). 

By combining the Internet, and telecommunications, computer and other technologies, the oil 

and gas industry has been able to engage in commercial transactions and activities in ways 

that represent a fundamentally different approach to business (Salomon Smith Barney 2000). 

• Web sites dating no farther back than 1999 have begun to offer procurement of well 

drilling services, auctions of oil service goods and services, and the buying and selling of 

oil and gas properties. These sales activities are supported by online access to economic 

and interpretation data (Greenberg 2000). 

• Such web-based business is credited with offering alternatives to fragmented 

procurement methods (Staff 2000c). 

• E&P companies are just beginning to realize the enormous potential for managing their 

portfolios of assets through the capabilities of online technology (Fockens and Warren 

2001). 

• The Internet allows companies to plan and monitor exploration, drilling, and production 

in real time from remote locations (Staff 2000c). 

• Cycle times for procurement using internet-based systems can be reduced by 50 percent 

(Beyster and Glancy 1999). 

• Even more drastic reductions in time have been claimed for assembling large sales of 

natural gas. Where before internet-based sales were available, such transactions would 

have taken 9 months; using the Internet, these transactions can now be completed in 20 

minutes (Reingold et al. 2000). Others assert even faster transaction completion times for 

standardized deals—1 second (Porubon 2001). 

Much of the application of the Internet has been to traditional business processes. The 

reduction in completion times for these transactions when the Internet is used seems a 

harbinger of more fundamental change for some. In 2000, an estimated $650 billion of 

business of all kinds was transacted over the Internet. By 2004, the Chief Executive Officer 

of Enron predicted $6.5 trillion will be transacted over the Internet (Porubon 2001). 

The capability to use the Internet and information technology to transact business may 

overturn basic business models for certain kinds of oil and gas companies. Whereas in the 

past, companies were asset-based and vertically integrated; some see the future as one of 

“virtual companies” that concentrate on marketing the delivery of energy products and rely 

on virtual integration to deliver the goods (Porubon 2001). 
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141 Corporate Organization and Strategy 

4.3.4 Technology and Its Effects on the Industry 

The effects of technology on the strategies and organization of the oil and gas industry and its 

companies have been identified throughout the discussion of technology. The following 

sections primarily serve to highlight and summarize this material. 

4.3.4.1 Risk and Corporate Decision Making 

In the context of the oil and gas industry, risk is the probability that companies will either 

lose money or fail to receive an adequate return on investment of time, funds, and effort. 

This risk, focused on technical issues, can be translated into a few major issues along the 

industry’s value chain. 

• How can commercially viable deposits of oil and gas be found? 

• Having located such deposits, can the necessary resources be brought to bear to access 

and extract them? 

• What portion of such deposits can be recovered? 

As has been noted throughout the earlier discussions of technology, each of these technical 

issues can be more easily solved today because of advances in technology over the 20-year 

period ending in 2000. Seismic imaging is, by most accounts, the greatest technical advance 

in that period. Seismic 3D and 4D images provide much more informative estimations of 

where oil and gas are located. In conjunction with advanced drilling techniques, this imaging 

helps create wells that access all significant deposits of hydrocarbons in these reservoirs. 

When this activity is in deepwater, advances in drilling ships, platforms, and floating 

production systems assure companies that exploration and production activities can be 

successfully undertaken. Once production is initiated, 3D and 4D images in conjunction with 

completion and production technologies can monitor and manage reservoir depletion so as to 

optimize oil and gas recovery. 

The total effect of these and related technologies on risk is to lower the probabilities that 

basic oil and gas activities will be unsuccessful, that is, to lower risk. These technologies in 

fact provide the industry with basic tools that allow the industry to manage that risk and to 

balance risks against likely outcomes or against competing projects. 

The improved success resulting from technological advances permits companies to enter 

complex and more hostile environments with greater confidence that the problems of 

deepwater exploration and production, for example, can be solved. As the costs of 

development climb in these more difficult environments, the ability to reduce and manage 

risks becomes increasingly important. Thus, the reduction in risk allows companies to make 

affirmative decisions in frontier areas that would not have been possible 20 years ago. 
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142 Corporate Organization and Strategy 

4.3.4.2 Information Technology and Corporate Decision Making 

The general effects of information technology on corporate decision making are to make it 

faster, cheaper, flatter, more complex, and usually better. Faster decisions are a direct result 

of the speed of computers and the interactive qualities of the Internet. As noted above, 

transactions that would have taken months in the past are now completed within hours or 

even less time. This reduced time almost always drives down costs. 

Information technology also has the effect of reducing layers of decision making in many 

organizations. This is often due to its ability to facilitate the kinds of corporate restructuring 

that have overtaken the oil and gas and most other industries in the past 10 years. (See 

discussion in Section 4.4.2 for the effects of restructuring.) By easing the flow of 

information between layers of management, information technology has essentially helped to 

eliminate the need for much middle management. 

Through the ability to manage and process large volumes of information, information 

technology makes possible decisions based on more complex, more information rich 

analyses. When properly handled, this capability leads to better decision making. Thus, 

models that monitor production from wells can guide decisions that will recover an optimal 

amount of oil and gas from subsurface formations. Resource allocation decisions among 

competing projects can be made on the basis of real-time data streams generated by 

numerous projects. 

Such information does not guarantee good decisions, however. At least one industry expert 

believes that information requirements of top management are often not met. While 

companies are capable of producing large volumes of data for operations, they are not as 

good at providing enterprise-wide information that can help top management make decisions 

that are best for the entire company (Chevriere 2000). Thus, the value of information 

technology is ultimately dependent upon the ability of decision-makers to have the right 

kinds of information in a form they can use at the proper time. 

4.3.4.3 Change in Labor Requirements 

As the sophistication of technology has increased and that technology has diffused 

throughout the oil and gas industry, the need for workers to have appropriate technical skills 

has grown. The necessity of having technical skills no longer applies just to petroleum 

engineers, geologists, and similar workers. As computers have enhanced drilling, 

production, and other core processes, the need for technological literacy has become virtually 

universal. 

This basic upgrading of the technical skill requirements of the industry’s workforce creates a 

number of issues. Workers need to remain on the leading edge of an increasing number of 

technologies, but a leaner industry is less interested in on-the-job training. The needs of 

other industries for similarly skilled workers have increased overall competition in hiring. 

(These and other issues related to technology and labor are discussed in Section 4.4.1 below.) 
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143 Corporate Organization and Strategy 

4.3.4.4 Location of Activities and Personnel 

The communications revolution brought about by computers and the Internet has begun to 

make geography irrelevant. As noted above, “Teamware” software can greatly ease 

communications among workers regardless of their locations. An increasing number of 

activities (e.g., drilling, monitoring production) can be accomplished remotely because data 

are transmitted virtually anywhere in real time and controls can be activated from distant 

locations. 

These developments are distinct from the more general changes in the workplace resulting 

from computing and telecommunications technologies. Collectively they are freeing workers 

from the need to work at the specific location where the physical activities occur. For the 

GOM, this tends to reduce the need for offshore workers and increases the potential for work 

to be conducted onshore. (See also discussion in Section 4.4.1 on the location of work.) 

4.4 Labor 

Traditionally, the goal of oil companies was to find oil and gas and sell it. Success was 

measured in production volumes. When prices outpaced costs, increased production meant 

increased profits (Crain 1993). Following the collapse of oil prices in the mid-1980’s, the 

goal shifted to measuring business success in terms of shareholder value. That meant 

revenues needed to go up and costs needed to go down. Cost cutting became a corporate 

strategy to achieve that goal. Oil and natural gas prices are outside of management’s control. 

But, costs are not. So, management began to focus on costs it could control, like labor and 

capital expenditures. Cost cutting strategies were prominent in the mid-1980’s to the mid1990’s and beyond. They were used in industry in general, and as discussed here in the oil 

industry. Companies focused on reducing organizational costs through reduction in force, 

improved performance, and introduction of technology. Other efforts to lower operating 

costs included selling noncore properties and business units. Cost cutting led to flatter 

management structures, smaller staffs, altered ways of doing work, shifts in skill needs, and 

personnel issues that could potentially hinder the growth of the industry in the coming years. 

In the decade between 1985 and 1995, low oil prices often offset company savings through 

cost cutting programs. This situation led to further cost cutting activities. Oil and gas 

companies selected a mix of cost cutting approaches according to individual needs. Cost 

cutting boosts cash flow and supports capital spending and shareholder value, but affects the 

industry’s work force. Labor-related strategies and their impacts on personnel and personnel 

issues are described in this section. 

4.4.1 Reduction in Force 

As first discussed in Section 3.4, employment in the oil and gas industry declined between 

1982 and 2000. Oil and natural gas price variability was one of the factors that contributed to 

the decline. But, employment kept on declining even when prices rose. Other factors that 

contributed to the employment decline in the industry include corporate strategies involving 

mergers and acquisitions, downsizing/rightsizing, freezes on salaries and benefits, and 

technological advances. These are discussed below. 
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144 Corporate Organization and Strategy 

4.4.1.1 Mergers and Acquisitions 

Mergers and acquisitions are corporate strategies to accomplish one or more of the following: 

 

• Improve reserve position 

• Reduce overhead and create synergies 

• Diversify geographically and functionally 

• Grow by acquisition as opposed to exploration (i.e., by the drill bit) 

• Enhance position of core areas and entry into new core areas 

• Change direction of the firm 

• Share risk and technical expertise 

Table 14 shows some of the mergers and acquisitions in the oil industry that occurred 

between 1980 and 2000. Oil companies, drilling contractors, and service companies used the 

merger and acquisition strategy during this time. Between 1996 and 2000, more than $500 

billion (unadjusted) in global merger transactions occurred, more than the cumulative total of 

oil and gas merger and acquisition activity over the previous 95 years (Cassidy et al. 2001). 

In 2000, the total value of upstream and downstream mergers and acquisitions in the global 

oil and gas industry was reported as $79.2 billion, down from $85 billion in 1999, and the 

record $122.1 billion in 1998 (Staff 2001d). The merger and acquisition strategy is expected 

to continue, resulting in further consolidation within the industry. However, the number of 

companies available for merger or acquisition has decreased and the potential anti-trust 

issues has increased which may slow this trend. 

One of the most obvious changes in the oil industry in the last 20 years is the disappearance 

of the “seven sisters,” the multi-national, multi-division corporations that were long 

dominant in national and international trade. Of the seven, Exxon, Chevron, Shell, British 

Petroleum, Mobil, Gulf, and Texaco, only the first four named still exist as they did in 1980. 

Chevron acquired Gulf and Texaco, and Mobil merged with Texaco. Gulf succumbed 

because of poor performance. Texaco and Mobil were acquired/merged as giant corporations 

sought economies of consolidation and scale. John D. Rockefeller’s original Standard Oil 

Company of Ohio (SOHIO) and Amoco (Standard Oil of Indiana) were both acquired by 

British Petroleum, which had acquired Sinclair’s downstream assets, principally gas stations 

and two refineries, when Arco bought Sinclair in 1968. 

Second-rank companies, such as Phillips, Conoco, and Kerr McGee, also went through major 

transformations, launching aggressive acquisition campaigns. After Conoco was spun off 

from DuPont Company in 1999, it made extensive buys in the Permian Basin and Canada, 

making it the 10th largest investor-owned oil and gas company in the U.S. Kerr McGee 

increased its presence in offshore U.S. areas and in foreign regions, as did Phillips. 

The consolidations in exploration and production were mirrored by changes in the industry’s 

service sector. During the 1980’s, the downturn led to failure of even large companies, such 

as Western Geophysical. Other diversified companies sold petroleum industry-related assets. 

Thus, Fluor sold its oil and gas operations to Houston Industries, which was later acquired by 

Schlumberger, which also bought Western Geophysical in 2000. By the end of 2000, 
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145 Corporate Organization and Strategy 

Table 14 

Examples of Mergers and Acquisitions, 1980-2001 

Year Merger/Acquisition 

1981 Dupont bought Conoco 

1982 U.S. Steel bought Marathon 

1982 Occidental Petroleum acquired Cities Service 

1983 Sun Oil bought Exeter 

1984 Mobil acquired Superior Oil 

1984 Chevron acquired Gulf Oil 

1984 Schlumberger bought Sedco 

1985 Royal Dutch Shell purchased Shell U.S. 

1985 Texaco bought Getty 

1987 BP America acquired Standard Oil 

1988 Chevron acquired Tenneco Oil Gulf of Mexico operations 

1997 Falcon Drilling and Reading & Bates Corp. merged to form R&B Falcon 

1998 BP acquired Amoco 

1998 Halliburton Co. acquired Dresser Inc. 

1998 Schlumberger Ltd acquired Camco International Inc. 

1999 Mobil merged with Exxon 

1999 Kerr McGee acquired Oryx 

1999 Schlumberger spun off Sedco Forex Offshore which then merged with 

Transocean Offshore, Inc. 

2000 BP Amoco bought ARCO 

2000 Transocean Sedco Forex bought R&B Falcon Corp. 

2000 Anadarko Petroleum acquired Union Pacific Resources 

2001 Texaco merged with Chevron 

Sources: Meister and Cady 1986, Staff 1995a, Flanagan 2000. 
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146 Corporate Organization and Strategy 

Halliburton, the other giant among service companies, had acquired M.W. Kellogg, the 

dominant engineering firm, and Dresser, the leader in production services, among other 

companies (Staff 1985, Fisher 2000). 

Consolidations were massive in the drilling and equipment sectors. Baker International 

merged with Hughes Tool in 1986 to become Baker/Hughes. The most recent price 

downturn placed Reading & Bates Corporation in a weak debt position and it was acquired 

by Falcon Drilling, which also bought Cliff’s Drilling Company. The relative lag in day 

rates, in turn, undermined the position of R&B Falcon, which was acquired by another 

product of recent mergers, Transocean Sedco Forex, Inc., in early 2001. 

The merger and acquisition strategy as a means to growth or improve cash flow is not unique 

to the oil and gas industry. In FY 2000, for example, more than 4,900 merger-related filings 

were made with the Federal Trade Commission, the agency that oversees antitrust 

enforcement in mergers and non-merger areas (Staff 2000b). This was a record number of 

filings. The number of filings more than tripled between 1991 and 2000. Consolidation 

through mergers and acquisitions has reduced the number of firms in some industries. In the 

1980’s, for example, meat-packing firms in the U.S. consolidated to the point that four firms 

account for the slaughter of about 84 percent of the nation’s cattle. And, after acquisition or 

elimination of smaller firms, three companies produce about 80 percent of the U.S. frozen 

french fry market (Schlosser 2001). 

One of the consequences of merger and acquisition activity has been a reduction in labor 

force. The loss of employment results from redundancies of jobs once the companies are 

merged, early retirement programs offered to reduce employees, and employees who resign 

rather than take job reassignments or transfers to other cities. Companies commonly sought 

economies through elimination of layers of management. Companies quickly save on the 

salaries and benefits that are no longer paid to these former employees. 

In 1984, for example, Gulf Oil merged with Chevron. By 1989 following their merger, the 

combined work force of the two companies had been reduced from 79,000 to 61,000. The 

remaining company, Chevron, was reported to have “emerged as a much stronger company, 

more diverse geographically and functionally and with worldwide reserves of oil and gas 

about doubled” (Staff 1989a). Chevron further eliminated more than 800 jobs in 1990 and 

more than 2,000 jobs in 1992 (Staff 1992c, e). When the Chevron Texaco merger was 

announced in 2000, workforce reductions of 4,500 worldwide, or 7 percent of the combined 

workforce were expected. Following the merger, workforce cuts increased by another 500 as 

the merged corporation set higher financial and operational targets (Staff 2001b). 

In another example, a reduction of about 9,000 workers was initially anticipated in the 1999 

ExxonMobil merger. That figure was later revised to upward of 16,000 or about 15 percent 

of the combined company’s workforce. Retirements, including early retirements, were to 

account for about 6,000 of the cuts, while layoffs were to account for the other 10,000 jobs. 

The reduction of workers was to be completed by the end of 2002 (Smith and Fan, 2000). 
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147 Corporate Organization and Strategy 

4.4.1.2 Corporate Restructuring 

Company restructuring resulted from cost cutting programs. Restructuring usually involves 

elimination of duplication and reduction in labor force. Approaches to corporate 

restructuring include downsizing, rightsizing, and reengineering. 

Downsizing is “using fewer people to do the same or less work in the same way” (Hammer 

and Champy 1993). This may be achieved in a number of ways, including mandated cuts 

across all departments. While mandated cuts may be perceived as an equitable approach to 

achieve desired results, it ignores differences in the requirements or competitive cost 

positions of various business units and it rewards managers who have been spenders and 

punishes managers who have consistently run lean operations. Other downsizing strategies 

include eliminating positions that would unlikely be filled any way and to not fill positions 

that are vacated through attrition or retirement. Contract labor is sometimes substituted for 

full-time employees in specialized areas as another way to eliminate company positions. It is 

not uncommon for employees to be laid off, only to be hired as contractors. The advantage 

to the company is retaining the expertise without incurring costs associated with benefits paid 

to company employees. 

Rightsizing is “the process of eliminating nonstrategic, financially marginal, or other 

undesirable properties from the portfolio, along with a parallel restructuring of the 

organization in order to reach such optimum” (Langley 1992). Divestiture programs to sell 

noncore properties, common in cost cutting programs and following mergers, are part of 

rightsizing activities. Divestiture of noncore properties by the major oil companies in the late 

1980’s led to an increased role for independent companies in the early 1990’s (U.S. DOE, 

EIA 1995). The majors also divested domestic properties in the early 1990’s when they 

refocused exploration and development activities overseas (Koen 1994b). Sale of noncore 

properties or business units resulted in employment losses and company restructuring. 

Employees whose jobs are eliminated in restructuring are sometimes reassigned to other parts 

of the company so that the number of employees laid off does not always equal the number 

of jobs eliminated. 

Reengineering is “the fundamental rethinking and radical redesign of business processes to 

achieve dramatic improvements in critical, contemporary measures of performance, such as 

cost, quality, service, and speed” (Hammer and Champy 1993). In contrast to downsizing, it 

is designed to do more with less and results in changes to work processes. 

Restructuring techniques, particularly downsizing or rightsizing, are sometimes used 

following mergers/acquisitions when redundancies are eliminated. Rightsizing and 

reengineering often start with the goal to improve performance. All three approaches can 

result in layoffs. These strategies are not unique to the oil and gas industry. Rather, they are 

commonly used corporate strategies to improve the company’s bottom line, regardless of the 

company’s line of business. While still in use, these strategies were common in the early 

1990’s. Hammer and Champy’s book, Reengineering the Corporation: A Manifesto for 

Business Revolution, was published in 1993. These strategies were in use throughout all 

types of industry in the early 1990’s and began being used to reinvent government in the 

mid-1990’s. 
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148 Corporate Organization and Strategy 

Companies not achieving desired results with one of the techniques tried more than one. 

Many oil companies used a series of cost cutting programs from the mid-1980’s to the mid1990’s and sometimes beyond. Examples of activities within restructuring programs are 

shown in Table 15. 

The sale of properties and company acquisitions created some large new independents, 

including Parker and Parsley (acquired by Pioneer in 1999), and Apache Corporation. 

Apache, on the scene in a relatively small way since the 1950’s, moved to acquire properties 

from Hadson Energy Resources in Australia and other companies, then worked to offset 

mounting production costs by acquiring additional holdings, buying offshore U.S. leases 

from Shell Offshore, Occidental, and Petsec, along with Canadian assets purchased from 

Phillips, Shell Canada, and Fletcher Challenge Energy. As part of its growth, the enlarged 

company bought holdings in Egypt along with sizable assets in the Permian Basin. By the 

end of 2000, opportunistic buying had made Apache one of the world’s largest independent 

oil and gas exploration and production companies, with nearly $7.5 billion in assets (Staff 

1993, U.S. SEC 2000, Apache Corporation 2000). 

4.4.1.3 Salary Freeze and Benefit Cuts and Shifts 

Salary freezes and cuts in benefits are another cost saving technique used to improve cash 

flow. This technique is used throughout business and industry when economic conditions 

warrant it. It was used by the oil industry in conjunction with techniques to cut costs and 

improve cash flow. For example, Occidental Petroleum began a broad restructuring program 

in 1991. The program included a pay freeze for all salaried employees earning more than 

$40,000 (unadjusted) per year from late 1992 through 1993. Salaried employees earning less 

than $40,000 per year received a 3 percent pay increase in April 1992 to offset inflation. 

Savings from the salary freeze and some adjustments to benefits were expected to be about 

$55 million per year (Staff 1992g). 

More recent economic conditions have warranted use of this approach. A survey of 222 

energy firms taken in January 1999 found that about 94 percent had taken compensation 

actions in the preceding 6 months in response to the decline in oil and gas prices. Of those 

surveyed, 62 percent of the drilling contractors and 37 percent of E&P companies had placed 

a freeze on salaries. Other actions taken by those surveyed included reducing salary 

increases, lengthening the interval between salary reviews and increases; terminating 

incentives/bonuses, offering smaller incentives/bonuses, adjusting stock options, offering 

early retirement, instituting a hiring freeze, layoffs, and not replacing terminated employees 

(Staff 1999b). 

The volatility of the industry during the 1990’s led some companies that still offered fixed 

benefits to shift to fixed-contribution pension programs. Some companies also offer more 

stock options than they did previously when personnel were less mobile (Bender 2001). 
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149 Corporate Organization and Strategy 

Table 15 

Examples of Oil Company Restructuring Programs 

Year Company Announced Activities 

Late 1980’s British Petroleum Co. plc 

(currently BP Amoco) 

• Sold assets worth $7 billion and cut 12,000 jobs 

following a series of reorganization and 

rationalization efforts 

1989 Occidental Oil and Gas • Reduced staff by 900 

1989 Mobil • Reduced staff by 400 

1990 Chevron (To become 

ChevronTexaco Corp. in 2001) 

• Sold assets, streamlined the organization, and 

eliminate more than 800 jobs 

1992 Chevron • Reduced work force by about 2,000 

• Initiated cost cutting program and shifted spending 

outside the U.S. 

• Sold nonstrategic producing leases 

• Consolidated production department to three 

business units from five 

• Consolidated exploration department business units 

in Houston 

1992 Unocal • Consolidated regional offices in Houston 

• Sold assets 

• Reduced staff 

• Sold emulsion polymers and chemical distribution 

businesses 

1992 Phillips • Sold assets and reduced work force by 1,100 

1992 Amoco • Eliminated 8,500 jobs 

1992 BP • Cut spending and reduced staff 

1994 Amoco (Merged with BP in 

1998) 

• Replaced three operating divisions with 17 business 

groups 

• Cut corporate staff 

1995 Oxy • Consolidated work 

• Redesigned systems 

• Redeployed assets 

• Transferred and laid off employees 

• Sold agricultural business 

1998 Shell • Reduced staff by 4,000 

• Sold a portion of its chemical portfolio 

1998 ARCO • Reduced staff by 450 

• Divested noncore properties 

1998 Mobil • Sold 25 fields 

1999 Phillips • Sold 22 properties and laid off 1,400 positions 

Sources: Vielvoye, 1990, Staff, 1989b, Staff 1992a, 1992b, 1992c, Staff 1992f, Staff 1992i, 

Staff 1994a, Staff 1995b, Staff 1998c, Staff 1999a, Solis 1998, Staff 2000g. 

