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Finding oil and natural gas is difficult and expensive

The search for oil and natural gas is a difficult and expensive exercise marked by long periods of failure, non-economic results and occasional spectacular successes.  A good rule of thumb for domestic (Lower 48 states), onshore exploratory wells (wildcats) is about a 1 in 10 for success rate.  This figure is somewhat misleading, however, in that it just implies "finding" some oil or natural gas.  Finding a deposit does not imply that a well or a project  will be an economic success.  To be an economic success, the well must find sufficient producible reserves to pay for the drilling, the completion, the operations AND the embedded costs of exploration.  These costs include the salaries for geologists, geophysicists, landmen, engineers and office support staff and the direct costs of buying leases, surveying the location and permitting the initial test.  If a company "buys" a ready-to-drill prospect from another company or individual, all of the above described embedded costs are included in the sales price either as "marked up" acreage prices or prospect fees.

Even more daunting is the fact that success ratios for an economic success are more like 1 in 17.  For a company to sustain an ongoing exploration program, each "discovery" must also pay for all the other prospects that failed...either as pure "dry holes" or as "non-economic" successes.  One of the worst circumstances for any oil and gas company is the so called "completed dry hole."  This is a well that indicates the presence of hydrocarbons but the amount of recoverable reserves and the daily production volume are unknown.  In many cases, the only way to determine those answers is by completing the well and equipping it for production.  The additional costs for completion and equipment may double or even treble the cost of simply drilling the hole.  Disaster strikes when such a well fails to produce any oil or natural gas or produces hydrocarbons at such small volumes that the operator cannot recoup the investment.

New technologies including sophisticated seismic mapping, horizontal and directional drilling, hydraulic fracturing techniques and stimulation all increase the success ratios (reduce risk) but add tremendously to the cost of exploring, drilling and completing.  Exploring for oil and gas is not for the faint of heart nor shallow of pocket.

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