Jack vs. The Giant: Does Bigger Really Mean Better?

In a shifting energy industry paradigm, adaptability – not size – provides the key competitive edge

A contemporary “Jack and The Giant” tale has emerged within the oil and gas industry. A market once dominated by large operators has been encroached by smaller independents and competition is mounting. As global E&P spending continues to increase and companies set their sights on attractive areas to deploy capital, operators of all sizes will be forced to re-assess their business strategies if they want to secure an advantage.

Internationally, capital-intensive deepwater drilling projects and projects with high environmental or political risk continue to be dominated by super-majors. However a new breed of independents armed with technology is coming to challenge the supermajors. These challengers are finding success in exploring smaller fields offshore in older basins tapping into reserves previously considered unreachable. Domestically, independents are challenging the supermajors in the North American land shale revolution, where oil giants seem to be on the back-foot in their own game. This contest makes the “Jack and the Giant” tale come alive in these very interesting times for the oil and gas industry.

The domestic unconventional oil and gas revolution for North America has created a number of fundamental changes to the economy. The conversation has moved from an energy security and Middle East imports to energy independence and exports in less than 8 years. EIA estimates show that the lower 48 states which produced about 4 mbopd (million barrels of oil per day) in 2006 today produce more than 6/5mbopd and is set to cross 10 mbopd by 2020. This is great news for all operators, Jack and Giant alike.

Yet the complexity of shale formations, most notably U.S. shales, continues to be one of the biggest challenges facing oil and gas operators. These heterogeneous formations with low permeability require constant reinvention and improvisation of techniques to optimize. In plays where adaptability and efficiency reign, size no longer guarantees success; instead, operators with lean management processes and innovative technologies win the day.

Modern Day Giants

Supermajors are bred to reliably deliver complex projects. Ones that involve large, deepwater floating LNG facilities or massive arctic subsea infrastructures, are examples of areas where these behemoths will continue to thrive. However, in the cost-competitive fast moving world of shales, their large organizations, and approval processes and operating practices have become an impediment.

Contrary to the conventional drilling to which these Giants are accustomed, shale environments require operators to penetrate rocks with high levels of heterogeneity. Continuous adaptation of designs to the rock’s specific properties then provides a need for quick decision-making and extreme focus on costs to be able to experiment cheaply.

Such an environment is not conducive to the supermajors multi-step life cycle management process (below graphic from: O&G Financial Journal) http://www.ogfj.com/articles/print/volume-7/issue-12/features/managing-risk-and-uncertainty-provides.html


This complex process can deliver good value in equally complex large projects, for example in deepwater subsalt wells that can produce 20,000 bbls/day of oil each. But in shale resources that normally deliver only 1000 bbls /day of oil, with this rate also significantly declining within the first year, producing solid returns on investments requires a lean, cost efficient delivery process.

Understanding the shortcomings of their current business process, supermajors are adjusting their workflows by creating subsidiaries. These smaller affiliates behave very similarly to the nimble independents, creating a more efficient model for larger operators. A prime example of this phenomenon is the ExxonMobil-XTO Energy merger that placed a strong unconventional player under the Exxon umbrella to streamline the company’s development of shale resources. The benefits of such refocus can be seen by observing cost differentials. There are instances where a major operator has incurred 5x times the cost to develop a well in the same play as compared to its smaller, shale-focused subsidiary. Clearly this segmentation can provide a great advantage to majors and there are likely to be more partnerships like this moving forward.

Adoption of new technologies will also play a key role in allowing the majors to solve the challenges of complex environments. Houston-based Ingrain’s approach to digital rock physics is an example of a technology that can greatly reduce the risks associated with shale reservoir characterization. Its CoreHD system provides early visibility into a formation’s porosity, permeability and production potential allowing operators to optimize their completions design.

Similarly, technologies such as down-hole gauges, distributed acoustic sensing (DAS) and distributed temperature sensing (DTS) fiber optic measurements (by providers like Sagerider, Ziebel, Fotech, etc.) that provide a better understanding of where production is coming from and what completions will yield results will be key to helping major operators achieve favorable returns in highly competitive environments.

Nimble Independents

Independent oil operators have always been an important part of U.S. oil and gas development but their relative growth and increase in size over the last few years has been unprecedented. While the shale boom has significantly attributed to this development, this growth has been maintained through the independents’ strict culture of discipline and lean operations.

Independents are known to be nimble, cost-focused and very open to trying new things, all of which are characteristics that have allowed them to be very successful in unconventional environments. Yet some of these “Jacks” have grown so large so fast that they are fast becoming as big as their rivaling “Giants” and, as the industry continues its laser-focus on delivery, it is only the ones who can retain discipline on ROI that will continue succeeding.

A willingness to implement new technologies is also an area that will allow independents to continue focusing on lowering costs and improving productivity. One example is the adoption of “pad drilling”, whereby multiple wells are drilled directionally from the same site, a process that decreases number of rigs required and reduces costs while improving predictability and efficiency. Similarly more efficient fracturing technologies, such as the one developed by Oxane Materials, are also being developed to improve productivity. The company has proven that lighter, rounder ceramic proppants are far better for production than heavier, rougher proppants of similar strength (such as marble or stone). Operators testing this technology have seen a >20% increase in production when compared to traditional ceramic proppants. By placing an emphasis on this type of efficiency, independents are taking the necessary steps to achieve a truly factory-like environment that will is both manageable and profitable.

It’s no secret that the dynamics of the oil and gas industry are shifting. Super-majors have seen an influx of smaller independents creep into their domain and competition is thick. As drilling and services intensive environments such as shale remain attractive ventures, operators of all sizes will need to optimize their business processes and implement new technologies in order to deliver good returns in this environment. Whether you’re a Giant or a Jack, the moral of this modern day tale is clear: “Adapt or Die”.