Striking Gold in Natural Gas

On December 12^th, I gave a presentation at a luncheon jointly sponsored by the American Petroleum Institute and the Society of Petroleum Engineers.The title of the talk was, “Striking Gold in Natural Gas – A lesson from 1848” (on YouTube at https://www.youtube.com/watch?v=_Q-oSd7KOlE).I used the example of Samuel Brannan, the first millionaire in California, to make a point about anticipating your competitors’ behaviors and identifying scarce resources.See, Mr. Brannan never found any gold.When he heard about the possibility of gold discoveries, he went out and purchased every pickax, shovel, and pan he could find.His profit margin on the pans alone was 7,480%.It’s a great example of thinking several steps ahead of others.

Imagine my surprise, then, when I opened the December 21^st – January 3^rd issue of The Economist and found an article entitled, “A Tale of  Two Rushes – There’s Gold in Them There Wells.”And the very first

paragraph mentions Samuel Brannan’s entrepreneurial creativity!I considered suing The Economist for copyright infringement, but ultimately decided to be a sport about it.

Seriously, though, it was exciting to have a major publication latch on to a line of thought so similar to my own (although to give credit where it’s due, my colleague, James Maffione, told me about Mr. Brannan).There were differences, of course; the entire Economist article dealt with the similarities and differences between the 1848-49 California gold rush and the current “shale rush” in various parts of the United States (the article focused primarily on North Dakota).For example, the author discusses how in both cases, a tidal wave of young single men converged on the scene, overwhelming the local housing and dining infrastructures.But a key difference was that in the California gold rush, people were salivating over a small probability of becoming rich; in North Dakota, people are jumping at the high probability of earning a very nice middle-class wage for semi-skilled blue-collar work.

By contrast, my presentation used Mr. Brannan’s millions as just one of several examples of the points I was trying to make: how to identify economic choke points, capitalize on scarce resources, and get into your competitors’ heads well enough to be able to predict their behaviors and needs.The themes of unintended consequences and scarce resources were common to both the presentation and the article, but my underlying objective was different from The Economist’s.

My purpose was to encourage the audience to try to anticipate such unintended outcomes and position their companies to take advantage of them.I talked about a company which was the first – and ultimately the only – one to get a permit to put an all-weather road into an area in which getting in and out was otherwise only possible when the ground was frozen.This gave them control over not only their own access to the area, but their competitors’, too.The value of that control was huge; they could tariff their competitors, or they could just refuse access.When you own the pinch point, you get the profits.

Another oil company took advantage of low oil prices in the 1980s to tie up several Gulf of Mexico seismic crews with long-term contracts.They then had those crews go out into deep water (which was reputed to be the next big thing in exploration) and acquire data, much of which was useless noise because the technology did not yet exist to get good data in the presence of salt, which badly distorts seismic data.No matter – they processed the data where they had decent quality, and high-graded those blocks where they saw prospects.In the next lease round, they were positioned to pick up the areas with the highest potential.When oil prices rebounded, the seismic crews were still under contract; competitors had to negotiate with this company in order to acquire any new seismic data in the area.For a fairly small investment, this company put themselves in the driver’s seat in that area for a number of years.Competitive advantage can mean doing things well, but it can also mean ensuring that your competitors do less well.

Game theory can be useful to tease out the iterative nature of complex situations with multiple players – which is a good description of most active shale resource plays these days.Many oil and gas companies are used to operating in the conventional world, where they often acquire all of the acreage over a prospect.Once that has been done, success or failure depends almost exclusively on how well or how poorly the company explores, appraises, develops, and produces the asset.Thus shielded from the effects of others’ behaviors, it’s no wonder so many oil and gas companies are so inwardly focused.

However, this is a very dangerous attitude in shale resource plays.A single company never owns all of the prospective acreage in such a play; indeed, there is almost always a “land rush” phase in which many companies are charging in at once to buy mineral rights.Getting inside your competitors’ heads to understand their likely actions, interactions, and reactions to each other (and to you) can keep your company two steps ahead of everyone else.More fundamentally, having an external focus is simply a sign of a healthy corporate culture (in fact, it’s the first symptom listed in Rob Kleinbaum’s new book, Creating a Culture of Profitability).It is sorely lacking in many companies.

And it isn’t just competitors who are poorly understood by many companies’ management teams and work forces.As mentioned above, local resources are often overwhelmed and ultimately degraded when a “rush” of any sort takes place.Housing becomes horribly expensive, roads get pulverized into potholed nightmares, traffic jams become a daily feature, noise levels go up, and – due to the sudden decrease in average age and increase in testosterone level in most entertainment establishments – nights out on the town become louder, rowdier, and more costly.How companies deal with the (justifiable) local backlash against these phenomena will determine whether they are seen as good corporate citizens providing local jobs, or rapacious raiders looking to milk the local resources for everything they’re worth.Bobby Ryan of Chevron gave an excellent talk on the importance of earning this “social license to operate” at one of our Oilfield Breakfast Forums last year.I tend to tie this idea back to the concept of “referent power,” about which I’ve written before.When people respect you and what you stand for, they become loyal partners and/or supporters.

So to bring this back where I started, giving the presentation at the API/SPE luncheon in December was a double-bonus for me. Not only did I get to give a talk to a fun and responsive crowd with many good questions, I got to feel like a trendsetter when The Economist article came out.If I get some good feedback from this blog entry, it will be a tri-fecta.