Oil Production

Growth in the nonmajors' oil production in the 1990's was largely derived from the lower 48 onshore (Figure 2, and endnote 7). This growth in the 1990's marks a change from sharp cutbacks in production by the majors and nonmajors following the oil price collapse of late 1985 and early 1986. The nonmajors cut their lower 48 onshore oil production by nearly 500,000 barrels per day between 1985 and 1989 (an 18-percent decline) while the majors made even larger reductions. After 1989, the nonmajors reversed the earlier trend in oil production and, by 1993, about matched their 1986 production. However, the majors' lower 48 onshore oil production continued to decline through the early 1990's.

Drilling Adds More Reserves than Purchases

What were the sources of growth in the nonmajors' oil production? Within the context of accounting for energy reserves and production, there are three possibilities: purchases from the majors, exploration and development performance, or more rapid extraction of oil reserves.

Production may have grown through purchases of reserves from the majors. Net purchases of oil reserves from the majors (i.e., from the FRS group to nonmajors in total) totaled nearly 500 million barrels over the 1989-1993 period. However, net purchases accounted for only 14 percent of the nonmajors' total U.S. oil reserve additions in the lower 48 onshore (Table 1).

Reserves added through drilling may have outpaced production. Nonmajors added 2.9 billion barrels of oil to their lower 48 onshore reserves through extensions, discoveries, improved recovery, and revisions of earlier estimates over the 1989-1993 period. Even including net purchases, growth in the nonmajors' reserve base was insufficient to replace production. If growth in the reserve base did not offset the growth in production, then only one other source of increased production is apparent.

Growth Through More Rapid Depletion

An increased rate of extraction may have added to production. The rate of extraction is the proportion of reserves going to production. The annual rate of extraction (see endnote 8) of lower 48 onshore oil reserves by the nonmajors steadily increased, from 8.9 percent in 1989 to 10.6 percent in 1993 (Figure 3). In contrast, the comparable extraction rate for the majors varied within a narrow 8.0-percent to 8.5-percent range over the same period.

The nonmajors' increased extraction rate was probably a phase of their adjustment to lower oil prices. During the U.S. drilling boom of the late 1970's and early 1980's, oil and gas reserves were added which not only were costly to discover and develop but also entailed high costs of production (lifting costs). High oil prices and the expectation of rising oil prices in the future justified adding high-cost reserves to producers' books. The downside of this high-cost strategy became painfully evident when oil prices began to decline modestly at first in the early 1980's and then crashed in late 1985 and early 1986. Oil producers responded by cutting back on higher cost production, but, as long as asset values were properly adjusted (see endnote 9), there was no imperative to remove reserves from their books unless the associated field was fully abandoned. Consequently, the decline in the computed extraction rate from 1985 to 1989 may largely have reflected the combination of production cutbacks and a reluctance to remove reserves from the books.

After low oil prices were recognized as the norm, high-cost reserves were removed from companies' books altogether. However, by the late 1980's, prices of drilling and production services had declined in response to lower oil prices, making some fields again economic. Also, given lower oil prices, new production was likely to be derived from low-cost reserves. Consequently, the rise in extraction rates in the 1990's reflected the combination of removing high-cost reserves from the books and increased production in part, from new low-cost fields and, in part, from formerly subeconomic fields. Nevertheless, nonmajors' extraction rates from lower 48 oil reserves have not yet quite matched the extraction rates of the early 1980's.

In the context of reserve accounting, the increase in the nonmajors' lower 48 onshore oil production between 1989 and 1993 breaks down as follows: reserves added through drilling, 57 percent; increased extraction rate, 33 percent; and net purchases of reserves, 10 percent (see endnote 10).

Offshore locales (see endnote 11) contributed little to the growth in the nonmajors' share of U.S. oil production. For both majors and other producers, there was little overall change in offshore oil production in the late 1980's and thus far in the 1990's (Figure 2). Instead, the nonmajors directed offshore operations toward producing natural gas.