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There is certainly momentum toward a “new” energy economy – electricity derived from solar and wind power, cars that run on batteries rather than gasoline. But tales of the “rapid obsolescence” of the oil and gas industry are simply wrong. And, in fact, the “traditional” energy players – such as oil and gas companies – will be key to the widespread realization of renewable energy and electric vehicles.
“While much has been written about how oil and gas firms ought to operate, there is little on how they actually do operate,” say Thunderbird professors Andrew Inkpen, Michael Moffett, and Kannan Ramaswamy. “How do they create strategies, manage multiple stakeholders, and develop complex projects in countries and regions across the globe, within an industry that constantly challenges received wisdom?”
Inkpen, Moffett, and Ramaswamy answer those questions in a new book, The Global Oil & Gas Industry: Stories from the Field. “Resulting from our analysis of both successful and unsuccessful business decisions in the industry, we identified four key themes that characterize the current state of the industry and its future prospects.” The first: The role of change, innovation, and disruption in the energy industry.
“In broad terms, the oil and gas industry is quite similar to other industries where change, innovation, and disruption are central to long-term success,” the professors say. “Despite the relatively long arc of their success, even established oil and gas rivals are challenged by an emerging class of competitors who have the capital access and the willingness to question received wisdom. Many of the central tenets of the business – ranging from costs and economics, access to resources, connectedness of markets, and product substitutability – are being rewritten by the disrupters.”
“Many central tenets of the oil & gas business are being rewritten by disruptors.” – Click to tweet
In the new book, the Thunderbird professors recount the story of Mitchell Energy. The company, a disruptor in every sense of the word, invented an economical way to extract gas from shale rocks – the beginning of what the Financial Times calls “perhaps the most important innovation of the 21st century.” The innovation launched the U.S. shale revolution – a phenomenon that has boosted the U.S. economy and its global influence. Some experts say the Iran nuclear deal would not have happened had it not been for the shale revolution.
Mitchell Energy’s successful disruption of the oil and gas industry hinged on three factors, say Inkpen, Moffett, and Ramaswamy:
Those three factors, the professors write, “Converged to create the ideal conditions for a blue ocean company to take root and prosper in Texas.” A ‘blue ocean company’ is one that “captures new value by offering a product or service that is a significant departure from prevailing industry norms.”
“The most important innovation of the 21st century is not Facebook. It’s fracking.” – Click to tweet
Two key tenets of technological innovation are the ability to “stand on the shoulders of giants,” as Isaac Newton put it, and experimentation. George Mitchell, the founder of Mitchell Energy, was known for both. The professors write, “Key factors that seemed to distinguish Mitchell from other operators in the region were his ability to keep ahead of developments in science associated with drilling and fracking and his willingness to try new techniques that had not yet been proven in large-scale operations.”
“Keys to innovation: Learning from others and experimenting.” – Click to tweet
That innovativeness had to extend beyond the C-suite, of course. “Mitchell clearly wanted to create a climate of creativity and innovation and set about designing a culture that would recognize and nurture independent thinkers,” write Inkpen, Moffett, and Ramaswamy. “Mitchell was dogged in his pursuit of new ways to address the coming gas shortage and constantly challenged leaders within the company to pursue all leads and ideas that were worthwhile.”
Indeed, it was an underling who finally figured out how to crack the Barnett Shale. But even at Mitchell Energy, it was an uphill battle. Having invented a new formula for fracking fluid, Nick Steinsberger was told by his peers at the company that his experiment would fail. The potential solution was the subject of much derision in the company. One executive said, “The idea was crazy at the time. He had guts; no one else would have even thought of doing it.”
“‘He had guts; no one else would have even thought of doing it,’ they said, about every entrepreneur ever.” – Click to tweet
Saying Mitchell’s “dogged” innovativeness paid off is actually a dramatic understatement: the Barnett Shale play, which many were ready to give up on, could yield 45 trillion cubic feet of natural gas. Shale gas and tight oil plays – possible only because of the fracking technology that Mitchell proved viable – will account for two-thirds of all U.S. natural gas production by 2040, according to the U.S. Energy Information Administration.
The presence of “legislative support” was critical in launching the shale revolution, the professors note. That support included a federal tax subsidy that enabled Mitchell Energy to “dampen” the risks of financial losses from experimental wells – and, therefore, drill more experimental wells. Government knowledge resources were critical as well, including the Gas Research Institute (GRI) and the Department of Energy (DOE), which had set up “an extensive research program targeting shale after the oil embargo of the 1970s.”
“The presence of ‘legislative support’ was critical in launching the shale revolution.” – Click to tweet
In fact, it was in collaboration with the DOE that Mitchell Energy drilled its first horizontal well. The collaboration, write the professors, was a good resource trade-off. “Mitchell was able to offer the DOE a test site, and DOE was able to extend its own research program…The efforts of the DOE yielded several crucial pieces of technology…Mitchell Energy was able to use these new technologies in its effort to fracture the Barnett Shale successfully.”
“The most crucial driver in the U.S. ecosystem is the clarity in landowner rights,” write Inkpen, Moffett, and Ramaswamy. “Absent a clear incentive for landowners to allow drilling in parcels they control, there would be very little appetite for cutting-edge approaches such as the shale industry undertook.”
For example, after finding initial success in Wise County, Mitchell Energy was able to buy 400,000 acres there in just 90 days. “The laws in the U.S. are quite favorable to landowners, allowing them to sell the rights to the oil and gas reserves that lay under their property. The owner-friendly legal system combined with the risk appetite of small independent oil and gas companies created an ideal ecology.”
The story of Mitchell Energy is a story of how one company found tremendous commercial success – and launched a revolution that shifted the balance of global power – by defying convention. Its lessons are useful for new disruptors in energy or any other industry, as well as the established companies more likely to innovate at the margins. And perhaps, these and other lessons from past disruptions and revolutions in the energy industry will be key to the future of the “new” energy economy.
“By defying convention: How Mitchell Energy launched a revolution that shifted the balance of global power.” – Click to tweet
The story of Mitchell Energy and the U.S. shale revolution is just one that professors Inkpen, Moffett, and Ramaswamy use to illustrate the role disruptors have played, and will play, in the current and future state of the global oil and gas industry.