Do You Have The Right Land Strategy To Compete With OPEC?

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A few weeks ago, Deon Daugherty from Rigzone made the point that the OPEC cartel is not working. When Saudi Arabia’s oil minister Ali Al-Naimi talks about leaving oil prices up to the market because it is “the most efficient way to rebalance supply and demand” it proves that Daugherty may be on to something. The whole point of a cartel is to control output and prices so why leave it to the market?

Delia Morris, senior market analyst at Rigzone Data Service says U.S. shale is to blame, ‘shale producers are the upstarts and they’ve messed up the whole oil world order.’ A major factor driving this change is good old American made competition and it can be traced back to how the U.S. manages mineral rights ownership. Unlike OPEC countries and even some non-OPEC countries the U.S. mineral rights ownership rules have created a system that is not subject to the whims of government, fostering a truly capitalistic environment that has spurred competition, innovation, and a new ‘world order.’ To stay relevant both OPEC and individual U.S. E&P companies need to manage the intense competition, innovation that is bred from the U.S. mineral rights system.

To understand how mineral rights ownership can lead to so much disruption in OPEC and intense competition for U.S. E&P companies let us first understand how ownership differs between the U.S. and the rest of the world. In almost all countries property owners have no rights to the minerals that lie underneath the surface land they own. By contrast in the U.S. if you own a piece of property you also have the right to extract any minerals that are found in the subsurface of that land. This difference has huge consequences for the efficiency of oil and gas exploration and production. This point cannot be overstated because it changes the entire structure of the U.S. oil industry.

In the international system governments offer licenses to oil companies that wish to explore or extract oil and gas; however, bureaucracy and politics inevitably causes large delays that can sometimes take years to resolve. In the U.S., oil companies contact and negotiate terms with the owner of the mineral rights directly. These mineral owners can be highly motivated to develop their land because of the lucrative royalty payments associated with making a deal. This changes everything.

The fact that the mineral owners are highly motivated to lease their rights means two things:

  1. You don’t have to be a large oil company to partake in the industry because small producers actually have an advantage when competing for land due to the fact that they are more likely to actually develop the land they lease, and generate royalty payments. This leads to more companies and more competition.
  2. The speed at which oil companies can go from looking for prospects to actually extracting oil or gas is significantly shorter than the rest of the world improving the economics and further reducing the barrier to entry into the industry. This again leads to more companies and more competition.

What does this mean for OPEC and your land strategy?

It means competition drives the oil markets and Al-Naimi’s comment, ‘we’re all in this together,’ is unfounded. As Morris points out, ‘That’s not how capitalism works.” OPEC cannot expect US producers to act like a cartel and cut production and US producers can’t expect to stay relevant without constantly innovating and becoming more efficient.

For a U.S. E&P company, streamlining your land acquisition process is part of that equation. With U.S. mineral ownership laws driving lower barriers to entry, flooding the market with new competitors you need to find ways to beat them to the best land. At Drillinginfo we are dedicated to innovating and accelerating the search for open acreage so you spend more time negotiating deals not finding them. Our mineral ownership laws have driven down the time to spud from years to months. Drillinginfo is pushing that even further by finding innovative ways to squash even more inefficiencies. Check out this video to see how we are doing this:

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JC Zapata

JC Zapata is a Product Marketing Manager for Drillinginfo. He is responsible for go-to-market strategy, sales enablement, and customer facing materials for several products across the Drillinginfo portfolio. JC has a diverse background in product marketing including entrepreneurship, startup companies and Fortune 50 experience. JC has completed 4 Ironman races, holds a BA in Political Science from Rice University and a MBA from the University of Texas McCombs School of Business.