Note: Examples based on selected announcements in industry publications. Actual 

reductions in staff and sale of properties per year are likely to have been higher. 
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150 Corporate Organization and Strategy 

4.4.1.4 Response to Technology 

The oil industry is a now a high technology business. Technology, such as computers and 

3D seismic exploration, have increased productivity, made it possible to undertake more 

work with fewer people, and share information rapidly (Hasan 2001; Knight 2000). 

Technology has affected workers in terms of how they do their work and the required skill 

levels and corporate strategies to staff positions. 

Technology has increased the skill level needed for geoscientists entering the industry. 

These professionals need to be able be productive immediately. The cost cutting programs 

begun in the 1980’s mean there are fewer people doing the work and there are fewer people 

to develop new employees. Since orientation and training are overhead expenses and, take 

away from the bottom line, these programs have been scaled back. In 1985, the average 

training staff with a major multinational firm was over 100. Each geoscientist was expected 

to accumulate a minimum of 100 hours of training each year. In 1999, training staffs had 

shrunk to about 15 to 20 and expected training time had been cut to 20 hours (Pohlman 

1999). While on-the-job training for geoscientists has decreased in response to leaner 

operations, the number of software packages they are expected to know increased from six in 

1985 to 37 in 1999 (Pohlman 1999). 

Technology has changed where some work is done as well. Table 16 summarizes the 

evolution of the geophysicist’s workplace since the 1950’s. Technology has changed where 

and how this work gets done. 

Companies such as Shell and ExxonMobil have large imaging theaters in which geologists 

and engineers see the projected data at the same time as geophysicists and provide their own 

reactions and interpretations on the spot. Formerly, the geophysicists processed and 

interpreted data, sometimes in collaboration with the geologists. The engineers were brought 

in at the end of the evaluation process. The results of bringing all the three disciplines in at 

about the same time as has been saved time and money and transfer of learning and 

perspective. 

From the drilling perspective, operations became more sophisticated in the 1990’s. The need 

is for technically competent workers in the areas of electronics, hydraulics, and subsea 

systems. Rural areas of the South have traditionally supplied labor to the drilling industry. 

The mechanical skills needed for drilling have declined as the areas from which the labor is 

drawn become increasingly suburbanized. Much of the operating knowledge in the drilling 

part of the business is learned on the job. Relatively little of it is written, despite the 

increasing number of manuals. This is potentially serious because technological 

improvements in drilling require a larger number of trained technicians (Plaisance 2000). 

From the companies’ perspective, recruiting personnel with proper computer expertise has 

been a struggle. The oil industry competes with other industries for the some of the same 

skill sets -- computer science and information technology personnel, engineers, and 

administrative support staff, for example. Price swings have worked against recruitment. 

The layoffs that have accompanied low prices do not encourage promising candidates to go 

into the industry. (See Section 3.4.2, for a discussion on petroleum engineers and their 

education.) Also, the price swings led many people to leave the industry (Van Wie 2000). 
Labor 

151 Corporate Organization and Strategy 

Table 16 

Evolution of the Geophysicist’s Workplace 

Year Workplace Comments 

1950 Worked in field using 

analog methods 

• Sent results determined 

in the field to the 

central office 

1960’s Worked in central office 

using paper sections and 

colored pencils 

• Sent data to the central 

office for processing 

and interpretation 

1975 Worked in central office 

using mainframe computers 

and paper sections 

• All aspects of 

geophysics done inhouse 

• Most petroleum 

geophysicists worked 

for integrated major oil 

companies 

1980’s Introduction of interactive 

workstations and 

development of 3D seismic 

acquisition 

• Led to decrease in 

support staff and 

increase in productivity 

of seismic interpreter 

 2000 Work in central office using 

workstations 

• All acquisition and 

most processing 

outsourced 

• Most geophysicists 

work for contractors 

• In transition on where 

work is done because of 

the World Wide Web 

(1990), fiber optical 

networks, satellite 

technology, and widearea networks 

Future Work anywhere with 

instantaneous interaction 

• Real time exchange of 

information 

Source: Russell et al. 1995.
Labor 

152 Corporate Organization and Strategy 

The oil industry now competes for graduates of traditional oil industry disciplines with 

companies that a decade ago did not exist (Lucent Technologies) or traditionally were not 

interested in the same graduates. In 1999, for example, Chevron recruited 144 new 

employees, mostly engineers while IBM hired 6,000, Schlumberger hired 371, and Lucent 

Technologies hired 408, many from traditional oil industry disciplines (Staff 2001a). As part 

of their corporate strategy in 2000, Chevron developed a more strategic approach to hiring. 

For example, Chevron North America Exploration and Production plans to add 30 new 

professionals per year regardless of oil prices (Staff 2001a). 

Companies also hire laid off workers with needed skills. Previously, there was not much 

movement of personnel among companies so there was not much sharing of proprietary 

technologies. Personnel take their accumulated knowledge, skill, and experience when 

changing jobs. That includes the transfer of technology. 

4.4.1.5 Globalization of the Industry 

Globalization, a term that came into use in the 1980’s, refers to the ongoing process and 

complex forces that are increasing the integration of ideas, people, and economies 

worldwide. Trade, capital movement, movement of people (labor), and spread of knowledge 

and technology play key roles in globalization. 

Globalization affects the oil industry’s labor in a number of ways. Oil company investment 

affects the level of activity in a region and, therefore, the need for labor in a region. Offshore 

oil and gas development expanded from the Gulf of Mexico. By 1992, the GOM was viewed 

as a mature area and there was declining interest in the gulf from the majors oil companies. 

Field sizes tend to be smaller in North America than in other parts of the world. Smaller 

fields tend to have higher per barrel finding and production costs making them less attractive 

economically. An accommodating policy toward investment from western corporations by 

many oil-producing nations also attracted investment. Many areas in the U.S. had been 

placed off limits to offshore oil and gas exploration and development (see Section 3.5.2). So 

as opportunities opened up overseas, the major companies shifted their focus away from the 

GOM. Divestiture programs shifted properties to independents, who in turn, replaced the 

majors as the gulf’s predominant players. Between 1987 and 1992, they had acquired more 

leases in the GOM than major companies and had drilled about 64 percent of the shallow 

water wells on the federal OCS (Staff 1992h). The industry expanded into more parts of the 

world in the 1990’s. Exploration and development spending started shifting to outside the 

U.S. in late 1970’s, and by the late 1980’s more than half of E&P budgets were being spent 

overseas, meaning oil industry employment opportunities also shifted away from the U.S 

(U.S. DOE, EIA 1999d, Staff 1992a.) 

As major oil companies moved overseas, petroleum engineers (PEs) in the United States 

relied on independents and service companies for employment or worked as independent 

consultants rather than work for the integrated majors, a traditional source of employment 

(Koen 1994b). Membership roles of the Society of Petroleum Engineers in the mid-1990’s 

showed job opportunities for PEs shrinking in the U.S., but growing overseas (Koen 1994b). 

At the same time rapidly expanding technology was forcing PEs to acquire new skills. Some 

PEs, who lost their jobs with major companies, were hired by independents that had acquired 
Labor 

153 Corporate Organization and Strategy 

leases from the majors’ divestiture programs. But, there were not enough jobs with the 

smaller companies to absorb all those who lost jobs with the majors. 

As oil companies spent more of their investment funds overseas, service companies followed. 

Halliburton, for example, was a U.S. company that did business overseas. Now it is a U.S. 

company that receives about 70 percent of its revenues from outside the U.S. This switch in 

perspective has meant recruiting a diverse management team from all parts of the world 

(Lyle 2000). 

Globalization also involves the spread of knowledge. When oil is discovered and developed 

in areas for the first time, labor needs to be trained or imported until there is a sufficient 

qualified workforce to hire locally. Labor from the GOM played a role in developing the 

offshore oil industry in the North Sea. For example, when oil was first discovered and 

developed in the North Sea, several tugboat companies from south Lafourche Parish, 

Louisiana took boats and crew to live on the coasts of England and Scotland to teach the 

local populations about the marine transportation aspects of the offshore oil industry. 

For workers with specialized skills such as divers, globalization has meant that labor markets 

are defined internationally. Employment opportunities increase for those with these skill sets 

as more regions of the world are opened to outside investment in oil and gas projects. 

However, given the nature of the work (e.g., only at specific times during the project) these 

workers live where they choose to and commute to work sites globally. Workers with 

rotational work schedules (e.g., 7, 14, 21 days on followed by 7, 14, 21 days off) also often 

have different place of residence patterns from their place of work. The commuter 

employment nature of the industry has implications for local communities. On the one hand, 

they may avoid boom and bust cycles of employment if there is a commuter workforce. On 

the other hand, they lose opportunities for economic development. 

Globalization of the industry also strengthens the problem-solving skills and deepens the 

experience of the workforce of oil industry firms working globally. Oil and gas properties, 

water conditions, and other factors present challenges that must be overcome in order to 

successfully find, develop, and produce oil and gas in an offshore environment. The 

challenges vary by region. For example, water temperatures are much colder in North 

Atlantic Canada than in the GOM. Companies working in many regions of the world have 

in-house experience overcoming a variety of challenges that can be applied to challenges in 

new regions or new challenges. Technology is often a key to overcoming these challenges. 

Technology is an integral part of globalization. Computerization, fiber optics, digitization, 

satellite communications, and the Internet facilitate information exchange. They permit more 

work to be completed with fewer workers, information to be shared rapidly and 

simultaneously among different and sometimes remote work places, and some work to be 

conducted at vast distances from the well site. While technology requires fewer people, it 

requires people with higher skill levels. 
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154 Corporate Organization and Strategy 

4.4.1.6 Outsourcing 

Not all oil industry companies are large enough or choose to have all needed expertise in 

house. What is not available in house is outsourced. Outsourcing noncore activities reduces 

costs and staff, or enables more to be done without adding staff. It requires a company to (1) 

determine its core business, (2) find firms whose core business is performing one or more of 

the company’s noncore activities, and (3) then hire them to do the noncore activities. 

Company personnel are used to oversee outsourced work to maintain quality control over the 

work (Knight 2000; Jeppesen 2000). Outsourcing was a cost savings business strategy of the 

1990’s. 

4.4.2 Reorganization of Work 

Reinventing the organization for the good of business customers, partners, and stockholders 

is part of recognizing the need to change. The structure of companies was modified from top 

down hierarchical structures to models that are flexible, fast, and coordinated. Layers of 

middle management were reduced. This is sometimes called delayering and often results 

from downsizing, rightsizing, reengineering, introduction of technology, or other techniques 

which reduced the labor force. In the reshuffling, authority was delegated to business units 

where work is done. In the jargon of the times, this is called empowerment. In addition, 

companies turned to other firms to form strategic partnerships or alliances to cut costs, and 

sometimes opportunities beyond cost cutting. Reorganization of work occurred with external 

partners and within the firm, as discussed below. 

4.4.2.1 With External Partners 

Another response to low commodity prices was to forge new cooperative working 

relationships; that is to change from being ruggedly independent to being collaborative 

through interdependent alliances and tighter integration between oil companies and service 

companies. These changes were typical in the period 1985 to 1995 (Le Blanc 1997a). Some 

alliances transferred jobs, including petroleum engineers, from operators to service 

companies, provided efficiencies, provided opportunities for cross training experiences, and 

created value through cooperation. 

Alliances take many forms – for example, informal cooperation, simple contracts, and 

contracts with long-term explicit commitments. They have significant benefits initially, with 

the right mix of people. Team members with people skills are needed for successful alliances 

(Bruce and Shermer 1993). Alliances require periodic reassessments to determine if they are 

still beneficial. Over the longer term, as people change, the benefits tend to disappear. 

Long-term relationships tend to stagnate over time. After 4 or 5 years, there is little benefit 

from an alliance in comparison to when it was initiated (Kappmeyer 2001; Hasan 2001). 

Long-term relationships with contractors allow oil companies to proceed with project 

development with less elaborate, detailed planning, and in the presence of some uncertainties 

or ambiguities. Changes can then be negotiated as they become necessary. When 

contractors are brought in early and work with the company for relatively long periods of 

time, the learning curve accelerates and costs are cut (Hasan 2001). 
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155 Corporate Organization and Strategy 

The downside to alliances is the limitations placed on getting work done. No one company 

has the edge in terms of technology over all the others. Alliances with service providers limit 

options for oil companies (Knight 2000). The pace of technological innovation on the part of 

contractors tends to lag over time which is a major disincentive to long-term relationships 

with non-drilling contractors. Operators can lose out on new technologies if they are locked 

into tight arrangements with contractors. In turn this may raise costs relative to other 

producers (Pattarozzi 2001). Depending on operator needs, there may be an advantage to 

working with smaller service providers. Operators need the best people for what they are 

doing, and those skills may well be with smaller providers. Many highly skilled personnel 

have left the larger service providers to work for “Mom and Pop” type companies. These 

smaller companies may provide the best service. Also, some contractors are more proactive 

about applying the newest technology than others. Operators with complicated projects may 

want to try to find contractors who are ready to use the newest technology (Kappmeyer 

2001).

Another strategy started in the early 1990’s was in the integration or bundling of services. 

Halliburton started Integrated Solutions in 1993 right after Shell’s Drilling in the ‘90’s. It 

began by examining processes. It then moved to integrate processes, which resulted in some 

costs savings. Finally, technology was integrated into the processes, which took out more 

costs. Once the processes and technology were integrated, service companies took over from 

production companies to construct wells. 

The alternative to integrated services is best of breed service. Some companies prefer 

integrated services, while others prefer best of breed. Flexibility allows the large service 

companies to serve either customer (Lyle 2000). 

4.4.2.2 Within the Firm 

Within the oil companies, work moved from a sequential or linear approach to work teams. 

Under the linear approach, the responsible person completed each piece of a project and the 

results passed to the person responsible for the next step. Once a person’s work was 

completed, he or she was assigned to the next project. With this approach it was unlikely an 

intermediate part of a project would be reworked if new information became available. 

Under the work team approach, the team is multidisciplinary and all members complete their 

portion of the project with the help of other team members. New ideas are developed and 

assumptions tested as the project progresses. The work team approach encourages 

information sharing, creativity, and innovative problem solving. Workers refine their work 

based on intermediate results. Team members are responsible for the whole project not just 

their portion. The project reflects the combined knowledge of all team members. A major 

obstacle to implementing the work team approach was computer systems and software that 

did not work together well enough to allow updates or changes to previous work. By the 

early 1990’s this issue had been resolved. Project teams have enhanced productivity and are 

a better way to handle decision making (Van Wie 2000). 

There is some disagreement on whether they save costs. The interviewee from Conoco said 

they do (Bishop 2000). The interviewee from Vastar disagrees (Knight 2000). Teams were 

used in large and medium size companies in the 1950’s through 1970’s for large projects like 

lease sales. They became common in the mid-1980’s when cost cutting efforts meant that it 
Labor 

156 Corporate Organization and Strategy 

was necessary to do more work with fewer people (Sneider 1999). Cost cutting led to flatter 

organizational structures and fewer managers. The work team approach requires fewer 

managers. 

Work teams are part of fast track management designed to cut the time from prospect to 

production. Fast track, started in the cost cutting era, was used to maintain income flow and 

productivity. The approach includes letting the platform tenders shortly after field discovery, 

one team performing parallel work instead of a sequence of teams conducting sequential 

work, concurrent engineering, building equipment of same basic design, and use of portable, 

reusable equipment. Components are usually comparable wellhead platforms, not staffed if 

possible, or subsea equipment tied to existing infrastructure, floating production systems, 

topside process equipment and production offloading systems (George 1997). Fast track 

management has cut costs in all exploration and production operations. It became a 

management approach in the early 1990’s. 

For 10 years, BP has been working with interdisciplinary teams and three business units: 

exploration, development, and production. The organization by business units has kept 

operations flexible. Employment by activity is: about 150 in exploration, 300-400 in 

development, and 300-400 in production. Exploration, includes geologists and geophysicists, 

reservoir engineers, seismic processors, and commercial analysts who have been added 

relatively recently. The trend is to overlap more, by bringing development engineers into the 

exploration process as it advances. Team organization speeds up operations within each 

group and the overlap shortens the time from exploration to production, producing shorter 

and more economical cycles (Farnsworth 2000).

Work teams are formed in a variety of ways. For example, ExxonMobil has a geoproject 

management system, whereby after identification of a specific problem or situation, the 

company uses inventories of experience-relevant skills to assemble task groups, which are 

assembled on a project basis (Griffith 2001). Both companies were working with 

multidisciplinary teams prior to their merger. Apache uses teams of geologists and engineers 

on projects. As needed, geoprofessionals from other firms participating in a project will be 

included on the project team (Jeppesen 2000). Some companies combine specialists from 

different countries so teams become multicultural as well as multidisciplinary. 

Contractors or partners are often brought in at the beginning of a project. Vastar includes 

personnel from its partners on work teams. A recent work team on a Grand Isle project, for 

example, included members from Occidental, Conoco, and Texaco. Usually this 

management strategy works well, although there can be problems. For example, partners 

value properties differently because of differences in business objectives (Knight 2000). At 

Conoco, teams have evolved to become much more inclusive, and in joint ventures, 

representatives from all firms involved are included (Bishop 2000). 

Some work teams have been together for awhile which brings synergies to the group. For 

example, interdisciplinary work teams became the mode of operation nearly 20 years ago at 

Shell Offshore. Many staff have worked together in this system for decades given their 

continuity of employment. This working relationship has tended to increase the flow of 

information and make them more efficient in project design, implementation, and problemsolving (Hasan 2001). 
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157 Corporate Organization and Strategy 

At the beginning of deepwater GOM development, Shell was working with interdisciplinary 

work teams, whose members commonly served more than one project at a time. As a result, 

productivity increased as individuals became highly expert with some problems and 

conditions and took this intellectual capital with them to other teams. Information flows 

became increasingly efficient and rapid. The same teams who developed Auger, Mars, Ursa, 

and are now completing Brutus. The internationalization of Shell has expanded information 

flows. The learning curve produced by extended team experience accelerated projects, led to 

cost-saving changes in implementations, and sustained the economics of work in the 

deepwater GOM even in the context of price volatility. The advantage Shell had in this 

regard over other large companies was the concentration of effort in deepwater GOM, which 

focused attention and assets (Pattarozzi 2001). 

Work teams, like downsizing, created a lot of efficiency in the industry. Companies who 

downsized, took the best and brightest people, who were the most creative and had the 

greatest breadth of experience, and put them together to determine how to do everything 

faster, cheaper, better. They created “A Teams.” With rising prices, companies try to 

expand again, but in order to do so, they must break up their “A Teams”—half on one 

project, half on another. In effect, that means there is no longer an “A Team” but two “ATeams.” This means lost efficiency (Patterson 2000). 

Work teams, however, pose special problems for drilling contractors. The older workers in 

the producing firms, who before the late 1980’s had been authorized to make decisions, were 

often forced into early retirement in the cost cutting programs because they were expensive 

to employ. With the upturn of the late 1990’s, contractors found that they were often 

working with young and relatively inexperienced engineers and that it was time consuming 

to get answers from operators’ work teams when unavoidable questions arose while drilling 

was underway. It is hard to get the oil company to assemble a 16-person group for a 

teleconference at 4 a.m. so they can respond to the drillers’ questions or problems. The result 

has been that downtime has increased sharply. Operator work teams have also tended to 

overwhelm drilling personnel with questions that are often redundant. One anecdote 

indicated a drilling superintendent could not be reached when needed because all the phone 

lines were tied up by members of a single operator project team (Ellis 2001). 

4.4.3 Resulting Personnel Issues 

The various activities described above to cut costs, improve cash flow, and support 

shareholder value resulted in a number of personnel issues that now may limit future growth 

of the industry. Human resources became an agenda item at a major oil industry conference, 

the Offshore Northern Seas Conference, for what is thought to be the first time in 1994 (Staff 

1994b). By then some companies were on their third or fourth round of lay offs in an effort 

to boost profits. In 1997, worker shortages were not thought to be driving the speed of 

offshore expansion (Von Flatern 1997c). In 1999, shortage of skilled personnel was listed as 

the sixth most significant problem facing the U.S. exploration and production industry by all 

respondents to the Arthur Andersen 1999-2000 survey of 89 oil and gas company executives 

(Arthur Andersen 1999). Majors ranked it sixth, large independents ranked it fourth, and 

other independents ranked it seventh. By 2000, following layoffs in 1998 and 1999, 

personnel shortages were cited as the top concern of a 2000 survey of drilling and well 

service companies (Neal 2000). The following are personnel issues facing the oil industry: 
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158 Corporate Organization and Strategy 

• Age cohort distortion. The layoffs and retirements following the oil price collapse in 

1986 have left a large age gap in management and technical ranks in oil companies and 

drilling companies. Veteran workers, who also had the highest salaries, took early 

retirement and the layoffs affected those under 30. Now, essentially there are few 

employees between the ages of 25 and 45 (Cunningham, 2000, Sunwall 2000, Ellis 

2001). The average age at ExxonMobil Explorations is reported to be about 45 (Griffith 

2001), about 47 at Chevron (Staff 2001a), and 45 or older at BP (Kappmeyer 2001). The 

average age of members of the Society of Exploration Geophysicists (SEG) is 45; 75 

percent of the membership are age 40 or older; and more than 51 percent of SEG 

members will reach retirement age (55) within 10 years (Wyatt 2000). A concern 

expressed by some is where experienced and knowledgeable staff will come from in 5 to 

10 or 15 years given the lack of current personnel in the late 20’s to mid-40’s age bracket 

(Knight 2000; Holleck 2000). Others note the gap and comment there does not seem to 

be evidence of company concern (Rickey 2000). The difference in point of view may 

well be the vantage point of different companies. Those that have acquired companies 

have had additional employees to incorporate (or release if unneeded), whereas 

companies that have not taken that path have had to recruit or purchase the missing skill 

sets through contract labor or contracts. 

• Some personnel in short supply. Personnel shortages range from geoprofessionals to 

drilling crews to those with computer science and information technology expertise. 

There are a number of reasons for this.

− Some of the personnel laid off after 1986 did not return to the industry. All segments 

of the industry permanently lost experienced and knowledgeable personnel through 

the massive lay offs of the 1980’s and 1990’s. Many qualified people found jobs in 

other industries and have not returned.

− Some companies are short-handed because they laid off many of their staff. 

Contractors, for example, are reported to be short handed because of consolidations 

and past layoffs. Contractors are now quite conservative in responding to increased 

demand because of their cut backs during the 1980’s and 1990’s (Griffith 2001). 

There is a reluctance on the part of some oil companies to staff up in an improved 

price environment because of uncertainties that an expanded staff will be needed in a 

year or two (Kappmeyer 2000). Shortages of personnel constrain the ability to 

manage projects when expansion is warranted (Kappmeyer 2001; Bishop 2000). 

− During and after the lay offs in the mid-1980’s to early 1990’s, the next generation of 

some needed personnel were not trained (see discussion of lay offs and university 

programs below).

− Some personnel (like IT personnel, for example) needed in the oil industry work in 

other industries. So, the oil industry must compete with other industries for these 

skills. 

− There is reportedly a critical shortage of personnel in some entry-level technical 

drilling jobs. New roustabouts have fewer mechanical skills than those with farming 

and shrimping experience who used to work on the offshore rigs. Extensive training 

is needed (Plaisance 2000). Turnover is reportedly high with roustabouts and higher 

than roughnecks (Von Flatern 1997c). 

