It’s all geology and geophysics. As /u/cavalier78 said they know generally where to find oil based on types of geological formations and patterns.
Oil and Gas companies will then invest in more detailed exploration to find exactly where the oil and gas is specifically (and whether or not there’s enough in a given area to make it worth the investment). If there’s a business case, they’ll drill exploratory wells or do further research or things like seismic to confirm. If it works out, they do full drilling and then work to develop the asset.
Source: Have worked for many O&G companies.
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