Commentary: Regulations for the oil & gas industry are a good thing

A friend of mine recently shared an article from the Wall Street Journal entitled “The Regulated States of America”.  The article is very relevant:  a lot of the political discourse today in the United States concerns the role (or non-role) of government, and its reach as it pertains to regulations.  The oil & gas industry comes up frequently in this context, and stirs up strong opinions from all sides of the issue.  I have my own thoughts to share with you in the hope that it stimulates some discussion, and I suspect what you read will surprise you coming from someone very “pro” oil & gas!

Full disclaimer here:  I’m not an American citizen, and as a Green Card holder, I have no voting rights so in the strictest sense, my opinion literally doesn’t count.  This means that I’m speaking entirely for myself with the only goal of sharing my views, and nothing I say today is meant as an endorsement of any political belief or party.  As much as I’d like the country to recognize the continued supply of energy as a common problem to solve rather than a political line in the sand, the fact is that oil & gas HAS been politicized, so I think it’s important to state my political neutrality up front.

Ok…

If you ask anyone what they think the oil & gas industry’s stance on regulation is, I’m sure the answer would be:  “they don’t want it”.  It just makes sense to give that answer:  more rules means more complexity which means possibly more costs and less efficiency.  To be fair, I’ll point out that NO industry is asking for more regulations, but the oil & gas business has a very particular public image and impact on society, so in that sense we should consider it separately from other sectors of the economy.

I do get the impression that regarding regulations, the message from the industry goes something like this:  “the government doesn’t know the industry as well as we do, so there’s no way it can monitor us effectively or fairly.  The bottom line is that regulations just get in the way of us operating efficiently.”

It’s a fair point, but I’ve said many times that the oil & gas industry has a clear public relations problem, and that this is entirely our own doing.  When our “knee jerk” reaction to any new regulation is “no” (even if its goals seem good!), we come across as having something to hide.  Clearly, this is incompatible with what should be one of the industry’s top priorities:  building trust with the public.

I can already anticipate two related objections to my argument.  The first is that many operators do in fact strive not only to meet but also exceed local standards of operation.  Actually, it’s even been documented that safety records can improve when large operators move into a play, or acquire smaller players.  The second objection could be that people will say that overall the bigger companies operate well, and it’s the very small independents operating at a very local level (who may not hold themselves to equally high standards) that are giving the industry as a whole a bad name.

Even if you believe those objections to be true, the problem is that given much of the public’s view of the oil & gas business, ANY incident caused by ANY company will tarnish the whole industry.  Furthermore, if I, as someone deeply involved in, passionate about, and fairly knowledgeable about the industry get the impression that we automatically resist any proposed rule changes, how is someone removed from oil & gas supposed to think any differently?  Again, how is resisting every proposed change justifiable, even when that change seeks to achieve something objectively positive (more transparency, stricter environmental standards, etc…)?

Look, I believe strongly in Capitalism (I wouldn’t be a very good MBA if I didn’t!), and I understand that accepting this system means trusting that resources are allocated most effectively by a free market, and this market should have more freedom than not.  However, I think that there is a “spectrum” of Capitalism:  you don’t have to have “the Market” deciding everything for this system to be in place, and to the extent that it would be a terrible idea to let companies just do as they please, some intervention is necessary to keep things working smoothly.  In oil & gas, we rely way more than other businesses on a “social contract” with the public, and if it takes rules to keep EVERYONE honest, then so be it.  This is why I emphatically think that fair, reasonable regulation of the oil & gas industry is a very good thing.

Sports provide a great analogy with which to make that point.  In sports, there are rules and referees.  The rules are established by a governing body, usually in tandem with players’ representatives.  The idea is not to dictate anything outright, but to come to some compromise on a rule (regulation) that brings about hopefully positive change to the game.

Take football (the American kind, for international readers).

I love football, but the game has gotten so violent that I worry every weekend that I’m going to see a player die.  There is currently a dialogue going on between the National Football League, players, and to some extent the fans to determine what the best course of action is to make the game safer:  stiffer penalties for illegal hits?  Mandating new equipment specifications?  Altering kickoff procedures?

If changes are implemented, they likely won’t satisfy everyone, but they’ll probably be made taking into account multiple points of view, and if player safety increases, how can anyone label these changes “bad”?  Ultimately, the goal of keeping players safe must be given priority over other considerations such as fans’ enjoyment of how the game “should be”.

Now let’s consider the referees.

If you accept that everyone is self-interested, and doesn’t always have incentives to take the honest course of action, there needs to be some enforcement mechanism.  Referees are supposed to be neutral third parties whose role is to enforce the rules, NOT deliberately determine the outcomes.  Granted, referees’ decisions will always disappoint someone, but the idea is that spectators should be able to trust that referees will use all means available (instant replay, conferences with other referees) and their best judgment to make the best, “in good faith” call.

How is this any different from the fields in which we operate and the role of regulators?

Though I believe in regulation, it’s important to notice that I’m staying away from the questions of “how much regulation should there be?”, “what kinds of regulations should be implemented?”, and “how much involvement should come from the federal vs. state levels?”  If I knew the answers to these questions I’d be much better paid than I am now!

In all seriousness, I’m not interested in getting “down in the weeds” of policy debates.  Rather, I’m advocating for a fundamental shift in attitude of the oil & gas industry with regards to regulations and the governing bodies that propose them.  While we shouldn’t be prepared to accept anything and everything that comes our way, our initial reaction should be “ok, let’s talk about this” rather than “no, this will be bad for business”.  Might there be some cost to this shift in attitudes?  Maybe, but what if the return on that investment is greater public trust, and more leeway to undertake the projects to which there is currently resistance?

One industry I’ve always been impressed with due to its “healthy” relationship with government is air transportation.  It seems that there is a good spirit of collaboration between the public and private groups, and a culture among pilots of reporting any incident no matter how small so that more severe accidents can be avoided later.

Think back to Boeing and the Dreamliner:  I’m sure Boeing wanted to avoid grounding its new plane and incurring the associated costs and loss of reputation, but safety took top priority, the government grounded the airplanes, Boeing went along with it, and after a thorough investigation the planes are now flying again.  Certainly, air travel is one area I’m grateful for regulation.  Can you imagine how things would be if we allowed airlines to operate completely independently and just let “the Market” decide which one to use based on the resulting safety (or lack thereof) records?  That would be nuts!

Ultimately, in oil & gas we should aim to have the same relationship the airlines have with the government:  collaborative rather than combative, and presenting transparency to the public rather than secrecy.  The hard truth is that oil & gas operators don’t have sovereignty over the areas they work in.  These companies work in these areas because they are granted permission to do so, both by government and residents.  If we attempt to run roughshod over a region in ways that benefit us solely and say “well, we know better, please keep away and let us do our work”, then eventually that social license to operate WILL be revoked and WE will be the ones told to keep away.