What Is Development Drilling?
Development drilling refers to the process of drilling additional wells within a proved undeveloped acreage or an existing oil and gas field to optimize the extraction of hydrocarbons. It is a crucial phase in the upstream segment of the Oil and Gas Industry, following successful exploration efforts that have confirmed the presence of commercially viable reservoirs. The primary objective of development drilling is to establish efficient and sustained production from a known crude oil or natural gas discovery, maximizing the recovery of reserves and improving the overall return on investment for energy companies.
History and Origin
The practice of drilling for oil and gas dates back centuries, but modern development drilling techniques evolved significantly with the industrial revolution and the increasing global demand for energy. Early oil fields, such as those discovered in Pennsylvania in the mid-19th century, initially relied on relatively simple vertical wells. As understanding of subsurface geology advanced and technology improved, particularly in the 20th century, companies began to employ more systematic approaches to develop entire fields. The introduction of directional and, later, horizontal drilling revolutionized the efficiency and reach of development drilling, allowing access to larger portions of a reservoir from a single surface location and enabling the economic exploitation of previously inaccessible reserves. The U.S. Energy Information Administration (EIA) regularly tracks and reports on drilling productivity, highlighting the continuous advancements in drilling efficiency and new well productivity that drive domestic oil and natural gas production growth.8, 9, 10
Key Takeaways
- Development drilling focuses on extracting confirmed hydrocarbon reserves from existing fields.
- It aims to optimize production efficiency and maximize the recovery of oil and natural gas.
- This activity involves significant capital expenditure and ongoing operating expenses.
- Technological advancements, such as horizontal drilling, have greatly enhanced the effectiveness of development drilling.
- Economic factors, including commodity prices and production costs, heavily influence development drilling decisions.
Interpreting Development Drilling
In the context of the Oil and Gas Industry, interpreting development drilling primarily involves assessing its role in a company's overall capital allocation strategy and its impact on future production profiles. For an energy company, development drilling represents a strategic investment aimed at converting proven reserves into marketable production. Analysts often examine the number of development wells drilled, the associated costs, and the resulting increase in production volume to gauge a company's operational efficiency and its ability to monetize its resource allocation. Successful development drilling programs lead to sustained or increased output, which in turn influences revenue streams and profitability. The decision-making process for development drilling is deeply tied to the economics of oil production, where companies evaluate drilling plans based on prevailing oil prices and anticipated costs.7
Hypothetical Example
Consider "Horizon Energy," an oil company that has successfully discovered a significant crude oil reservoir in the Permian Basin. Following their initial exploration and appraisal drilling, they confirm 100 million barrels of recoverable oil. To effectively extract this oil, Horizon Energy initiates a development drilling program.
They plan to drill 50 additional wells over a three-year period. Each well requires a drilling rig and associated services, costing an average of $5 million per well. This means a total capital expenditure of $250 million for the drilling phase alone. As each development well is completed, it begins contributing to the field's total production. Horizon Energy monitors the decline rates of existing wells and the initial production rates of new wells to adjust its development drilling schedule, ensuring a consistent flow of oil to market and maximizing the economic life of the field.
Practical Applications
Development drilling is central to the operational strategies of major and independent energy companies globally. Its applications span various aspects of the Oil and Gas Industry:
- Reserve Conversion: It is the direct means by which identified proved undeveloped acreage are converted into producing assets.
- Production Optimization: Companies use development drilling to strategically place wells to maximize recovery, maintain desired production rates, and manage reservoir pressure.
- Economic Viability: The number and type of wells drilled depend heavily on the economic assessment of the field, factoring in commodity prices, drilling costs, and expected return on investment. Financial disclosures by major corporations, accessible through the U.S. Securities and Exchange Commission (SEC), often detail substantial capitalized development drilling costs, reflecting their importance in overall financial health.2, 3, 4, 5, 6
- Technological Advancement: The drive for more efficient development drilling has spurred innovations in drilling rig technology, well completion techniques, and sub-surface imaging.
Limitations and Criticisms
While essential for hydrocarbon production, development drilling faces several limitations and criticisms:
- Environmental Impact: Concerns about environmental footprint are significant. Development drilling can lead to habitat disruption, land use changes, and potential for spills or leaks. Regulations from bodies like the U.S. Environmental Protection Agency (EPA) govern wastewater discharge and air emissions associated with these operations to mitigate risks.1
- High Costs and Financial Risk: Development drilling requires substantial capital expenditure and ongoing operating expenses. Fluctuations in energy markets and commodity prices can impact the profitability of these projects, leading to potential write-downs or delayed development if economic conditions deteriorate. Effective project finance and risk management are crucial.
- Geological Challenges: Even in proven fields, unexpected geological formations, pressure anomalies, or reservoir complexities can increase drilling costs, reduce efficiency, or lower anticipated recovery rates.
- Regulatory Hurdles: Increasingly stringent environmental regulations and permitting processes can add significant time and cost to development drilling projects.
Development Drilling vs. Exploration Drilling
Development drilling and exploration drilling are both critical activities in the Oil and Gas Industry, but they serve distinct purposes and carry different risk profiles.
| Feature | Development Drilling | Exploration Drilling |
|---|---|---|
| Primary Purpose | To extract confirmed hydrocarbons from a known reservoir. | To search for new, undiscovered hydrocarbon deposits. |
| Location | Within or adjacent to existing, proven oil or gas fields. | In unproven or frontier areas, often based on seismic data and geological studies. |
| Risk Profile | Lower geological risk; higher financial risk related to project costs and market prices. | High geological and financial risk; potential for dry holes is significant. |
| Investment Stage | Follows successful discovery and appraisal. | Initial stage of the upstream process. |
| Objective | Maximize production and optimize recovery of reserves. | Confirm presence of commercial quantities of oil or gas. |
The key distinction lies in the certainty of the resource. Development drilling aims to exploit known quantities, whereas exploration drilling seeks to find new ones.
FAQs
What is the main goal of development drilling?
The main goal of development drilling is to maximize the economic recovery of crude oil and natural gas from a known reservoir by strategically placing additional wells and optimizing production efficiency.
How does technology impact development drilling?
Advanced technologies, such as horizontal drilling, directional drilling, and hydraulic fracturing, significantly enhance development drilling by allowing companies to access more of a reservoir from fewer surface locations, increasing recovery rates, and reducing overall costs.
Is development drilling environmentally regulated?
Yes, development drilling operations are subject to numerous environmental regulations at local, national, and international levels. These regulations aim to control emissions, manage waste, prevent pollution, and ensure safe operating practices within the Oil and Gas Industry.
What are "proved developed reserves" in relation to development drilling?
Proved developed reserves refer to the estimated quantities of crude oil and natural gas that can be recovered through existing wells with existing equipment and operating methods. Development drilling contributes directly to increasing these reserves by adding new producing wells.
What factors influence a company's decision to undertake development drilling?
Key factors influencing development drilling decisions include the geological characteristics of the reservoir, current and projected commodity prices, anticipated drilling and operating expenses, regulatory environment, and the company's overall resource allocation and risk management strategy.