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THE OIL AND GAS INDUSTRY SUPPLY CHAIN
for the
PITTSBURGH REGIONAL ALLIANCE
from
347 Girod St.
Mandeville, LA 70448
(985) 626-9868
FAX: (985) 626-9869
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CONTENTS
INTRODUCTION ................................................................................................................................. 3
SIZE OF DOMESTIC SUPPLY CHAIN .................................................................................................... 3
UPSTREAM ......................................................................................................................................... 6
Exploration .................................................................................................................................... 8
Prior to Leasing .......................................................................................................................... 8
Leasing ....................................................................................................................................... 8
Exploration Wells ....................................................................................................................... 9
Development ............................................................................................................................... 10
Development Drilling ............................................................................................................... 10
Hydraulic Fracturing ................................................................................................................ 10
Completion and Production .................................................................................................... 10
Testing and Workovers ............................................................................................................ 11
MIDSTREAM .................................................................................................................................... 11
DOWNSTREAM ................................................................................................................................ 12
INDUSTRIAL CONCENTRATION in the SUPPLY CHAIN ..................................................................... 12
Integrated Oil and Gas Companies .............................................................................................. 12
Exploration and Production Companies ...................................................................................... 12
Storage and Transmission Companies ......................................................................................... 12
Oil and Gas Drilling Companies ................................................................................................... 13
Oil and Gas Equipment and Service Companies .......................................................................... 13
THE SUPPLY IS HIGHLY CONCENTRATED ......................................................................................... 13
DRIVERS OF INDUSTRY GROWTH AND EXPANSION ........................................................................ 14
CONCLUSIONS FOR INDUSTRY TARGETING ..................................................................................... 15
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INTRODUCTION
Finding and producing oil and gas is a complex set of activities, including identifying a “prospect”
or area of interest, collecting data and evaluating the prospect in comparison with other
prospects, obtaining the rights to drill, drilling wildcat well(s), and evaluating the economics of
potentially developing the reserves.
The “upstream” sector is the portion of the industry involved in extracting the oil and gas from
below the ground until it reaches the surface (see Figure 1 for a flowchart of the supply chain).
This part of the industry incurs the most risk because of the uncertainty in finding gas in
commercially producible quantities and the capital intensive methods needed to extract it
(drilling). Recent technological advances, including 2-D and 3-D computer modeling, have
reduced the uncertainties a great deal. Although the Marcellus Shale is fairly well understood
geologically, some degree of exploration is still necessary on the part of operators to refine their
understanding and identify precise well locations. For this reason “wildcat” or exploration wells
are still being drilled in Pennsylvania.
If a “prospect” turns out to be economical, additional drilling is done and pipelines are installedto transport the hydrocarbons to refineries and from there to market. The “midstream” portion
of the industry begins at the "Christmas tree", a large set of valves at the top of every well and
continues through the gathering and distribution network to the refinery or chemical plant. The
“downstream” part of the industry is comprised of refineries, chemical plants and other types of
processing into products and fuels which are then distributed to markets and end users.
SIZE OF DOMESTIC SUPPLY CHAIN
The global energy industry accounts for about 10 percent of world economic output1. The oil and
gas sector accounts for a major share of it. Oil and gas production, while declining domestically
over the last 40 years, continues to be a major force in world markets. Domestic production of
6.7 billion barrels of oil equivalent generated $227 billion of revenue in 2007. Natural gas
generated about half of the production and a smaller 43 percent of revenues (see Figures 2 and3). Natural gas liquids were a significant share of the production and revenues in the industry.
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Figure 1.
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Figure 2: Production Revenue
Source: Compiled from 2007 Census of Busi Figure 3: US Domestic Oil and
Natur
Liq
12
Natural Gas
43%
Natural Gas
Natural Gas
Liquids
17%
in 2007 ($227 billion)
iness
Gas Production in 2007 (6.7 billion BOE
Crude
+condensate45%
al Gas
ids
%
Crude
+condensate
32%
)
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Of the five sectors in the supply chain, production, referred to by the Census Bureau as
extraction, dominates (see Table 1). The entire supply chain is estimated at $800 billion of
revenues (valued at the downstream end to avoid double counting of revenues), about 22,000establishments with 900,000 employees. The upstream portion of the supply chain accounts for
about 60 percent of the employment and 75 percent of the establishments in the supply chain.
