Production oil and gas

What Is Production Oil and Gas?

Production oil and gas refers to the stage within the energy sector where crude oil and natural gas are extracted from subsurface reservoirs and brought to the surface for processing and distribution. This crucial phase, a core component of energy finance, follows successful drilling and well completion. It encompasses all the activities involved in recovering hydrocarbons from a wellbore and preparing them for subsequent transportation and sale. This includes the initial flow, separation of oil, gas, and water, and often initial treatment before the product enters the midstream activities segment of the industry.

History and Origin

The history of oil and gas production is deeply intertwined with technological innovation. Early oil production, dating back centuries to shallow pits, evolved significantly with the drilling of the first modern oil well in Titusville, Pennsylvania, in 1859 by Edwin Drake. This marked the beginning of commercial oil extraction, initially driven by demand for kerosene lighting. For much of the 20th century, conventional vertical drilling dominated, tapping into readily accessible oil reserves.

A pivotal shift in production methods occurred with the widespread adoption of hydraulic fracturing and horizontal drilling in the early 21st century. These techniques, though existing for decades, transformed the landscape of oil and gas production by enabling economic extraction from tight shale formations previously considered unrecoverable. For instance, the U.S. Energy Information Administration (EIA) highlights how the combination of horizontal drilling and hydraulic fracturing significantly boosted U.S. crude oil and natural gas production, with hydraulically fractured wells accounting for a substantial portion of total U.S. crude oil output by 2015.⁷, ⁸

Key Takeaways

Production oil and gas is the process of extracting and bringing hydrocarbons to the surface, following exploration and drilling.
It represents the "upstream" segment of the oil and gas industry, focusing on the volume and efficiency of extraction.
Technological advancements, particularly horizontal drilling and hydraulic fracturing, have revolutionized global production capabilities.
Production levels are influenced by factors such as geological reserves, commodity prices, operational costs, and regulatory environments.
The output from production oil and gas fuels subsequent midstream activities (transportation) and downstream activities (refining and distribution).

Interpreting the Production Oil and Gas

Interpreting production oil and gas figures involves understanding the volume of hydrocarbons brought to the surface over a specific period, typically measured in barrels of crude oil per day (bpd) or cubic feet of natural gas per day. These numbers are critical indicators of a company's operational efficiency, reserve utilization, and revenue-generating potential. High production volumes generally indicate a robust operational capacity and successful exploitation of reserves.

However, interpreting these figures also requires context. A high production rate needs to be weighed against the associated capital expenditures and operational costs. For instance, increasing production from mature fields may be more costly per barrel than from new, highly productive wells. Analysts also consider decline rates, which measure how quickly a well's production decreases over time, to project future output and assess the long-term viability of a company's assets.

Hypothetical Example

Consider a hypothetical energy company, "Horizon Energy Corp." In Quarter 1, Horizon reports daily average production of 50,000 barrels of crude oil and 100 million cubic feet of natural gas from its Texas operations.

To illustrate, let's break down how this production might be achieved and interpreted:

Well Performance: Horizon operates 200 producing wells. This means, on average, each oil well contributes 250 barrels per day (50,000 barrels / 200 wells). Similarly, if half of these wells produce gas, then each gas well averages 1 million cubic feet per day.
Operational Efficiency: Horizon's production engineers continuously monitor well performance, optimizing flow rates and performing routine maintenance to maximize the recovery of hydrocarbons.
Cost per Barrel/MCF: Management calculates the cost of lifting each barrel of oil and each thousand cubic feet (MCF) of gas. If their lease operating expenses for the quarter are \$15 million, their lifting cost per barrel equivalent (combining oil and gas) is a key metric for their return on investment.
Sales Volume: The 50,000 bpd and 100 MMcfd represent the raw product available for sale, which then feeds into their revenue projections based on prevailing commodity prices.

This production volume is a direct measure of Horizon's success in extracting valuable resources from its upstream activities.

