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2009.08.0369_IPAA.indd 1 CMYK 8/18/09 7:37:09 AM

 This latest profile of the
American independent
The major conclusions of the survey
producer provides a include:
fascinating look at how
independents have evolved in x Independents range in size from small one-or-two person
just the past few years. private companies up to very large public firms. More than one-
Perhaps most interesting is the fifth of responding independents are publicly traded firms, with
strength of the industry as this their stock being traded on the NYSE (57.1%), NASDAQ
snapshot was taken in 2007- (23.8%) and AMEX (19.1%). Volatility is becoming more and
2008, during volatile economic more of a mainstay and companies have expanded their use of
times that saw prices rise financial instruments to counter rapidly shifting commodity
dramatically, and then fall just prices.
as fast. Even though the
commodity price collapse and x The offshore area continues to be a noteworthy domain of
financial crisis took place after independents although the numbers have declined slightly since
the survey was conducted, the last survey conducted in 2000. Currently, almost 10% of
visible changes are apparent responding firms operate in federal waters, while 14.6% operate
since the last survey was in state waters, a decrease in both categories from the 2000
conducted in 2000. survey.
Of course strength through adversity has been the story of independent x Nearly 11% of responding firms currently operate internationally
producers for decades, who, prepared for both, have continued to endure through which is down slightly from the 11.6% reported in the 2000
bust and boom. These latest survey results only speak further to this truth, survey. Just over 11% of responding firms plan to pursue
painting the picture of a prudent and versatile industry that is dealing with international opportunities within the next five years. The areas
increased volatility and heightened political scrutiny. For our part, during the past most often indicated for future exploration include Canada,
80 years, the Independent Petroleum Association of America has proudly worked South America and the North Sea.
on the industry’s behalf on the national stage.
x The past two conclusions indicate that U.S. independents have
Emulating the resolve and preparation of its members, IPAA has geared up its become more focused on domestic onshore production
efforts in the face of recent significant changes in the political and economic operations compared to offshore or international pursuits
landscape. One can see the changes in technology over time – the growth of including a growing focus toward unconventional natural gas
horizontal drilling and the advent of hydraulic fracturing. One can see how production. This focus is significant as IPAA data shows that
political hurdles have become as challenging as financial hurdles. Demographic independents produce approximately 68% of our oil, 85% of our
data shows the aging of the industry and the workforce challenges ahead in natural gas and drill almost 90% of the country’s wells.
attracting new talent to the exploration and production (E & P) sector. In addition,
we have broken the data down into three size groups to better illustrate how x The industry is more high tech than ever with horizontal drilling
small, medium and large-sized independents are coping with these changes. and hydraulic fracturing featuring large in our production profile.
Over one-quarter of independents expect to participate in
Expanding advocacy campaigns to counter misinformation in the media and to horizontal drilling ventures by the year following the survey
promote a balanced American energy policy, IPAA remains proactive beyond (2008). Over 62% saw an increased budget for seismic (2007-
Capitol Hill in its efforts to advance and defend the industry. In the face of new 2008) which grew by 50% (median). The median respondent
legislative and regulatory challenges (and some old) IPAA has worked to shape hydraulically fractured 12 wells in 2007 and the most popular
the national debate on energy to include not only the importance of American oil EOR technologies were water flooding (71.6%) and horizontal
and natural gas production, but also the importance of the independent producer drilling (43.2%).
on the American economy as well. More than holding our own, the industry’s
profile is now being seen across the country in the media and in the most x The most common forms of organization for responding firms
powerful corners of Washington, D.C. are S Corporations and C Corporations, with over 63% of
respondents being organized in this way. Compared to the 2000
This latest survey shows that very industry in action, meeting its challenges head survey an increasing number of companies are established as
on, and in many cases thriving. limited liability companies (over 20% compared to 10% in 2000).

Thank you to the support of our members for making our results in Washington x The average independent respondent has been in business for
and across the nation possible, and special thanks to those who submitted 26 years, employs 11 full-time and three part-time people and
responses to this survey. For questions, contact Frederick Lawrence at produces gross revenues of $7,851,000 (median).
202/857-4722.
x Independents tend to be well-educated with a large majority
holding a degree from some level of higher education (over 94%
with a bachelor’s degree or higher). Over 62% of independents
surveyed possess a professional background in either
engineering or geology with another 24% in either accounting or
H. G. “Buddy” Kleemeier, Chairman finance.