− It is reportedly getting more difficult to find people willing to work offshore (Bishop 

2000, Plaisance 2000). The long hours and weeks-on/weeks-off work schedule are 
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159 Corporate Organization and Strategy 

impediments to recruitment. One view holds that part of the problem is many young 

workers have never been away from home for extended periods. The military has 

downsized and many young people do not go away from home to go to technical or 

university. So, the isolation and communal living of offshore oil industry life require 

a difficult adjustment which many do not make (Plaisance 2000). It should be noted 

that a 1980 article in Work Boat Magazine cites the same problem. “There has 

always been a high degree of turnover in new workers going offshore. The hours are 

long, the work is hard, and even though the pay is high, the weak and faint-hearted 

are quickly weeded out.” (Staff 1980). 

• Layoffs and university programs. The massive lay offs in the oil industry had a dramatic 

and almost immediate affect on university petroleum engineering programs. Figure 29 

shows total undergraduate engineering degrees and degrees in petroleum engineering from 

1980 to 1997. Total undergraduate engineering degrees during this period peaked at 

80,000 in 1982. There was an annual decline in the number of undergraduate engineering 

degrees between 1986 and 1992, followed by slight increases in 1993, 1994, and 1995 and 

decreases in 1996 and 1997. Undergraduate degrees in petroleum engineering were on the 

rise from 1980 to1985 when there were about 1,700 graduates. The number of graduates 

then fell off dramatically to about 200 in 1991. Since 1990 the number of graduating 

petroleum engineers has been between 200 and 300 per year. Many of these graduates are 

thought to be foreign students. While they may be part of the global oil industry 

workforce, many will not be part of the U.S oil industry work force. The number of 

schools offering PE degrees decreased from 27 in 1991 to 20 in 1998 (Gaddy 1998). 

Efforts have been made to encourage students to study petroleum engineering. The 

Society of Petroleum Engineers and operators are taking steps to increase enrollment in 

PE programs including recruiting at high schools (Gaddy 1998). Previously, Texas A&M 

had a recruiting program for its PE program that included scholarships averaging $1,200 

(unadjusted) for 200 incoming freshmen (Staff 1990). 

• Colloquia on petroleum engineering education. The lay off and cost cutting programs had 

ramifications beyond the companies initiating those strategies. As seen above, the number 

of graduates of petroleum engineering programs declined after 1986. Declining 

enrollments in a particular discipline affects the number of facility needed, the amount and 

type of research that can be done, and in some cases, whether the department will survive 

or be phased out. The University of Texas petroleum engineering department, for 

example, changed its name in the early 1990’s to the Department of Petroleum and 

Geosystems Engineering as a way to broaden and diversify its programs to train students 

for employment outside the petroleum industry (Koen 1994a). In response to the changes 

taking place in the industry after 1986, petroleum educators and representatives from 

industry and government began meeting to discuss petroleum engineering education. 

There were five Colloquias on Petroleum Engineering Education between 1991 and 2000. 

The issues discussed at these meetings reflect the evolving nature of the industry. The 

second colloquium held in 1993, for example, looked at skills needed for the future and 

concluded that problem solving, petroleum engineering skills, and computer literacy were 

already part of PE training. However, desirable attributes such as cultural awareness, 
Corporate Organization and Strategy 160

Figure 29. Undergraduate engineering degrees awarded, 1980-1997.

-

10,00020,00030,00040,00050,00060,00070,00080,00090,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1

Year

Total Undergraduate Engineering Degrees Awarded

Total undergraduate engineering degrees B.S. Petroleum Engineering

Source: U.S. Department of Education annual 1981-1998. 
Labor 

161 Corporate Organization and Strategy 

adaptability to new situations, and team skills had not been integrated into most PE 

curricula (Koen 1994a). This was at a time when work teams were replacing the 

traditional sequential or linear approach to work and spending was shifting E&P 

expenditures outside the U.S. The third colloquium held in 1995 explored ways of 

increasing the value of PE education to those with the degree (Russell et al. 1995). By 

the fifth colloquium in 2000, the focus was on the partnership among industry, education 

and government and how each partner can develop the people and technology needed for 

the 21st century (Lee et al. 2000). 

• Salaries. Offshore salaries for drilling did not keep pace with onshore salaries. In an era 

when a more highly skilled worker is needed, salaries are no longer an incentive to 

endure what are difficult working conditions. The drilling sector as well as the overall oil 

industry competes for labor with other industries. Previously, people with little formal 

education beyond high school eagerly took jobs on a rig. The oil industry paid more than 

other industries so the industry could be selective in personnel hired. Now, wages on rigs 

are not competitive for the caliber of worker required (Ellis 2001, Plaisance 2001). 

Industry publications indicate that wages for offshore workers are not as high in 

comparison to other jobs as they were previously. However, no specifics are given. 

Table 17 provides a recent snapshot of three offshore jobs, rotary drill operator, derrick 

operator, and roustabout, and petroleum engineer in comparison to two service industry 

jobs – cashier and retail sales. The service industry jobs In the Houston Primary 

Metropolitan Statistical Area (PMSA) are $3.57 to $6.15 per hour below that of 

roustabout, the lowest paying of the jobs in Table 17, making the offshore jobs higher 

paying than the service industry jobs. Examples of jobs similar in hourly wage to a 

roustabout in Houston are: first line supervisors/managers of landscaping services 

($12.14), pesticide handler ($12.70), fitness trainer ($11.54), travel agent ($12.72), billing 

and posting clerks ($12.08) (U.S. DOL, BLS 1999). No wage data for roustabouts in the 

Houma, La. Metropolitan Statistical Area are provided. However, examples of jobs with 

similar hourly wages to a roustabout in Louisiana are: emergency medical technician and 

paramedics ($10.92), parts salesperson ($10.05), bill and account collectors ($9.61), 

carpenters ($10.16), and general maintenance and repair workers ($10.70). 

• Tarnished image of the industry. The mass lay offs in the mid-to late-1980’s destroyed 

the myth there was job security in oil industry jobs and reduced worker loyalty. At the 

beginning of the period of interest people thought they would be able to work for the 

same company to retirement. For companies able to maintain staff throughout the last 20 

years that could be true. For the remainder, the oil industry no longer offers job security. 

In 2000 at the Offshore Technology Conference, the public image of the oil industry was 

referred to as “just awful” by an industry analyst (Staff 2000g). The industry has 

demonstrated in the last 15 years that it does not, as a whole, offer stable employment. 

This is a factor in the industry’s difficulties attracting workers. 
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162 Corporate Organization and Strategy 

Table 17 

Comparison of Wages 

 Mean Hourly Wage (1999 dollars) 

Location 

Petroleum 

Engineer 

Rotary 

Drill 

Operator 

Derrick 

Operator Roustabout Cashier 

Retail 

Service 

United 

States 

$34.99 $17.81 $11.18 

Texas $37.19 $18.38 $13.23 $10.95 $6.96 $9.26 

Houston, 

TX PMSA 

$39.36 $20.75 $13.56 $12.99 $6.84 $9.42 

Louisiana $33.96 $18.43 $18.21 $9.94 $6.32 $8.50 

Source: U.S. DOL, BLS 1999. 

• Impacts on professional associations. Professional associations exist to service their 

membership. The massive lay offs meant that fewer geoprofessionals were employed 

and that fewer had the means to pay membership fees or had the need for membership 

services of professional associations. The Society of Petroleum Engineers, Society of 

Exploration Geologists, and American Association of Petroleum Geologists are the major 

professional associations for the oil industry. In 1999, a member of the oil industry 

community writing in the Oil and Gas Journal proposed a merger of the three societies. 

Companies would save money with an annual mega society meeting/exhibition by not 

having to send personnel to multiple events. Integrated work flow demonstrations and 

technologies could be presented to the benefit of cross functional teams. Under the three 

society system, integrated work flow demonstrations are limited to the portion that fits 

the specific meeting (Peebler 1999). 

• Needed attributes of personnel. Oil companies rate networking skills, relationships with 

colleagues, and communication skills higher than technical skills on the list of 

requirements for new employees. Since much of the technical work is done by service 

companies, being able to work as an effective team member is essential. New hires in 

service companies need strong technical skills and a good foundation in geology and 

reservoir engineering. Other skills needed in service companies include communication 

and marketing skills, computer programming, project management, and strong writing 

skills. Internships with oil companies are valued by service companies. Computer 

programming, written and oral communication skills, and project management are skills 

that can be transported to other industries when there is a down cycle in the oil industry 

(Marfurt et al. 2000). 

• Recruiting from colleges and universities. On-campus recruiting was common in the 

1970’s. Students were hired prior to graduation and enrolled in company training 

programs upon joining the firm. The concepts of company loyalty and working for a 

single company for an entire career were still in place. From 1985 to 1992, there was no 

college recruiting (Preng 1998). Students left geoprofessional programs or never entered 
Labor 

163 Corporate Organization and Strategy 

them. As a result, the pool of qualified entry-level personnel from colleges and 

universities has shrunk and on-campus recruiting has returned. University-based 

recruiting is being used more now than in the 1990’s (Cunningham 2000). 

Much of on-campus recruiting is based on networks with professors, who facilitate 

contact between students and recruiting companies. The professors invite company 

representatives to be guest lecturers, introduce them to students, and keep students up to 

date on technologies and industry developments. Companies that have been away from 

college recruiting for a number of years may have difficulty getting it restarted because 

they have lost their college and university contacts (Preng 1998). 

Some companies, however, were never heavily involved in recruiting from universities. 

Traditionally, independent firms have not done much college recruiting because they did 

not have training programs for new graduates. However, because of the difficulty finding 

personnel some have turned to college recruiting (Jeppesen 2000). Competition for the 

few graduates is fierce (Hollek 2000). Companies do not want to recruit graduates only 

to lay them off in 18 months. 

• Shift of jobs from oil companies to contractors and manufacturers. The shift in staffing 

between operators and contractors has reduced accessibility of professionals to one 

another. Company personnel are generally more accessible than outside expertise since 

there is a reluctance to go outside the firm for short term consultations (Loth et al. 1999). 

• Globalization of industry requires a diversified workforce. It is easier to stabilize a work 

force since workers can be transferred from slack areas to active ones and keep 

experience and knowledge within the company (Pattarozzi 2001). The geoscientist of the 

future will need to be career proactive, a generalist, computer literate, with a solid 

foundation in oil and gas fundamentals (Staff 2000d). 

• Doing more with fewer people. Blue collar workers who survived the personnel cuts are 

now very knowledgeable and experienced. They operate facilities with far fewer people 

than 20 years ago. Replacing them is going to be a serious problem (Holleck 2000, 

Patterson 2000). 

• Not much learning curve time for geoprofessionals. New geoprofessionals get 

assigned to deepwater projects with little practical experience. What experience they have is 

narrow. At one firm, for example, new graduates would be assigned to relatively 

inexpensive onshore projects to drill lots of well, encounter lots of problems and learn the 

industry from the ground up. Now new personnel are immediately assigned to work on wells 

costing $25-30 million. This could prove to be very costly since they are working on 

expensive projects with minimal amounts of experience (Holleck 2000). Interdisciplinary 

teams and overlapping project teams tend to bring more experienced staff into projects from 

the beginning.
Labor 

164 Corporate Organization and Strategy 

4.4.4 Response to Personnel Issues 

A number of approaches have been and are being used to address the personnel issues in the 

industry. The following examples highlight personnel training and development and 

retention programs. 

• In-house training programs. The answer to personnel shortages is to hire skilled 

personnel or train them. The U.S. military has been a source of labor for offshore 

segments of the industry. Drilling crews require more formal education or in-house 

training than before. Those with computer and electronic skills are often recruited away 

by other industries for better pay and working conditions after they have had some on the 

job training in the offshore oil industry. Downsizing in the military has reduced the 

number of maritime workers coming from the U.S. Navy and Coast Guard, traditional 

sources of these personnel. Contractors are increasingly relying on the maritime 

academies in California, New York, and Maine for personnel needed for deepwater 

activities or dynamic positioned vessels. There are no schools that teach drilling skills. 

They are learned through experience and in-house training programs. It can take many 

years to develop a good driller or tool pusher and they almost always work their way up 

the ranks. Companies that offer training for drilling and offshore work frequently lose 

their personnel to smaller companies or other industries (Ellis 2001). 

• Mentoring. The American Association of Petroleum Geologists initiated a mentoring 

program in the fall of 1999 for young professionals. The program was launched because 

the industry no longer promotes mentoring and there are few corporate programs. It was 

also a way to use the resources of members after their retirement and a way to encourage 

retired members to retain their membership (Freeman 2000). 

• Company programs. Schlumberger initiated two personnel programs during the 

downturn in the mid-1980’s that were viewed as successful by both the company and the 

individuals who participated. One program was the Advanced Degree Program which 

provided for an educational leave of absence for one year for selected field personnel to 

pursue an advance degree or gain additional course work in the petroleum field. The 

second program was the Summer Petroleum Engineering Seminar, administered with the 

University of Texas, a 12-week program of instruction for field engineers in petroleum 

engineering (Gadomski 1988). 

One way to broaden the based of experience is to cross-train personnel. BP, for example, 

has a program called “Petroleum Challenger” which is designed to broaden an engineer’s 

experience quickly. In this program, a BP engineer receives assignments of 

approximately a year in different areas, so that at the end of 3 years he/she has received 

solid training and understands operations that might otherwise take 6 to 9 years to 

achieve. This training program provides the foundation for an engineer’s career as much 

as his/her college education. However, from a project manager’s point of view, as soon 

as the engineer gains knowledge and experience he or she is gone (Kappmeyer 2001). 
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165 Corporate Organization and Strategy 

• Retention program. The rules for retaining good personnel differ now from 20 years ago. 

When oil engineers changed jobs in the 1970’s and 1980’s, it was usually from a major 

company to an independent. Banks such as Texas Commerce (now Chase Texas) and 

First City as well as service companies hired oil engineers as well. Higher salaries and 

sometimes cutting commute time in Houston were the reasons for the switch. Employees 

look at factors beyond salary now (Preng 1998). 

Some companies now offer retention programs and make an effort to address the personal 

and professional needs of their employees. For example, in 1997 BP established an 

employee retention program whereby the company donated to an account which the 

employee could redeem in 2000, if still employed by the company (Von Flatern 1997c). 

Other programs include payment of a percentage of an employee’s base salary each 

quarter and stock options (Preng 1998). Hiring, orientation, and training new employees 

is expensive and those costs can be avoided if employee turnover is low. 

4.5 Regulatory Environment 

The regulatory environment from the perspective of corporate organization and strategy is 

discussed in terms of Gulf of Mexico leasing and the Deep Water Royalty Relief Act. 

Leasing starts the process by which offshore oil and gas are found, developed, and produced. 

The placement of infrastructure, existing and future, plays a role in determining approaches 

to where, how, and when exploration and development proceeds. Technology allows the 

industry to work in deeper and deeper water and deepwater is viewed as the future. 

4.5.1 Gulf of Mexico Leasing 

The Outer Continental Shelf Lands Act (OCSLA) in 1953, and subsequent amendments in 

1978 and 1985, establish federal jurisdiction over the submerged lands of the OCS and, as 

amended, authorizes the Secretary of the Interior to lease OCS lands for mineral development 

(U.S. DOI MMS 2000). A lease is a contract authorizing the right to explore, develop, and 

produce minerals covered by such a contract. It usually contains 9 square miles. A tract is 

the geographic and legal extent of a single lease area (Havran and Collins 1980). Since 

offshore oil and gas exploration and development starts with a lease, the rate of leasing drives 

other activities. Through August 2000 in the GOM, over 91 million acres on 17,754 tracts 

had been leased through 86 sales. About 53 percent of the lease sales occurred between 1980 

and 2000 (U.S. DOI, MMS 2001a). There were two lease sales per year between 1980 and 

2000, except for 1983, 1985, and 1988 when there were three lease sales. 

Prior to Lease Sale 72 in May 1983, tracts were offered on a tract-selection basis, which was 

designed to offer for lease by competitive bidding a limited number of blocks determined to 

have the greatest interest from a broad spectrum of industry. Under this system, tracts were 

“nominated” by the oil and gas industry for inclusion in a lease sale. The U.S. Department of 

the Interior would then study the tracts geologically to determine which were offered in the 

lease sale. This system resulted in piecemeal geological work for the oil companies (Staff 

1983). 
Regulatory Environment 

166 Corporate Organization and Strategy 

Beginning with Lease Sale 72 in the Central GOM OCS, tracts in the GOM are offered on an 

areawide basis. The new system relies totally on the geological assessments. Lease Sale 72 

set new records for bonus bids offered, high bids, and bids accepted. This sale also indicated 

industry’s interest in the application of deepwater technology, since 85 (about 13 percent of 

the blocks receiving bids) tracts were in water over 1,000 feet (Weise et al. 1983). Areawide 

leasing has enabled operators to assemble sufficiently large tracts to justify the risks 

associated with deepwater exploration (Pattarozzi 2001). 

In 1994, companies that had participated in leases sales were asked about the change in 

leasing policy on business practices. Most of the responses were positive with common 

responses citing (Seydlitz et al. 1995): 

• Stimulated activity 

• Reduced risk 

• Justified the purchase of new technology for extraction 

• Increased the potential for finding oil and gas 

• Ease and increased fairness in the leasing procedure 

• Reduced costs 

• Increased exploration 

• Increased the number of leases 

• Enabled some companies to become active in Gulf extraction 

A second policy change in leasing occurred in 1987 when the minimum bid was set at $25 

per acre. Respondents to a survey of oil companies that had bid on GOM leases were asked 

about the effect of the policy change. No impact was seen by 19 percent of the respondents. 

The following were cited as positive effects of the policy change (Seydlitz et al. 1995): 

• More activity 

• Increased bids, leases, and acres 

• Greater exploration 

• Reduced costs 

• Enabled entry into extraction in the Gulf 

• Allowed funds to be used for extraction activities rather then acquiring lands 

Bidding on leases is a risky business as demonstrated in Conoco’s lease simulation game, 

“Oil is Where You Find It,” that models leasing and drilling risks. The primary objective of 

the game is profits, not leases gained, discoveries made, or money saved. The second 

priority is to win the most desirable leases. The third priority is laying off risk through deal 

making and partnering among producers and suppliers. Other simulated realities include 

(Staff 1998b): 

• Producers winning too many leases must deal with budgets without enough money to 

explore them 

• Producers that do not win enough leases have leftover cash 
Regulatory Environment 

167 Corporate Organization and Strategy 

• Producers that have drilling contractors under contract and not enough tracts to drill are 

attractive to producers that have tracts to explore but no drilling contractors 

• Diversification is not a goal of leasing. Concentration and focus are needed 

• Only the government values the bidder who leaves too much bid money on the table, that 

is, the difference between the winning bid and the second bid 

4.5.2 Deep Water Royalty Relief Act 

While deepwater blocks were acquired in lease sales, initial exploratory activity was slow. 

With the oil price collapse, as described above, cost cutting measures and movement of 

capital overseas adversely affected GOM activity. In 1987, Shell discovered the Auger field 

with reserves of approximately 220 million barrels of oil equivalent. This discovery altered 

the view of the Gulf of Mexico as a declining offshore oil area to one with deepwater 

promise. Oil prices were low and the U.S. was increasingly competing for exploration and 

development investment dollars with other parts of the world. Economic incentives needed 

to encourage exploration of GOM deepwater were provided in the Deep Water Royalty 

Relief Act, signed in November 1995. The law affects oil companies and specific deepwater 

projects. It allowed MMS to suspend royalties on existing leases in order to promote 

development, increase production, and encourage production of marginal resources on 

producing or nonproducing leases. The mandatory provision for offering leases with royalty 

suspension volumes under the Deep Water Royalty Relief Act expired in 2000. 

By all accounts the Deep Water Royalty Relief Act stimulated GOM deepwater activity. 

Quantitatively, this can be seen in Table 18 which shows OCS by water depth between 1994 

and 1998, that is before and after the Act. 

Table 18 

Gulf of Mexico OCS Bids, 1994-1998 

Water Depth1 1994 1995 1996 1997 1998 5-Year Total 

<200 m 490 516 637 542 280 2,465

200-400 m 18 50 69 52 38 227

400-800 m 28 83 113 104 61 389

>800 m 49 214 722 1,138 817 2,940

1

Water depth categories defined by the Deep Water Royalty Relief Act. 

Source: U.S. DOI, MMS 1999. 

Qualitatively, the significance of the Act is revealed in the personal communication with oil 

company representatives conducted for this study. The Act was highly important, it kicked 

off major plays in the GOM, and it had a positive effect on deepwater projects (Cunningham 

2000, Griffith 2001, and Knight 2000). The Act could affect the order in which projects are 

developed, particularly satellite fields. The potential for royalty relief figures into a project’s 

economic analysis but does not make or break a project (Pattarozzi 2001). 
Regulatory Environment 

168 Corporate Organization and Strategy 

The Act enabled an increasing number of participants to take the risk to get into deepwater. 

Some huge finds have resulted from increased exploration. The improved economics may 

have encouraged more independents to try deepwater (Van Wie 2000). 

The Act brought new players into deepwater. It is significant in marginal fields. The 

absence of deepwater relief might make it more difficult to develop subsea tiebacks with 

infrastructure in relatively close fields. The cumulative effect would be to slow deepwater 

GOM development (Farnsworth 2000). The Act did spur activity and it is a factor people 

consider in comparing the GOM to other areas in the world. It has influenced the pace of 

activity (Bishop 2000). Areawide leasing is essential to deepwater development because 

without it, operators could not assemble sufficiently large tracts to justify the risks in frontier 

exploration (Pattarozzi 2001). 

Deepwater activity has resulted in increased oil and gas production (see Figures 3 and 4.) 

GOM deepwater oil production exceeded production from shallower water in 1999. 

Deepwater gas production in the GOM is expected to exceed conventional gas operations in 

the gulf within the next 9 to 10 years (Fletcher 2000). The high costs of activity in deepwater 

GOM has meant that seven companies, BP Amoco, Shell, ExxonMobil, Chevron, Total/Elf, 

Petrobas, and Texaco, have located more than three-quarters of the deepwater reserves. 

4.6 Sidebars 

The following are examples of information gathered or observations made in the course of 

the research for this report which are important, but not directly on target with the thrust of 

this chapter. They are presented briefly so as to not lose sight of the information. 

4.6.1 Organizations Preoccupied with Consolidation 

Organizations preoccupied with consolidation have little time for day-to-day operations. 

Merger integration redirects resources away from operations. It is estimated that executives 

and managers in firms involved with merger integration are internally focused for 1 to 2 

years (Cassidy et al. 2001). There are internal audiences, investors, government regulators, 

and customers which must be attended to during the consolidation process. This means that 

day to day activities are not priorities. New drilling programs are put on hold while details of 

the merger are sorted out. Reductions in staff that accompany mergers also upset the 

contractor/operator relationship. The same people are unlikely to be in the same position 

after a merger than prior to it, meaning that new working relationship between contractors 

and operators need to be developed. This may help explain price surge in 1996 did not 

produce a recovery in drilling activity. Employee morale usually falls during the integration 

because of anxiety and uncertainty. Growth initiatives are stalled while the executives and 

managers focus on integration and realizing synergy cost savings. 

