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The technology revolution and upstream costs

Cambridge Energy Research Associates, Cambridge, Massachusetts, U.S.

Corresponding author: mfagan@cera.com

The first 20% of the full text of this article appears below.

The impact of technology, especially information technology, is widely credited as the main driver in reducing upstream costs and enabling the E&P industry to survive the 1986 oil price collapse and the oil price volatility that has followed. But the actual concrete proof—a measurement of just how much credit technology deserves—is less clear.

To answer the crucial question—What is the role of technology in reducing costs?—we conducted a multiyear in-depth look at finding and development (F&D) costs for more than 25 companies through the 1980s and 1990s.

Note, in the following, F&D costs are calculated as exploration and development expenditures over three years, divided by additions to reserves over the same time. Three-year periods were used to smooth volatility in discoveries and account for some of the time lag between drilling and booking reserves.

	Methodology for measuring the impact of technical change

 
In order to isolate the impact of technology, we created an economic model that analyzes the relationship between the level of F&D costs and the factors that can affect these costs. These factors are:

• Acreage costs. Lease bonus payments for acquisition of unproved acreage are a component of F&D costs.
  
• Rates for well drilling and equipping. The prices paid for the services of drilling contractors rose dramatically as oil prices increased in the late 1970s, and fell just as dramatically with the 1986 price collapse.
  
• Costs apart from wells and acreage. F&D also includes the cost of geologic and geophysical surveys, and platforms, pipelines, roads, and grading—i.e., all equipment and infrastructure needed on the oil lease except well drilling.
  
• High-grading. Drilling fewer wells and focusing . . . [Full Text of this Article]