One of the aspects I find fascinating about this industry is its incredible variety, and that’s not a word often used to describe a commodity business.
This month’s issue covers one of the world’s great hydrocarbon provinces – the Middle East. It’s a region endowed with immense quantities of oil and natural gas and the projects to extract these resources are dominated by large national oil companies.
These are big projects that require big investments and state-of-the-art technology, frequently also involving international oil companies and both global and regional service companies as partners and collaborators. Every time I’m in the region, I’m reminded how these large decisions, representing a major share of global production, are taken by a relatively small number of operators.
Our Members there justifiably take pride in their role of meeting global energy demand and serving well their companies and countries. The focus is on value, with decision making that is (typically) strategic, taking a long-term view of the resource they’re producing and its role in generating sustained wealth for the producing nation.
Contrast that with the scrum we see in U.S. oil fields where, over the past decade – especially in the unconventional space –the mantra has been “either grow or die.” And, unlike most other parts of the world, there are so many actors pursuing these opportunities that competition is fierce, as each group seeks to find its edge – the one that will catapult them to success.
As we discussed last month, here in the United States the industry is shifting to a value focus as the financial community demands that companies figure out a way to survive and grow within cash flow – without additional infusions of capital. Investors want a return on their investments.
Rise of the Independents
Even so, according to a study released by the Independent Producers Association of America in May of this year, the independent oil and gas producer will dominate U.S. oil and natural gas production in the years ahead. Independent producers, as defined in the study, are firms that are not vertically integrated; that is, they do not have refining operations,
The commissioned study, conducted by IHS Markit, updated a report it had issued in 2011 on the contribution of independent oil and gas producers to the U.S. economy. The study team, led by AAPG member and Corporate Advisory Board member Bob Fryklund, looked at data from 2016, 2017 and 2018, and then projected activity from 2020 to 2025.
They segmented the U.S. E&P community for this analysis:
- Eight global E&P firms – the vertically integrated IOCs
- 18 large independents (production greater than 200,000 boe/d)
- 35 mid-sized independents (production between 100,000 and 200,000 boe/d and large private companies with production in excess of 50,000 boe/d)
- 75 small independents (production between 20,000 and 100,000 boe/d and mid-sized private companies with production between 20,000 and 50,000 boe/d)
- 2,079 private companies (production less than 20,000 boe/d)
All told, IHS Markit is tracking 2,215 companies active in the U.S. E&P sector, classifying 128 of those firms as independents. And, according to the study, the independents are currently responsible for 91 percent of the wells being drilled in the United States today. Their combined share of U.S. oil production is 83 percent and 90 percent of natural gas (both dry gas and natural gas liquids).
IHS Markit expects to see both oil and natural gas production volumes grow through 2025 and for the independents to continue drilling at a pace comparable to today. The economic impact of this drilling activity is substantial.
“Overall, the independents influenced almost $1.2 trillion of sales activity in the United States during 2018,” wrote the authors. “This, in turn, contributed about $573 billion or 2.8 percent of U.S. GDP and supported 4.5 million jobs (3.0 percent of non-agricultural employment). IHS Markit estimates the independents initiated economic activity that generated over $101 billion in federal, state, and local taxes in 2018.”
They do note that while drilling will remain stable during the forecast, the costs are going up. They modeled a capital expenditure increase of 87 percent over the term of their analysis. This is due to cost increases expected as the market continues to rebound, but also a trend toward more difficult and more expensive wells.
Which brings us back to value creation.
Whether you’re working for a large NOC in the Middle East or a small independent producer in North Dakota, ask yourself how you can use the information in this report – which is available online atwww.ipaa.org – the models used and the projections presented, to better understand the market dynamics within which you operate.We’re all competing in the same market, but we’re not all playing the same game. Sure, at the core, each player in the market is looking to find, produce and sell a product. But the means whereby the NOC accomplishes that is very different from that of the small producer. That’s where the opportunity is to be found. That’s where you create an “edge” that allows you to compete successfully.
I’m not promising it’s easy, but I do believe it’s possible.