Table 1. Estimated Size of O&G Supply Chain in 2007
NAICS Name O&G
Share
Sales in
$billions
Est. Emp.
UPSTREAM2111 O&G extraction 100% $255 6260 150,443
213111 Drilling O&G 100% $22 2109 106,859
213112 Support activities for O&G 100% $46 7089 239,774
333132 O&G equipment 100% $17 664 48,085
SUBTOTAL $340 16,122 545,161
MIDSTREAM
237120 O&G pipeline construction 100% $30 1986 159,6374862 Pipeline transportation of
natural gas
100% $17 1514 24,202
SUBTOTAL $47 3,500 183,839
DOWNSTREAM
32411 Petroleum refineries 100% $580 195 64,839
32511 Petrochemicals 100% $78 56 9,229
3252 Polymers 100% $101 1338 96,485SUBTOTAL 100% $759 1,589 170,553
COMPLETION EQUIPMENT*
33111 Steel 10% $10 37 10,846
333911 Pumps 31% $4 167 10,666
331210 Pipe & tube 32% $3 60 6,941
332911 Ind. Valves 40% $4 192 15,390
333912 Compressors 31% $3 107 7,693SUBTOTAL $25 563 51,535
TOTAL $1171 21,774 899,553
*Sales, Est. & Emp. Adjusted to reflect O&G share of industry
Source: Compiled from 2007 Census of Business
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Examples of companies in the exploration and production services sector include Halliburton,
Schlumberger, and Baker Hughes. Drilling and exploration services account for about half of
upstream services (see Figure 5 at the end of the document). Eleven other services account forthe balance of upstream revenues.
In terms of employment, exploration and production services represent about half of the
upstream employment.
Figure 4.
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EXPLORATIONThe exploration process begins when an oil company decides to evaluate a particular area or
region for oil and gas, and continues until a decision is made to develop a particular field.
PRIOR TO LEASING
The exploration process begins long before a well is ever drilled. Geologists and geophysicistsstudy the subsurface characteristics of areas and regions using publically available data combined
with some proprietary data in the possession of or ordered by the oil company. These data
sources include well logs (measurements made within wells2), and production data from old
wells which have become public record, and two or even three-dimensional seismic testing.
Large trucks move along the surface and produce shock waves that bounce off rock formations
below the surface of the earth. The waves are captured by “geophones” or measurement
devices that are strategically placed above ground. The vibrations are translated into electricalsignals and processed for review by geophysicists who confer with geologists.
The geologists and geophysicists confer to develop “prospects” or targeted areas of interest for
potential hydrocarbons.
During exploration, the oil company acquires seismic data, computing equipment, and may
contract for additional data collection or specialized processing. In addition, many non-core
office functions at the oil company are now contracted out, including accounting, IT, and logistics
services (helicopters, trucks, workboats, etc.). The geosciences staff, human resources, and the
legal/land staff are examples of core functions that continue to be employed by the oil company.
Most of the employment associated with the pre-leasing activities occur at the company’s
headquarters location.
LEASING
Once particular prospects are identified, the oil companies will negotiate a contract or lease for
the rights to drill to compensate the mineral owners. Lease terms vary, but generally include a
“bonus” or one time payment, calculated per acre, for the right to drill over a specific period of
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EXPLORATION WELLS
Once the needed property is leased, the oil company – now called the “operator” as described in
the lease - must obtain a permit from the state regulatory body to authorize drilling a new well.
Items such as surveys, drilling plans, and other technical information frequently accompany a
permit application, and the permit may require site specific environmental protection measures,
or other permits that pertain to environmental issues. The oil company will contract with
outside organizations to obtain the surveys or environmental evaluations, but would prepare
drilling schematics or plans in-house.
After the Permits are obtained, the drilling site must be prepared and the drilling contractor is
hired. Site prep includes the construction of roads, grading of the site, installation of the well
pad from which the drilling is done and other associated equipment is located as well. Erosion
and drainage control measures are also implemented as needed.
The two primary parties in drilling a well are the Operator and the Drilling Contractor that they
hire to drill the well. Each party has significant responsibilities for supplying the operation. The
Drilling Contractor is responsible for the rig and its crew, and contracts for all rig-associated
services, including maintenance mechanics and electricians, food, and first aid for crew. If a
piece of equipment associated with the rig (motors that power the drilling process, crane, etc.)
breaks down during drilling, the Drilling Contractor is responsible and will purchase or rent the
tools, parts and personnel needed for repairs and maintenance. Drilling Contractors that are
active in the Marcellus Shale region include Pioneer Drilling, and Helmerich and Payne.