4.6.2 Oil Industry and the Energy Industry 

Oil and gas represent a majority of the fuel used by the economy. According to one industry 

expert, 80 percent of the fuel consumed globally is either oil or gas (Gibson-Smith 1999). 
Sidebars 

169 Corporate Organization and Strategy 

Given the dominance of these fuels and the success the industry has had in maintaining 

production, it is not difficult to understand the widely held belief that oil and gas will 

continue to dominate the world’s energy markets for the next several decades (Raymond 

2000, Gibson-Smith 1999). While all of the major oil companies monitor the development of 

alternative sources and some of these companies have actively considered development of 

these options, there is skepticism over the ability of solar, wind, or other alternatives to play 

any significant role in the energy picture for many years. In this view, the oil and gas 

industry will continue to be just that—devoted to the delivery of oil and gas products to 

customers (Raymond 2000). 

Despite this skepticism, there is a minority view among the major companies that their core 

business is the creation and marketing of energy. BP Amoco may be the leader in this 

thinking. Part of this thinking derives from a very long-term view of the industry—looking 

at world energy markets in 2050 and beyond. Another factor supporting a somewhat broader 

view is the belief that the economy of the 21st century will be much more reliant on gas than 

oil. This gas-based economy will succeed in developing technologies (e.g., fuel cells) that 

will radically change basic industries (MacKenzie 2000). 

Another issue in the mix of the oil and gas industry’s future is sustainability. Here the 

predominance of oil and gas begins to make way for a broader definition of the role of the 

major oil and gas companies. Sustainability raises a number of fundamental issues related to 

oil and gas including global warming, the environmental impacts of energy use, and the 

ultimately finite nature of fossil fuels. Thus, on the basis of sustainability, there is some oil 

and gas industry interest in active pursuit of renewable energy sources. For those with an eye 

on the more distant, sustainable future, the “ultimate objective” of the oil and gas industry is 

to “provide the energy the world needs without negative social environmental impact” 

(Davies 1999). 
171 Crosscutting Themes and Impacts 

5.0 CROSSCUTTING THEMES AND IMPACTS 

It is difficult to look at the events and trends of the past 20 years in the oil and gas industry in 

isolation. Prices, corporate organization and strategy, economics, technology, labor, and 

regulation are so interwoven in the dynamics of the industry that, as has been shown in the 

previous sections of this report, the discussion of one issue soon involves most or all of the 

others. 

This should not be surprising in an industry as complex or extensive as oil and gas. 

Nevertheless, this interconnectedness does not lead to an analytical Gordian knot. Rather, 

there are a relatively small number of phenomena that have driven most of the changes and 

dynamics experienced by the industry from 1980 through 2000. These can be seen as a small 

number of fundamental forces that drive change and a similarly small number of industry 

responses that also drive change. 

Most of these drivers converged in the mid-1990’s to revive the once moribund prospects of 

the GOM. Over the past 5 to 7 years, the result has been a remarkable turnaround for this 

area as a locus of oil and gas activity. 

These forces and dynamics create a number of impacts that affect the industry, the economy, 

the communities, and the people that support and sustain oil and gas activities in the GOM. 

The impacts vary widely, but some are of particular interest to government and specifically 

MMS. 

5.1 Major Drivers of Change 

Determining the causes of change as opposed to its consequences can be problematic. This is 

particularly true in an industry as multifaceted as the oil and gas industry. Nevertheless the 

following factors stand out as major forces that have created change within the oil and gas 

industry in the 1980-2000 period. 

The increasing volatility of prices. As the most casual of glances at Figure 6 shows, the 

behavior of prices of oil and natural gas was radically transformed by the oil crises that began 

in 1973 and carried out their havoc through the early 1980’s. Price changes had always been 

experienced by the industry and were associated with national recessions in the period 

between World War II and 1973. These earlier examples of volatility seem innocuous in 

retrospect compared to the sea change in price behavior since 1973. By 2000, price 

volatility, uncertainty, and risk had become facts of life for every company in the industry 

and had changed the industry in fundamental ways. 

The rising costs of oil and gas projects. Less dramatic, but also fundamental to change in 

the industry, has been the increasing role of offshore and especially deepwater oil and gas. In 

the period 1980-2000, OCS as a share of total domestic natural gas increased a modest but 

significant amount, while the share of total domestic oil production from OCS sources almost 

tripled. The role of deepwater in the GOM has grown even more dramatically from 1985 to 

1999, from 6 percent to 45 percent of OCS oil production and from less than 1 percent to 17 

percent of OCS gas production. (See discussion in Section 2.3.) Compared to onshore 
Impacts of Change and Industry Dynamics 

177 Crosscutting Themes and Impacts 

It is likely the case that technology is ahead of corporate culture. Certain actions that could 

be conducted remotely are not because the physical presence of relevant workers during, for 

example, drilling operations is still considered necessary. Nonetheless, the need to be at the 

site of physical activities is declining and will likely continue to do so. This has reduced and 

will continue to reduce the need for personnel to be offshore or in a central onshore location. 

In turn, this will tend to reduce the effects—both positive and negative—of moving and 

keeping people offshore or gathering them in a single onshore location. 

Capital replaces labor. As capital and machines have replaced labor, there has been a 

diminution of impacts associated with staffing projects or companies. The industry has 

become a much smaller source of employment compared to its status in 1980. This is similar 

to the impact of technology on where work is done—fewer people generate fewer impacts, 

good or bad, onshore or offshore. 

Houston is the center. One of the more noticeable onshore impacts is the agglomeration of 

oil and gas businesses in Houston. Companies have chosen to relocate staff to this city or 

establish a presence there, if only because all other companies are there. This shifting has 

benefited Houston and transferred activities from New Orleans, Denver, Tulsa, and other 

formerly more prominent oil and gas cities. 
Major Drivers of Change 

172 Crosscutting Themes and Impacts 

activities, developing projects offshore is more expensive and deepwater is a quantum leap in 

expense beyond shallow water activities. 

Thus, in the past 20 years, the industry has been increasingly engaged in exploration and 

production in locations where expenses are substantially higher than the onshore locations 

that sustained the industry for decades. While these higher costs are more than compensated 

by the income that offshore and deepwater projects generate, the cost of getting into the 

offshore, and particularly the deepwater, game is very high. 

The globalization of the industry. Oil has always been an international industry. Still, the 

consolidation of the industry since 1980 and the advances in communications and other 

technology have created an industry led by corporate giants that think and act internationally. 

Even the so-called independents that historically focused on the U.S. and often on specific 

regions within U.S. have shown an increasing tendency to operate internationally. As a 

result, the interests of these companies in the GOM or any other area are increasingly seen in 

comparison to opportunities in other areas of the world. More and more, the GOM is in 

competition with West Africa, Brazil, the Caspian Sea, and other locations where the 

industry is active. 

The triumph of the marketplace and competition. Along with globalization, there has 

been a marked trend towards a marketplace mentality and an emphasis on competition in the 

industry. These parallel trends have washed over the oil and gas industry as they have over 

almost all major industries. Part of this trend has been the increasing interest in many 

companies in financial performance and the perceptions of Wall Street, encompassed under 

the heading of concern with shareholder value. Closely allied to this is heightened level of 

competition within the industry (as well as among oil and gas and other industries). 

The ascendance of technology. One of the most critical enablers of price volatility, 

deepwater exploitation, globalization, and marketplace is technology. Principally by 

increasing the flow of information and the speed at which information is processed and 

distributed, technology itself has become a major driver of change in the oil and gas industry 

(and all other industries). 

The management of risk. In reaction to many of the drivers listed above, the oil and gas 

industry has been increasingly concerned with the management of risk. This focus on risk 

management has in turn driven a wide array of changes in the industry. The increasing 

importance of technology reflects in part its ability to reduce the chance that drilling will 

produce a dry hole or that less than the optimal amount of oil and gas will be extracted from 

a formation. In order to spread risk, individual projects are increasingly collaborative, multicompany efforts. To protect themselves against precipitous drops in price, companies have 

moved to futures, options, and other hedging instruments. To reduce costs of R&D major 

companies have pushed many these efforts onto contractors and many companies have relied 

on research consortia. 
The Resurgence of the GOM 

173 Crosscutting Themes and Impacts 

5.2 The Resurgence of the GOM 

In the late 1980’s and the early 1990’s, the GOM was considered such an unpromising area 

for oil and gas, it was known as the “Dead Sea.” Within a few years, this situation was 

reversed as leasing activity surged, explorations followed, and soon thereafter, production 

from deepwater began to make significant contributions to the total production of petroleum 

in this country. 

This remarkable turnaround illustrates the array of factors that drive oil and gas activity. 

Indeed, the complexity of variables that influence the industry is one of its more salient 

characteristics. This confounds attempts to predict demand and prices and creates the 

uncertainty that is the context for all industry decision-making. 

When these factors converge, they can focus the industry’s attention and result in major 

shifts in activities as was seen in the GOM in the mid-1990’s. The factors in the GOM’s 

resurgence that contributed were diverse. Among the most important of these were the 

following. 

Areawide leasing. This shift in MMS leasing policy allowed companies to assemble GOM 

tracts sufficiently large enough to increase the potential for finding oil and gas and to justify 

deepwater exploration. These and other benefits contributed to a significant increase in 

industry bidding for OCS tracts (see Table 18). 

Deepwater royalty relief. In late 1995, the federal government allowed MMS to suspend 

royalty payments to increase interest in OCS deepwater. The clear increase in deepwater 

bids shown in Table 18 is evidence of the success of this regulatory strategy. 

Exploratory technology. Seismic imaging as a technology began to make remarkable 

strides in the early to middle 1990’s, reducing the probability that attempts to find oil and gas 

would be unsuccessful from 90 percent in 1990 to 50 percent in the year 2000—a fivefold 

increase in the industry’s exploratory success rate. The utility of this technology to the 

industry can be seen in the fact that only 5 percent of GOM wells resulted from 3D imaging 

in 1989, but that by 1996, this technology was used to find 80 percent of GOM wells. (See 

Table 3.) At the same time, improved imaging technology allowed independents and other 

companies to find additional oil and gas in properties that were being reworked. While these 

new technologies were instrumental in deepwater locations, they also have continued to 

improved success with subsalt reservoirs throughout the GOM. 

Production technology. As in exploration, technology made substantial improvements in 

production. Drilling technologies, including steerable drills, horizontal and multilateral 

wells, improved fracturing methods, and real-time monitoring of drilling and production, 

were among the technologies that sharply increased the recovery rates for the industry. 

Favorable prices. In the mid-1990’s oil and gas prices were generally improving or at least 

they were not clearly unfavorable. Moreover, the level of volatility was lower than it had 

been in the 1980’s. 
The Resurgence of the GOM 

174 Crosscutting Themes and Impacts 

Corporate necessity. Despite the increasingly global nature of the oil and gas industry, 

certain companies continued to focus on the GOM as their only business location. For global 

companies, some major business units by definition were essentially restricted to the GOM. 

Thus, for these companies, particularly the U.S.-based units of the majors, deepwater GOM 

was their last, best hope of being successful. By necessity, if they were going to succeed, 

that success would have to be in the deepwater GOM. 

With technology, regulatory, and price factors in their favor, these companies began a series 

of exploratory and production steps that effectively turned the “Dead Sea” into a hub of new, 

renewed, and successful activity. That renewal continues to the present (i.e., in 2001) and 

shows little sign of subsiding as new deepwater finds are followed by massive projects that 

promise more production for years to come. 

5.3 Impacts of Change and Industry Dynamics: 1980-2000 

Change and the ever more dynamic nature of oil and gas have affected the way industry 

operates. Impacts from these forces also extend to the socioeconomic realm and how they 

occur onshore and offshore. 

5.3.1 Industry 

Old economy to new economy. The oil industry is now as good an example of a high-tech, 

new economy industry as can be found. While in many ways oil and gas as an extractive 

industry that dominated much of the 20th century typifies the so-called old economy, the 

industry is now highly dependent upon a very broad range of digital technologies. It is also 

constantly refining these through its concern with next-step technology. While much of this 

technological change has been incremental, the industry today is radically different from the 

industry that operated in 1980. 

Simple to complex. Risk management, corporate strategy, technology, and other factors 

have pushed the oil and gas industry in the direction of increasingly complex arrangements 

and operations. The decline of the vertically integrated oil company has meant that a 

network of outsourcing arrangements supplants activities what were once internal to a given 

company. To spread risk, major projects are undertaken collaboratively with alliances or 

partnerships. Once the province of the major companies, R&D is now parceled out among 

contractors, university-based consortia, and other parties. Work that was once done 

sequentially is now done in parallel by multi-disciplinary, sometimes multi-national and 

multi-cultural, teams. Companies that once looked for oil and gas within a fairly narrowly 

defined area are increasingly weighing the value of the GOM versus other, far flung parts of 

the world. 

Science-based production to economic-based production. Decades ago companies 

operated under the assumption that getting oil from ground to market as fast as possible was 

the best course of action. Thus, the best strategy was to use science and engineering to 

accelerate that process. Stimulated by the nationalization of oil assets in the early 1970’s, the 

increasingly volatile nature of prices, and other factors, companies began to reconsider how 

best they could maximize long-term returns. In an environment of price uncertainty, the 
Impacts of Change and Industry Dynamics 

175 Crosscutting Themes and Impacts 

economics of production are no longer straightforward. Thus, hedging instruments, 

strategies to retain or release products, and other considerations became part of a production 

strategy that may not find the quickest route to market to be in the best economic or financial 

interests of the company. Increasingly sophisticated understandings of oil recovery from 

formations have also added complexities to this trend as optimal rates of flow from deposits 

may be significantly less than the quickest rates of flow. 

Uncertain status of R&D. Demands for better financial performance may argue against 

using cash flow and earnings to support R&D, particularly those efforts without short-term 

and almost certain “returns on investment” in R&D. As a result, the oil and gas industry is in 

a position where it may limit its future success or delay the onset of that success for the sake 

of present-day financial success. Technology has transformed the industry particularly in the 

past 5 to 10 years. Whether the industry will continue to exploit technology as it faces more 

complex challenges will depend in part on its ability to finesse the competing, sometimes 

conflicting, demands of shareholders and R&D. 

Less is more. Technology has generally allowed the industry to produce more oil and gas 

with less infrastructure and fewer people. The most visible example of reduced infrastructure 

is the declining number of platforms or drilling sites needed to reach and produce oil and gas. 

As drilling technology has advanced, the horizontal reach of any given drilling location has 

expanded dramatically. The hub system used in the GOM has allowed new production to 

reach shore by tapping into existing infrastructure. The classic substitution of capital for 

labor has also reduced the number of people needed to produce this country’s oil and gas. 

This increased efficiency and effectiveness has contributed to the financial success of the 

industry and has also reduced the environmental impacts of oil and gas production. 

Everything is faster. The hallmark of the information age is speed. As information has 

become more important and information technology has become more intertwined in the 

industry, the time required to do work has collapsed. Parallel processing in computers has 

been echoed in the parallel activities of multi-disciplinary teams that are now standard in the 

industry. A few examples from the timeline in Table 3 illustrate the remarkable reductions in 

time needed to complete major activities. 

• By 1996, the time from initial offshore discovery to initial production was about 2 years. 

In 1984, the elapsed time from initial discovery to initial production was a decade. 

• By 2001, Exxon could process the same volume of seismic data in 10 days that would 

have taken 11 years in 1990. 

• Before internet-based transactions were available, large sales of natural gas took 

approximately 9 months. Using the Internet, these transactions can now be completed in 

20 minutes according to one report and only 1 second according to another. (See Section 

3.3.3). 

Information is essential. Whether the issue is finding oil, drilling, maximizing the recovery 

rate from a formation, or understanding world prices, information is increasingly critical to 

the industry. Real-time monitoring capabilities allow companies to adjust drilling and 
Impacts of Change and Industry Dynamics 

176 Crosscutting Themes and Impacts 

production activities to avoid problems and increase success rates. Information systems can 

allocate resources across widely dispersed projects. Software can enable the creation of 

virtual teams focusing on a single project from locations almost anywhere in the world. The 

Internet and e-commerce are making portfolio management an increasingly powerful tool for 

companies ever more active in shedding or acquiring assets. All of these impacts are derived 

from the increasing availability, quantity, and quality of information. 

5.3.2 Socioeconomic Impacts 

Socioeconomic impacts center on the industry’s human resources. The repeated cycles of 

hiring and firing over the 1980-2000 period have changed the way the industry uses people 

and how prospective workers respond to the industry. 

Different, more sophisticated skills. Given the increasing significance of information and 

information technology, the skills that almost all oil and gas workers must bring to their jobs 

are different and much more sophisticated. As with other basic industry, the opportunities 

for unskilled or semi-skilled workers to find jobs and advance have largely gone away. As 

the newly important skills are often transferable from oil and gas to other industries, the 

competition among industries for those with the right skills is also greater. 

Shortage of PEs. Perhaps the most acute impact of industry dynamics is the shortage of PE 

talent. This is true of young people just starting their careers as well as mid-career 

professionals. Petroleum engineering schools produce a fraction of the undergraduate PEs 

that they did in 1980. 

Personnel issues. A host of other personnel issues have also emerged in response to the 

dynamics of the industry and other trends over the past 20 years. The layoffs following the 

oil price collapse of 1986 have left a hole in the middle of the industry’s age distribution with 

relatively few workers in mid-career status and a high average age for the overall workforce. 

Workers no longer view the industry as a stable place to work throughout one’s career. The 

downsizing of the military has reduced the supply of technical workers comfortable with the 

work environment offshore. The industry no longer enjoys the high salary and wage 

differential that was a major attraction for labor. 

5.3.3 Onshore and Offshore Impacts 

Despite the many changes that have affected oil and gas, the basic steps involved in finding, 

producing, and marketing petroleum are unchanged. These steps generate a series of impacts 

onshore and offshore. The forces changing the industry have begun to modify the quality 

and extent, if not the basic nature of, these impacts. 

 

Where work is done. The rise of information technology is beginning to redefine where 

work is done. The ability to transmit electronically large volumes of data with ease, to 

monitor physical activities from remote locations, and other consequences of digital and 

related technology have given rise to workers physically remote from where the work is 

conducted. In other cases “virtual teams” of workers have been assembled that operate on 

projects without regard to the physical locations of individual team members. 
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Appendix A 

Future Study Issues 
 A-1 Appendix A 

FUTURE STUDY ISSUES 

During this project, the team identified a number of issues that merit further investigation. 

The more significant of these are described below. 

• GOM versus the rest of the world. 

Objective. Determine the competitive advantages and disadvantages of the GOM relative 

to the other important oil and gas areas in the world. Describe the resource allocation 

decision-making processes of companies that have the option of working in the GOM or 

other areas. 

Description. Through literature review and interviews with industry and other experts, 

the project would examine how the GOM competes with other oil and gas areas such as 

Brazil, West Africa, and the Caspian Sea. It would examine and compare factors such as 

the leasing process, lease costs, lease terms, regulations, and taxes in the GOM and other 

oil regions of the world. The role of government agencies (e.g., MMS) would be 

highlighted as would other areas that could be influenced to support continued interest in 

the GOM. 

Linkages. The study would likely address such issues as globalization, the role of 

regulation, risk management, technology, and the optimization of resource utilization. 

• The role of independents in developing the GOM. 

Objective. Describe the changing role of independent oil and gas producers in the 

development of the GOM and likely future prospects for these companies. Identify the 

forces that have influenced changes in those roles and the major trends that have emerged 

in the past 10 to 15 years. 

Description. Through literature review and interviews with industry and other experts, 

the project would document the recent history of the activities of independents, which 

have played a more active role in the GOM in the past decade. It would document how 

independents enter the GOM through primary lease sales and through the secondary lease 

sale market. It would also explore the niche areas of the independents in shallow water 

and in deepwater. The study would distinguish between the forces that drive the behavior 

of these firms and those that motivate the major international oil companies. It would 

also examine the role of the independents in the GOM as compared to Alaska. 

Linkages. The study would likely address the issues of differentiation within segments of 

the oil and gas industry, globalization, shallow water versus deepwater development, and 

access to capital and other barriers to action. 
 A-2 Appendix A 

• Foreign oil companies in the GOM. 

Objective. To determine the forces that have encouraged the increasing participation of 

foreign oil companies in the GOM. 

Description. Through literature review and interviews with industry and other experts, 

the project would document the history of foreign oil company participation in the GOM. 

Distinctions between private foreign firms and national oil companies would be drawn. 

Distinctions would be made between new players, that is those who have not previously 

bought leases, and old players operating under new names. Examination of bid levels 

and win rates of new and old players would be made. Reasons why foreign oil 

companies decide to operate in the GOM would be explored. The opportunities to 

encourage additional investment by these companies would be described. 

Linkages. The study would likely address the issues of globalization, privatization of 

foreign firms, and stakeholder agendas. 

• The role of OPEC in the development of GOM and U.S. oil and gas. 

Objective. To describe the changing nature of OPEC’s role in influencing prices and 

production in the GOM. To identify those factors that have helped and hurt OPEC in its 

attempts to manage world oil markets. 

Description. Through literature review and interviews with industry and other experts, the 

project would look at how OPEC has succeeded and failed as an organization trying to 

support the interests of its members. 

Linkages. The study would likely address the issues of globalization, the role of foreign 

oil companies, the role of OPEC and non-OPEC countries. 

• Labor shortages in the oil and gas industry. 

Objective. To identify the range of labor shortages that have emerged within the industry 

in the past 10 to 15 years. To isolate the factors that have led to those shortages. To 

assess the opportunities for redressing these shortages. 

Description. Through literature review and interviews with industry and other experts, the 

project would identify the range of labor requirements of the oil and gas industry and 

quantify the demand and supply conditions for each category of labor. The forces that 

have been instrumental in creating problems would be described. The potential for 

intervention by government or others to reduce these shortages would be assessed 

through the identification of successful efforts and by synthesizing findings from 

literature and interviews. 

Linkages. The study would likely address the issues of downsizing and other laborrelated corporate strategies, changing views of industry, loyalty of workers to companies 

and the industry, outsourcing, and the use of immigrants by the industry. 
 A-3 Appendix A 

• Oil and gas wages versus wages for competing industries. 

Objective. To document the wages of oil and gas labor versus competing industries. To 

examine the role of wages in securing and sustaining the industry’s labor force. 

Description. Through the analysis of standard secondary sources for the labor force and 

wages, literature review and interviews with industry and other experts, the project would 

define major labor categories and associated wages for the oil and gas industry. These 

categories and wages would be compared to competing work opportunities that may also 

be attractive to current or prospective oil and gas workers. The study would track these 

wages over time to determine trends and the underlying reasons for changes in these 

trends (e.g., any reduction in the wage premium paid to oil and gas workers for difficult 

or potentially unattractive work conditions). 

Linkages. The study would likely address the issues of downsizing and other laborrelated corporate strategies, short-term planning, demands of the financial marketplace on 

labor rates, changing views of industry, loyalty of workers to companies and the industry, 

outsourcing, and the use of immigrants by the industry. 

• Whither R&D? 

Objective. To document the changing nature of R&D within the oil and gas industry. To 

assess the potential for the industry to devote sufficient resources to this area in light of 

the prospective need for technological change and innovation. 

Description. Through literature review and interviews with industry and other experts, the 

project would describe the changing role of major, independents, contractors, academia, 

government, and others in oil and gas R&D. The need for R&D, particularly in relation 

to the perceived need for technology to address prospective exploration and development 

problems, would be described. The opportunities for industry, academia, government or 

others to address any R&D shortfalls would be identified. 

Linkages. The study would likely address the issues of technology, innovation, risk 

management, stakeholder agendas, and the conflict between funding R&D and other uses 

of cash flow and retained earnings. 

