Drivers of Low Costs
The authors draw their comments from experience with very different resources: onshore U.S. unconventional gas, deep water oil in the Gulf of Mexico, deep water gas in Indonesia and Canadian oil sands. Yet there are common themes. Generally, for oil sands and gas locked in tight sands, coals or shales, the issue is not to "discover" the resource, but to access it and find the managerial and technological keys that will unlock the door to their economic recovery. Oil sands and stranded gas both require the development of integrated value chains to convert the resource into a fungible product, salable in major markets. And deep water oil and gas require a population of material prospects to allow a company to high grade its portfolio and build a continuous program of activity. In all cases practitioners are learning lessons from other industries in organizing supply chains with a balance between competition and collaboration. The objective is to design and operate a system that will continuously lower unit costs and risks.
In the view of the authors, the primary drivers toward low costs are: the patience, selectivity and conviction to capture large resources; the ability to leverage economies of scale and of learning; the ability to define tasks as programs of work embodying continuous improvement rather than a series of independent projects and application of performance management practices to solidify the gains; the design of processes and business models to let "the right people do the right things'; a commitment to learn from SCM best practices across industries; reliance on transparent information throughout the supply chain coupled with objective, clear decision rules; and an emphasis on innovation through applied know-how more than proprietary technology to minimize risk.
Resource Access
Low costs start with gaining access to the right resource, whether it is an unconventional oil or gas resource or deep water oil play. Ultimate unit costs are what counts, and a primary determinant will be the denominator - the size of the resource that can be converted into reserves and production. The managerial attributes required are patience, selectivity and conviction.
Cobalt has shown considerable success in gaining access to deep water resources despite its status as a new entrant. The cost of resource access has increased substantially. The most recent Central Gulf of Mexico lease sale attracted the largest total industry exposure and total high bids for a Gulf lease sale since the first area-wide sale was held in 1983. Cobalt has been a very effective bidder, achieving its objectives and winning the largest number of highly contested bids in the latest sale, indicating that it was bidding for the right leases and had the conviction required to win. Cobalt's key to successful bidding is clarity of goals and an understanding of which leases really matter.
The Loews approach embodied in HighMount E&P is to understand fully what the company wants, and then be patient. This involves a tight definition of what is attractive, looking at a large number of potential deals and choosing to compete for the few that fit those objectives. It is important to recognize that a dominant player emerges in time in most resource plays; the leader benefits from economies of scale and, more important, economies of learning. Successful players capture a significant position early in the life of the play, then are able to make good tactical acquisitions to fill in their positions because they understand the play better and can capture scale economies better than the seller. For example, the resource available in shales is astounding; the industry is at the early stages of developing a new resource pyramid where the only issue is how to make it work physically and economically.
Leaders need to be patient, selective and then be decisive with the conviction that the technical barriers can be overcome by a motivated and experienced work force and to then rigorously and aggressively deploy and improve the technologies that work.