The Operator, ultimately responsible for the well and the environmental condition of the site,
contracts for all services and materials not associated with the rig. These services include drilling
mud, rental pipe, cement and cementing services, evaluation tools and services, and logistics
services. Because intangible drilling costs can be used as a tax credit on the Operator’s Federal
tax return, there is a strong motivation to rent as much equipment and services as possible.
Intangibles comprise about 80% of total drilling costs. The Operator will purchase the tangible
equipment (casing, valves, etc.) that will become part of the well. The set of companies that
supply rental equipment and services are known collectively in the industry as “service
companies.” Operators that are active in the Marcellus Shale are Chesapeake Energy, Range
Resources, Chief Oil and Gas, EQT, and Devon.
Af d illi l i ll h i f i i d d i d illi i f d i
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DEVELOPMENTThe decision to further develop oil and gas proven by exploration wells marks the end of the
exploration phase and the beginning of the development project.
DEVELOPMENT DRILLING
Usually, bringing all of the oil and gas to the surface requires more wells than are drilled duringexploration. Well-drilling during exploration is kept to a minimum due to the capital intensive
nature. The additional wells drilled at this point in the process are referred to as development
wells. Some portions of the well pad can be removed and other types of more permanent
equipment and infrastructure are installed to accommodate a more permanent operation. As
during exploration drilling, the Drilling Contractor is responsible for supplying the rig and its
personnel, and the Operator is responsible for everything else.
HYDRAULIC FRACTURING
Hydraulic fracturing, necessary to develop the Marcellus and other shales, is a process done
during the drilling of wells in which water, sand or other particles (called “proppants”), and
additives are pumped into a well at pressures high enough to crack the rock formation. The
proppants hold the cracks open, permitting the gas to flow to the surface. The company doingthe hydraulic fracturing contracts for sand or proppants, chemicals, water, water recycling or
disposal, etc. The Operator, however, is ultimately responsible for the environmental condition
of the well site under the terms of the lease with the landowner, and may wish to execute
multiple contracts with water recycling and disposal companies. Halliburton and Schlumberger
are the industry leaders in hydraulic fracturing.
COMPLETION AND PRODUCTION
At this point the wells are “completed” meaning that the final equipment needed for the wells to
produce is installed, including the "Christmas tree” – a large set of valves on top of the well,
combined with other equipment inside the well Equipment needed on site includes separation
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Gathering and transmission pipe, compressors and related equipment, storage, processing, and
transportation infrastructure is installed at this point to connect the field’s production to existing
transportation infrastructure. Other needed equipment may include heating equipment,metering and control station equipment, or storage tanks. This is frequently referred to as the
“midstream” part of the industry, and the Operator will contract for all of these operations.
Completion equipment, such as steel tube, compressors, valves and pumps, accounts for about
$25 billion of revenue (see Table 1). Most of the completion equipment is used in the upstream
end of the supply chain.
Oil and gas companies are a significant share of the overall market in these industries. A third of
all tubing, compressors and pumps and about 40 percent of industrial valves are bought by oil
and gas customers. The oil and gas portion of these industries involve over 500 plants and
employ approximately 50,000 workers.
TESTING AND WORKOVERS
Gas production declines over time. After the well has been producing for a while, certain
procedures are needed to maintain the equipment inside the well, evaluate the reservoir
performance over time, and stimulate production. Hydraulic fracturing, when done after the
well has been producing for a while, is one type of workover, done repeatedly on a shale gas well
over its life. The Operator will contract with a service company for these types of operations.
MIDSTREAM
Midstream services consist of transportation, storage and marketing of products. Pipelines are
the principal transportation mode for domestic production. Pipeline construction is a $30 billion
per year industry. Pipeline operations represent an additional 24,000 employees.
Services provided to oil and gas producers by the midstream firms include transportation,
storage, and trading of oil, natural gas, and refined products. Major independent participants
include El Paso Corp., Enterprise Products Partners LP, Kinder Morgan Energy Partners LP,
TransCanada Corp., and Williams Cos. Refining and Marketing.