2009.08.0369_IPAA.indd 2 CMYK 8/18/09 7:37:10 AM

 The following summarizes the results of the survey’s ten major components, with highlights A comparison of age groups for all respondents indicates the largest
including: demographics, company profile, capital formation, technology, international percentage of respondents, 49.7%, are between 50 and 59 years of age.
operations, public lands—onshore, public lands—offshore, oil and gas operations, marginal An additional 29.0% are 66 and over, while 13.8% of respondents are
well operations and taxes. A new addition to the producer survey includes size differentials between 40 and 49. Entrants into the industry have historically tracked
based on the company’s full-time employee count with 1-19 a small-size independent, 20-249 a crude oil prices, whereas the largest age group reflected an extended
medium-size independent and 250 and over a large-size independent. period of higher prices. This has not been the case based on data
between the past two surveys. Compared to the 2000 survey, the 20-39
and 40-49 groups both shrunk while the 50-59 age category grew from
Demographic Summary 17.6% to 49.7% illustrating serious future workforce challenges for the
Perhaps one of the most important results of a study of this nature is the industry.
development of a demographic profile of the association’s membership.
The following table shows the demographic highlights as reported by the LEVEL OF
EDUCATION Small-size Medium-size Large-size
2008 survey participants. COMPLETED independents independents independents
High School 8.9 2.4 0.0
POSITION IN Small-size Medium-size Large-size
Bachelor’s degree 55.7 63.4 28.6
COMPANY independents independents independents
Master’s degree 32.9 26.8 64.3
CEO 23.6% 19.4% 0.0%
Doctorate 2.5 7.3 7.1
President 45.8 19.4 0.0
COO 0.0 5.6 7.7
CFO 0.0 11.1 15.4 The upstream sector is an increasingly highly educated industry with 55.2%
Vice President 5.6 16.7 23.1 of the independents responding possessing a Bachelor’s degree, and an
Owner 12.5 13.9 0.0 additional 39.3% possessing degrees beyond the undergraduate level. The
Partner 9.7 2.8 7.7
percentage holding a Doctorate has doubled since the 2000 survey.
Manager 1.4 2.8 7.7
Other 1.4 8.3 38.5 Engineering and geology are the predominant areas of professional
background representing 62.10% of total respondents. Since 2000, the
The vast majority of small and medium-size company respondents are percentage of geologists has increased by 12.8% and the percentage of
either Presidents or CEOs of the reporting company while Vice Presidents, respondents with financial backgrounds has fallen by 6.1%.
CFOs or other employees typically responded for the large-size
independents. Based on all respondents, the highest percentage of valid PROFESSIONAL Small-size Medium-size Large-size
BACKGROUND independents independents independents
respondents, 35.3%, are Presidents of the reporting company, with an Engineer 39.7 36.1 21.4
additional 20.3% holding the position of CEO. Geologist 29.5 16.7 7.1
Finance 5.1 19.4 21.4
Small-size Medium-size Large-size Accountant 9.0 19.4 28.6
AGE GROUP independents independents independents Landman 11.5 5.6 7.1
20-39 1.3 2.5 21.4 Economics 0.0 2.8 0.0
40-49 11.3 20.0 21.4 Marketing 5.1 0.0 0.0
50-59 55.0 45.0 42.9 Government relations 0.0 0.0 14.3
60-65 2.5 5.0 14.3
66 and over 30.0 27.5 0.0 The respondents hold a high level of authority which varies depending on
the size of the company. Almost 71% of the respondents report that they
AGE GROUP
are responsible for making the final decision in the company’s purchase of
oil field service and supplies and an additional 14.3% play some role in the
4.2
20-39 decision process.
3.5

40-49
13.8

17.6
50-59
49.7

10.6
60-65
4.1

26.1
66 and over
29.0

2000 2007

2009.08.0369_IPAA.indd 3 CMYK 8/18/09 7:37:10 AM

 Graph 1: Graph 2:

ROLE IN PURCHASE DECISION SERVICES TYPICALLY RECOMMENDED

Small Independents Medium Independents Small Independents

Financial services 71.4%
8% Format ion evaluat ion/ well
5% 19% complet ion
67.5%

3% Drilling cont ract or services 67.5%

Well maint enance 53.3%

Cement ing equip./ services 49.4%

Surf ace product ion equip./ services 44.2%

50% Mud & chemicals 41.6%
Mot ors/ engines/ pumps/ compressors 31.2%
26% Valves 28.6%

Drilling rigs & equipment 26.0%

85% Aut omat ion syst ems 13.0%
5%
Of f shore services/ equip. 7.8%
OCTG 7.8%
Large Independents Legend

Medium Independents
Financial services 63.3%
36% Make final decisions Drilling cont ract or services 56.7%
Format ion evaluat ion/ well
46.7%
complet ion
Specify Surf ace product ion equip./ services 40.0%

57% Well maint enance 36.7%

Recommend Cement ing equip./ services 33.3%

Drilling rigs & equipment 30.0%

7% No role Mot ors/ engines/ pumps/ compressors 26.7%

Mud & chemicals 23.3%
Valves 20.0%

OCTG 13.3%

Aut omat ion syst ems 13.3%

Of f shore services/ equip. 0.0%

Of the services typically recommended by respondents, 70.7% report that

they typically recommend financial services, 61.8% said that they
Large Independents
recommend drilling contractor services and 60.2% recommend formation
evaluation/well completion services [Graph 2]. Financial services 80.0%

