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Independents Rule the Onshore, Says IPAA Study

Independent explorers now drill close to 94% of U.S. oil and natural gas wells, a level of drilling that is forecast to remain steady over the coming decade, according to a study commissioned by the Independent Petroleum Association of America (IPAA).

Independents contributed nearly four million U.S. jobs last year, which is more than 3% of the total domestic workforce, said the study, which was issued by IHS Global Insight (USA) Inc. on Monday at the IPAA Oil & Gas Investment Symposium in New York City.

"The headline here isn't just that independent oil and natural gas producers know how to create jobs; we've been doing that since Col. Drake spudded his first well back in the 1850s," said IPAA CEO Barry Russell. "The headline is that independent producers are delivering jobs -- millions of them -- and billions in annual tax and royalty revenue for state, local and federal governments at a time and place when they have perhaps never been needed more.

"Throughout our history, innovation has been the driver of that progress -- and so it is again, with independents applying the best in science and engineering to develop an onshore resource base that earlier this decade was considered almost entirely out of reach."

The independents contributed "nearly $580 billion in total economic activity" in 2010, which accounted for 4% of U.S. gross domestic product, noted Russell. Over the next 10 years, "the contribution of U.S. independents is slated to be in the trillions."

The authors defined "independents" based on two criteria: market capitalization and operational activity in the upstream, midstream and downstream. By that criteria, they said close to 18,000 independents operate in 32 states.

"For this study we defined independents as those companies with only upstream activities," noted the authors, who used IHS Herold tracking data to focus on small, medium and large independents. "Generally the medium and large are better known to a wider public; but the small independents also play an important role as they operate most of America's marginal wells (less than 16 boe/d), which account for about 80% of America's 800,000 producing wells."

In the past five years, data indicated that independents' share of production and investment in the United States has risen steadily, both in liquids and natural gas.

"Currently, onshore independents account for 65% of total natural gas production and close to 45% of total oil production in the United States. Over the next 10 years these figures are expected to continue to increase as shale plays ramp up," said the authors.

The increase in output, particularly liquids output, also has followed the development of tight formations that include the Granite Wash and Wolfberry plays in Texas, and the Niobrara and Bakken shales, they said. New technology, regulation, taxes, investment or new discoveries all could influence future growth, positively or negatively.

"The amazing thing here, of course, is that the findings in this study are limited only to onshore activity," said IPAA Chairman Bruce Vincent, who also is president of Swift Energy Co.

The unconventional resource plays, said the study, "have reset the marginal cost of America's hydrocarbons and also have increased the average production rate and estimated ultimate recovery per well. The result of this new productivity is that it takes fewer wells to produce the same amount as before.

"For example, prior to 2008 more than 31,000 annual new natural gas wells were required to sustain 58 Bcf/d of natural gas production; now it is possible to produce almost 63 Bcf/d with the drilling of only 19,000 new natural gas wells per year."

Independents' share of drilling activity over the coming decade is expected to drop slightly from a peak in 2010.

"This is due to the individual well productivity increase, maturity of the plays and entry of majors and national oil companies into the plays," said the authors.

The independents' direct upstream value of output is expected to grow to $351 billion in 2010 from $263 billion today, according to the study. Midstream/downstream value also is expected to be higher at $685 billion in 2020 from $518 billion today. Total upstream jobs are expected to increase to 2.6 million in 2020 from 2.1 million in 2010.

The study, when combined with an IHS study last year on the offshore, indicated that independents collectively produce 54% of domestic oil and 85% of U.S. natural gas, accounting for 67% of total U.S. production (see Daily GPI, July 23, 2010).

Independents operating in the Gulf of Mexico last year accounted for more than 200,000 jobs, $38 billion in economic benefits and $10 billion in federal and state revenue and royalty payments in 2010, Vincent noted. "Unfortunately, even as we continue to seize on new opportunities onshore, offshore numbers are expected to decline, owing in large part to the position of the current administration" regarding offshore drilling.

The new onshore study is available on IPAA's website highlighting independents' contributions at www.oilindependents.org.

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