Gas transmission companies convey the natural gas from the region where it is produced to the
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DOWNSTREAMDownstream activities consist principally of manufacturing of fuels, petrochemicals and
polymers. The Downstream end of the supply chain is the largest in terms of revenues (due to
the accumulated value added throughout the supply chain) but is the smallest in terms of
establishments and employment.
INDUSTRIAL CONCENTRATION IN THE SUPPLY CHAIN
While the supply chain includes over 21,000 companies, less than 1,000 companies account for
the majority of revenues and jobs. The principal divisions in the supply chain are Integrated Oil
and Gas Companies, Exploration and Production Companies, Storage and Transportation
Companies, Oil and Gas Drilling companies, and Oil and Gas Equipment & Service Companies.
INTEGRATED OIL AND GAS COMPANIES
The largest companies in the supply chain are termed “integrated oil and gas companies.” These
companies are global in scope and are involved in every aspect of the industry from upstream
through downstream. Examples of the integrated companies include Chevron, Conoco-Phillips,
and Exxon Mobil. Integrated companies headquartered outside the USA include BP, Shell, ENI
spa, Petrobras, Petrochina and Repsol SA. Each of these companies has annual revenues
exceeding $100 billion. The integrated companies have not been pioneers in shale gas. They
have entered the shale gas arena by buying exploration and production companies with
properties in the shale gas plays.
EXPLORATION AND PRODUCTION COMPANIES
Exploration and Production companies are also referred to as Independents because their
upstream activities are not integrated with the downstream operations of refining and
petrochemicals. The Independents have been the major drivers of shale gas development.
Among the largest independents are the pioneers in shale gas: Chesapeake, Devon, Anadarko
and Apache. Each of these independents has annual revenues exceeding $8 billion in 2010.
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OIL AND GAS DRILLING COMPANIESThe Integrated and Independent companies typically contract their drilling activities to
contractors which have the specialized rigs and equipment needed to drill the wells. Leading
onshore drilling companies include Noble Drilling, Nabors Industries and Helmerich & Payne.
Each of these companies has revenues exceeding $2 billion in 2010.
OIL AND GAS EQUIPMENT AND SERVICE COMPANIES
Most of the services in exploration are contracted to companies that specialize in providing
equipment and expertise needed to support the drilling and completion of the wells. While this
industry has over 7,000 establishments, just a few major companies dominate the market. The
majors in this division of the supply chain are Schlumberger, National Oilwell, Halliburton, and
Baker Hughes. These four companies all have annual revenues exceeding $10 billion and
collectively have annual revenues exceeding $60 billion in 2010. They represent about 54percent of the market in domestic oil and gas services.
THE SUPPLY IS HIGHLY CONCENTRATED
The oil and gas industry is so capital intensive that the majority of the exploration, production,
services and equipment manufacturing are conducted by large companies with access to Wall
Street and institutional finance. Most production is concentrated among 334 publicly traded
companies while the roster of publicly traded companies in the equipment and services market
includes 82 companies.
In 2009, the seven integrated domestic companies like Exxon Mobil and Chevron had sales
totalling $684 billion while the 12 global integrated companies, like BP, Shell and Total, had sales
of $1,247 billion. The 28 Independents, by contrast, had sales of $58 billion.
In terms of shale gas, the Independents are the pioneers and leaders in the industry. The
integrated companies are gaining entry into the shale plays through acquisitions. Exxon, for
instance, acquired XTO in 2010 while Chevron acquired Atlas in 2011 to acquire its shale gas
resources and technologies.
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shipments while the 8 largest generated 47% of shipment. The top 50 companies in the industry,
which has 559 companies, generate 81% of industry revenues.
Completion equipment companies are nearly as concentrated. Out of 451 pump companies in
the USA, the Top-4 generate 31% of shipments and the top 8 generate 41 percent. Twenty
companies in the pump industry generate two-thirds of industry sales. The concentration ratios
are nearly identical in the industrial valve industry and the pipe and tube business.
The lesson for economic developers is that, in the equipment markets, the action lies with the
Top-20 companies. They account for two-thirds of production and employment and are the
most likely to have a need for facilities in the Pittsburgh region.
DRIVERS OF INDUSTRY GROWTH AND EXPANSION
The oil and gas supply chain is highly cyclical. Prices drive upstream activity because they
determine the amount of capital investment that companies can make in new properties. The
equipment industries respond accordingly. The relationship between crude prices and drillingactivity is apparent in Figure 6. The number of establishments in the Upstream division of the
industry grows steadily regardless of price but the job levels upstream track drilling activity (see
Figures 7 and 8). The same pattern is apparent in the equipment sector of the industry (see
Figures 9 and 10).
