Independents: Lessons to Teach

Survival Depends on Skills, Smarts

Admittedly angry over Big Oil’s big profits the past couple of years, a host of elected officials in the nation’s capital recently cobbled together a package of onerous proposed legislation designed to strip the industry of tax breaks and to force it to increase royalty payments.

However, it would be prudent for the zealous lawmakers to take an extra deep breath of the apparently thin air enveloping Capitol Hill in order to calm down and examine a major potential consequence of their current shenanigans:

The hastily assembled anti-industry proposals, once enacted, may well decrease domestic oil and gas production (read: increase imports). After all, the new laws undoubtedly would impact not only the big guys but also the independents and small operators who fill the critical role of finding and producing the bulk of America’s own oil and gas resources.

Given the current anti-industry jockeying in the D.C. crowd, it’s timely indeed that a forum at the annual AAPG meeting in Long Beach, Calif., will include a presentation tagged “From Wildcatters to Wall Street: The Role of Independents and Small Operators in Today’s Oil Patch.”

“The importance, particularly today, is there’s a real push for growing our own domestic natural resources, especially in terms of natural gas production,” said Monika Ehrman, an attorney in the Oil & Gas Practice Group at Locke Liddell & Sapp, who will make a presentation at the meeting.

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Admittedly angry over Big Oil’s big profits the past couple of years, a host of elected officials in the nation’s capital recently cobbled together a package of onerous proposed legislation designed to strip the industry of tax breaks and to force it to increase royalty payments.

However, it would be prudent for the zealous lawmakers to take an extra deep breath of the apparently thin air enveloping Capitol Hill in order to calm down and examine a major potential consequence of their current shenanigans:

The hastily assembled anti-industry proposals, once enacted, may well decrease domestic oil and gas production (read: increase imports). After all, the new laws undoubtedly would impact not only the big guys but also the independents and small operators who fill the critical role of finding and producing the bulk of America’s own oil and gas resources.

Given the current anti-industry jockeying in the D.C. crowd, it’s timely indeed that a forum at the annual AAPG meeting in Long Beach, Calif., will include a presentation tagged “From Wildcatters to Wall Street: The Role of Independents and Small Operators in Today’s Oil Patch.”

“The importance, particularly today, is there’s a real push for growing our own domestic natural resources, especially in terms of natural gas production,” said Monika Ehrman, an attorney in the Oil & Gas Practice Group at Locke Liddell & Sapp, who will make a presentation at the meeting.

“It’s the independents who produce most of our oil and gas resources (an estimated 90 percent of the oil and gas wells in the United States),” she said, “but the role of these companies and the small operators is overshadowed by the supers, such as Exxon, BP and others.

“People are not as aware of the important role independents play,” Ehrman noted. “This can be a one or two-person oil company in West Texas with its own rig, and also the larger independents who have grown from being focused on a regional area, and in some cases have grown internationally and then decided to come back to a domestic area.”

Valuable Lessons

Independents and small operators are usually leaders in a specific geographic area, Ehrman said, and they become leaders in operating these areas and in the technology. The former Mitchell Energy comes to mind given its almost two-decade effort to develop the technology to produce gas in commercial quantities from the now-hugely-productive Barnett Shale.

There are plenty of lessons to be harvested from these smaller members of the oil patch, according to Ehrman, who noted several examples:

The first thing one can learn from an independent or small operator ishow to define a scope , she said. This involves defining an operating area, which could entail divesting assets scattered geographically, including overseas, and narrowing the focus.

Ehrman cited, for example, EnCana’s “amazing” set of international and domestic assets and the ultimate divestment of some non-key properties to focus on domestic natural gas production.

She noted still another way to define yourself is by resource area, such as the Barnett, the Fayetteville Shale or the Canadian oil sands.

How to set and measure goals is yet another lesson to be learned. Ehrman noted what makes a successful independent successful is they have a way to set and measure goals (whether formally or informally) and the level of risk. The risk can be financial, geographic, technical, political, etc.

Independents have the advantage over the majors here in that it’s easier to communicate and focus on goals with fewer levels of management; measurements of risk levels or limits are performed on a routine schedule.

Become an expert -- either keep up with or develop technology that makes you a leader in the designated area.

This doesn’t necessarily mean the most expensive or the most cutting edge technology but what works best for the particular objective. For example, producing marginal wells in the Oklahoma Panhandle may require less sophisticated technology than what is needed to frac the producing intervals in some of the now-popular shale plays.

The successful independent avoids empire building -- the goal is to become the best company in a particular area or region. Whether private or public, the aim is to grow for the sake of quality.

And it’s not always about acquisitions; it also entails divestitures where practical.