Large Vs. Small E&P Company: Corporate Structure and Innovation
Graham Hack, SPE, is a reservoir engineer at Jupiter Resources. His passion and expertise lie in the reservoir engineering discipline, where his focus on optimization, integration, and data analytics have given him exposure to strategic decision processes at both large and small producers. He is a graduate of the chemical engineering program at the University of Alberta. Hack is a professional member of the Association of Professional Engineers and Geoscientists of Alberta. When not immersed in equations and models, he can often be found buried in a book or hot air ballooning in the Albertan countryside.
How did you get your start in the energy industry?
I joined the energy industry in 2008 as a summer student studying chemical engineering at the University of Alberta. Coming from another province, I had not really considered a career in oil and gas. I was originally drawn to the nanotech space, but had a change of heart when I realized the devastating power of a sneeze in that environment.
While attending a career fair during my second year, I quickly realized the prevalence of energy-related options in Alberta. What was most appealing was that the sector seemed to be going through a technical renaissance as advances in horizontal drilling and multistage stimulation were opening up vast opportunities for technical and practical optimizations and innovation.
At the time, Encana Corporation was leading the development of a number of unconventional plays from coast to coast, and the culture they espoused seemed a good match for me. After two student terms, I signed on full-time in 2010 and spent the following 4 years in various roles such as facilities, production, and reservoir engineering. During this time I was fortunate enough to gain a wealth of experience in many aspects of the resource life cycle, including project management, production optimization, reservoir surveillance, and exploration. Leveraging this knowledge, I made the transition in late 2014 to a private startup producer, Jupiter Resources, where I have continued to focus on the technical subsurface facets of resource development.
With your experience working at a large and smaller exploration and production company, can you explain how the role of a young professional differs in these companies?
The role of a young professional is notably different when moving from a large to a small independent producer, much of which stems from the difference in staffing levels and corporate structure. With a smaller company, there is less of a “parachute” as there are fewer internal experts to bounce ideas or results off of; instead, you are encouraged to develop and collaborate with outside contacts. The opportunity to develop a greater scope of expertise due to the integration of functional roles provides the potential for tremendous growth. The flatter corporate structure also offers increased involvement and input to corporate-level activities that young professionals may not get exposure to at large organizations.
There are also a few drawbacks to working in a small organization. At a large operator you have the opportunity to experience different roles, assets, and stages in the resource life cycle. This diversity can be a great educational boon for a young professional. Larger corporations typically have a more structured development plan for new staff, which can be very beneficial for someone just beginning their career.
What has your experience taught you about how corporations are structured?
Corporations are made up of individuals, even at the senior level, who operate with the data and insight provided by the management structure beneath them. The more complex that structure becomes, the more critical assembling a trusted team becomes to the decision-making process. Recently, the market has rewarded companies who strive to simplify these structures by focusing on development and reducing staff. This centralization aims toward consistent analysis and more optimal capital allocation. Despite every organization being full of smart people striving to deliver the best possible results, the energy industry remains a complex business based on incomplete information. This makes capital allocation and decision-making a challenging task.
Many, if not all, producers use economic modeling software in order to help steward the budgeting process. Sound corporate decision-making relies on accurate, transparent data to drive its economic engines. In some organizations, differences in underlying assumptions and inconsistent handling of risk and uncertainty between teams can be detrimental to an effective comparison. This is rarely malicious; it is often a function of the stresses put on asset teams to compete for capital in the corporate process. It is human nature to try to present your project in the best possible light, as it can help secure a reputation as a valuable employee.
Talent retention during low points in the commodity cycle can also drive decisions. In a time when corporations are reducing staff they must also ensure the retention and development of future leaders. Maintaining this balance ensures a company is well-positioned for a price recovery, but retention is an art which depends on many things such as engagement, compensation, and corporate culture.
