Upstream companies carry out their exploration and production activities either on land or underwater worldwide. Depending on the location itself, E&P (exploration and productions) facilities owned by upstream companies fall under the following two broad categories:
- onshore facilities
- offshore facilities
Onshore exploration and production facilities
Exploration and production facilities that explore and produce hydrocarbons from underground (on land) are referred to as “onshore” facilities. Today nearly 84% of crude oil production and 95% of natural gas production in the US comes from onshore E&P facilities. Companies with a substantial onshore presence in the US include Pioneer Natural Resources (PXD) and Cimarex Energy Company (XEC).
Apart from investing directly in these companies, investors can also gain exposure to upstream energy companies like these by investing in the SPDR S&P Oil and Gas Exploration & Production ETF (XOP).
Offshore exploration and production facilities
Exploration and production facilities that explore and produce hydrocarbons from under the sea are referred to as “offshore” facilities. These offshore E&P facilities can be located in shallow waters close to the seashore, or in deep or ultra-deep waters farther out at sea.
Today, nearly 16% of crude oil production and only about 5% of natural gas production in the US comes from offshore E&P facilities. Noble Energy (NBL) is a major player in the offshore Gulf of Mexico upstream industry while Murphy Oil Corporation (MUR) is heavily active in the deepwater Gulf of Mexico industry as well as in the South China Sea, offshore from Malaysia.
“Onshore” versus “offshore”
Onshore E&P facilities are less complex and less expensive than offshore E&P facilities. This is because offshore E&P facilities need additional capital expenditures on building floating platforms above sea waters, or under the sea, on the sea floor. In addition, drilling underwater—including the process of bringing hydrocarbons to the surface from below water and the environmental ramifications—is more challenging when compared with onshore drilling.
We should note as well that offshore facilities in the Gulf of Mexico are exposed significantly to weather hazards like hurricanes. Typically, then, production costs are higher for offshore facilities within same resource category. At the same time, both onshore and offshore E&P facilities produce hydrocarbons from conventional and unconventional resources.
We’ll begin discussing these two types of geological resources and how they impact upstream companies in detail in the next part of this series.