Drilling rigs & equipment 20.0%

Aut omat ion syst ems 20.0%

There were a total of 150 surveys submitted by independent* producers. Cement ing equip./ services 20.0%

Drilling cont ract or services 20.0%

An additional 16 surveys were submitted by members of IPAA that did not Format ion evaluat ion/ well
0.0%
complet ion
classify as independents and were not included in these results. The data Mud & chemicals 0.0%
Surf ace product ion equip./ services 0.0%
have been organized into size categories based on full-time employees to Mot ors/ engines/ pumps/ compressors 0.0%

match U.S. census data. Small independents have less than 20 Valves 0.0%
OCTG 0.0%
employees. Medium-size independents have between 20-249 employees Well maint enance 0.0%

and large independents have over 250 employees. To be included as a Of f shore services/ equip. 0.0%

small, medium or large independent the respondent company had to be

classified as an independent producer based on being primarily focused on
E & P business and tax classification. Company Profile Information
The profile indicates that the median firm has been in business for 26 years
Throughout this report, the percentages shown are based on the valid, and has median gross revenues of $7,851,000 and median net taxable
non-missing responses for each question (rather than on the total sample income of $1,242,315. In addition, the median independent employs 11
size of 150). full-time and three part-time employees. As these figures indicate,
independents are primarily small businesses that help fuel their regions'
economic activity. Data in a sister IPAA publication, The Oil and Gas
Producing Industry in Your State, shows that 33 states currently produce oil
and/or natural gas in addition to the Federal Offshore. This publication can
be viewed at http://www.ipaa.org/reports/econreports/2007-
2008IPAAOPI.pdf.
* The basic definition of Independents is a non-integrated company which receives nearly all
of its revenues from production at the wellhead. They are exclusively in the exploration and
production segment of the industry, with no marketing or refining within their operations. The
tax definition published by the IRS, states that a firm is an Independent if its refining capacity
is less than 50,000 barrels per day in any given day or their retail sales are less than $5 million
for the year.
2

2009.08.0369_IPAA.indd 4 CMYK 8/18/09 7:37:10 AM

 Graph 3: Graph 4:

ANNUAL OIL FIELD SERVICES FORM OF BUSINESS ORGANIZATION

AND EXPENDITURES
Small Independents Medium Independents
Small Independents Medium Independents
2% 20% 21% 17% 38%
12% 2%
14%
27% 2%

17% 7%
14%

60%
13% 7%
21% 38%
36%
31%

Large Independents Legend

Large Independents Legend

7%
$0-$500,000 21% C Corp.
S Corp.
$500,001-$1,000,000
Limited partnership
$1,000,001-$5,000,000 14% 57% Sole proprietorship
Limited liability company
$5,000,001-$10,000,000
7%
93%
Over $10,000,000

As expected, the dominant business activity of all surveyed association Capital Formation
members is production (83.1%) and exploration (79.5%) with an aggregate Although the mix of capital coming into the industry has been changing, the
of 80.5% in the collective E & P sector. The remainder of the membership most frequently mentioned source of capital is generated through internal
is comprised of service-supply firms, integrated producers, other sources at 41.4% followed by banks at 21.1% and outside investors (oil &
association affiliates, consultants, financial providers, marketers and royalty gas partners) at 18.6%. This is why the industry's capital expenditures are
owners. highly correlated to crude oil or natural gas prices; most of the industry
uses internally or industry generated funds for reinvestment. Private debt,
A large percentage of independent producers are organized as S private equity and industry partnerships represent the largest percentage of
Corporations and C Corporations at 34.2% and 28.9%, respectively. A total funding for operations. The proportion of projects financed through
total of 92.2% of all responding companies are classified as independent outside sources is relatively small with 31% of projects being $0-$1million
(versus integrated) for tax purposes. (Note: only data from independents and an additional 29.2% being $1.1-$5 million. Price expectation plays a
are used except where noted otherwise.) More than one-fifth of responding large part in the budgeting process for exploration and production
companies reported their stock is publicly traded. Of publicly-traded companies. The 2007-2008 crude oil and natural gas markets were more
independent producers, the NYSE is the predominant exchange at 57.1%. favorable to the industry compared to previous surveys, which was
The remaining independents were registered on NASDAQ and AMEX reflected by increased expectations as demonstrated by capital
exchanges at 23.8% and 19.1% respectively with the AMEX proportion expenditure budgets. Median capital expenditures for 2007 were
growing 8.4% since the 2000 survey and the NASDAQ declining by 1.2%. $3,500,000 and median budgeted capital expenditures for 2008 were
Only 14.7% of all respondents were publicly traded which is down from $7,500,000. As might be expected capital expenditures increase with
21.1% of public respondents in the 2000 survey. company gross revenues. Budgeted expenditures for 2008 ranged from
$2,500,000 for small-sized independents to $2,150,000,000 for the largest
firms.