The culture a company aspires to create is a key differentiator for both workers and investors. This culture, and the image it projects to the market, can provide a strategic overlay more significant than economic considerations. For instance, companies with a safety-first operating culture will make notably different day-to-day decisions, and this attitude will inevitably affect capital allocation. A review of recent investor presentations will bear this out: social license to operate has become a critical aspect of corporate culture for many of the top independent producers, and it is through this balance of social and economic drivers that energy companies can best make responsible decisions.
Do you find energy companies (large and small) do an effective job at stimulating testing and development of new technologies? Do you think there are ways to make this industry more receptive to new ideas and accepting of failure in some cases?
Innovation in the energy industry comes in many forms, and different players tend to be more or less effective in stimulating development in each area. For instance, service providers tend to be at the vanguard of development in the operational (drilling, completions, facilities) realm, while academia tends to be the source of new modeling and theoretical analysis techniques. The role of producers is generally one of facilitation and adoption, as only the largest of producers have the resources to carry out independent research and development.
Producers are active in their role of influencing technology through a number of means. They allocate significant capital toward the endowment of chair positions in academia and sponsorship of technical conferences to help enable new ideas to make their way out of the far corners of the industry and into the mainstream. They are often willing to forgo some amount of competitive advantage by allowing the publishing of data or results drawn from their assets, and are willing to accept added risk to the development of these same assets to steward new technology in the first place.
As a direct result of the ingenuity of all facets of our industry, there are numerous examples of the successful leveraging of technology to unlock resources, decrease emissions, and maximize returns. That being said, there is a well-known communication problem between oil and gas producers and the general public. Unfortunately, media coverage of our technological innovations is often negative, focusing more on sensationalized risks than on the brilliant applications at play. When coupled with the inability of the public to effectively differentiate products supplied by the industry, this lack of voice can provide a strong disincentive to innovation.
Our strong history of advancing technology does not preclude the opportunity to make the industry a more receptive environment for new ideas. The biggest hurdle to acknowledge is the high cost of failure for many operational experiments. Often these can result in bit trips, sidetracks, lost wells, or sterilized drill slots; the cheapest of these costing hundreds of thousands of dollars and causing days, weeks, or months of scheduling delays. Contrast this against the tech space, where cost of failure is generally limited to programming or prototyping time. In that sort of atmosphere, the culture of “fail faster” can thrive, with cheap, rapid iteration resulting in a better product to market.
Recent and ongoing advances in our ability to characterize and model operational results without having to test in the field may help drive down this cost of failure and allow for more agile experimentation in our industry. Producers could also affect the cost of iteration by fostering a more collaborative approach with external resources. Too often, multiple producers invest in an idea and do not share their successes or failures to allow for the aforementioned iteration. Lastly, corporations should develop young professionals and technical staff in the design of experiments in order to maximize the relevant learnings from any investment made in a new idea. This more considered approach to adopting technology can help reduce the impact of failures and help identify the path to successful implementation, which can benefit the entire industry.
How has the recent downturn affected this process? Do you think companies are more willing to try new things because they have no choice, or are they less willing because research and development money is limited?
I think there will always be a place for innovation in the oil patch, regardless of the commodity cycle. It is incumbent on the company to be aware of the advancements that could trigger the next shift in the industry, and as technical professionals, we have an important role to play in any downturn.
Technical staff are often the gatekeepers of new technology for producers, and it falls to us to maintain a knowledge and understanding of changes and threats to the status quo. It is critical to understand the strategic focus of your role in a low price environment, and how innovation can either drive better identification of development targets or optimized producing assets. Companies are currently trying to do more with less, and there is an opportunity to better use the incredible wealth of data that was gathered during the boom in novel ways. By taking advantage of the breathing room afforded to us by the slowdown, we can leverage information and past results to design the next set of experiments that will propel the industry to future success. After all, the only way we can continue to responsibly supply the world with the energy it needs is to continue to apply innovation in every area of our business.
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01 March 2019