First Oil

Vol. 233 No. 4

“To stand still is to fall behind.”          —Gordon Forward, CEO, Chaparral Steel

This sage advice served Chaparral Steel well for several years after Mr. Forward left the company in 1998. In 2007, however, the small steel company was caught standing still when Gerdau Ameristeel acquired the company. Mr. Forward moved on at the opportune time to serve other industrial organizations and deserves our thanks for giving us a useful guideline for any business.

I was painfully reminded of the rapid change that takes place in the consumer electronics market, having purchased an iPad 2 a few months before the launch of the new, suffix-less iPad with the awesome retina display. The pace of change in technology innovation in the computing industry is so fast, that you either have to pull the trigger and risk buyer’s remorse or suffer buyer’s paralysis while waiting for the next-generation product.

Change is a powerful variable in the oil and gas industry, as well. We’re continually buffeted by changing economic incentives and regulatory shifts. Sometimes, we’re able to tack with the wind. Other times, we have to suffer patiently for the wind to shift. A few recent examples:

Liquids-directed drilling. U.S. independent operators have an excellent track record for turning on a dime. Having been in the forefront of the shale gas frontier when gas prices were high, many have remained in the shale plays, but were able to shift their resources to the liquids and oil windows. Operators in the dry gas areas are waiting for the start of LNG liquefaction terminals to export the gas to Europe and the Far East, where prices remain relatively high. Some of the service companies have invested heavily in infrastructure in the Barnett, Marcellus and Haynesville, where drilling activity is now being curtailed.

Nationalization mood swings. One of the greatest risks that international oil companies face is the nationalization of their assets. ExxonMobil and ConocoPhillips are now in the midst of arbitration after their assets were seized in Venezuela by the Hugo Chavez government in 2007. The vacuum created by the departure of some of the Western oil companies is being filled by Chinese, Indian and Russian companies, who should be aware of the risk factors. There are rumblings of discord taking place between Repsol YPF and Argentinian government that could spell trouble for the Spanish operator, which holds a 57.4% stake in the local company. There has been a continual love-hate relationship between Vladimir Putin’s Russian government and international operators, such as BP. In the latest mood swing, Putin recently said he favors the involvement of the international oil companies in the development of Russia’s Arctic fields, where there are huge potential rewards and political risks of the same order. An ear to the ground is essential to forestall the potential loss of billions of dollars.

G&G in shales. Among the most interesting adaption to change has been the evolving involvement of the geophysical and geological companies in shale plays. During the pioneering days of the shale revolution, it was commonly thought that shale gas production would be somewhat similar to oil sands extraction. All one had to do was drill horizontally through the shale formation and fracture away. Steadily, operators are finding out that no two shale plays are alike, and there are significant areal differences within each play. This understanding has created an opening for G&G companies that are applying their expertise in defining shale sweet spots through the evaluation of total organic content (TOC), vitrinite reflectance and thermal maturity. Additionally, the application of microseismics for tracking fracture propagation has created a new business enterprise.

Just goes to show how the oil and gas industry needs to constantly change and evolve or face the prospect of falling behind.