Based on relative proportions, production comprised 70% of a company’s

financing, followed by exploration at 50% and pipelines at 9%. The median
amount financed for these areas was $5,000,000, $6,500,000 and
$750,000 respectively. The total General & Administrative budget for 2008
3

2009.08.0369_IPAA.indd 5 CMYK 8/18/09 7:37:10 AM

 was $1,450,000 with amounts ranging from a median amount of $850,000
12
for small-sized independents, $5,400,000 for mid-sized independents and 10
$100,000,000 for large independents.

Volatility of prices is something that all producers continue to face, but 1 N/A
swaps, at 41.5% have replaced futures and long-term contracts as the
financial instruments most frequently used to stabilize price levels. The use 2000 2007
of futures, which was most popular in 2000, fell to a second place tie at
Number of horizontal drilling ventures (average)
26.8% (with other) followed by the use of options at 19.5%. Coping with
Number of wells hydraulically fractured (median)
volatility has become an increasingly important component of the E & P
industry as witnessed with the proliferation of hedging strategies to mitigate
risk associated with more extreme commodity price fluctuations. The average respondent hydraulically fractured 54 wells on average (12
median) in 2007. The percentage of production affected averaged almost
FINANCIAL INSTRUMENTS CURRENTLY USED TO 51% (a median of 30%). The large companies hydraulically fractured an
GUARANTEE PRICE LEVELS
average of 269 wells compared to 44 for the mid-sized and 14 for the
small-sized independents. The average number of wells using other
27.8%
stimulation techniques (e.g. cavitation) was 28 with a median of 18. These
Futures 26.8% techniques encapsulated an average of 49% of production or a median of
35%. For more information on the importance of hydraulic fracturing,
Options 19.5% please visit http://www.energyindepth.org. In regard to enhanced oil
Swaps 16.7% recovery (EOR) technologies used, water flooding was top at 71.6%
41.5%
followed by horizontal drilling at 43.2% and then multi-lateral well-bores at
Volumetric production payments 13.6% and polymer augmented water flooding at 12.4% (multiple
3.7%
responses allowed).
Long-term contracts 21.5%
15.9%
The small-sized independents primarily were split between the utilization of
10.4%
Production agreements 13.4% water flooding (66.7%) and horizontal drilling (31.1%). The mid-sized
independents used water flooding and horizontal drilling (75% and 60%
Other 6.9%
26.8% respectively) in addition to some other flooding technologies (25% for
polymer augmented water flooding and 20% for carbonate water flooding).
2000 2007 The large-sized independents responded with an 87.5% and 50% mix for
water flooding and horizontal drilling which was supplemented by
multilateral well bores (50%), carbonate water flooding (25%), and CO 2
Technology injection (25%).
Besides company personnel, in many cases, the use of technology is the
second biggest contributor to the independents’ relative success. The median budget for seismic activity of companies in 2008 is $800,000,
Technology can contribute significantly to a company’s bottom line in the compared to a budget of $350,000 for the 2000 survey. The range of the
forms of improved efficiency and reduced costs. The survey highlighted median averages of companies was from $340,000 for the small
the following three technologies -- horizontal drilling, seismic and hydraulic independents to $25 million for the large independents. The use of 3-D
fracturing – and their increasing importance to domestic production. Based seismic is now more prevalent, outpacing 2-D with a median of 99.5%
on all independent respondents, the company participated in an average of representing 3-D and 25% representing 2-D. The proportion of 3-D for the
ten horizontal drilling ventures in 2007 (compared to just one in the 2000 large independents averaged 91% compared to 72% for mid-sized and
survey). Size made a big difference with the large-size independents 94% for small-sized independents. 3-D seismic has proven to be an
operating an average of 87 horizontal drilling ventures compared to eight extremely important exploration and exploitation tool that has become more
for the mid-sized independent and one for the small-sized independent. A competitively priced due to the increased speed and memory of the
total of 26.6% of respondents indicated that they did not participate in computer.
horizontal drilling ventures in 2007 but expected to do so in 2008.
International Operations
The international arena is an area where a select group of independents
are considering risking relatively small amounts of their exploration budgets
for large (and typically oil) reserve payoffs. However, the growth in onshore
unconventional natural gas plays most probably forestalled international