• Houston versus New Orleans as the center for U.S. offshore oil and gas. 

Objective. To examine the reasons for the concentration of oil and gas businesses and 

staff in Houston, particularly those related to offshore operations, as opposed to New 

Orleans. To assess the advantages and disadvantages of this trend. 

Description. Through literature review and interviews with industry and other experts, the 

project would document the history of the movement and gradual accumulation of the 

offshore oil and gas industry in the Houston area as well as the primary forces that drove 

this trend. The business climate and locational advantages and disadvantages of the two 
 A-4 Appendix A 

regions for different types of oil industry operations (e.g., headquarters, R&D) would be 

examined. The positive impacts (e.g., easier deal making) and negative impacts (e.g., the 

isolation of the industry from the economy and society as a whole) would be identified 

and described. 

Linkages. The study would likely address the issues of redistribution of personnel and 

businesses to Houston, globalization, corporate strategy, and stakeholder agendas. 
Appendix B 

Current Dynamics of the Oil and Gas Industry: 

After September 11, 2001 
Table of Contents B-i

TABLE OF CONTENTS 

Page

1.0 Introduction..................................................................................................................... B-1 

1.1 Background and Objectives ...................................................................................... B-1 

1.2 Appendix Issues, Organizing Framework, and Methodology ................................. B-1 

2.0 Stakeholder Expectations ............................................................................................... B-5

2.1 Defining Stakeholders .............................................................................................. B-5 

2.2 The U.S. Government as Policymaker ..................................................................... B-5 

2.2.1 Stakeholders ..................................................................................................... B-5 

2.2.2 Changing Expectations .................................................................................... B-6 

2.2.3 Issues ............................................................................................................... B-6

2.3 The U.S. Government as Implementer of Policy and Law ...................................... B-8 

2.3.1 Stakeholders .................................................................................................... B-8 

2.3.2 Changing Expectations .................................................................................... B-9 

2.3.3 Issues ............................................................................................................... B-9

2.4 Oil Producing and Net Exporting Countries ...........................................................B-10 

2.4.1 Stakeholders ...................................................................................................B-10 

2.4.2 Changing Expectations ..................................................................................B-11 

2.4.3 Issues .............................................................................................................B-12 

2.5 Shareholders and Investors ....................................................................................B-14 

2.5.1 Stakeholders ..................................................................................................B-14 

2.5.2 Changing Expectations ..................................................................................B-14 

2.5.3 Issues .............................................................................................................B-14 

2.6 Other Stakeholders .................................................................................................B-15 

3.0 Globalization ................................................................................................................B-17 

3.1 Globalization Defined .............................................................................................B-17 

3.2 The World of Oil is Changing ................................................................................B-17 

3.3 Meeting the Triple Bottom Line .............................................................................B-20 

3.3.1 Intertwined Concepts: Sustainable Development and Corporate Social 

Responsibility ................................................................................................B-20 

3.3.2 Components of Corporate Social Responsibility ..........................................B-23 

3.4 Other Globalization-Related Challenges ................................................................B-25 

4.0 Risk Management .........................................................................................................B-27 

4.1 Risk Management Redefined and Priorities Reshuffled ........................................B-27 

4.2 Strategic Risk Management ...................................................................................B-29 

4.2.1 Thinking About the Future ............................................................................B-29 

4.2.2 Partners and Alliances ...................................................................................B-33 

4.3 Operational Risk Management ...............................................................................B-33 

4.3.1 Overview of Security and Safety Issues Raised ............................................B-33 

4.3.2 Information Sharing ......................................................................................B-34 
Table of Contents B-ii

TABLE OF CONTENTS (cont’d) 

Page

4.3.3 Gulf Safety Committee ................................................................................. B-36 

4.3.4 Offshore Platform Security and the Fishing and Diving Industries .............. B-36 

4.3.5 Information and Computer Technology Security ......................................... B-37 

5.0 Crosscutting Themes and Implications ........................................................................ B-39 

5.1 Some Responses are New; Others, Re-Order the Priorities ................................... B-39 

5.2 The Role of the Oil Industry Continues to Evolve ................................................ B-40 

5.3 Implications for the GOM ...................................................................................... B-40 

5.3.1 Competitive Advantages................................................................................ B-40 

5.3.2 Challenges ..................................................................................................... B-40 

Literature Cited .................................................................................................................. B-43
B-1

1.0 INTRODUCTION1

1.1 Background and Objectives 

The study, Current Dynamics of the Oil and Gas Industry, was undertaken to review changes 

in the oil and gas industry operating in the Gulf of Mexico (GOM) between 1980 and 2000. 

During those 20 years, the industry responded or adjusted to changes on many fronts. Some 

of the changes that occurred were unanticipated. Others were slow to emerge as trends. The 

oil and gas industry, like so many other industries and institutions, now faces the challenge to 

respond, change, and adapt in the aftermath of the terrorist attacks on the United States on 

September 11, 2001. The dynamics of the industry changed as a result of September 11, but, 

in what ways? 

Some of the changes, responses, and adjustments in the oil and gas industry result from 

political actions taken by governments – the U.S. government and other governments. The 

political actions are redefining the nature of parties who affect international oil and gas 

operations and shifting the equation on when and where exploration and production activities 

can occur. Some of the changes are originating in the oil and gas industry. Others are from 

outside the industry. Some of the responses are strategic in nature. Others are operational. 

Some oil and gas industry responses are new. Others reflect a shift in priorities and a rethinking of issues already facing a global industry. 

This appendix was begins the examination of the changing forces in the oil and gas industry 

as a result of the events and fallout of September 11. The objectives are to: 

• Frame the issues affecting the oil and gas industry’s response to the events of September 

11, and 

• Summarize early indications of the industry’s response to the issues and the implications 

for the industry in the Gulf of Mexico.

1.2 Appendix Issues, Organizing Framework, and Methodology

The appendix focuses on three issues: 

• Stakeholder expectations. Stakeholders are individuals or groups who either influence (or 

can influence) or are affected by a particular decision, action, or activity. Changes in 

expectations of oil industry stakeholders can affect an array of factors including: 

investment, labor, goods and services, policy, regulations, and access to reserves, thereby 

potentially affecting all types of oil and gas activity (e.g., exploration, production, 

research and development, technology). 

• Globalization. Globalization refers to the ongoing process and complex forces that are 

increasing worldwide integration of ideas, people, and economies. Since it is not a 

universally embraced phenomenon, it embodies opportunities, challenges, and added 

 

1

 The draft report was completed prior to September 11, 2001. This appendix was prepared after the draft report 

was completed. 
B-2

responsibilities. On the one hand, it offers the oil and gas industry increased access to 

known reserves. On the other, the industry must increasingly address such issues as 

diversity, sustainable development, transparency, corporate conduct and social 

responsibility. 

• Risk management. Risk management encompasses strategies and techniques used to deal 

with the possibility that some future event will cause harm. It seeks to protect tangible 

assets – physical, financial, and human resources – and intangible assets such as corporate 

reputation or goodwill. For the oil and gas industry, this covers an array of factors 

affecting results such as infrastructure, reserves, geographical location, security of assets 

and people, project economics, market volatility, and technology. 

While the issues are addressed separately in this appendix, they are actually intertwined. For 

example, diversifying holdings to include international assets can be a strategy that addresses 

risk and shareholder (as one type of stakeholder) expectations. At the same time, it 

contributes to globalization. The analysis of stakeholder expectations focuses on first 

identifying stakeholder groups and then on what has changed or is changing for the key 

groups. The discussion of globalization focuses on some of the changing geopolitics of oil 

and the challenges to companies operating outside their home country. The risk management 

discussion is organized into two parts – strategic and operational responses. Strategic 

responses are the long range, big picture implications of changes for the oil and gas industry. 

Operational responses address day to day issues facing the industry. Some of these responses 

are short term. Others are longer term. 

The appendix was prepared through a review of industry, government, and general circulation 

publications and websites. The appendix uses the same organizing framework as the original 

report. That is, some of what is discussed relates to the broader category of industry, of which 

the oil and gas industry is one part, and some of what is discussed is narrower in focus 

looking at company or project specific factors. These three categories, all industry, the oil 

and gas industry, and individual companies or project specific factors, provide the organizing 

framework for thinking about the changes, response, and adaptations to the dynamics 

affecting the oil and gas industry following September 11. This framework is summarized 

below: 

Issue Area All Industry The Oil and Gas Industry 

Individual 

Companies/Projects

Stakeholder Expectations X X X 

Globalization X X X 

Risk Management X X X 

The oil and gas industry has many sectors. The companies that decide where and when to 

explore for oil and gas and when to develop discoveries are primarily the focus of the 

discussion which follows because their decisions affect when and where other sectors of the 

industry work. One way to look at these companies is to divide them into majors and 

independents. Major oil companies are vertically integrated, meaning their operations 

encompass oil and natural gas exploration, production, transport, petroleum refining, and 

marketing of refined petroleum products. Non-majors, often referred to as independents, are 
B-3

specialized oil and gas producers. Another way to slice exploration and production 

companies, and one that is more relevant here, is by their geographic focus. Some companies 

literally work wherever there are known oil and gas reserves. Others are more focused 

geographically. The following is a scheme for thinking about where oil companies work 

geographically: 

• Global: anywhere known oil and gas reserves are found. 

• International: in their home country and overseas, but not in every area of known 

reserves. 

• Multi-nation region: within a continent or area comprising several countries such as the 

North Sea or West Africa. 

• National: Limited to one country such as the United States. 

• Sub-national: Limited to one area within a country such as the Gulf of Mexico. 

Some of the issues discussed in the remainder of this appendix affect companies no matter 

where their geographic focus is. Others more directly affect those with a wider geographic 

focus. 
B-5 Stakeholder Expectations 

2.0 STAKEHOLDER EXPECTATIONS 

2.1 Defining Stakeholders 

The word stakeholder refers to individuals or groups who either influence (or can influence) 

or are affected by a particular decision, action, or activity, that is, they have a stake in the 

future of, in this case, the oil and gas industry. Five broad categories of stakeholders, their 

changing expectations, and September 11-related issues are described in the remainder of this 

section. The stakeholder groups discussed are: 

• The U.S. government as policymaker, 

• The U.S. government as implementer of policy and law, 

• Oil producing and net exporting countries, 

• Shareholders and investors, and 

• Other stakeholders (e.g., financial services, employees, and local communities). 

2.2 The U.S. Government as Policymaker 

Government is a major stakeholder in the oil industry. This is true around the world whether 

nations are generally seen as oil producing or oil consuming or, in the case of the U.S. and 

other countries, are both major producers and major consumers. While the U.S. government 

has many roles as a stakeholder, one of its most fundamental is the role of defining national 

policy with respect to the oil industry, in particular, and to energy in general. This involves a 

range of interests and the articulation of policies through which government attempts to 

balance these interests or attempts to find optimal solutions to competing or conflicting 

interests. 

2.2.1 Stakeholders 

In creating oil and energy policy in its broadest terms, the U.S. Congress is the principal 

formal decision-making body. Interacting with Congress are many organizations and 

individuals representing a broad swath of interests. What these disparate organizations and 

individuals have in common is a desire to influence the formal decision-makers. They 

constitute a set of policy stakeholders who may not directly work with the oil industry, but are 

clearly affecting the industry’s fortunes. 

The following is a brief identification of the most critical of these policy decision-makers and 

stakeholders. It should be noted that each category identified below encompasses many 

organizations that share a few key characteristics, but may have radically different 

perspectives on specific policy issues or methods of trying to influence policy issues. 

• Legislatures and other formal policymaking bodies. The U.S. Congress is the principal 

source of policy in this country. Its fundamental purpose is to be a forum for the range of 

interests of policy stakeholders on oil and energy policy and to create legislation that 

reflects to varying degrees the concerns of stakeholders. 
B-6 Stakeholder Expectations 

• Industry and allies. The oil industry directly and through such organizations as the 

American Petroleum Institute (API) advocates its policy positions with the U.S. Congress 

and other governmental policymaking bodies.

• Environmental community. This community comprises a spectrum of organizations that 

has an avowed interest in the environment. Concerns related to energy and the oil 

industry include exploitation of federally-owned land [e.g., Alaskan National Wilderness 

Reserve (ANWR)], energy conservation and efficiency, and renewable resources. 

• Antiglobalist community. The rise of globalization as a force shaping economies and 

societies has sparked the creation of organizations that are opposed to the issues related to 

global economic development and trade and their potential impacts. As some of the most 

visible international corporations, major oil companies are closely associated with 

globalization, and are targets of concern for the antiglobalists. 

2.2.2 Changing Expectations 

The shock of the events of September 11 has revived several key energy issues that have been 

part of the energy and oil debate for decades. The change in expectations focuses on four 

issues: 

• Increased interest in identifying and developing domestic (i.e., U.S.) sources of oil, 

• Increased interest in securing oil and gas from foreign sources that are nearby and have 

friendlier ties to the U.S., 

• Greater concern with energy efficiency, particularly in cars and trucks, and 

• Greater interest in developing renewable and innovative energy sources. 

2.2.3 Issues 

In the weeks and months following September 11, U.S. policy priorities have been 

reconsidered and to some extent reordered. The policy issues that have been raised are not 

new; however, they had in many cases receded into the background prior to the terrorist 

attacks. These terrorist attacks served as a wakeup call for a range of policy issues that have 

been part of the national energy debate at least since the energy crisis of the 1970’s. 

The broadest of these issues is the call for U.S. energy independence, which has been 

commonly linked to national security in the commentary following September 11 (Russell 

2001, Russell 2002). A close corollary is the cry for reducing our dependence on imported 

oil, particularly from the Middle East (Appleyard 2001, Benditt 2002, Kates 2001). While 

this increased concern with reducing U.S. need for imported oil has been acknowledged even 

by the major oil companies, experts have pointed out that there is no alternative to Saudi 

Arabia as a major source of oil (Staff 2002c). Following these expressions of concern from 

the spectrum of interests with a stake in oil and energy policy, Congressional consideration of 

energy and oil policy became front-page news for the first time in years. 
B-7 Stakeholder Expectations 

One dimension of this issue relates to the supply of energy available within the U.S. The 

Secretary of the Department of the Interior spoke for many when she called for increased U.S. 

oil production (Russell 2001). The development and exploitation of oil resources in the 

Alaskan National Wilderness Reserve is emblematic of the interests of those who feel that the 

energy benefit of this region outweighs the environmental costs of developing these resources 

(Staff 2001f). Similarly, others have advocated greater exploitation of energy resources on 

other federally-owned land. These issues have been the subject of debate for years, of course. 

It should be noted that while many advocate ANWR development, in particular, at least some 

oil companies have expressed reservations about working in this area. These companies 

assume that groups opposed to ANWR development could tie up any development for years 

in the courts, thereby delaying any oil development activities. These companies would prefer 

to pursue more achievable opportunities (Banerjee 2002). In addition to such hot button 

issues as ANWR, there have also been renewed calls for more traditional incentives for 

domestic production such as tax breaks for drilling and opening up more federal lands for 

exploration and production (Russell 2002). 

Despite these longstanding disputes, some have called for a spirit of compromise and sacrifice 

including initiatives on the part of the environmental community to identify areas suitable for 

drilling, not solely identify areas like ANWR where drilling is unacceptable. This spirit of 

compromise is seen as an appropriate response to the “war” on terrorism (Kates 2001). 

While dependence on foreign sources has long been a concern, the availability of oil and gas 

from our immediate neighbors—Mexico and Canada—is usually much less controversial. 

The role of these sources was elevated after September 11. By December 2001, Mexico had 

been the largest source of crude oil imports for three straight months. In that month, Canada 

was the largest source of imported crude oil and oil products combined. Conversely, Saudi 

Arabia was the third largest source of crude oil imports in December 2001 and the volume of 

imported Saudi crude had decreased 28 percent from December 2000 (Staff 2002c). 

In the post-September 11 world, independent oil companies have been reported to be 

aggressively pursuing “hemispheric” sources of oil and gas. These include such frontier areas 

as western and eastern Canada, deepwater Gulf of Mexico, and coal-bed methane (Lawrence 

2002). 

The call for new sources of energy has extended not only to oil in controversial locations, but 

also to unconventional oil sources. Thus, commentary has drawn attention to Canadian oil 

sands and heavy oil in Canada and Venezuela. These sources are more expensive to develop 

than conventional oil deposits, but are receiving greater attention and investment from major 

oil companies (Staff 2002c). 

Within the overall issue of energy supply is the potential for energy production from 

renewable resources. September 11 has raised the visibility of these interests as well, 

including wind energy and ethanol (Staff 2002c). 

This broad concern with energy independence clearly supports energy activities in the GOM. 

Whether considering the “frontier” of deepwater GOM or other GOM areas, all provide 

sources of domestic energy, without the security concerns of imported oil and gas. 
B-8 Stakeholder Expectations 

The other major dimension of the energy independence policy debate is reducing energy 

demand. Here the most salient issue is the efficiency of the U.S. vehicle fleet and the 

opportunity to raise that efficiency by requiring higher mileage in new cars and trucks, 

particularly the mileage of sport utility vehicles and light trucks that have claimed an 

increasing share of the U.S. market (Benditt 2002, Kates 2001). Unchanged since the 1980’s, 

these standards are seen by many as a significant opportunity to use available technology to 

reduce the need for imported oil because the principal use of oil in the U.S. is for 

transportation. 

In considering the U.S. reliance on Middle Eastern oil, the post-September 11 debate also 

called for a price for oil that considers what some see as the true price of this resource. Thus, 

there have been calls for the price of energy to reflect costs of securing oil from unstable areas 

of the world and of the long-term environmental effects such as global warming (Benditt 

2002). 

One of the advantages that oil and gas from the GOM has is a lack of substantial external 

costs that apply to oil from the Middle East or some other areas of the world. Thus, the costs 

of military intervention or foreign aid that some economists would consider an externality 

attributable to some imported oil are absent. 

2.3 The U.S. Government as Implementer of Policy and Law 

Once public policy related to the oil industry is established, the government is the agency by 

which that policy is implemented. As U.S. policy is a function of the legislative branch, 

implementation is the function of the executive branch. 

2.3.1 Stakeholders 

In the U.S. several cabinet level departments are stakeholders with respect to the oil industry. 

There is a federal stakeholder related to virtually every activity undertaken by the oil industry, 

including principally the following. 

• Department of the Interior. Through the Minerals Management Service (MMS) and the 

Bureau of Land Management, the Department of the Interior controls and manages 

industry access to federal lands, both onshore and offshore, and the oil and gas resources 

that lie beneath them. 

• Department of Transportation (DOT). The transportation of industry workers and oil and 

natural gas products is regulated by agencies with U.S. DOT. 

• U.S. Coast Guard. The Coast Guard has maritime safety, mobility, and security 

responsibilities. 

• Department of Labor. The safety and health of onshore industry workers is regulated by 

Labor’s Occupational Safety and Health Administration. 
B-9 Stakeholder Expectations 

• Department of Energy (DOE). Research and development activities related to oil and gas 

are funded in part by U.S. DOE, which also sponsors research and development of 

renewable resources and alternative energy technology (e.g., fuel cells). 

• Environmental Protection Agency (EPA). EPA regulates the industry relative to air, 

water, solid waste, and hazardous waste emissions. It also has a substantial stake in 

industry-relevant issues such as for the administration of federal vehicle mileage 

standards, global warming, and greenhouse gases. 

2.3.2 Changing Expectations 

Since September 11, the change in expectations focuses on the following: 

• Increased regulation related to safety and security. 

• Seeking the proper balance between safety and security and company operations. 

• Heightened interest in government as the promoter of innovative energy technology. 

2.3.3 Issues 

In the days immediately following September 11, perhaps the most widely discussed concern 

relative to the oil industry was security. This concern focused on the safety of the industry’s 

workers around the world, especially in locations considered vulnerable to terrorism. Almost 

equally important was the security of the industry’s facilities and operations. In response to 

concerns about industry facilities and operations, government began to tighten certain 

regulations that govern helicopter flights, pipeline operations, and marine vessels. The thrust 

of these changes was to increase government oversight and increase security and surveillance. 

While security was increased with the implementation of many of these measures, some also 

interfered significantly with oil and gas company operations. The filing of helicopter flight 

plans with the Federal Aviation Administration rather than internally within oil companies 

soon created major bottlenecks and the initial regulatory response was modified (Fletcher and 

Lorenzetti 2001). 

Increased security precautions directly bear on the GOM. For example, the reliance on 

helicopters for transportation to offshore platforms means that greater security becomes an 

added burden on the efficiency of operations. 

Government security concerns were by no means the exclusive province of the U.S. In an 

extreme case, the Nigerian navy initiated 24-hour surveillance of that nation’s oil facilities 

shortly after September 11 to respond to concerns about internal terror threats (Staff 2001h). 

The concerns for government action did not stop with operational security. There were also 

calls for greater federal investment in energy-related research and development. The desire is 

to advance the state of energy technology (e.g., fuel cells) so that U.S. dependence on Middle 

Eastern oil is reduced and the environmental effects of oil and gas (e.g., greenhouse gases) are 

minimized (Benditt 2002). 
B-10 Stakeholder Expectations 

Energy–related research and development is pivotal to the long-range health of deepwater 

GOM. This frontier has been developed largely because of the industry’s ability to refine and 

advance exploration, drilling, platform, and other critical technologies. While industry and its 

private sector allies have generally been the leaders in technology development, the federal 

government has also played a role. 

2.4 Oil Producing and Net Exporting Countries 

The discussion here concerns those countries that are net exporters of oil, natural gas, and 

petroleum products. These countries are critical players in the world economy. 

Substantively, the focus is on broad policy concerns, rather than issues of regulation. For the 

oil industry, these countries are obvious stakeholders as they manage access to the oil and 

natural gas resources that oil companies seek to develop. While regulation by these countries 

clearly affects oil companies, in the post-September 11 world the basic issues are at the policy 

level. 

2.4.1 Stakeholders 

The net exporters of oil can be grouped into three principal categories. The most visible 

category is the countries in the Organization of the Petroleum Exporting Countries (OPEC). 

In recent decades, OPEC has increasingly shared the world market with others. 

• OPEC. OPEC comprises 11 developing countries, mostly Arab nations in the Middle East 

that are reliant on oil revenues as their main source of income. Current members are 

Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United 

Arab Emirates and Venezuela (OPEC n.d.). Of these, 6 are among the 10 largest oil 

exporters worldwide: Saudi Arabia (#1), Iran (#4), Venezuela (#5), Iraq (#6), Nigeria 

(#8), and the United Arab Emirates (#9). The leading power in OPEC is commonly 

considered to be Saudi Arabia, which produces 12 percent of the world’s oil and accounts 

for more than one-sixth of total world crude oil exports (IEA n.d.a). 

OPEC includes all important producers and exporters of oil in the Middle East. From 

1973 to 2000, the Middle East share of crude oil production declined from 37 percent to 

31 percent (IEA n.d.a). 

The export market for natural gas is not dominated by OPEC as is crude oil. Although 

natural gas is less significant to OPEC than oil, OPEC has substantially increased its share 

of world natural gas production from 1973 to 2000. Over that period, OPEC’s share of 

global production rose from 2 percent to 9 percent. In the year 2000 global export market 

for natural gas, Algeria ranked second, Indonesia was fifth, and Qatar was tenth (IEA 

n.d.b). 

