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Oil and Gas Exploration Companies - The 3 Phases of Oil and Gas Drilling Explained

Oil and Gas Exploration Companies - The 3 Phases of Oil and Gas Drilling Explained

Oil and gas exploration companies play a very important role within the energy sector as they spent all their time, money and efforts on trying to find new structures of oil and gas in the earth's crust. Because the current production reservoirs are finite by definition, finding new structures of oil and gas is of great significance to our way of life - as many of our daily products can only be produced with the help of these resources.

As the easy to extract oil and gas structures are getting more and more scarce, the oil and gas companies have to search for these structures in more remote places where the necessary infrastructure to bring the oil and gas back to the market is not in place. Logically, the cost price of extracting these oil and gas resources and bring them to the market is higher than the cost price of most current production locations. Therefore I believe it's not likely that the prices for oil and gas will decrease over the long run.

To understand the relevant working methods used in the energy sector, I have created this article to explain the 3 different phases of oil and gas drilling.

1. The Oil and Gas Drilling Process

After the drilling crew has set up the drill rig to start the drilling operations, drilling mud is added between the drilling pipe and the drill bit, to aid the drilling bit into the Earth's crust. Drilling mud, which is often referred to as a drilling fluid, is a mixture of water, clay and often chemicals. The main functions of the drilling mud are to lubricate, cool and support the drill bit; it also provides for pressure on the bottom of the drill hole to prevent any blow out of gases encountered while drilling.

As the drill hole gets deeper new joints of drill pipes are mounted in the drill hole until a certain depth is reached. Then the drill crew will place a steel casing in the center of the drill hole and fill the space between the outside of the casing and the drill hole with a cement slurry to prevent the drill hole from collapsing in on itself. A smaller diameter drill bit will then be used to recommence drilling operations; these operations may be repeated a number of times before the total depth of the well is reached. Sometimes horizontal drilling is required to reach the targeted area.

2. Testing for Oil and Gas

When the final depth is reached the drilling crew will perform the following tests to confirm if they really found a new oil or gas structure:

  • Analysing core samples: The drill cuttings and the drilling mud are returned to the surface up the annulus (the space between the drill pipe and the open hole formed by the drill bit) where samples are caught. Rock chips are being analysed for traces of visible oil and to see if they are porous. Samples are tested under ultraviolet light as oil is very fluorescent. However, when tested positive this only proves that at some time oil or gas was present.
  • Drill Stem Test (DST): The DST device is lowered in the drill hole to measure the pressure and production capacity of the geologic rock formations at depth.
  • Geophysical well logging: Sensors are lowered in the drill hole to create a detailed record of the geologic rock formations at depth.

After achieving a successful drill result (i.e. finding the targeted oil or gas structure) a full production test can be employed. The pressure and volume of the findings are measured, oil is collected and gas is burnt (flared). If the first test results are positive, the test will be stopped (shut in) to allow pressure to build up and then reopened for another measurement for extended time periods.

3. Extracting Oil and Gas

Once the testing has been successful, the drill rig is removed from the drill location and the production equipment is set up to extract the oil or gas from the well. Extracting oil and gas from the well normally takes place in three stages:

  • Primary Recovery: The underground pressure in the in the reservoir is normally sufficient to force the oil or gas to the surface. A complex structure of valves, called a Christmas Tree, is placed on the well head to connect the well to a network of pipelines for further processing. Sometimes a pump is connected to the well head in order to force the oil or gas to the surface. In the primary recovery stage the typical recovery factor is 5% to 15%.
  • Secondary Recovery: Due to the production in the primary recovery stage, the underground pressure in the reservoir has decreased. In order to increase the production, fluids (typically water) are injected into the reservoir to reinstate the pressure in the reservoir so that the oil or gas is forced to the surface again. After the primary and secondary recovery stages the typical recovery factor is 35% to 45%.
  • Enhanced Oil Recovery: In this tertiary recovery stage another 5% to 15% of the oil can be recovered. By heating up the oil in the reservoir by injecting steam into the well the pressure in the reservoir is again reinstated. Sometimes, in stead of steam, carbon dioxide (CO2) is used to inject in the reservoir.

Thus, in total only 40% to 60% of the discovered resource will be extracted form the reservoir.


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Jeroen Snoeks - UndervaluedEquity.com

Jeroen Snoeks is the founder of UndervaluedEquity.com, a website for investors passionate about investing in undervalued stocks. Through UndervaluedEquity.com, he shares his experience and knowledge and will soon reveal his personal stock portfolio.

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