2009.08.0369_IPAA.indd 6 CMYK 8/18/09 7:37:11 AM

 ambitions over the past two years (2006-2008) as companies focused on Graph 8:
consolidating domestically and targeting regional shale plays. A total of
BIGGEST HINDRANCE IN OPERATING
10.8% of responding firms reported participating in international operations,
INTERNATIONALLY
a decrease of 0.8% from the 2000 survey. Of those independents that did
not participate in international operations, 11.1% planned to do so within Small Independents Medium Independents
the next five years (significantly down from 27.3% in the 2000 survey). The
projects responding independents will be pursuing internationally are
28% 28% 24%
primarily onshore E & P and production enhancements followed by
33%
redevelopment/refurbishment and E & P offshore [Graph 7].
2% 5%
The biggest hindrances to international operations were the accompanying 5%
2%
political uncertainty (33.3%) and capital outlays (25.6%), constituting a
6%
reversal from the 2000 survey responses which resulted from the dearth of 32%
2% 33%
capital following the 1997-1998 price collapse [Graph 8]. For those
companies with international reserves, an average of 14% was outside
North America (median of 10%). Latin America and Canada remain
popular venues due to their geographic proximity and relatively amenable Large Independents Legend
Capital outlays
(albeit increasingly on a country-specific basis) political risk. 29%
Political uncertainty
Graph 7: Tax structures
Information
WHAT KIND OF INTERNATIONAL PROJECTS DO
YOU PLAN TO PURSUE? Tariffs
57% Sanctions
Small Independents Medium Independents Other
14%

9% 5%
9%
43%
SINGLE BIGGEST HINDRANCE IN OPERATING
76%
INTERNATIONALLY
40%
95%
Capital outlays 31.3%
25.6%
29%
5% Political 25.9%
27% 33.3%
9% uncertainty

Tax structures 5.4%

5.1%

Large Independents Legend Information 7.1%

5.1%
14%
E&P-onshore
Tariffs 0.0%
E&P-offshore 1.3%
14%

Redevelopment/refurbishment Sanctions 2.7%

1.3%
71%
Production enhancement 27.7%
Other 28.2%
43% Service/supply
Other 2000 2007

The large-sized independents were much more active internationally with

50% of respondents indicating current operations overseas and with 37.5%
of respondents planning to pursue international opportunities over the next
five years. Only 8.1% of mid-sized independents and five percent of small-
sized independents operate internationally and just 10.8% of mid-sized and
7.5% of small-sized companies are considering international activities in
the near future. The large company has on average just 10.5% of its
reserves outside of North America. In regard to obstacles, the large-sized

2009.08.0369_IPAA.indd 7 CMYK 8/18/09 7:37:11 AM

 independents were more concerned about political uncertainty (57.1%) regulations, and 23.6% cited environmental costs. By comparison, in 2000,
while the mid- and small-size independents were more worried about a 27.8% of responding independents indicated financial constraints, 23.6%
combination of political uncertainty (33.3% & 31.9%) and capital outlays indicated no interest offshore, 19.4% cited environmental costs, and 19.4%
(33.3% & 27.7%). For more information on the international activity of U.S. cited government regulations. As in other areas of the survey, regulatory
independents, please refer to our 2008 International Activity Survey at and environmental issues have been catching up to or surpassing financial
http://www.ipaa.org/issues/international/2008NewSurveyOnIntlActivity.pdf. issues as future developmental hurdles.

Public Lands—Onshore A total of 10.3% of independents reported having drilled wells in federal
waters in 2007, while 8.2% drilled wells in state waters, down from
Over 43% of responding independents reported they currently hold federal
respective numbers of 16.4% and 10.5% in 1998. For the active drillers of
or Indian leases. Based on size, 75% of large-sized independents held
wells, the median number of wells was nine in federal waters and one well
federal/Indian leases compared to 61.1% for mid-sized and 28.2% for
in state waters. Despite the decline in offshore operators, company
small-sized independents. The average number of leases ranged from a
production was much higher than in the 2000 operator survey. The median
median amount of 775 for large, 12 for medium and four for small
offshore crude oil and natural gas production for 2007 was 4,746,500 Bbls
operators. Of all independents who hold such leases, the median number
and 12,000 Mmcf compared to 283,750 Bbls and 14,313 Mmcf,
held is 12, an increase from five in the 2000 survey.
respectively, in 2000. In addition to dramatically increased production
volumes per company, the operating depths have greatly increased with
The median daily federal production of crude oil was eight barrels (Bbls)
the help of new seismic, drilling and imaging technologies. Of the
per day, while the median daily federal production of natural gas was 16
independents operating offshore, 60% are operating in water of less than
thousand cubic feet (Mcf) per day; compared to 4.5 Bbls and 50 Mcf in the
300 feet and 20% are operating in ultra-deepwater over 2,001 feet. By
2000 survey. Regarding median federal land production volumes, the large
comparison, in 2000, 86.4% were operating in water of less than 300 feet
independent produced 2,125 Bbls/day and 22,300 Mcf/day compared to 90
and only 5% were operating in ultra-deepwater over 2,001 feet.
Bbls/day and 315 Mcf/day for a medium company. The two greatest
Independent producers have become active participants in ultra-deep and
hindrances impeding pursuit of federal land opportunities are government
deepwater production, reaffirming the lease sale data from the Minerals
regulations at 63.1% (up from 41.0% in 2000) and environmental costs at
Management Service (MMS) showing consistently robust participation by
48.8% (up from 27.8% in 2000).
independents in the bidding process and in high bids.
DAILY FEDERAL PRODUCTION (MEDIAN) Graph 9:

50.0 INDEPENDENTS’ OFFSHORE OPERATIONS

BY WATER DEPTH

Small Independents Large Independents

16.0
8.0
4.5 13%
5%
17%
2000 2007
48%
Crude Oil (bbls/day) Natural Gas (mcf/day)
17%
38%

Public Lands—Offshore 3%
62%

The offshore area continues to be a robust domain for the industry and
especially for independents but the numbers show a decline compared to
the 2000 survey. The spate of hurricanes (including Ivan, Katrina, Rita and
Ike) certainly played a large role in shaping activity and future plans in this Legend
important production arena. While 9.5% of responding independents 0-300 ft.
currently operate in federal waters, 14.6% operate in state waters. More 301-600 ft.
than 16% of respondents plan to operate offshore in the next five years, a 601-1,200 ft.
decrease of over seven percent compared to 2000. The reduced interest 1,201-2,000 ft.
may involve more enticing onshore opportunities combined with a changed
2,001-5,000 ft.
perception of hindrances (e.g. hurricanes) and steep financial barriers to
5,001-10,000 ft.
entry. When asked about the biggest hindrance impeding pursuit of
offshore opportunities, 43.1% of responding independents indicated no Over 10,000 ft.
interest, 30.6% indicated financial constraints, 25% cited governmental
6

2009.08.0369_IPAA.indd 8 CMYK 8/18/09 7:37:11 AM

 produced 500,000 Mcf/d gross/255,000Mcf/d net compared to 6,000 Mcf
The large independents are by far the most active in this category in similar /2,106 Mcf and 1,500 Mcf /500 Mcf for the mid and small-size producers.
fashion to international operations. By comparison, 45.5% of large The smaller company required a higher crude oil price to increase their
independents operate in federal waters compared to 8.6% of the mid-tier exploration budget with 40.6% of small companies reporting over $120
companies and 2.9% of the small-size operators. In regard to the next five compared to 28.6% of mid-size companies for over $120 and only 12.5% of
years, half of the large companies are planning on operating offshore large-size companies. The large independent would change the budget at
compared to just 10.7% for mid-size and 12.1% for small-size the $101-$110/Bbl threshold (37.5%) and $81-$90/Bbl threshold (25%).
independents. Regarding production by depth, it is interesting to note that This held similar to natural gas with small companies requiring prices over
while over 66.7% of the large-size independents’ production comes from $11.00 Mcf (29.5% compared to a range of $10.01-$11.00 Mcf (24.1%) to
the ultra-deepwater (over 2,001 ft.), an impressive 50% of small-size over $11 Mcf (20.7%) for the mid-size companies and a larger range of
operators’ production is from water depths greater than 5,001 feet. $8.00-$8.50 Mcf (22.2%, $9.01-$9.50 Mcf (22.2%) and $10.01-$11.00 Mcf
(22.2%) for the large size companies.
Oil and Gas Operations
The typical respondent reported a median gross crude oil production per The smaller company had a higher amount of spending for exploration
day of 300 Bbls and a net production per day of 160 Bbls. The respondent (36.4%) compared to the mid-size company (23.1%) or the large
also reported a median gross natural gas production of 2,000 Mcf and net independent (17.7%). The small independent also had a much higher
production of 1,500 Mcf. The largest percentage of independents would proportion of unconventional production (90%), compared to 40% for mid-
increase their exploration budget in 2008 for crude oil at $120.00 and size and 50% for large-size companies. The smaller and larger
above per Bbl and their exploration budget for natural gas over $11.00 per independents had more unconventional oil (17.5% and 14.0%) than the
Mcf. It is important to recall that this survey was taken prior to the collapse mid-sized company (4.3%) but they all shared roughly similar percentages
in commodity prices and demand which took place in the second half of for the proportion of unconventional natural gas: 42.5% for small, 49.8% for
2008. Nonetheless, these benchmark prices are illustrative of how price medium and 42.2% for large producers. The phenomenon of
volatility has changed for this industry. For the 2000 survey, the responding unconventional natural gas is readily apparent compared to the 2000
producers noted they would increase their exploration budgets at survey with the proliferation of plays such as the Barnett, Woodford and
$25.00/Bbl and above (48.1%) and $2.80-$3.20/Mcf (50%). Fayetteville in addition to newer activity in the Haynesville and Marcellus.