• Established non-OPEC. In addition to OPEC, several other countries have been major 

players in the global oil market for decades. These countries tend to have strong ties to 

the developed world and include Norway, the United Kingdom, and Mexico, which 

ranked second, seventh, and tenth in oil exports in 2000. As noted, OPEC does not 
B-11 Stakeholder Expectations 

dominate world natural gas exports; Norway, however, is the fourth largest natural gas 

exporter; Canada is the second largest (IEA n.d.a, IEA n.d.b). 

• Emerging sources. The third category of oil exporting countries constitutes most of the 

frontier areas for oil and natural gas exploration and development today. Within this 

category are Russia, various countries that were part of the Soviet Union, West Africa, 

and Brazil. Russia’s oil and natural gas industry has become a major world player 

following the collapse of the Soviet Union, ranking third in global oil exports and 

dominating natural gas exports. Most of the other areas have not entered the top ten ranks 

for oil or natural gas exports, although Turkmenistan was ninth in natural gas exports in 

2000 (IEA n.d.a, IEA n.d.b) Nevertheless, these countries have been the source of 

attention from oil companies in recent years and in some cases have gained substantial 

visibility since September 11. Indeed, the countries that were formerly part of the Soviet 

Union are seen by some as the locus of the biggest attempt to create a “new U.S. sphere of 

influence” since the U.S. entered the Middle East 50 years ago (Starobin 2002). 

While clearly different in type from oil producing and exporting nations, Muslim 

fundamentalists constitute a type of stakeholder in the oil industry in countries where much of 

the population is Muslim. These include key OPEC members as well as some of the 

emerging sources of oil in former parts of the Soviet Union. 

2.4.2 Changing Expectations 

As in many other areas of concern following the terrorist attacks, the changes in expectations 

for oil exporting nations are more a matter of priority and emphasis than of new expectations. 

They include the following: 

• Increased sensitivity of oil exporting nations, particularly OPEC members, to the role of 

oil and oil price in the world economy and the potential for higher oil prices to undermine 

global economic growth and the demand for oil. 

• Increased concern by oil companies, developed countries, and others, with political 

stability in oil exporting countries and the tension between those countries’ governments 

and the general populace. 

• Increased awareness of longstanding conflicts between the Arab world and the West and 

the Arab world and the symbols of globalization, including international agencies such as 

the United Nations and major oil companies (Staff 2001i). 

• Increased interest by oil companies in emerging nations (e.g., former parts of the Soviet 

Union in Central Asia) and a reciprocal interest by those nations in becoming alternatives 

to traditional oil sources. 

• Increased awareness of the role oil and gas companies can play in economic development 

plans of oil exporting countries. 
B-12 Stakeholder Expectations 

2.4.3 Issues 

In at least some quarters of the oil-exporting world, the events of September 11 are considered 

tumultuous, capable of overturning the established order. This view sees major struggles in 

the Middle East, stretching from the “Stans”2

 in the east to the Mediterranean Sea in the west 

and down to Somalia and Sudan in Africa. Disparities between global supply and demand 

will create substantial tensions between growth areas that need oil and the Middle East where 

most of the world’s reserves are located. In this extreme view, the attacks of September 11 

are a harbinger of the strife to come (Bakhtiari 2002). 

For most of the oil producing areas, the issues after the terrorist attacks have been 

characterized in less catastrophic terms. While much of the policy debate in the U.S. revolved 

around energy independence, the policy issues for many oil producing nations focused on the 

balance between maximizing oil revenues (thereby providing many benefits to citizens) and 

maintaining a viable global economy. For those nations largely dependent on oil as a source 

of gross domestic product and of revenues from exports, this debate was particularly 

important. 

The most obvious illustration of this policymaking concern can be seen in the deliberations of 

the OPEC countries and its most important member, Saudi Arabia (Banerjee 2001). In the 

past quarter century, OPEC has become increasingly sophisticated in its understanding of the 

relationship between oil prices and global economic growth. In brief, when oil prices are too 

high, economic growth slows or stops and demand for oil declines. Alternatively when oil 

prices are low, growth is encouraged. At some point, however, lower prices fail to stimulate 

additional growth. The issue for OPEC and other oil producers is to determine the optimal 

price that stimulates global growth, and also provides for substantial oil revenues. While 

OPEC has shown greater or lesser skill in managing this balancing act, some observers felt it 

had been successful in the several years leading up to September 11 (Banerjee 2001, Staff 

2001g). 

The ability of OPEC and a few others to attempt to manage the global oil market (and 

sometimes to succeed) stands in sharp contrast to oil production in the GOM. For crude oil 

developed in the GOM, prices are established by the world markets. The GOM is not a part 

of the efforts of OPEC to move oil prices up or down, but must live with whatever prices are 

established by the world market. 

September 11 occurred as the global economy was already weakening. Thus, the perennial 

question of the balance between the price for oil and global economic health had already been 

a matter of increased attention. The immediate economic concern following the terrorist 

attacks was then whether a weak global economy would be pushed into recession or 

depression (Banerjee 2001). These concerns were not unwarranted as the International 

Energy Agency (IEA) reported the sharpest drop in fuel consumption in almost two decades 

 

2

 The “Stans” include Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. All were part of the 

Soviet Union until its demise in 1990. 
B-13 Stakeholder Expectations 

following the terrorist attacks. Regardless of source, estimates for oil demand growth for 

2001 were substantially below historical averages while expectations for 2002 were also 

showing much slower growth3

 (Staff 2002a). 

For countries highly dependent on oil revenues, maintaining those revenues is often critical to 

maintaining government-funded social welfare systems and political stability. Social welfare 

systems help maintain the political allegiance of those who are served, but are particularly 

expensive. Economic growth in Russia and economic reform in Mexico are both considered 

highly dependent on oil export revenues. When stress on these systems is combined with 

high unemployment among young men, non-democratic governments, and Islamic 

fundamentalism, the political stakes can be high (Banerjee 2001, Lawrence 2002, Staff 2001e, 

Staff 2001g). 

There have been long-term concerns with the viability of authoritarian governments in the 

Middle East. The events of September 11 underscore these concerns. Links between Islamic 

fundamentalism and the terrorists have created basic conflicts for Middle Eastern 

governments that want to participate in the global economy and reap the benefits of this 

participation, but are subject to internal criticism for doing so. Among the benefits from 

keeping the West supplied with oil is military protection for existing Middle Eastern 

governments. This protection has been sharply opposed by some groups that are at odds with 

current Middle Eastern governments (Snow 2001, Banerjee 2001). 

For at least some Muslim fundamentalists, the West, including the U.S., is anathema on 

religious grounds; U.S. policy on Israel and the Palestinians and on Iraq is inextricably linked 

to this religious and ideological opposition. Often focused on the U.S., this antipathy also 

extends to international organizations like the United Nations. Accommodations with the 

West by the governments of major oil exporting countries and becoming a part of the global 

economy are accordingly opposed by many fundamentalists. The major oil companies are 

seen as extensions of the U.S. or the West and are opposed on that basis (MacFarquhar 2002, 

Snow 2001, Banerjee 2001). 

For some analysts, this conflict between Middle Eastern governments and Islamic 

fundamentalists constitutes a “hidden” civil war and the attacks of September 11 were part of 

a larger effort to unseat rulers in Saudi Arabia and other oil exporting countries. The 

increased integration of these countries into the global economy is seen as an effort to 

generate the economic growth and diversity that will address critical problems of 

unemployment. If successful, these efforts are expected to defuse the concerns that support 

fundamentalist dissent. Investments by major oil companies in projects that will create this 

economic diversity are crucial to this strategy. As a result, the actions of major oil companies 

are interwoven with the economic and social policies of oil exporting nations (Caffentzis 

2001). 

 

3

 IEA estimated a 750,000-barrel per day (bpd) decrease in global oil demand for the third quarter of 2001. 

Estimates by several sources for oil demand growth for all of 2001 were below the 1 million to 2 million bpd 

average for the decade preceding 2001 and ranged from 640,000 bpd (OPEC) to 400,000 bpd (U.S. Department 

of Energy) to 120,000 bpd (IEA). Projected oil demand growth for 2002 was higher, but still below historic 

growth levels: 1 million bpd (OPEC), 800,000 bpd (U.S. Department of Energy), and 600,000 bpd (IEA). These 

projections for 2002 were revised downward following the terrorist attacks (Staff 2002a). 
B-14 Stakeholder Expectations 

The issue of internal political stability that haunts the oil and gas industry in many key 

countries is simply not a factor in the GOM. Indeed, the ability of oil and gas companies to 

operate in the GOM confident that the basic political framework is sound is one of the key 

competitive advantages offered by the GOM. This does not mean that politics is unimportant; 

the issue of leases in the eastern GOM is evidence of that. Still, oil and gas activities in the 

U.S. are not subject to the kinds of fundamental political risk that can exist in some parts of 

the world. 

2.5 Shareholders and Investors 

2.5.1 Stakeholders 

These stakeholders are vital sources of capital for the oil industry, always a capital-intensive 

enterprise. Among the stakeholders are those institutions and individuals who own shares in 

individual companies as well as partnerships and other financial interests in corporations 

within the industry. The common thread here is having an equity position in a company that 

is part of the oil and natural gas industry as opposed to being a creditor of such a company. 

2.5.2 Changing Expectations 

The change in expectations following September 11 focuses on: 

• Long run investor optimism about the economy and the markets. 

• Optimism towards companies in the oil and gas industry, which in some cases have 

already served as a sort of safe haven for investors. 

• Lower expectations for returns on investment than before the general collapse of the stock 

markets. 

2.5.3 Issues 

The fundamental concern of investors has not changed. It is obtaining a desirable return on 

their investment. Investors, however, tend to value stability and predictability. Both were 

badly affected in the immediate aftermath of the terrorist attacks, resulting in some sharp 

downturns in the world’s stock markets. Within weeks of the attacks, however, investors had 

begun to regain some confidence in markets and optimism for the future although that 

optimism is tempered by a general sense that future returns will not match the returns 

witnessed in the late 1990’s, before the high-tech stock bubble burst. 

As a key element of the global economy, the oil industry was integral to the concerns about 

that economy and the world’s stock markets following September 11. Following a very short 

period of substantial volatility in the market, general investor sentiment in the oil industry 

rebounded. September 11, however, tended to underscore the sense that the high stock market 

returns of the late 1990’s were history (Value Line 2001). 
B-15 Stakeholder Expectations 

Despite general concerns about the market, investor faith in the oil and gas industry appears to 

have quickly recovered. Indeed, some investors tended to move into oil and gas industry 

stocks because they were considered less risky than the market in general. The companies in 

the industry are often considered more conservative investments, particularly the larger, 

integrated companies. The longer-term outlook for investors in these companies tends to be 

positive as analysts see oil and gas as critical to the global energy market for many years to 

come. As global growth returns to expansion, the prospect for major oil companies is 

considered to be positive (Value Line 2001). 

 

2.6 Other Stakeholders 

The stakeholders identified above are those that appear to be particularly and immediately 

affected by the events of September 11. Other important oil industry stakeholders, it appears, 

have not fundamentally changed their expectations of the industry and of their relationships 

with oil companies. 

These other stakeholders include many components of the financial services industry, the 

employees of the oil industry, and the local communities where oil industry activities occur. 

In addition to facilitating equity investment in the oil industry, the financial services industry 

plays a critical role in supplying capital through bonds, loans, and other financial instruments. 

The insurance industry helps manage risk through the provision of insurance policies. From 

the insurance industry’s perspective, the events of September 11 can be handled in a manner 

similar to other belligerent events. The risk of war and its effects on the oil industry have 

been a part of the relationship between insurers and the oil industry for decades. Thus, 

insuring the oil industry against terrorist attacks and their potential impacts on the industry 

are, if not standard operating procedures, then at least within the bounds of previously 

available protections (Ahmad 2001). 

Employees of the oil industry are clearly stakeholders in the industry. Their security has been 

one of the most immediately raised concerns following the terrorist attacks. This issue was 

discussed above from the perspective of impacts on oil industry operations and related 

changing expectations. What is not clear yet, is whether heightened awareness of security 

issues in the oil and gas industry will have an effect on industry recruitment at a time when 

there is a labor shortage. 

Local communities where the oil industry operates have important stakes in the industry. As 

a source of direct employment, an engine of economic development, or a generator of 

environmental impacts, the oil industry can play an important role in the life of local 

communities. The terrorist attacks have had operational impacts on the industry that affect 

local communities and were discussed above under the industry’s response. As discussed 

below in Section 4, physical barriers have been added to some facilities, which serve to 

separate the facilities from the community. The terrorist attacks, however, have so far had 

little bearing on the basic economic, environmental, or social relationship between the oil 

industry and local communities where they already operate. 
Globalization B-17

3.0 GLOBALIZATION

3.1 Globalization Defined 

In The Lexus and the Olive Tree, Thomas Friedman argues that globalization is the 

phenomenon that succeeded and replaced the Cold War as the global organizing system at the 

end of the twentieth century. Unlike the Cold War, globalization is defined as a dynamic 

system that tends to integrate corporations, markets, nations, and technologies. Free-market 

capitalism is the fundamental driving force. The process of globalization tends to spread freemarket capitalism into formerly closed economies, opening them to the private sector and 

reducing the role of government as regulator of national economies and individual companies 

(Friedman 1999). 

The growing importance of globalization and the interdependence among countries that it 

encourages can be seen in what did not happen after September 11. One, oil prices 

experienced a very short-term volatility, but soon began to fall. They did not rise 

precipitously as a response to economic panic. Rather, they began to decrease as global 

economic activity slowed even further. Realizing the importance of global economic growth 

and health, OPEC tried to maintain adequate supplies and moderate prices. Two, 

international trade negotiations did not falter either as a response to terrorism or in the face of 

antiglobalist protests (Tippee 2002). 

As a dynamic system, globalization is responsive to events such as the terrorist attacks of 

September 11. When particular events have sufficient force they can create repercussions that 

are felt throughout this globalization system. 

Globalization tends to link the interests of the private sector and government. While this is by 

no means a new relationship, globalization tends to accelerate and accentuate this intertwining 

of interests. The lines between the roles of government and the private sector become more 

blurred. 

Globalization is not a universally embraced phenomenon; witness the backlash of protests that 

accompany meetings of the World Trade Organization, the World Bank, and the International 

Monetary Fund and the attacks on September 11. Although the oil industry has a long history 

of working globally, globalization has altered oil industry behavior and the industry continues 

to adjust and respond to the dynamics of the globalization. The response is an evolutionary 

process that started before September 11. However, the events of September 11 underscore 

some of the challenges facing the industry related to globalization. 

3.2 The World of Oil is Changing 

The U.S. government’s response to the September 11 attacks included a call for a global 

united front against terrorism4

. This was followed by a major military campaign against Al 

Qaeda and Taliban forces in Afghanistan. These two actions had ramifications within and 

 

4

 In other actions, in late 2001 the U.S. called for United Nations weapons inspectors to return to Iraq to 

determine whether it was building weapons of mass destruction. Iraq initially rejected the request. 
Globalization B-18

among the oil producing countries of the world and their relationships with the U.S. As a 

result, the world of oil is changing in the following ways: 

• Greater governmental and corporate interest in countries that represent emerging sources 

of oil. 

• Increased capital flows to the Stans, West Africa, and other frontier areas. 

• Loosening of established strictures on Iran and Libya. 

• Continuing and increased emphasis on opening closed country economies to globalization. 

• Reinforcing of the integration of public and private parties in the global economy. 

The military effort against Al Qaeda and Taliban forces in Afghanistan sparked a much closer 

military relationship between the U.S. and several new nations along the northern Afghan 

border. There was also a general warming of relations between the U.S. and these and other 

new countries that were formerly a part of the Soviet Union. Among these countries are 

several with significant oil and natural gas resources. 

These countries (often termed the “Stans”) are not strangers to the global oil companies. 

Indeed, the break up of the Soviet Union created opportunities beginning in the early 1990’s 

for western oil companies to seek oil and gas deals. Since September 11, however, Western 

interest (e.g., from the U.S. and other national governments and from international lending 

agencies like the World Bank) in these countries has intensified (Andrews 2002). Indeed, 

global oil companies reportedly are ready to invest up to $200 billion in Kazakhstan over the 

next 5 to 10 years (Brauer 2002). Since the terrorist attacks of September 11, U.S. 

government aid to these countries will reportedly increase by 50 percent to over $800 million 

annually (Starobin 2002). 

Part of this interest is in the development of oil sources that are alternatives to the Middle 

East. In concert with this heightened interest, at least one of the Stans—Kazakhstan—has 

expressed an interest in becoming a major force in global oil trade. Kazakhstan sees oil as a 

means of generating income and wealth and pulling itself out of poverty5

 (Brauer 2002, 

Starobin 2002). 

In Africa, the aftermath of September 11 and the war on terrorism has underscored the 

strategic value of that continent’s oil resources. This is especially true for West Africa, closer 

to the U.S. than the Middle East and considered by some to be the most exciting oil frontier in 

the world. Investment in West African exploration and production is expected to increase 

sharply in the next few years, quintupling to $10 billion by 2005 from current levels. Within 

a decade capital flows to West Africa could exceed those to the Gulf of Mexico and the North 

Sea (Staff 2002a, Crawley 2002). 

 

5

 Income levels in Central Asian countries range from about $200 in Tajikisatan to $600 in Uzbekistan to $1200 

in Krygyzstan (Andrews 2002). 
Globalization B-19

Even within the context of Middle Eastern oil, the events of September 11 may have 

reshuffled international relationships. For years, Iran has been on the outs with the U.S. and 

other governments and has been the focus of restrictive economic policies. As an alternative 

to other major Middle Eastern oil sources and a neighbor of Afghanistan, however, Iran has 

clear economic and political benefits that could lead to more engagement with the West and 

global oil companies (Banerjee 2001). Indeed, within a month of September 11, high level 

European Union and British officials visited Iran. This was the first visit to Iran by a British 

foreign secretary since 1979 (Staff 2001e). In response, Iran is reportedly eager for European 

and Asian investments that could modernize its oil and gas industry. Even Libya, long an 

outcast from U.S. and western economies, has benefited from the shifting political alliances of 

the post-September 11 world. Sanctions imposed years ago on trade with Libya have been 

suspended, reopening ties to that country’s oil (Townsend 2002). These shifts in relations, 

however, have also been seen as the kind of exaggeration in geopolitics that is characteristic 

of a major crisis (Staff 2001e). 

Also within the traditional sources of oil in the Middle East, shifting geopolitics have 

underscored interests in economic diversification that depend on investment by foreign oil 

companies and other parties. Longstanding prohibitions against foreign investment in Saudi 

Arabia and other countries had begun to crumble before September 11, but subsequent events 

appear to have increased the momentum for a number of economic diversification projects in 

Saudi Arabia, Kuwait, and Qatar that have been implemented only with outside investments. 

Consistent with these changes in investment opportunities, new fiscal, legal, and regulatory 

provisions in Saudi Arabia have significantly improved the investment climate. Overall, 

September 11 has helped to open up the Middle East for foreign investments, with Europe and 

Asia the most eager to pursue new opportunities while the interest of the U.S. may be waning. 

While the impact of September 11 appears to be measurable, long-term interest will depend 

on the success or failure of one or two key projects that have depended on foreign investment 

(Townsend 2002). 

While September 11 and its aftermath have enhanced oil-based economic opportunities for 

some countries, they have also increased strains in some countries which have long been 

mainstays of the global oil market. The call for governments to announce their opposition to 

terrorism, particularly that sponsored by the Al Qaeda network, increased internal pressures in 

certain Muslim countries or at least gave substantially greater publicity to those internal 

pressures. The essence of these pressures is the array of political, social, and/or cultural 

conflicts between the rulers of a number of Muslim countries and the general populace. 

These countries are often plagued with high levels of unemployment for young men, little 

prospect of future employment, increasingly fundamental religious outlooks among the 

general populace which tends to have a strong anti-Western bias, and other contentious issues 

(Staff 2001i). The participation of these countries in the global economy can hold the 

promise of economic development and the mitigation of internal economic problems, but also 

further integrates these countries into globalization and its Western-oriented values 

(MacFarquhar 2002). 

Despite the countervailing forces in the oil world, the impact of September 11 will likely be in 

the direction of increased globalization of the oil and gas industry. This would mean a further 

integration of traditional oil powers like Saudi Arabia into the global economy as well as the 
Globalization B-20

introduction of additional countries from the Stans to certain developing African nations to 

globalization. To the extent that this happens, the GOM will face competition for the 

investment dollars and other resources of the oil and gas industry from additional parts of the 

world. 

Some oil and gas companies operate solely within the GOM and, to some extent, are not as 

directly affected by these global shifts. Nevertheless, many key players in the GOM operate 

in one or many other areas of the world. For these companies, the issue is whether to invest 

resources in the GOM or elsewhere. September 11 will in all likelihood create more 

“elsewheres” for these companies to consider, potentially increasing competition for the 

GOM. 

3.3 Meeting the Triple Bottom Line

Social issues and corporate strategy, traditionally treated separately, are increasingly coming 

together as a result of globalization, because globalization creates the need for responsibility. 

The role of the foreign oil and gas industry in the economies of the less developed countries in 

which they operate and those countries’ opportunities for economic development are under 

increasing scrutiny by the companies, shareholders, non-governmental organizations (NGOs), 

financial institutions such as the World Bank, and the host countries. In brief, the argument is 

that trade and globalization are critical to the reduction of poverty and the maintenance of 

general stability in such countries. Further, oil and gas are central to economic growth and 

the economic transformation of those parts of the Third World with significant oil and gas 

resources. Thus, it behooves oil companies to understand more clearly the role that oil and 

gas have played and could play in these countries’ development (Tippee 2002). As discussed 

below, multinational oil companies led by the major companies are: 

• Assuming greater responsibility (although sometimes reluctantly) and see opportunities to 

participate in economic development in less developed countries where they operate. 

• More accepting of their global corporate citizenship including, within limits, 

responsibilities to clarify their relations with governments in the developing world. 

Business success, in general, and for the oil industry specifically, is increasingly measured by 

the triple bottom line − performance in environmental protection and community affairs, as 

well as economic performance. This phenomenon is not a direct result of the events of 

September 11, but those events underscore the industry’s struggle to address the economic 

growth, environmental protection, and social issues. Embodied in the triple bottom line are 

the concepts of sustainable development and corporate social responsibility, examples of 

other dynamics reshaping the oil industry. 

3.3.1 Intertwined Concepts: Sustainable Development and Corporate Social 

Responsibility 

Sustainable development was first defined in 1987 in the United Nations-published report Our 

Common Future, also known as the Brundtland Report, as “development which meets the 

needs of the present without compromising the ability of future generations to meet their 
Globalization B-21

needs” (Brundtland 1987). The report also highlights sustainable development’s three 

fundamental components − environmental protection, economic growth, and social equity −

and the need to work toward economic development that can be sustained without depleting 

natural resources or damaging the environment. The 1992 Earth Summit, during the United 

Nations Conference on Environment and Development in Rio de Janeiro, Brazil, stressed the 

global nature of the environment and that long term economic progress must be linked to 

environmental protection. The Rio Earth Summit resulted in the adoption of Agenda 21, a 

wide ranging action plan to achieve sustainable development worldwide. A progress report 

on Agenda 21 is expected at the United Nations-sponsored World Summit on Sustainable 

Development, Johannesburg Summit 2002 (August 26-September 4). 