Practical Applications

Production oil and gas figures are fundamental to various aspects of the financial and energy industries.

Financial Analysis: Investors and analysts closely scrutinize production volumes to evaluate the operational performance and financial health of oil and gas companies. Stable or growing production indicates a company's ability to maintain or increase its market share and revenue.
Economic Indicators: National production data serves as a key economic indicator, reflecting energy independence, trade balances, and overall industrial activity. Organizations like the International Energy Agency (IEA) publish extensive data on global oil supply and demand, which is crucial for understanding market dynamics and energy security.⁶
Resource Management: Governments and regulatory bodies use production data to monitor the depletion of oil reserves and manage national energy policies.
Investment Decisions: Decisions regarding capital expenditures for new projects, acquisitions, or divestitures within the energy sector are heavily influenced by current and projected production capacities. The Federal Reserve Bank of Dallas, for example, conducts surveys among energy executives to gauge industry sentiment and expected production changes, providing insights into investment trends.⁴, ⁵

Limitations and Criticisms

Despite its economic importance, production oil and gas faces various limitations and criticisms. One significant area of concern is environmental impact, including greenhouse gas emissions, potential water contamination, and habitat disruption. Regulatory bodies like the U.S. Environmental Protection Agency (EPA) establish environmental regulations to mitigate some of these impacts, but balancing energy needs with environmental protection remains a persistent challenge.³

Furthermore, the industry is highly susceptible to commodity prices volatility. A sustained drop in oil and gas prices can render certain production operations uneconomical, leading to reduced investment, layoffs, and decreased output, as highlighted by regional Federal Reserve surveys.¹, ² Geopolitical instability can also significantly disrupt production flows, affecting global supply chains and energy markets. Another criticism revolves around the finite nature of hydrocarbons and the long-term sustainability of relying on fossil fuels, prompting a global shift towards renewable energy sources.

Production Oil and Gas vs. Oil and Gas Exploration

While closely related, production oil and gas and oil and gas exploration represent distinct stages in the upstream segment of the energy industry. Oil and gas exploration is the initial phase involving the search for potential underground or underwater crude oil and natural gas deposits. This includes geological surveys, seismic imaging, and exploratory [drilling] to identify and appraise new reserves. It is a high-risk, high-reward endeavor with significant upfront [capital expenditures] and no guarantee of finding commercially viable quantities. In contrast, production oil and gas begins after exploration has confirmed the presence of recoverable reserves and wells have been successfully completed. This phase focuses on the ongoing extraction, processing, and bringing of discovered hydrocarbons to the surface. Essentially, exploration is about finding the resource, while production is about getting it out of the ground once found.

FAQs

What are the main methods of production oil and gas?

The main methods include conventional vertical [drilling] for traditional reservoirs and unconventional methods like horizontal drilling combined with hydraulic fracturing (fracking) for tight formations such as shale. Other techniques involve enhanced oil recovery (EOR) methods that inject substances like water, gas, or chemicals into reservoirs to increase pressure and improve flow.

How is production volume measured?

Oil production is typically measured in barrels per day (bpd) or thousands of barrels per day (Mbpd). Natural gas production is usually measured in cubic feet per day (cfd), million cubic feet per day (MMcfd), or billion cubic feet per day (Bcfd). These volumes represent the raw output from [wellbore] operations.

What factors influence the cost of production?

The cost of production is influenced by geological complexity, depth of wells, transportation logistics, regulatory compliance, labor costs, technology used, and the age of the field. Maintaining older wells often incurs higher lease operating expenses than newly developed, highly productive ones.

Is production oil and gas environmentally sustainable?

The long-term environmental sustainability of production oil and gas is a subject of ongoing debate. While the industry continuously develops technologies to reduce its environmental footprint, such as carbon capture and storage, the extraction and combustion of [hydrocarbons] contribute to greenhouse gas emissions and other environmental impacts. The push for global energy transition aims to reduce reliance on fossil fuels over time.