In 2007, the typical responding independent operated 60.0 gross and 54.0 Regarding drilling, the large company drilled 54 oil wells and 300 natural
net crude oil wells and 44.0 gross and 35.0 net natural gas wells. The gas wells in 2007 compared to a median of 15/46 for mid-size and 4/5 for
typical firm drilled nine crude oil wells and 12 natural gas wells in 2007 and small-size. For 2008, the large company planned to drill 64 oil wells and
planned to drill eight crude oil wells and eight natural gas wells in 2008. 280 natural gas wells compared to 15/25 and 4/5 for the respective others.
Many independents have been continuing to orient their drilling portfolios The large company in 2007 operated 1000 gross oil wells (619 net) and
towards more unconventional gas-directed drilling as shale plays continue 3,300 gross natural gas wells (2,651 net) compared to the small company
to develop. Regarding breakdown of spending in 2007, 31% was directed who operated 34 gross oil wells (25 net) and 20 gross natural gas wells (13
toward exploration and 69% toward development. Approximately 50% of net).
production was unconventional and natural gas-oriented. Graph 10:

RANKING OF COST CENTER

AMOUNT OF PRODUCTION THAT IS UNCONVENTIONAL
(MEDIAN) Small Independents
Environmental costs 4.83
All
50% Transportation 4.83
Independents
Taxes 3.04
Small 90%
Electricity 5.25

General & Administrative 3.14

Medium 40%
Insurance 4.62
Large 50% Labor 2.34

Other 6.04

For the large independents, median U.S. crude oil production per day was
4,000 Bbl gross and 10,000 Bbl net compared to 750Bbl/450 Bbl for mid-
size and 150Bbl/75 Bbl for the small-size producer. The large independent

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 RANKING OF COST CENTER (continued) independents. The median marketed crude ranged from 15,000 Bbl/d for
the large, 500 for the mid-size and 213 for the small-size independent. For
Medium Independents
natural gas, the median amount was 350,000 Mcf/d for large, 5,715 Mcf/d
Environmental costs 5.44 for mid-size and 1,500 for small-sized independents. A total of 45% of the
Transportation 4.33 respondents market their own crude oil and natural gas compared to 60%
Taxes 2.96 in the 2000 survey. The median amount of crude oil sold for all
respondents was 500 Bbls. The median amount of natural gas sold was
Electricity 4.71
2,000 Mcf which compared to 75 Mcf in the 2000 survey. A total of 87.5%
General & Administrative 2.66 reported firm service compared to 12.5% for interruptible service.
Insurance 5.52
Only nine percent of small independents process their own natural gas
Labor 2.55
compared to almost 22% for mid-sized and 40% for large independents.
Other 7.17 The median amount of natural gas processed ranged from 50% for small,
70% for medium and 55% for large-sized independents. Fifty percent of the
Large Independents large-sized companies held capacity in their name on an interstate natural
Environmental costs 6.63 gas pipeline compared to almost 17% for mid-size and just over 3% for
Transportation 4.38 small-sized independents.

Taxes 2.75 The largest percentage of responding firms, 35.6%, reported labor as their
Electricity 4.75 largest cost center. This is followed by general and administrative (G & A)
expenses as the largest cost center of 28.3% of responding firms. Two
General & Administrative 2.75
notable cost centers which grew compared to the 2000 survey were taxes
Insurance 5.38 at 27.2% for largest cost center compared to 19.8% and environmental
Labor 3.00 costs which grew from 1% to 5.8% as the largest cost center. The largest
cost center for the small producers was labor (40%) followed by G & A
Other 5.83
(27.5%), taxes (25.5) and environmental costs (8.5%). For medium-size
producers, the largest cost center was G & A (34.5), followed closely by
labor (31%), taxes (21.4%) and transportation (7.4%). For large
independents, the largest cost center was taxes (37.5%) followed by labor
For the reserves outlook, the large independent held 152 MMBbls of oil and
(25%), G & A (25%), and other (16.7%).
1,266,528 MMcf of natural gas at year-end 2007 compared to six
MMBbls/1,134 MMcf for the mid-sized independent and 100 MMBbls/140
MMcf for the small-size producers. For the typical independent, the median Marginal Wells
reserves for crude (YE 2007) rose compared to the 2000 survey from 22.6 Crude oil production from marginal wells accounted for large quantities of
MMBbls to 71 MMBbls while natural gas reserves dropped from 2,651 total production in nearly every size company. A marginal well is defined
MMcf to 2,100 MMcf. as a well that produces less than 15 Bbls per day of crude oil or less than
90 Mcf per day of natural gas. Marginal oil accounts for 80% of all crude
For the pipelines and marketing segment, the large company relied production for small independents, 40% of production for mid-sized
primarily on producer/gatherer (49.4%) while the middle and small independents and 10% of production for large companies. Natural gas
independents were more balanced on their gathering sources. Small marginal wells are growing in their collective importance with these wells
producers used intrastate pipelines (34.7%), independent gatherers constituting 67.5% of production for small producers, 50% for mid-sized
(27.3%), producer/gatherers (23.5%) and interstate pipelines (14.5%). Mid- and 11% for large.
size producers utilized producer/gatherers (27.9%), interstate pipelines
(26.9%), independent gatherers (23.1%), and intrastate pipelines (22.1%). Responding independents reported operating a median number of 37.0
The largest percentage of natural gas, 29.9%, is gathered through gross and 32.0 net marginal crude oil wells and 23.0 gross and 37.0 net
intrastate pipelines, followed by producer/gatherer at 27.6% and marginal natural gas wells. Marginal wells represented 75.0% of total
independent gatherer at 24.1%. The remaining 18.4% is gathered through crude oil production (up from 65% in the 1998 survey and holding roughly
an interstate pipeline. Compared to the 2000 survey, the largest growth steady compared to the 2000 survey) and 40.0% of total natural gas
was in the producer/gatherer and independent gatherer categories and the production for the reporting independents. The typical small independent
biggest drop was in the interstate pipeline category. operated 33 gross and 25 net marginal oil wells in addition to eight gross
and 14 net natural gas marginal wells. The mid-size independent operated
Approximately 32% of small producers marketed their own crude oil and 65 gross and 120 net oil wells and 50 gross and 59 net marginal gas wells.
natural gas compared to almost 67% for the mid-size and 80% for the large

