Editorial comment

Vol. 232 No. 11

Evolution is just another “theory that’s out there,” according to Texas governor and US presidential candidate Rick Perry. Despite the views of some skeptics, the natural selection process, described colloquially as “survival of the fittest,” is working with remarkable efficiency in the oil and gas sector. In the economic jungle, it is typically the fit that get fitter, but on occasion, young species have an opportunity to survive and even thrive.

Unconventional to conventional. A recent example of oilfield evolution is how unconventional E&P has now become a conventional segment of major operators’ portfolios. The dual strategy of horizontal drilling and multistage fracturing led to the discovery of prolific shale plays in North America, and now the search has been extended to the entire globe. Young companies that have thrived in the shale sector include US independents such as Chesapeake, Devon and EOG.

In predatory fashion, however, industry giant ExxonMobil acquired XTO in 2009 to gain quick access to shale formation evaluation, drilling and fracturing know-how. Even overseas operators have joined the shale hunt. In late October, Statoil acquired Brigham Oil to gain a large stake in the oil-rich Bakken play.

Kinder Morgan’s acquisition of El Paso is an extension of this evolution to the midstream sector. Kinder Morgan is expected to absorb the pipeline portion of El Paso to acquire a strong position in the transportation of shale gas and liquids to industrial markets in the Midwest and the Northeast, and sell El Paso’s E&P segment, most likely to one of the IOCs.

Service company acquisitions. While there have been acquisitions of small service companies in the Northeast, I haven’t come across any significant shale-specific acquisitions by the large service behemoths. Two companies that have achieved successful growth through shale technologies are Canada-based Packers Plus, a leader in multistage fracturing, and Microseismic, a leader in frac monitoring. These companies might be attractive targets for M&A activity. The success of Microseismic reminds me of the rise of Landmark Graphics during the 1980s. Landmark created a suite of 3D visualization products against stiff competition from the established service companies, and was ultimately acquired by Halliburton in 1996.

Energy, not oil and gas. A classic example of firms that failed to evolve is the horse carriage companies in the 1900s that did not have the vision to realize that they were not in the horse-and-buggy business, but in the transportation business. They failed to realize the import of the nascent horseless carriage.

Energy companies today have the smarts to realize that they are not in the oil-and-gas business, but in the energy business. Most of the majors have stakes in renewable energy sources such as ethanol, solar and wind. My favorite example is the Hywind wind energy pilot project offshore Norway, which is operated by Statoil. Hywind’s turbine is designed by Siemens, and the floating structure is built by Technip. All of these companies are major players in the oil and gas industry.

Beyond the horizon. Future evolutionary opportunities could include applying formation evaluation techniques for the discovery of other valuable commodities such as rare earth minerals. Production companies could apply their technologies for mining hydrates or mineral nuggets from the ocean floor.

We’ve borrowed several technologies from medicine, such as MRI logging. Perhaps acoustic, nuclear logging and signal processing advances in the oil field could be applied for better imaging of cancerous growth and heart disease. A modern CT scan cannot image an anomaly smaller than 1 cm. With MRIs, false shadows can often lead to unnecessary surgeries.

The oil and gas industry remains vital, but it’s always good business planning to keep an eye on the future. It is going to take vision and survival instincts to remain the king of the jungle.