There is no single definition of Corporate Social Responsibility (CSR) but it is “about 

companies determining their social values, or what they stand for, and about integrating social 

concerns into their business strategy” (Staff 2001b). It is a dynamic concept that is evolving. 

CSR implies deeper and wider involvement of companies in the societies where they operate. 

This means companies can gain insights into host countries and become more politically and 

culturally sensitive and better equipped to manage the associated risks (Fjell 2000). 

Companies are increasingly incorporating social responsibility programs into their operations, 

both because they make for good community relations and because they make business sense. 

If CSR is not fully aligned with other components of business strategy, it becomes 

philanthropy. But, integrating CSR into business strategy is easier said than done (Fjell 

2000). Companies are being encouraged to combine CSR and business strategy from 

multilateral lending organization such as the World Bank, NGOs, and shareholders.6

 

CSR is also one aspect of managing reputational risk. Companies, all types of companies not 

just oil companies, are acutely aware these days with the examples of Enron, Arthur 

Andersen, WorldCom and others, of how fragile company reputations can be and that 

consumer and shareholder trust and the company’s favorable reputation can evaporate 

overnight. Gaps between what companies say about CSR and what they do are quickly 

noticed in our interconnected world. Political and economic developments that once went 

largely unnoticed can now be flashed around the world immediately with the internet and 

influence public perceptions of international companies and industries, including the oil 

industry. Trust and reputation are created with results and help sustain commercial success 

(Brinded 2002, Fjell 2000, Cheney 2000). Many companies make a concerted effort to 

communicate their efforts beyond financial performance through their websites, in their 

annual reports, and in special reports. This move from simply doing to demonstrating what is 

done is also about trust and reputation. A good reputation can benefit a company – with 

investors and by attracting a good workforce with like values (Fjell 2000). The values tie the 

company together top to bottom and across geographic areas. One of the many challenges for 

oil companies operating in countries with different social and political systems is to respect 

 

6

 There are organizations that monitor corporate governance and social responsibility issues for those interested 

in socially responsible investing. The Interfaith Center for Corporate Responsibility, for example, sponsors 

shareholder resolutions on major social and environmental issues such as human rights and emissions of 

greenhouse gases. Companies are targeted for specific issues. These resolutions, while not often successful in 

passing, gain media attention and send a strong message to management. 
Globalization B-22

the local culture and appreciate its history while preserving the companies’ core values 

(Browne 2001). 

CSR programs are typically structured to meet the needs of the countries in which the 

companies are working. In developing countries, they may address basic infrastructure or 

health needs. In essence, these programs fund activities associated with government, and 

whether the companies like it or acknowledge it, the programs fund development and can act 

as catalysts of change. The programs are sometimes run by the companies or sometimes 

funded through international organization such as the World Health Organization or UNICEF. 

So between sustainable development and CSR, international oil companies are wrestling with 

a host of issues besides the technical challenges of extracting oil. There is increasing interest 

within the industry to standardize programs with the adoption of best practice standards (Alba 

2001). 

There is not general consensus yet on how to meet the triple bottom line, i.e., tie profits to the 

principles of sustainability and responsibility. Oil companies differ in their willingness to 

acknowledge responsibility for sustainability and community affairs and to act accordingly 

(Fjell 2000). The oil industry in general is addressing the intertwined issues of sustainable 

development and CSR in a number of forums. Given that meeting themes and agendas are set 

months in advance, the focus of some recent or planned forums on sustainable development 

and CSR illustrates the timeliness and evolving nature of the issues for the industry. 

Some oil companies are members of the World Business Council for Sustainable 

Development (WBCSD), a coalition of international companies from 30 countries and 20 

industrial sectors with the shared commitment to sustainable development through economic 

growth, ecological balance, and social progress. The current WBCSD Chair is Philip Watt, 

Chairman of the Committee of Managing Directors for the Royal Dutch/Shell Group. 

The issues are also being addressed in oil industry-sponsored forums. The International 

Petroleum Industry Environmental Conservation Association’s (IPIECA) Strategic Issues 

Assessment Forum sponsored a Workshop on Corporate Responsibility in 2000. The 

participants in this information sharing session acknowledged that the oil industry needs to 

further address the issues of corporate responsibility and is being pressured to do so by nongovernmental organizations, government, and the media (IPIECA 2000). 

The theme of the 18th World Energy Council (WEC) Congress held in October 2001 in 

Buenos Aires was the globalization of energy and its impacts on developing nations, “Energy 

Markets: The Challenges of the New Millennium.” The Congress, held every 3 years, was 

the first in the new century and the first held in Latin America. The meeting message was 

“sound energy development is the key to global economic sustainability” (Williams 2001). A 

key sub-theme focused on the increasingly important role of social responsibility programs in 

energy industry operations. In keeping with the globalization theme, an official from the 

Philippines energy sector was named chairman of the WEC, the first from a developing 

nation. 

The World Petroleum Congress (WPC) holds its meeting every 2 years. The theme for the 

16th WPC held in Calgary in 2000 was “Petroleum for Global Development: Networking 
Globalization B-23

People, Business, and Technology to Create Value.” One session was devoted to the 

challenges of achieving international consensus on social responsibility in an international 

market economy. 

The discussions of sustainable development and corporate social responsibility will continue 

at the 17th World Petroleum Congress in 2002 whose theme is “The Petroleum Industry: 

Excellence and Responsibility in Serving Society.” 

3.3.2 Components of Corporate Social Responsibility 

There are a number of key themes within CSR, and four of these themes are discussed below: 

• Human rights and security. By the nature of where oil and gas reserves are found, oil and 

gas companies must work in a variety of settings, including isolated and remote areas and 

in developing countries. Here two forces, human rights and security, interface. Some 

companies have been accused of complicity with security forces accused of human rights 

violations (Bray 1999). To help address this, the U.S. and United Kingdom governments 

along with seven oil and mining companies and several human rights NGOs conducted a 

year-long dialogue which resulted in the release in December 2000 of The Voluntary 

Principles on Security and Human Rights (U.S. Department of State 2001). The voluntary 

principles or best practices fall into three categories: risk assessment (i.e., risks within a 

company’s operating environment), relations with public security, and relations with 

private security. Security arrangements with host governments are encouraged to promote 

the principles of the Universal Declaration of Human Rights and the International Labour 

Organization’s Declaration of Fundamental Principles and Rights at Work. Private 

security arrangements should be consistent with law enforcement principles such as the 

U.N. Principles on the Use of Force and Firearms by Law Enforcement Officials and the 

U.N. Code of Conduct for Law Enforcement Officials.

• Economic development. Economic development attempts to reduce poverty and improve 

the quality of life through job creation, wages, investment opportunities, and training. 

Foreign investment for financing economic development in developing countries comes 

from official development assistance and private capital. The recent trend has been a 

decline in official aid and an increase in private investment (Staff 2001b). Direct foreign 

investment is part of globalization in which the world becomes more integrated. Oil 

revenues are a major source of income in many developing countries and should be a 

source of development funding and, through development, a way to reduce poverty. 

• Business conduct. Business conduct ties CSR to the company’s senior management and 

Board of Directors who are responsible for overall business strategy, and policies and 

procedures. The significance of corporate governance to some companies can be seen in 

the appointment of a director of business ethics in October 2001 at one major oil 

company. The company expects the highest ethical standards in areas such as business 

relations, human rights, and respect of the law (Browne 2001). 

One of the issues in business conduct is corruption, often referred to as transparency. 

Corruption began to be seen as a threat to the environment, sustainable development, and 
Globalization B-24

human rights and as an economic issue negatively affecting economic development efforts 

in the 1990’s. It garners media and shareholder attention. Oil companies pay 

significantly to explore and produce oil and gas. In the United States, leasing and royalty 

payments are public record and the transactions are transparent. 

In some other areas of the world, there is no public accounting of oil-related payments. 

These transactions are referred to as opaque. In oil producing countries with established 

track records of failed development, inadequate legal systems and deficient infrastructure, 

corruption is thought to have diverted oil revenues from supporting human and economic 

development. There is some thought that oil revenue spent in support of economic 

development would help temper the criticism of globalization. Greater transparency 

would, at a minimum, demonstrate what oil companies paid and would encourage 

governments to be more accountable for the management of these monies (Swarns 2002). 

The transparency issue raises a dilemma for oil companies: make their royalty and license 

payments public when host governments do not or respect the wishes of host governments 

when they do not choose to make oil payments public. In some cases, disclosures would 

violate contracts with host countries, break its laws, and cause a loss of concession 

(Aalund 2002). Whether payments are disclosed or not, the transparency issue is part of 

sustainable development and CSR. 

A coalition of more than 30 NGOs has teamed with international financier George Soros 

to launch a “Publish What You Pay” appeal to transnational oil and mining companies. 

The NGOs include such diverse groups as Amnesty International, Friends of the Earth, 

Global Witness, OxFam, Save the Children, and Transparency International. Under their 

proposal, full disclosure of net taxes, fees, royalties, and other payments made to 

governments would be a precondition for oil, gas, and mining companies to be listed on 

international stock exchanges and financial markets. The information requested is the 

same basic information disclosed in many developed countries (Suri, 2002). 

• Environment. Energy is essential to economic development and the eradication of 

poverty. One of the challenges is to develop energy in an environmentally responsible 

way. In the last 30 years, a number of high profile environmental events (e.g., Santa 

Barbara Channel oil spill, Three Mile Island, Exxon Valdez), the creation of 

environmental protection institutions (e.g., U.S. Environmental Protection Agency, and 

international meetings (e.g., U.N. Conference of Environment and Development) have 

shaped environmental issues. National and international mechanisms regulate 

environmental protection. The environmental challenge has changed in two ways for 

companies. First, the environment, which was once a bottom line concern, is now an 

aspect of corporate performance. Second, recently there has been recognition that poverty 

in developing countries and environmental degradation are linked. So, environmental 

issues are merging with issues of poverty alleviation and social equity. 

One of the many challenges facing the oil and gas industry is how to meet the demand for 

affordable oil and gas, while protecting the environment and meeting societal needs. Business 

success in the developed and developing world is linked to strong performance in financial, 

markets, environmental stewardship, and community affairs (Gossen and Riemer 2001). 
Globalization B-25

3.4 Other Globalization-Related Challenges 

Globalization provides at least three other challenges to oil and gas companies working 

outside their home country. 

• Diversity. Globalization brings oil and gas companies into different parts of the world and 

into different cultures and working environments. Companies are increasingly 

recognizing the benefits of diversity in the workforce and implementing strategies to 

achieve it. People are the backbone of companies. While technology is credited with 

many of the advances of the oil and gas industry, people develop the technology and make 

it work. So having a talented workforce is essential for a successful and sustained 

business (Moody-Stuart 2001). There is a competitive market for oil industry workers. 

People who have appropriate cross-cultural skills in addition to technical skills are critical 

to getting the job done in other parts of the world. 

Building a diverse workforce is a challenge that involves addressing cross cutting issues 

of gender, culture, and education, at a minimum. Historically the industry’s workforce 

was predominantly male, white, and Anglo Saxen. The industry requires professionals 

with university degrees, and access to higher education is not universal throughout the 

world. The science and technology based disciplines used in the industry traditionally 

have not attracted large numbers of women. Industry management has been 

predominantly male and Anglo Saxen and has recruited and promoted like people 

(Browne 2002). 

• Getting the deal done. Globalization underscores the need for companies working in 

multiple countries to understand the distinctive characteristics of the countries and 

communities in which they work. That understanding contributes to being able to get the 

deal done. Getting the deal done requires a host of skills, including the ability to: 

understand each part of the world in which a company works and to establish working 

relationships; listen and find terms for each party at the table; and develop and maintain 

trust (respect) (Guther 2002, Brinded 2002, Sprow 2002). Some companies partner with 

indigenous companies. Some companies staff with local personnel. It has been noted that 

the small size of independents gives them an advantage compared to the majors in the 

developing world. With the independents, the host government is working with the 

people who run the company, unlike the majors where the decision makers are less visible 

(Dittrick 2002a). 

• Getting the Project Done. Globalization underscores operational issues related to getting a 

project completed. These include management, technology, security of people and assets, 

respect for local communities (Longwell 2001, Sprow 2002). These are issues that apply 

to projects no matter where they are located geographically. However, projects that are 

part of the globalization process may have special needs based on location, number and 

type of partners, personnel or other factors. Projects involve all types of management: 

teams, contracts, outcomes, and knowledge. Technology, which plays a key role in 

globalization, is used in projects in several different ways. It is needed to extract the oil or 

gas. It is also needed and used by the project staff, which can be geographically distant, to 
Globalization B-26

stay connected. Security issues are heightened in many of the environments in which oil 

and gas exploration and development are now taking place. (Also see Section 4.3.) 
Risk Management B-27

4.0 RISK MANAGEMENT

4.1 Risk Management Redefined and Priorities Reshuffled

If asked, most people would say that the goal of the oil and gas industry is to make profits, 

thus the overriding activity of oil and gas companies is financial management, assuring that 

revenues exceed costs. An equally strong argument could be made that the core activity of oil 

and gas companies is risk management. Risk involves not only finances, but a host of other 

factors from the ability of technology to increase well yield to the probability that a barrel of 

oil loaded onto a ship in the Persian Gulf will safely reach its destination. 

For one oil company corporate economist, risk management has superceded economic 

forecasting. Economic conditions can be difficult to predict. Risks, on the other hand, can be 

defined and plans to manage risks can be developed. Risks here include not only financial 

conditions such as currency exchange rates, but also more qualitative variables such as 

political risk in developing countries. The assessment of these risks is not an academic 

exercise. Basic business decisions—credit limits on specific deals, go/no go decisions on 

investments in new exploration and production projects—are routinely based on country 

specific risk analysis (Painter 1999). 

There is no consensus on the ultimate impact of September 11 on risk management in the oil 

and gas industry. One view is that nothing has changed; at the other extreme, some view 

September 11 as the beginning of a new and fundamentally different world for oil and gas. 

The no change argument is based on the conflict faced throughout the 120-year history of the 

oil and gas industry (Dahan 2002). As a result, terrorism is nothing new to the industry (Staff 

2001c). Indeed, the history of the Middle East is a long saga of local distrust of the West and 

all its agents, oil and gas companies being particularly salient examples of the latter (Staff 

2001i). One indicator of this lack of change in the post-September 11 world is the fact that 

reportedly few oil companies have added significantly to their insurance coverage since that 

date—political risk is a basic fact of life for these companies (Ahmad 2001). 

Others argue that September 11 has made and will continue to make a difference in the oil and 

gas industry. While analysts have pointed out that crises always exaggerate the geopolitics of 

oil (Staff 2001e), the head of Royal Dutch/Shell has asserted that the terrorist attacks will 

affect not only oil’s geopolitics, but also the entire issue of energy security (Staff 2002c). 

While the industry has historically dealt with terrorism, the issues surrounding Islamic 

fundamentalism, including the political strife flowing from the tension between 

fundamentalists and more moderate reformers in many Muslim countries, will need to be 

added to the risks that oil companies manage (Staff 2001c). 

This shift in risk assessment can be seen in analyses of the insurance industry which estimate 

that the events of September 11 created claims worth $10 billion that erased 8 to 10 percent of 

the insurance market’s capital. As a result, insurance companies will be more restrictive in 

providing coverage in the future. There will likely be a “flight to quality” that penalizes 

greater risks and an increase in the cost of that coverage. Politically susceptible regions—the 

kinds of areas where oil and gas companies often operate—may lack coverage. One sign of 
Risk Management B-28

insurance companies’ reaction to this greater risk is the reported addition of a $0.20 per barrel 

war insurance premium to cargo loaded at Persian Gulf ports (Ahmad 2001). 

This sense of reordered risks also includes oil exporting countries. For many OPEC 

countries, September 11 underscored the risks associated with faltering economies and high 

unemployment among young men—a combination ripe for exploitation by fundamentalists 

(Townsend 2002). For these countries maintaining domestic living standards is crucial to 

maintaining social stability (Staff 2001e). One response is the recent invitation to oil 

companies to invest in projects designed to diversify the economies of Persian Gulf countries 

and provide massive employment opportunities. This invitation represents an overturning of 

policies banning foreign investments in these countries that have stood for as long as 70 years 

(Townsend 2002). 

Among the many responses to September 11 was a call for a better, more integrated approach 

to risk management and contingency planning. This was seen as a responsibility of both 

government and the private sector. As one commentator put it, in the past the concern was 

that a single house would burn down. Now the concern is that the whole street will be 

destroyed. Moreover, the ability of individuals to disrupt company operations or even 

national level systems will likely lead to a more uncertain and chaotic future (Aldred 2002). 

On balance there seems to be a sense that risk management needs to be reassessed in light of 

the events of September 11. For oil companies, this reassessment is seen in part as a need to 

reconsider their effort to balance traditional issues in the Middle East (e.g., maintaining access 

to oil, coping with popular sentiment that opposes the West and global oil companies) with 

longstanding ties to Western democracies (Snow 2001). One upshot of this reassessment is a 

renewed sense of urgency for the task of understanding the proper role of oil and gas 

companies in the developing world. In countries where they operate, companies have even 

more reason to understand why development fails to occur or to flourish, the role of 

corruption in government, and the debilitating effects of inadequate legal systems and 

deficient infrastructure and to ponder how best to respond to these difficulties (Tippee 2002). 

This is all the more important as companies see their future sources of oil in countries that are 

less politically stable and, for that and other reasons, more challenging (Longwell 2001). For 

the U.S., September 11 has redefined energy security as a national priority (Russell 2001) and 

redefined energy supply as both an energy security and national security issue (Russell 2002). 

Realizing the limits on domestic sources, the U.S. sees emerging sources of supply such as 

Kazakhstan as strategically important means to reduce dependence on the volatile Middle 

East (Starobin 2002). 

Thus, the events of September 11 appear to have reordered risk management priorities. For 

oil companies, the issues of geopolitics and energy security have increased significance. The 

particular threats posed by terrorism in the age of Al Qaeda are a new and important variation 

on the historic theme of terrorism. Whatever limits they face, leading global oil companies 

are also more aware that they have a responsibility to act as a force for change in developing 

countries. They cannot ignore those local concerns that give rise to unstable socioeconomic 

and political conditions. With the U.S. and other Western countries, oil companies have 

placed and will continue to place greater emphasis on diversifying sources of oil and gas, 

trying to reduce their dependence on any given area, particularly the Middle East, and thereby 
Risk Management B-29

increase energy security. While some will argue that none of these issues are new, the 

preponderance of evidence to date indicates that since September 11 all have gained 

significance in the overall process of managing risk, taking greater priority over other ongoing 

risk factors. 

4.2 Strategic Risk Management

While the risks receiving greatest attention in the immediate aftermath of the terrorist attacks 

were operational, the safety of employees and workers and the security of facilities, much of 

risk management tends to concentrate on long-term issues of demand and supply and the core 

mission of companies. As such it is concerned with the future and what fundamental forces 

drive that future. These drivers tend to be factors that affect a broad range of oil company 

business (or any other business) activities such as geopolitics and technology (Pratt 1999). 

4.2.1 Thinking About the Future

How to sustain and grow a competitive and profitable enterprise is a challenge. For oil 

companies that challenge encompasses meeting people’s energy needs as well as meeting 

customers, vendors, partners, and shareholder needs. The events of September 11 changed 

the geopolitics of oil and thinking on energy security (see Sections 3.2 and 4.1). These shifts, 

along with other uncertainties such as oil prices, the state of the economy, and globalization, 

affect corporate strategies which determine choices for the future; choices that affect 

investments, employees, customers, vendors, partners, shareholders, and the communities in 

which companies operate. 

To develop corporate strategies, one must think about the future. Scenario planning is one 

approach to thinking about alternative futures. It is a management tool that relies on 

imagining the future rather than predicting it or extrapolating from the past. Scenarios are not 

projections; “rather, they are coherent and credible alternative stories about the future, 

incorporating a spectrum of ideas and focusing on issues that are important for our business 

decisions today” (Davis 2002). They focus “less on predicting outcomes and more on 

understanding the forces that would eventually compel an outcome; less on figures and more 

on insights” (Wack 1985b). They “effectively organize a variety of seemingly unrelated 

economic, technological, competitive, political, and societal information and translate it into a 

framework for judgment – in a way that no model could do” (Wack 1985a). Scenario 

planning has its roots in military planning, but was further developed by Royal Dutch/Shell in 

the late 1960’s and early1970’s, at a time when management became fixated with the next 

quarter as opposed to the next decade. It is sometimes referred to as the “Shell method” for 

thinking about the future. It was Shell’s scenario planning in the 1970’s that is credited with 

preparing the company to react quickly to the oil crisis and rise from last of the seven majors 

operating in the United States before the oil crisis to second within 10 years (Pratt 1999). 

The following are two sets of current examples of oil and gas scenarios, neither of which 

address Islamic fundamentalism blocking the spread of western capitalism and democracy, 

but both of which are viewed as relevant by their developers in the post-September 11 

environment. The first was prepared by Shell International; the second by the Global Energy 

Practice of Arthur D. Little (ADL). 
Risk Management B-30

4.2.1.1 Shell International: People and Connections

Shell International prepares scenarios every 3 years. The most recent, People and 

Connections, was completed in mid-2001. It considers how people with different 

perspectives, values, and motivations may react to the forces of globalization, liberalization, 

and technological advances. The scenarios focus on the interplay of four interconnected 

geographies of connection: the diverse circles of association, influence, and loyalty (local and 

global) with which people find identity, the changing role of nations, the interplay between 

deeply-rooted cultural values of the heartland of many regions with outward-oriented cities 

inhabited by people with often different lifestyles and values, and the growing appreciation of 

shared interdependence of all on the earth’s systems (Shell International 2002). There are two 

scenarios in People and Connections: Business Class and Prism. 

The Business Class scenario describes 

a world focused on efficiency and individual choice – driven by an 

interconnected global elite influenced by US values and ideas. Power diffuses 

from states and people pursue the ‘politics of protest’ – particularly against 

multinationals. Businesses have to satisfy many different interests – from 

governments to NGOs, local communities to international institutions. 

Integration brings economic volatility and companies require superior risk 

management – as well as relentless operational improvement and innovation. 

The key is to focus on the ‘core’ – what matters for value creation and 

competitive differentiation (Watts 2002). 

The Prism scenario describes 

a future shaped not by what we have in common but by the interplay of our 

differences. People find their values in their roots. They are interested in 

economic well-being and growth – but also social cohesion, religious faith and 

national pride. Countries find their own development paths – to suit their 

individual economic, political, and social circumstances. 

For businesses being ‘local’ is what matters. Multinationals must compete in 

many different environments – each with their own values, rules, and 

requirements. Access depends on relationships and reputation – as well as the 

ability to deliver global best practice and cutting-edge technologies in a way 

that suits local conditions (Watts 2002). 

The scenarios offer alternative energy futures in which the power of globalization, 

liberalization, and technology remains significant, but where the control by regulations, 

restraints, and rules differ. 

In ‘The Great Game of Gas’ traders manage risks in liberalized energy markets. 

Low prices limit oil investment while consumer priorities, business 

opportunities, fuel cells and emissions trading drive rapid gas growth. 
Risk Management B-31

Companies prosper by acquiring strategic resources, developing infrastructure, 

supplying energy services and introducing disruptive technologies. 

‘The Long Oil Game’ takes place in a security driven world – wary of 

liberalized markets and price volatility. Government promote efficiency, 

environmental standards and technological solutions. Security concerns limit 

cross-border gas infrastructure. Companies prosper by gaining access to 

attractive markets for long term investment. Renewables break through – but 

low-price oil remains the dominant fuel until 2040 (Watts 2002). 

