SIC 1311 Crude Petroleum and Natural Gas
SIC 1311
This industry consists of companies that are primarily engaged in the operation of properties for the recovery of hydrocarbon liquids and natural gas. These companies may perform any or all of a broad range of activities. They may explore tracts onshore and offshore for crude petroleum and natural gas; drill and complete wells; equip wells for production; supply services to increase or maintain the recovery of oil and gas; or provide any of the other services necessary to prepare the product for shipment from the production site. This industry includes companies that produce oil and gas from oil shale and oil sands, or that recover hydrocarbon liquids and natural gas through the gasification and liquefaction of coal. The industry also encompasses firms that are responsible for operating oil and gas wells for others on a contract basis. Oil field service companies that perform services for operators are classified in SIC 1382: Oil & Gas Exploration Services.
211111
Crude Petroleum and Natural Gas Extraction
The crude petroleum and natural gas industry was highly volatile during the late 1990s, which directly impacted the industry in the early 2000s. Between 1998 and 2001, natural gas prices doubled and for a brief time quintupled before returning to 1998 levels. During the same time the number of natural gas drilling rigs fell 40 percent, rebounded to produce at record levels, and then declined again. The petroleum industry also felt effects from the events of the late 1990s. Asia, a large importer of petroleum, underwent an economic crisis that curtailed demand. At the same time, petroleum production worldwide increased, causing an oversupply that pushed prices down.
By 1999 production was curtailed and prices rebounded, but the fallout from the situation remained. In the United States 35,000 jobs were lost, but only 7,000 were replaced, when balance returned to supply and demand, and of the 331 oil rigs that had ceased production, only 67 were put back on-line. This, in turn, led to a decrease in reserves, which, coupled with an increase in demand, drove prices higher.
During the early 2000s, the U.S. oil and gas industry was affected by several other conditions. First, the sluggish economy and unusually warm weather caused a decrease in demand. Second, on December 2, 2001, Venezuela's exports fell drastically due to a strike. Finally, the U.S. war with Iraq in 2003 caused market volatility that put the industry on edge.
By 2004, demand for U.S. oil and natural gas was climbing faster than supply. As a result, oil prices became notoriously volatile, with 2005 marking new record prices in many global benchmarks. With the uprising in Nigeria, and the threat of further terrorist attacks, United States officials stepped up the pace to look at alternative sources and decrease dependency on foreign oil. Although the 2005 energy bill was on its way to President George W. Bush for signing, it did not look too promising.
Two types of companies are involved in the crude petroleum and natural gas business: the independents and the majors. The majors are large, vertically integrated companies that explore, produce, refine, and sell oil and gas to end consumers. These companies benefit most from the economies of scale. In contrast, the independent operators produce oil and gas to sell to others who then refine and distribute it.
While major oil companies usually fund drilling programs out of their own resources, independents rely heavily on outside investors. Favorable tax treatment for investors in oil and gas limited partnerships helped fuel an unprecedented boom of exploration and drilling in the late 1970s and early 1980s. In a limited partnership there are two kinds of partners, limited and general. General partners, like limited partners, invest money and share the risk of drilling programs. General partners also handle the day-to-day management of the business. Usually, there are several limited partners, but only one general partner.
The companies in the crude petroleum and natural gas industry range from enormous conglomerates that employ 100,000 people and generate revenue of more than $100 billion to companies reporting less than $1 million in revenue with few employees. Despite the fact that some firms are very large, 53 percent have fewer than five employees and report revenues of $50 million or less. The industry reported 325,900 employees in 1998.
Historically, the federal government has helped as well as hindered the industry. The 1990 Omnibus Budget Reconciliation Act encouraged production by granting a tax credit for projects using enhanced recovery. It expanded the use of deductions for intangible drilling costs and the percentage depletion allowances, and provided a special deduction for independent oil and gas producers to apply against the alternative minimum tax. The decision to cancel the 1990 sale of leases for exploration on the outer continental shelf off California, the Gulf Coast of Florida, and the Northeast, however, hindered the discovery of new oil. The Oil Pollution and Liability Act of 1990 prohibited oil and gas exploration off the coast of North Carolina. That same law also hampered production by imposing federal liabilities on vessels and facilities for oil spills. In addition, the act allowed states to impose their own forms of liability independently. As a result, drillers paid higher insurance rates for their offshore activities.
Crude petroleum has been used since ancient times. It has caulked boats, cured ailments and aches, and lit the lamps of home and the fires of war. However, it was the demand for lamp oil that triggered the creation of the oil and gas industry. In the mid-nineteenth century, overfishing decimated the whale population, which was the primary source of lamp oil. Experts speculated that the supply of kerosene, made from petroleum collected at ground seepages, could be increased to solve the problem. A group of investors, led by George Bissell, a New York attorney, and James Townsend, a banker from New Haven, Connecticut, decided to finance the drilling of the first petroleum well.
On August 27, 1859, that well was completed in Titusville, Pennsylvania, by Edwin L. Drake. Drake's success triggered a frantic search for oil in the area, and boomtowns sprang up quickly. While the first wells required that petroleum be pumped from the ground like water, before long the first flowing well, producing 3,000 barrels per day, was discovered several miles from Drake's well. Refineries were built closer to the wells, and existing refineries increased capacity. Soon hundreds of small companies were involved in drilling for oil.
Seven years later, however, the once-bustling streets of Titusville were nearly deserted. A legal loophole, "the rule of capture," led the fledgling oil companies to take as much oil as possible from the ground as quickly as possible. This practice promptly ruined the oil-producing capabilities of the underground field, and the wells ceased to produce. The industry had completed its first boom/bust cycle.
The cycle was a phenomenon that the industry has been unable to shake for more than 100 years. After the Civil War, the United States began a period of massive economic expansion and development. The need for petroleum and its products greatly increased.
In 1871 the industry was in a panic because too many wells were producing too much oil. The price of kerosene fell more than 50 percent, and many refineries were losing money. This alarmed a commodities trader-turned-refiner named John D. Rockefeller. He decided that the best way to save the industry was to limit the intense competition by combining most of the refineries into one company. Eventually, Rockefeller's Standard Oil Trust controlled 90 percent of the refining capacity in the United States. However, the company's questionable business practices came to light and, in 1890, the Sherman Antitrust Act was passed by Congress. In 1911 the U.S. Supreme Court ordered that Standard Oil be dissolved. The trust was divided into 33 independent companies. Among these were Standard Oil of New Jersey, which later became Exxon; Standard Oil of California, which later became Chevron Corporation; and Standard Oil of Indiana, which became Amoco Corporation. Also among the independent companies were Socony and Vacuum Oil Co., Inc., which later merged to form Socony-Vacuum, which became Socony-Mobil Co., Inc., and then the Mobil Corporation before merging with Exxon to become Exxon Mobil; Standard Oil of Ohio, which became Sohio and subsequently was bought by the British Petroleum Company p.l.c. as part of its BP America subsidiary; and Atlantic Petroleum, which merged with Richfield to become Atlantic Richfield Company, also known as ARCO.
The quest for oil led west and the first large find was in California in the 1890s. By 1903 that state was leading the nation in oil production. Nevertheless, to the east lay a larger discovery. In the Texas town of Corsicana, south of Dallas, civic leaders were upset when they discovered oil while drilling for water in 1893. The new well marked the beginning of the Texas oil industry.
One of the Texas oil industry's grandest openings was...
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