Oil Companies Adjust To New Reality

by:

The Oklahoman, Adam Wilmoth

The oil and natural gas industry over the past decade has undergone a fundamental shift that has altered industry, commerce and global politics, speakers said Thursday at the University of Oklahoma Energy Symposium.

“The shale revolution has moved the world from scarcity to abundance,” said Kenneth Hersh, CEO of the George W. Bush Presidential Center and co-founder of NGP Energy Capital Management.

“We’re in a world where essentially the supply of natural gas is infinite and the supply of oil is measured in centuries. That is completely different.”

Mike Ming, general manager of the GE Global Research Oil & Gas Technology Center in Oklahoma City, pointed to the country’s drilling rig count to illustrate the industry’s new dynamic.

In 1981, U.S. production declined while 4,500 rigs were drilling for oil and natural gas throughout the country. In 2014, the industry flooded the market with 1,900 rigs. Production dropped early last year when the rig count fell to 400, but it started to increase again with just 500 active rigs.

“We’ve grown production at a higher volume and in a shorter period than at any time since oil was first discovered,” Ming said. “It’s a completely different world now. Shale has redefined it.”

Until the past 10 years, oil was considered scarce. Producers had to go wherever they could find it, and consumers had to pay premium prices for it.

“The North American unconventional game has changed that,” Hersh said.

The change has led companies to adjust both where and how they do business, he said. Drilling has shifted to onshore plays in the United States and away from expensive offshore projects and projects in many politically unstable countries.

Dry holes are no longer a concern, but companies must deal with other risks, including maintaining a strong corporate culture.

“When I started in the oil and gas business, we didn’t need a corporate culture,” Hersh said. “If someone was the biggest jerk you’d ever seen, it didn’t matter as long as you found oil. But now you’re running an operating company, so you need to think about recruiting and retaining people.”

The new model benefits consumers by holding down the price of oil and hurts high-cost producers who are unable to adjust quickly to the new dynamic, Hersh said.

Another result of the new world of energy abundance is that it’s no longer a bad thing for energy consumption to go up, said Joe Stanislaw, founder of the JA Stanislaw Group.

Global energy consumption often is said to be growing in the developing world but declining in the developed world because of increased inefficiencies. But while individual items are becoming more efficient, total consumption likely will continue to grow in the United States and other developed countries, said Mark Mills, senior fellow at the Manhattan Institute.

He pointed to growing demand for drones, lasers and three-dimensional printers as examples of high-consumption items that are likely to become more popular.

“To achieve what they do, consumption goes up, not down,” Mills said. “With most optimal 3-D printers, you double manufacturing energy consumption.”

While it will take some time for both producers and consumers to adjust to the new marketplace, Hersh said the long-term effects will be beneficial.

“I’m proud of what this industry has meant to the world,” he said. “It increases opportunity and increases advantages. It democratizes what was a world of scarcity into a world of abundance.”



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