Gas industry activity in the US has been driven by the shale gas technology since 2005. All of the
service and drilling companies report that activity levels in 2010 exceeded levels in 2008 due tohorizontal drilling for shale gas. Shale gas plays are redefining the market.
For the pipe and tubing division of the industry, industry growth is also being driven by exchange
rates. About 70 percent of the Oil Country Tubular Goods (OCTG) used in the domestic industry
are imported. With a falling US dollar, the economics of production have shifted back to
domestic production.
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CONCLUSIONS FOR INDUSTRY TARGETINGThe initial opportunities for the Pittsburgh region in the O&G supply chain were in the upstream
division of the industry. As the Marcellus industry grows, the upstream division will continue to
grow and the share of locally produced completion equipment and E&P services will grow as
well. Pennsylvania has a larger share of drilling employment and a much smaller share of
employment in equipment than Louisiana, Texas and Oklahoma (see Table 2). We believe that
the supply chain in Pennsylvania will become more like the supply chain in Oklahoma, Texas and
Louisiana over time.
Table 2. Oil & Gas Employment in 2009
Extraction Drilling Support Equipment
2111 213111 213112 333132 TOTAL
LA 8871 8968 29331 8700 55870
OK 19410 4375 17800 6862 48447
TX 84833 31597 76118 40351 232899Subtotal 113114 44940 123249 55913 337216
PA 2812 1949 2878 312 7951
USA 160688 67756 193589 60360 482393
LA,OK, TX% 70% 66% 64% 93% 70%
PA% 1.7% 2.9% 1.5% 0.5% 1.6%
US Breakdown 33% 14% 40% 13% 100%
LA,OK,TX BD 34% 13% 37% 17% 100%
PA Breakdown 35% 25% 36% 4% 100%
OK Breakdown 40% 9% 37% 14% 100%
TX Breakdown 36% 14% 33% 17% 100%
LA Breakdown 16% 16% 52% 16% 100%
Source: BLS QCEW employment series
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Figure 5. Breakdown of Exploration & Production Services Revenue in 2007
Source: Compiled from 2007 Census of Business
Drilling
36%
Rework
3%
Other drilling nsk
3%
Exploration services
11%
Cementing
2%
Surveying & Well Logging
3%
Hydraulic
facturing
8%Running, cutting, &
pulling casings,
tubes, or rods
3%
Perforating
1%
Installing equipment
3%
Pumping
1%
Other repair and
maintenance
5%
Support activities for oil
& gas operations, nsk
8%
Miscellaneous
13%
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Figure 6. Relationship between Crude Price and Drilling Activity
Source: EIA, Baker Hughes
$-
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
$100.00
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Wells
Feet(000)
Crude price
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Figure 7. Establishments in Oil & Gas Exploration & Production
Source: BLS QCEW employment series
0
5000
10000
15000
20000
25000
30000
2001 2002 2003 2004 2005 2006 2007 2008 2009 March or
Q1-2010
June of
Q2-2010
Pipeline Const.
Drilling
Support Act.
Extraction
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Figure 8. Employment in Oil and Gas Exploration & Production
Source: BLS QCEW employment series
0
100000
200000
300000
400000
500000
600000
700000
2001 2002 2003 2004 2005 2006 2007 2008 2009 March
or Q1-
2010
June of
Q2-2010
Pipeline Const.
Drilling
Support Act.
Extraction
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Th Oil d G I d t S l Ch i f th Pitt b h R i l Alli R J l 2011
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Figure 9. Establishments in Oil and Gas Equipment Supply Chain
Source: BLS QCEW employment series
-
500
1,000
1,500
2,000
2,500
2001 2002 2003 2004 2005 2006 2007 2008 2009 March or
Q1-2010
June of
Q2-2010
Compressors
Fab. Pipe
Ind. Valves
Pipe & Tube
Pumps
O&G Equip
Steel Mills
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Figure 10. Employment in Oil and Gas Equipment Supply Chain
Source: BLS QCEW employment series
$-
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
$100.00
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
C r u d e P r i c e ( $ / b a r r e l )
E m p l o y m e n t Compressors
Fab. Pipe
Ind. Valves
Pipe & Tube
Pumps
O&G Equip
Steel Mills
Crude
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