The cost of finding and developing US oil & gas reserves is going down

Let’s start with the good news, because unfortunately there is bad news too

US exploration and production (E&P) companies, perhaps unsurprisingly, explore for and produce oil & gas.

You can think of the operating costs of these businesses as existing in one of two buckets.

The first bucket is the cost of finding and developing the hydrocarbon reserves. Typically this means drilling exploratory wells to better understand the geological structures and the nature of any trapped hydrocarbons. Then you drill production wells to create a pathway for the trapped hydrocarbons to reach the surface.

The second bucket is production-related costs, the kind you incur as you lift the oil & gas to the surface and prepare it for sale. Here you have costs related to

• maintaining the land lease,

• pumping the hydrocarbons to surface,

• separating and compressing the produced hydrocarbons,

• treating and disposing of produced water,

• maintaining and repairing surface and subsurface equipment,

• storing the hydrocarbons and eventually transporting them to a point of sale,

• fueling all these operations, and

• managing the well site.

A rough rule of thumb is that these two cost buckets are about the same size. Said differently, operators spend about as much to find and develop the oil & gas reserves as they do actually getting those hydrocarbons to the surface and preparing them for sale.

This post will be exclusively about the first bucket of costs, what the industry commonly calls “finding and development costs”, or F&D costs.

Image generated by Google Gemini via the prompt “an oil drilling rig in West Texas in the distant background, and a hard hat and a magnifying glass in focus in the foreground”

I’m going to show that F&D costs have fallen over the past few years, which is good news for the industry.

Unfortunately I’m going to have to close the post by explaining this good news is only part of the story. We’ll dive more deeply into the bad news in a subsequent post.

In this post, we’ll start by explaining how we move from an understanding that oil & gas may be trapped beneath the surface all the way to creating proved developed oil & gas reserves that are ready to bring to the surface.

With an understanding of how reserves are “created”, we’ll explain what F&D costs actually are.

We’ll use data from Occidental’s public reports to walk through a real world example of calculating F&D costs. We’ll talk about the nuances between different types of proved reserves that unfortunately are clumsily ignored in a lot of public reporting from operators. In our work, we’ll take care to respect these nuances and show why ignoring them can yield mistaken cost estimates.

Finally, we’ll analyze data from 16 of the largest publicly traded independent E&Ps in the US and show how F&D costs have trended for this cohort over time. Some of these operators are more focused on liquids, i.e. crude oil and natural gas liquids (NGLs). Others are more focused on natural gas. We’ll make sure to explore how F&D costs are trending for these two groups of operators, in addition to the wider cohort as a whole.

Don’t worry if you don’t have a deep corporate finance background. I’ll explain everything that we’re doing each step along the way. This is the kind of topic where just a bit of depth beyond a surface-level analysis can reveal some really important and novel insights.

How we turn subsurface oil & gas resources into proved developed reserves that are ready for production

Before we get to real world data, let’s talk through how an E&P operator transforms oil & gas that’s hypothetically trapped under the surface into proved developed reserves that are ready to produce.