The Green and The Black
Every oil and gas company lives in a shale-shaped world, of an ever present risk of oversupply and $29 oil again, of the need to measure capital invested in a shale well against any other type.
Capital Thinking • Issue #160 • View online
OK, so this is a bit dated. But the idea behind the book is right on the money.
The Permian is - or very soon will be - the largest oil play in the world.
Every major oil and supply company is a player and there is little room for the independent wildcatters of old.
The world has changed.
From Gary Sernovitz:
U.S. shales have been tremendously disruptive to the global oil and gas business, far beyond the 5% of the world’s oil and 11% of its natural gas supply they currently represent.
Every oil and gas company lives in a shale-shaped world, of an ever present risk of oversupply and $29 oil again, of the need to measure capital invested in a shale well against any other type. Thinking about the shales as a disruptive force, like the Internet, helps us process the brutal, fight-to-the-death state of the oil business today.
Business disruptions, whether in the Christensen model or from new technology (as in the case of the Internet), can be sloppy — and should be sloppy, confusing, jarring, and rude. Hundreds of billions invested by old paradigms are no longer true.
Saudi Arabia’s decision in November 2014 to abandon its role as a swing producer, the precipitating factor of the long collapse in oil prices, was rational. The country was facing competition from a new disruptive supply. It couldn’t ignore the shales any more than Barnes & Noble could have decided that Amazon was a Seattle fad.
Investors are asking: if it is now 2002 for the Internet of oil, which companies will be the Google or Amazon of Shale 2.0, winners of the first land rush that used the market downturn to consolidate their position, or buy cheap tuck-in acquisitions, to become even more dominant in the next phase?
Which companies will be the unicorns of Shale 2.0 (if Internet unicorns are not bubbling over right now as the next big joke), the Ubers that didn’t even exist in the 2002? And, sweet billions, could there be a Facebook of Shale 2.0, a colossus that emerges from nowhere, and fast?
For me, at least, the metaphor breaks down here, given the finite amount of land that is prospective for the best shales, the commoditized nature of oil and gas, and the fragmentation of U.S. oil and gas producers.
Then again, in the Internet too, few in the bleakest days of 2002 saw clearly the changes, growth, and dominance to come — maybe even Mark Zuckerberg, who in 2002 had just graduated high school.
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Gary Sernovitz
*Featured post photo by Donald Giannatti on Unsplash