Although the scenarios were completed in mid-2001, the public summary published in 2002 

includes a section that uses the scenarios to explain the implications of September 11 and how 

the U.S. response will further test the fragile networks of the globalized world. 

In Business Class, the US pulls together a global coalition against terrorism, 

allying itself with the interconnected global elites from other societies, who 

share its beliefs and empathize with its concerns. In a number of developing 

countries, however, this successful coalition-building widens the gap between 

the connected edges, instinctively drawn towards supporting the US, and their 

heartlands, whose people have other, more immediate concerns, or else even 

relish the sight of an overweening US hegemon being ‘taken down a peg or 

two.’ ...The US continues as the only global superpower. Indeed, as has 

happened before in US history, crisis serves to strengthen American society and 

to involve it more constructively abroad. ...Issues such as terrorism are really 

beyond the competence of individual nation-states to handle; and over the long 

run the US recognizes that it is in its own interests to respect the sensitivities of 

other states, and to pursue its anti-terrorism agenda through effective global 

institutions and regimes, which it seeks to reform... 

Prism is a story of modernization in which people look beyond efficiency and 

global homogeneity to their roots, their values, and their families. As the 

conventional view of globalization, including the growth of a universal 

cosmopolitan market, is shattered, old forces of religion, ethnicity, and 

territoriality revive. As Prism makes clear, these forces can act to strengthen 

modernization by grounding it within a world of ‘multiple modernities,’ 

characterized by diverse cultural values and practices. But there is equally a 

dark side, in which diversity feeds prejudice against ‘the other,’ giving rise to a 

nationalist backlash...The war against terrorism leads western governments to 

introduce new security measures and even tighter controls over the movement 

of people. These measures and controls, including surveillance by the state, are 

made easier and more pervasive by the technology of globalization... In a world 

of ‘multiple modernities,’ different countries will modernize successfully in 

different ways. In retrospect, the events of September 2001 will be seen to have 

triggered off a huge impetus leading to a more diverse pattern of governance 

around the world...The twentieth-century’s obsession with US success is 

replaced by a twenty-first century awareness that many different forms of 

modernity are possible, and can co-exist ... (Shell International 2002). 
Risk Management B-32

At the end of People and Connections, the reader is asked to consider what he/she or 

his/her organization would do differently in each of the scenarios and then to determine 

what will actually be done differently. 

4.2.1.2 Recurrent Crises or Globalization

The Arthur D. Little oil industry scenarios were developed before September 11, but are still 

viewed by the company as being valid, although there have been shifts in the probabilities 

associated with each scenario. ADL identified the following as potential scenario drivers: 

geopolitics, sustainable development and environmentalism, energy technologies, other 

technologies, oil price formation, industry structure, and intellectual capital. They developed 

the following four scenarios by combining plausible outcomes for each of the drivers and 

using two key variables – economic potential (constrained to expansive) and degree of 

geopolitical cooperation (local optimization to global collaboration): 

 Orchestrated World: This scenario portrays global collaboration combined 

 with a belief in limits to economic growth. It echoes a widely held European 

view that a strong government and webs of treaties are needed to avoid recurrent 

crises, to address the inequalities created by rampant capitalism, and to promote 

sustainable development. Extremism is kept in check by more even distribution 

of wealth and economic opportunity through democratic processes and equitable 

treatment under stable laws. Global companies accept their share of responsibility 

for resolving long standing issues. 

 Technology Solutions: This scenario combines global collaboration with an 

expansive view of economic potential. It describes a world in which leapfrog 

energy and communications technologies solve many problems. Poorer nations 

can achieve resource efficient accelerated development through technology, 

alternatives to conventional energy resources are rapidly developed, and 

opportunities in services and business innovation abound. 

 Partial Globalization: A belief in unconstrained development combined with 

local optimization represents many aspects of the world we knew in the 1990’s. 

This scenario reflects rampant capitalism enabled by a pro business agenda and 

rapid technology advances. Despite a rising tide of prosperity (including 

emerging economies), the uneven distribution of economic well-being in this 

scenario makes it unstable over extended periods of time. 

 Recurrent Crises: Constrained economic potential combined with local 

optimization defines a gloomy world of growing conflict in which frequent 

geopolitical crises are likely to disrupt business. Wild oil price cycles result. This 

scenario reflects underlying demographic pressures, the uneven distribution of 

resources, and the failure of governments to address critical issues (Godley, n.d.). 
Risk Management B-33

According to ADL, prior to September 11 the oil industry had assumed the partial 

globalization scenario or something like it would continue. In the post September 11 

world, the oil industry view appears to have shifted to the recurrent crises scenario. It is 

unclear if this is a temporary or permanent shift (Godley, n.d.). 

4.2.2 Partners and Alliances

One of the changes in the industry that occurred after the dramatic decline in oil prices in the 

mid-1980’s was the forging of new cooperative working relationships among firms. These 

strategic partnerships and alliances helped cut costs and share financial risk. In the post 

September 11 era, partners and alliances remain a risk management tool in which financial 

risk is shared. The opportunities for forming strategic partnerships and alliances are 

changing. For companies working in multiple countries, partnering and alliances, particularly 

with local firms, may make it possible to work in different environments. Access to oil and 

gas reserves depends on a variety of factors including relationships and reputation and trust, 

intangibles which have become part of the risk management equation (Watts 2002, Robertson 

2002, Staff 2001d). 

Foreign firms which partner with local firms in developing nations can claim to be making a 

contribution to sustainable development, through local investment, local employment, 

technology transfer, and by building long-term relationships that help protect their significant 

long term investment. It is viewed as good business sense and enlightened self-interest 

(Brinded 2002). (Also see Section 3.3, for a discussion of corporate social responsibility and 

sustainable development.) 

4.3 Operational Risk Management

Operational risk management related to September 11 primarily addresses safety and security. 

On September 11 the immediate concern was the safety of company personnel and the 

security of facilities. In the Gulf of Mexico, helicopter service was shut down because of the 

nationwide federal emergency no-fly order, but vessel traffic was uninterrupted (Fletcher 

2001). Flights resumed on September 13. Publicly available information on the oil industry’s 

response to operational risk management issues in the aftermath of September 11 fall into the 

following categories discussed below: 

• Overview of Security and Safety Issues Raised 

• Information Sharing 

• Offshore Platform Security and the Fishing and Diving Industries 

• Information and Computer Security Technology 

4.3.1 Overview of Security and Safety Issues Raised 

Safety and security are not new issues for the oil industry and, like so many other industries, 

companies and industry organizations have undertaken and continue to undertake activities 

that reassess existing safeguards, fill safety and security gaps, try to anticipate unfulfilled 

needs, and share information. An overview of the types of issues that are being addressed is 

listed below. This is an evolving list. 
Risk Management B-34

• Plans and procedures 

- Hire security firms to conduct risk assessments and evaluate the security of 

specific facilities including offshore platforms (Dittrick 2002b). 

- Establish and follow procedures for verifying the identification and authorization 

of personnel (IADC 2002, Fletcher 2002c, GulfShare 2001). 

- Review, update, or prepare security measures and contingency plans (Dittrick 

2002b, IADC 2002). 

- Consider preparing security impact reviews (similar to an environmental impact 

statement) to assess the security ramifications of key business decisions (Staff 

2001a). 

- Establish security principles for U.S. offshore operations (IADC 2002). 

• Information sharing 

- Update contact and notification lists (OOC 2001). 

- Discuss security-related topics at industry conferences (Fletcher 2002b, Staff 

2001a) 

- Establish ENERGY/ISAC (see Section 4.3.2). 

- Use trade associations as clearinghouses of information for members and to 

coordinate with federal agencies on security issues (Lorenzetti 2001). 

- Form a Gulf Safety Committee to meet periodically to discuss security and antiterrorism issues (Fletcher 2002a, OOC 2001). 

- Use internet for crisis management communication (Wiese and Rasch 2001). 

• Physical security of facilities and equipment 

- Install gates and locks to control access (OOC 2001). 

- Require pre-flight manifests of passengers going offshore and verification by field 

for the need for personnel or cargo (OOC 2001). 

- Screen traffic and cargo entering shore facilities and going offshore (OOC 2001). 

- Hire security firms to conduct due diligence of vendors serving the oil industry 

(Dittrick 2002b). 

• Personnel Identification 

- Deploy oil industry common personnel identification (GulfShare 2001). 

4.3.2 Information Sharing

Two forms of new information sharing mechanisms are discussed below. The first, ENGERY 

ISAC, is industry specific. The second, the Gulf Safety Committee, is Gulf of Mexico 

specific. 

4.3.2.1 ENERGY ISAC

The vulnerability of the energy sector had been recognized prior to September 11. The 

national effort to address the vulnerabilities of critical infrastructure, which includes oil and 

gas, began in July 1996 with the establishment of the President’s Commission on Critical 

Infrastructure Protection. The Commission was tasked to develop a comprehensive national 
Risk Management B-35

strategy to protect critical infrastructures from physical and cyber threats.7 In October 1997, 

the Commission issued a report calling for a national effort to assure the security of the 

United States’ critical infrastructure. In response to the Commission’s recommendation, 

President Clinton issued Presidential Decision Directive 63 in May 1998, which among other 

things, authorized the formation of the National Information Protection Center (NIPC) located 

in the Federal Bureau of Investigation. It is the U.S. government’s focal point for “threat 

assessment, warning, investigation, and response for threats or attacks against our critical 

infrastructures” (NIPC n.d.). It works with federal, state, and local agencies, the private 

sector, and international government agency partners. Presidential Decision Directive 63 also 

encourages the establishment by the private sector of Information Sharing and Analysis 

Centers (ISACs). 

In response to the President’s policy directive, the Secretary of Energy requested the National 

Petroleum Council’s (NPC) “advice on cooperative approaches to protecting the critical 

infrastructure of the United States oil and gas industry” (NPC 2001). The NPC is a federally 

chartered, privately funded advisory committee that represents the oil and gas industry to the 

Department of Energy. The NPC issued its report, Securing Oil and Natural Gas 

Infrastructures in the New Economy, in June 2001. The study assessed vulnerabilities, 

consequences, and threats in the following categories: information technology and 

telecommunications, globalization, business restructuring, interdependencies among other 

critical infrastructures (e.g., information technology, transportation), political and regulatory 

issues, physical and human factors, and natural disasters. The report concluded that the 

creation of an oil and gas ISAC was “paramount to the protection of this infrastructure” (NPC 

2001). 

The ENERGY ISAC began operations November 1, 2001 with 11 U.S. oil and gas companies 

as the founding members. It is a limited liability company that operates and manages an 

information sharing and analysis center for oil and gas security. Membership has since 

expanded to all energy industry segments. ENERGY ISAC (n.d.) is a one stop clearinghouse 

of information and provides energy companies with: 

• Information on threats and vulnerabilities 

• Early notification of physical and cyber threats 

• Potential responses to identified threats 

• Alert conditions 

• Best Practices 

• A forum for members to communicate in a secure environment. 

ENERGY ISAC provides for two-way sharing of information. It includes a secure data base, 

analytical tools, and information gathering and distribution mechanisms. Members share in 

an industry-wide database. They voluntarily report either anonymously or attributed 

information about cyber or physical security threats, vulnerabilities, and incidents. The 

 

7

 Critical infrastructures are “systems whose incapacity or destruction would have a debilitating impact on the 

defense or economic security of the nation. They include: telecommunications, electrical power systems, gas 

and oil, banking and finance, transportation, water supply systems, government services, and emergency 

services” (President’s Commission on Critical Infrastructure Protection n.d.). 
Risk Management B-36

information is analyzed for potential solutions, and, if warranted, is distributed to members 

(ENERGY ISAC n.d.) Data and analysis from non-ENERGY ISAC sources such as federal 

law enforcement, technology providers, and security associations are also available to 

members. While not a direct result of the events of September 11, the ENERGY ISAC 

provides for improved communication within the oil industry on threats, vulnerabilities, and 

best practices on security issues. 

In the days following September 11, the oil and gas trade associations acted as clearinghouses 

for their members. They worked with the White House, Congress and federal agencies to 

improve and ensure the safety of the country’s energy infrastructure. The American 

Petroleum Institute served as the temporary threat information sharing mechanism for the oil 

and gas industry until ENERGY ISAC came online. API developed a segment-based e-mail 

list for distributing threat and security information (Petty 2002). 

4.3.3 Gulf Safety Committee 

In early October 2001, several federal agencies led by the U.S. Coast Guard met with the Gulf 

of Mexico Offshore Operators Committee (OOC) to discuss security issues, mutual assistance 

measures, and identification procedures. This initial meeting led to several subsequent 

meetings and what is evolving into a Gulf Safety Committee (GSC) to serve as a forum for 

offshore GOM stakeholders (OOC 2001). The major stakeholder groups include the 

following industries: oil and gas, fishing industry (recreational and commercial), diving 

(commercial, recreational, spear), shipping, and passenger transportation (cruise ships and 

helicopters) (GSC 2002a). The groups are further segmented. For example, the oil and gas 

industry groups represent production, drilling, pipeline and geophysical/seismic. There is 

federal government participation through the Coast Guard and MMS and state government 

participation through several state agencies. Like the committee itself, representation of the 

stakeholders is evolving as well. The OOC is facilitating GSC-related activities such as 

logistics. See below for discussion of one of the GSC’s activities. 

4.3.4 Offshore Platform Security and the Fishing and Diving Industries

The security of offshore platforms is an obvious concern for the industry and the companies 

that own the platforms and has been the focus of a number of meetings of interested parties in 

the GOM since September 11. Unique to the GOM is the long standing tradition of 

commercial and recreational fishers and divers tying their boats to platforms because the 

structures act as fish aggregators. Access of fishers and divers to the platforms contributes to 

the economic well being of the coastal counties in the Gulf. A recent study estimated 

recreational fishing and diving activities near oil and gas structures contributed $324.6 million 

to the economies of Gulf coastal counties in 1999 (Hiett and Milon 2002). The study found 

about 22 percent of the estimated 4.5 million recreational fishing trips in the GOM and 94 

percent of the diving trips were within 300 feet of an oil or gas structure. On average, more 

than two oil and gas structures were visited per trip. The analysis also showed that the typical 

angler who visited an oil or gas structure made more expenditures than those who did not 

(Hiett and Milon 2002). Any efforts to improve security of platforms in the GOM will need 

to address the interests of the fishing and diving community. 
Risk Management B-37

Prior to September 11 little attention was given to fishing and dive boats when they 

approached a platform. Since September 11, each boat approaching a platform garners 

attention. Scrutiny given approaching boats takes away from ongoing work tasks and can 

lead to safety issues related to the industrial processes on the platform. The GSC, a steering 

committee of cross industry groups in the GOM discussed above, is developing a voluntary 

GOM communications protocol for vessels approaching a fixed or floating platform intending 

to fish or sport dive around the platform (Fletcher 2002a). The protocol covers 

communication between commercial and recreational fishers, sport divers, and oil and gas 

contractors and operators. The communications protocol will establish an agreed upon format 

for the methods of notification, recommended radio frequencies, and generally accepted twoway marine VHF radio protocol. The protocol will be used in the GOM OCS and territorial 

waters adjacent to Alabama, Louisiana, Mississippi, Mississippi, and Texas (GSC 2002b). 

4.3.5 Information and Computer Technology Security 

Information and computer technology has changed how the oil and gas industry does 

business, as it has for other industries. It has increased overall worker productivity, allowed 

locationally and technically diverse groups to work together, and enhanced or enabled more 

industry-specific and focused technologies. Keeping the systems running is one challenge. 

Protecting intellectual property and network integrity and meeting internal, external, and 

system-induced threats are other challenges. Part of the security audits being done in the post 

September 11 environment include those related to information and computer technology 

(Dittrick 2002b). 

Cyber security measures range from mandatory change of password at specified intervals to 

use of smart card technology. A smart card is superior to a password system in several ways. 

The user’s digital credentials reside on the card, unlike password systems which store 

passwords on crash-prone hard drives. The smart card user must have it in his/her possession 

and use a personal identification number (PIN) to unlock the card which then presents the 

user’s digital credentials. This is referred to as two-factor authentication. Three-factor 

authentication involves biometrics where biological data such as a thumbprint or iris scan are 

used to verify a person’s identification. 

Smart card technology can be used for more than employee identification and computer 

network and web access. Other needs for secure information which can be stored on a smart 

card include work area access, critical medical information, training records, competency 

certifications, and work history. It can also be tied to helicopter reservation systems related to 

transport to and from the platforms. An example of the smart card technology used in the oil 

industry is the DeXa.Badge developed by Schlumberger Network Solutions. A security 

badge developed by Schlumberger for Royal Dutch Shell was awarded a “Best Smart Card 

Application of the Year in 2001.” The card is used to provide smart card log in and physical 

access security (SchlumbergerSema 2001). 
Crosscutting Themes B-39

5.0 CROSSCUTTING THEMES AND IMPLICATIONS 

It may be difficult to argue with those who say that while the world has changed in the 

aftermath of September 11, 2001, the oil and gas industry remains the same. War in 

Afghanistan has not changed world oil flows; OPEC still faces its old dilemma of high prices 

versus global economic growth. Corporate realignments common in the late 1990’s are still 

in the works. Even the market for jet fuel, which appeared to collapse as travelers abandoned 

airports in droves, may have been little affected if year-to-year inventories are considered 

(Staff 2002b). 

In the long run, however, September 11 may be seen as a milestone marking changes that had 

been underway in the oil and gas industry. Terrorist attacks may not have created new 

problems, but they have underscored many issues that the industry faces. By bringing these 

issues into high relief, these events may accelerate certain changes and trends that will affect 

the oil and gas industry and its many stakeholders in fundamental ways. 

5.1 Some Responses are New; Others, Re-Order the Priorities 

• Energy security. Energy security is a concern shared by the oil companies, the U.S. 

government, and oil producing nations. Part of this security issue is derived from 

diversifying sources of oil, either by projects in emerging countries such as Kazakhstan or 

by developing unconventional oil sources (e.g., oil sands, heavy oil deposits). Another 

aspect of diversifying sources is to increase reliance on nearby sources such as Mexico, 

Canada, and Venezuela that pose fewer risks than other sources. Even for traditional 

sources such as OPEC, the terrorist attacks have spurred renewed commitments to 

providing oil to the world to insure stable economic conditions. 

• Globalization. The events of September 11 have tended to strengthen the allegiance that 

countries and oil companies have to the principles of globalization. These include a 

common commitment to world trade and economic growth (e.g., the efforts by OPEC to 

stabilize oil prices after September 11) and close ties between the public and private sector 

in the achievement of economic and social goals (e.g., oil company investments in Saudi 

projects that will diversify that economy). 

• Energy efficiency. While getting greater output from energy inputs is typically associated 

with the environmental community in the U.S. and those elected leaders sympathetic to 

environmental issues, energy efficiency as a response to September 11 cuts across a wide 

swath of stakeholders and commentators. This concern with efficiency is a long-term 

issue for at least some oil companies that see their futures as energy providers. For these 

companies greater fuel efficiency in transportation allows for a longer life in the oil 

business and greater flexibility to segue from oil to natural gas and emerging technologies 

such as fuel cells. Greater fuel efficiency in vehicles is also a concern for a broad range of 

stakeholders and others who see fuel inefficiency as creating a dangerous dependence on 

foreign oil, particularly from the Middle East. 
Crosscutting Themes B-40

5.2 The Role of the Oil Industry Continues to Evolve 

• Oil companies and local development. In a case that can be seen as enlightened selfinterest, the terrorist attacks have given further impetus to oil companies’ concerns with 

local economic development. For some of the leading global oil companies, 

underdevelopment in countries where they operate had been an issue of concern well 

before the terrorist attacks. Nonetheless, September 11 has placed greater emphasis on the 

costs of failing to recognize the downside of local peoples who are shut out of the 

economic development opportunities that major investments by oil companies can create. 

While there are clear limits on what oil companies can accomplish, there are also more 

opportunities for engagement that have not been taken. This concern with local 

development has also spurred greater investment by the U.S. government in strategically 

located countries with major oil deposits. 

• Oil companies and governmental reform. Closely connected with local economic 

development is the issue of governmental reform and effectiveness in some developing 

countries. As major foreign investors, oil companies have opportunities to address some 

of the issues that can facilitate governmental reform, particularly by making more 

transparent the process of delivering oil royalties and other payments to governments in 

developing countries. As with economic development, there are clear limits on what oil 

companies can do, but also unrealized opportunities to be a force for positive change. 

5.3 Implications for the GOM 

The challenges that arise from the events of September 11 do not change the basic advantages 

offered by the GOM nor do they alter the GOM’s challenges. As in other areas addressed by 

this project, the effect of September 11 is to underscore what had been true before that date. 

5.3.1 Competitive Advantages 

• GOM as a model for public-private interaction. Oil companies operating in the GOM do 

not have to contend with many of the problems they face when operating in developing 

countries: inadequate legal systems, nonexistent infrastructure, corrupt government 

officials, disease, and inadequate health systems. Problems that may be routine in the 

developing world are simply not an issue when operating in the GOM. For business in 

general and oil and gas industry in particular, the U.S. and the GOM are a standard by 

which other areas can be measured. 

• GOM deepwater as an oil frontier. The industry is constantly on the lookout for new, 

major sources of oil. Deepwater GOM is routinely listed among the important oil 

frontiers in the world. 

5.3.2 Challenges 

• New sources create more competition. One of the consequences of September 11 has 

been an apparent acceleration in the development of new sources of oil. The “Stans” may 

be the best example of this although others would argue that West Africa is the most 
Crosscutting Themes B-41

exciting oil frontier in the world at this time. Regardless, the interest in developing 

important new sources outside of the Middle East will mean more competition for the 

GOM. Thus, global oil companies that have spearheaded GOM deepwater development 

will tend to have more non-U.S. opportunities in the post-September 11 world. 

• Technology for deepwater. The success of deepwater has depended substantially on the 

constant improvements in technology that have allowed deepwater development to occur 

at all and then have progressively lowered risks and costs. In the even more competitive 

post-September 11 world, the continuing willingness of the oil industry or others to invest 

in deepwater technology as opposed to other opportunities will be critical to the continued 

success of the GOM. 

• Labor. Technology has advanced the industry, but technology is developed and used by 

people. Technology has improved the efficiency and productivity of workers permitting 

more work to be done with fewer people. Nonetheless, there is an industry labor shortage 

in the GOM (Poruban 2001). Many of the dynamics affecting the industry in the last 20 

years (e.g., mergers, cost cutting programs, efforts to support shareholder value) resulted 

in a number of personnel issues, including few employees between the ages of 25 and 45, 

a shortage of some skilled personnel, and a decrease in the number of universities offering 

petroleum engineering degrees and the number of students seeking and receiving that type 

of degree. The heightened awareness of the potential for industry facilities in the GOM to 

be targets for terrorist activities may further challenge the industry’s ability to attract and 

retain the caliber of personnel needed in the GOM. 
Literature Cited B-43

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The Department of the Interior Mission

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 environmental and cultural values of our national parks and historical places; 

and providing for the 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) 

primary responsibilities are to manage the mineral resources located on the Nation's Outer 

Continental Shelf (OCS), collect revenue from the Federal OCS and onshore Federal and Indian 

lands, and distribute 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 Minerals Revenue Management 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.