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 The large independent operated 459 gross and 107 net marginal oil wells AVERAGE COSTS FOR OPERATING A MARGINAL WELL
and 3,350 gross and 500 net marginal gas wells. ($/BOE)

$24
As expected, the biggest concern of marginal well operators was the price
of crude oil and natural gas. Other concerns listed were labor costs,
environmental costs, produced water, and the costs associated with $9
decommissioning a well [Graph 11]. For the large independent, the biggest
concern was gas prices (66.7%), followed by energy costs (33.3%) and
labor costs (33.3%). For the mid-sized independent, the biggest marginal
Median
well concern was a tie between natural gas prices (40%) and crude prices
(40%), followed by labor costs (23.8%) and labor costs (38.1%). For the 2000 2007
small operator, the biggest issue was crude price (47.1%), followed by gas
prices (26%), and then plugging and abandonment (P & A) costs at 22.5%.
The median cost to decommission a 5,000 and 10,000 foot well had risen
Graph 11: significantly to $20,000 and $50,000, up from $10,000 and $20,000 in the
2000 survey. The average (median) work over cost per well was $25,000
BIGGEST CONCERN OF and the median company performed a work over once per month.
MARGINAL WELL OPERATIONS

Small Independents Medium Independents

Taxes
Independents reported a median of 6.0 inactive wells (less than two years
15% old) which is slightly up from the 2000 survey. Inactive wells ranged from a
4% 12%
10% median of 153 for large, ten for medium and five for small size
6% 5%
40% independents. Of those responding, over 47% noted that the intangible
6% drilling cost’s (IDC) preference had caused them to pay the alternative
minimum tax (AMT). Almost 46% of small independents paid the ATM
16% compared to 50% of the mid-size and just over 33% of the large-sized
47% 40% independents.

The median amount incurred for geological and geophysical expenses for
the last fiscal year was $500,000 compared to $175,000 in 2000. Based on
Large Independents Legend size, the median amount incurred for the small independent was $150,000
compared to $900,000 for the mid-size and $28,204,000 for the large
Produced water
17% 17% independent. The median percentage of these expenses capitalized for the
Energy costs
latest fiscal year was 40.0% which doubled since the 2000 survey. While
Labor costs
the large independent capitalized almost 83% of their geological and
Gas prices
geophysical (G & G) expenses, only 25% of mid-size and 10% of small-
Plugging & abandonment costs
sized independents did so. The median percentage of the
Crude prices
G & G costs that were expensed for the last fiscal year was 60.0%. Small
Other environmental costs
67%
independents expensed 90% of their G & G costs compared to 75% for
Other
mid-size and almost 18% for the large-sized independents.

Responding independents further reported that they operated a median of

eight wells that broke even or lost money in 2007, down from 20 in 1999
and 13 in 1997. The median cost to operate a marginal well was $24 per
barrel of oil equivalent (Boe) which almost tripled the $8.68 per Boe from
the 2000 survey, excluding taxes and corporate overhead expenses. The
average operating cost ranged from a high of $26/Boe for a small producer
to $23 for a mid-size producer to $20 for a large producer. The small
independent had five wells that broke-even or lost money on a cash-flow
basis for the 2007 fiscal year compared to 33 wells for the mid-sized
independent and 50 wells for the large independent.

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