The term "unconventional" oil and gas refers to oil and gas produced in a manner different than the traditional (conventional) way.  The traditional way, which we covered last week, is drilling vertical wells into subsurface structures/features identified on seismic ("prospects") that may have trapped sizable accumulations of migrating oil and gas.

In this post, we will deal with the type of unconventional production that involves producing oil and/or gas from shale or other types of "tight" rock using horizontal drilling and hydraulic fracturing.  We will address other types of unconventional production in future posts, including coalbed methane and the Canadian oil sands.

Unconventional shale and tight rock development is an important subject in the United States because it accounts for about 90% of all onshore wells currently being drilled in the U.S.  We developed the video below to provide a quick tutorial on the difference between conventional vertical drilling vs. unconventional horizontal drilling. We think you'll find it worth your time.

Unconventional development is favored in the U.S. for a couple of reasons.

• First, oil drilling started in the U.S. about 160 years ago and most onshore areas have been thoroughly explored, so good conventional prospects are hard to find, are generally modest in size, and involve significant dry-hole risk. In contrast, there is still a huge inventory of unconventional acreage that can be economically developed (depending on the ever-fluctuating balance between costs and oil and gas prices). A significant advantage of drilling into unconventional formations is that they extend somewhat uniformly over wide areas and can be drilled with little dry-hole risk, which eliminates a major cost.

• Second, unconventional development has brought more participants, investors and lenders into the industry in recent years because of the abundance of opportunity and the (at least seemingly) more-predictable results. Lenders and unfamiliar investors generally don't participate in conventional exploration projects because of the complex guesswork and dry-hole risk (which can result in a total loss of investment). That said, it is currently difficult to raise money even for good unconventional projects because investors and lenders have suffered losses in recent years due to industry volatility and other factors. Most of the current drilling is being done by larger, well-capitalized companies.

Don't think that conventional exploration is no longer a useful subject! Most exploration elsewhere around the world is conventional. All U.S. offshore exploration is conventional – with most exploration now focused in deeper waters because shallow areas have been extensively explored. There is still some highly-prospective conventional acreage on the North slope of Alaska that the industry would like to explore. There are also other onshore and offshore U.S. areas where the industry has not been allowed to explore.