Big Oil moved too slowly. Small oil producers adapted quickly. Difficult shale rock lends itself to nimble companies – those with flatter organizational structures that facilitate faster decision-making.
The industry has many explanations for why U.S. independent producers so far have outmaneuvered major integrated oil companies to higher profits in the North American shale plays.
But the human psyche also may make a difference between success and failure. Calculations of risk and reward, the most basic of cognitive drivers, can mold how a company behaves from the bottom up., says Carl Tricoli, Houston managing partner of private equity firm Denham Capital Partners.
The monetary rewards of success are often greater for small business owners and employees, while the risks of failure are greater for those climbing the corporate ladder at a big oil company. Those bigger financial rewards, Tricoli said, motivated energy entrepreneurs like the late George Mitchell, who led a small gas producer to unlock shale resources for the first time, and Harold Hamm, the billionaire head of Continental Resources who focused his company’s energies on deep-seated oil in the North Dakota’s Bakken Shale when others were searching for natural gas.
Tricoli spoke with FuelFix about why big and small producers have fared so differently in North American shale plays. Excerpts, condensed and edited for clarity:
Q: Why have the independents seen more success in the shale?
A: If you look at the independents that did a lot of this early work in the shale – at Harold Hamm and George Mitchell – they’re owners of the company. But then even if you look at the independents that are public, you have staff in a company for whom the success of these things has a material impact. They’re motivated with stock options or equity. In all of these cases what you have are individuals for whom the economic equation, if you will, is that if this is a success, I win big and create a lot of personal wealth for myself.
Q: What about the majors?
A: At a major oil company, if my idea hits big, the actual impact to me, financially, is minimal. If my compensation is in a stock option program, the rewards are not going to move the needle all that much. On the other hand, if I fail, and I’m in a large organization where I’m trying to move up the corporate ladder, I don’t want to have any mistakes. It’s kind of like playing poker: If it’s a huge pot, I’m going to play a little differently than if it’s a really small pot. To be fair, almost nobody thought shale would work. The majors had left town. The independents were there on the ground and seeing this in real time.
Q: Why does it help to be more nimble?
A: In an independent, you’re able to react to data and make decisions quickly because the organization is so flat. But that’s important because you can go through iterations much more quickly. If you look at the development of the shale plays, the way they figured it out was trial and error. So if you’re in a flat organization where you can make decisions quickly, the number of iterations you can go through per time period is greater than the majors, which often take a more academic approach.
Q: But what plagued the big oil companies after that?
A: The majors have to have a large position to move the needle. The problem with moving into a large position is if it doesn’t work, it doesn’t work big. Unfortunately, they got in when the assumption was these plays were much more homogeneous. The majors found out in some cases it didn’t work.
Q: So what comes next for the majors in the shale?
A: What the majors are good at is doing things large-scale. What may sort itself out over time is who is staying and who is going. As these plays are de-risked, they require gigantic amounts of capital. I think what you’ll see is a lot of consolidation. I can see some of the majors over time achieving large positions where they can put a lot of capital to work to create reserves that actually move the needle for them.