An increased public focus on unconventional reservoirs, hydraulic fracturing, and offshore development has allowed for major oil companies to be the face of recent industry growth.
However, within the industry itself, the importance of independent operators cannot be overstated. Independents are the behind-the-scenes heroes of unconventional development and effectively compete in basins across the U.S.
Although larger companies undoubtedly account for the majority of independent production, a 2013 IPAA survey indicated that the median independent E&P engaged only 12 full-time employees.
In an era of volatile commodity prices and capital-intensive projects, majors and large independents have inherent advantages. However, the smaller independents can truly become “Little Giants” by utilizing partnerships to grow within an increasingly competitive, big company-leaning industry.
The most obvious advantage for majors and large independents is available capital. Increased capital allows large companies to allocate more resources than small independents in two important areas: recruiting and technology.
Oil and gas industry growth has been accompanied by a drastic increase in Petroleum Engineering students, which tops the list of the highest paying college majors.
Admissions requirements for prospective Petroleum Engineers have also become more stringent. According to the University of Texas Petroleum and Geosystems Engineering Department, arguably the best in the country, the average UT freshman PE in 2014 had an SAT score of 1407 and was in the top 3% of his high school class.
The increase in engineering talent is especially good news for majors and large independents; the “employment gap” has been well-chronicled. Premier talent tends to gravitate toward large companies due to brand recognition, recruiting presence, and higher initial salaries and benefits.
Large companies also have an inherent technological advantage. Even beyond allocating resources toward the development of new ideas, majors and large independents can test emerging technologies in a variety of ways prior to field implementation.
Agreements with service companies, internal labs, and university grants are just a few avenues that large companies often take to gain a technological advantage.
Small companies are often adverse to the risks associated with applying emerging technologies in the field, and they may not have available capital to allocate toward new, expensive techniques.
Additionally, many small companies won’t be exposed to new methods until they have already been established.
Strength in Numbers: Partnerships with Small Operators and Vendors
Small companies are often initially comprised of seasoned managers that can build success based on expertise within specific industry niches.
Leasing and acreage acquisition, mature field redevelopment, waterflooding, well intervention, seismic analysis, and fundraising are common platforms upon which small independents can maintain a profitable company.
Without significantly expanding or engaging expensive contractors, it can be difficult for small independents to develop specialization in other sectors. However, even within limited geographic areas, small companies often have distinctly different areas of expertise.
Combining skills via partnerships allows small independents to function as a more diverse entity. For example, an operator focused on geophysical exploration could partner with an operator with mature field redevelopment experience.
By purchasing older fields with existing seismic data, the partnership could improve production from existing wells, identify infill well locations, and avoid expensive geophysical or reservoir engineering contractors.
Not only can these partnerships mitigate cost, but they also inevitably lead to knowledge sharing. Thus, partnerships can be a source of internal diversification for small companies as well.
Regardless of specialty, most small independents have the technical aptitude to design stimulation and workover plans internally.
However, service companies and vendors are a wealth of knowledge. Given complete well information and a clear vision of the operator’s goals, service companies can often recommend improvements to well intervention or stimulation procedures.
As small independents target new areas for development, relationships with vendors become especially important. Service company engineers typically have formation-specific experience and can access internal databases to provide information on past treatments applied in similar circumstances.
Vendors and service companies always seek repeat customers and are therefore incentivized to recommend beneficial treatments. Thus, by collaborating with service companies, small operators can potentially improve workover plans and productivity without incurring significant added costs.
Playing with the Big Kids: Partnerships with Large Companies
Although relationships with similarly sized companies and vendors are beneficial for small operators, partnerships with majors and large independents can be a source for more drastic growth.
Relationships with large companies can be difficult to generate. Managers of small companies may not have pre-existing links with large company engineers or executives. Even with prior relationships and familiarity, corporate structures can be difficult to navigate.
For small companies, the “simplest” way to enter a big company’s radar is to own something valuable. As it pertains to unconventional plays, acreage ownership appears to be the common denominator in many cases.
Small operators can create partnerships to develop large acreage blocks, or they can force partnerships by participating with minority interest via poolings.
Especially considering the industry’s rate of technological advancement, many would argue that more emphasis should be placed on optimizing currently producing assets.
Even beyond generic hydraulic fracturing, unconventional-related technologies can be applied in many circumstances to improve a variety of projects.
The playing field has been leveled with respect to data analytics; small independents can evaluate producing assets and formations as well as majors can in many respects.
However, capital availability can be a constant limitation for smaller companies. Just because they know how to improve it doesn’t mean they can.
If formation productivity is projected to improve via horizontal drilling, small operators may not have the budget to propose horizontal wells.
Alternatively, while a small company may only have available capital to apply a new stimulation treatment to a couple wells, larger companies can provide the capital to optimize full fields.
In addition to capital constraints, small companies also often lack experience with methods that many large operators apply frequently.
The potential application of new technology and the opportunity for expansion can make smaller assets attractive for large companies.
Not only can these assets provide large companies with an opportunity to test well or stimulation designs on new formations, but they can also provide valuable information on areas that the large company may not have previously considered.
Circumstances aside, the long-term benefit of partnering with large companies to further develop producing assets can outweigh the initial benefit of an outright sale.
Knowledge sharing applies to big company partnerships as well. By partnering with a large operator, small companies can improve their bottom line while also gaining experience with new technologies that can put them on the industry map.
Although the current industry environment favors majors and large independents in many respects, small operators are equipped with the experience and analytical tools to be profitable.
However, most small companies cannot truly compete by themselves. Partnerships of all shapes and sizes can be the precursor to significant expansion. “Little Giants” aren’t formed without a little help.
How do you think small operators can use industry partnerships to grow in today’s industry? What types of partnerships do you think are most beneficial? Let us know in the comments section.
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