New Drilling Technology

Cunningham is vice president in charge of the regional section of the Atlanta Fed's research department. Mancuso is an analyst in the regional section. They thank Jimmy Stone of Stone Energy, David Guidry of Guico Machine Works, and Frank King and Will Roberds for insightful discussion and comments. Shocks are mostly of concern when the potential outcome is bad. The most infamous example of a negative economic shock occurred in the 1970s, when the Organization of Petroleum Exporting Countries (OPEC) imposed oil embargoes. Serious negative economic consequences resulted and proved especially problematic for policymakers because of their sudden, essentially unforeseen onset. Shocks do not, however, have to be negative. Indeed, this article suggests that at the moment the energy extraction industry is in the midst of a very positive shock caused by a combination of two new technologies. These technologies emerged very quickly, and while either technology by itself would have improved the drilling process, as discussed below, it is the combination of the innovations that has served to substantially reduce energy extraction costs in certain types of geological formations. The oil and gas industry has seen a series of dramatic technical developments in two distinct areas: three-dimensional imaging and directional (or horizontal) drilling. Combined, these two revolutionary techniques have significantly lowered the net extraction costs of oil and made feasible the reopening of wells and fields that had ended their economic usefulness under the old technology. The result has been a surge in the energy sector that is all the more significant because it is being pushed not by a spike in prices but rather by a drop in production costs and may therefore be lasting. So far this positive technology shock has most affected the oil and gas industry in the Gulf of Mexico. The new technologies are particularly advantageous for the kinds of fields characteristic of the gulf, and their early application there can yield information about what to expect as use of the technologies spreads. The impacts on extraction and exploration costs in other fields in the United States and abroad are likely to be significant. The purpose of this article is to examine these changes in the energy extraction industry, focusing on Louisiana for examples of the particular benefits in the Gulf of Mexico. This regional focus is appropriate for two