What is a learning experience?

August 13, 2012

It is being touted as a game changer.  It will bring us energy independence. The technology has existed for over 60 years and we are grateful to the pioneer in this field, George Mitchell for his visionary thinking that has brought us to this point.

The technology I refer to is fracking or fracturing, the medium is shale rock, and the participants are in the oil and gas industry.  In 2011 alone over 25,000 shale wells were drilled and early evidence suggests that the U.S. will have enough shale reserves to supply our energy needs for the next century.  Even if this claim is exaggerated, it is useful to understand what the shale gale is all about.  We live in Houston, the energy capital of the world, we are Houston’s business school, and we understand the business of energy.

So we decided to go on a field trip to the closest shale play, the Eagle Ford Shale, near San Antonio.  Thanks to support from our faculty and alumni, we were invited to visits to two facilities – Talisman Energy in Kenedy County and Cameron in Pearsall County.

We left campus just after 7 a.m. on Thursday and reached Kenedy County by 10:40 a.m. Our first stop was the completion site operated by Talisman Energy.  The heavy equipment, the line of trucks and the complete self-sufficiency at the site (with para-medical facilities, power generators, food and lodging) spoke to the cost of the operation and the expense involved in keeping anything idle on the site.  Creating a community in the middle of nowhere, knowing that it will have to move easily and seamlessly to the next site at the end of 35-45 days requires nimble talent, or what we call agility.  The team of engineers that explained the technology to us were young, knowledgeable and worked as a team with respect for what they all did.  The implications of team work were even more apparent on the rig.  Dressed in protective coveralls, boots, hard hats and goggles, we went up the rig and learned about the ‘dog-house’, the ‘monkey-board’, the ‘opossum-belly’.  Understanding the entire frac process was interesting, and the focus on safety and risk management was obvious in the operations.

The generational gap between the talent that is getting ready to retire and the younger group speaks to the cyclical nature of this business.  Supply of talent to this industry moves with the price of oil and natural gas, and the low oil prices of the 80s is reflected in the generational gap in talent.  At the same time, the steep increase in the demand for talent to support the drilling, fracking and completion jobs but also ancillary services in the area is telling.  Hourly wages for workers here are around $24, and the local McDonald’s is hiring workers at $15 an hour.  Real estate is expensive, and the number of eateries has apparently mushroomed.  The unanswered question is – how long will this last?

Overall, we came away with a keen appreciation for the technical side of the business, and the need for preparedness in crisis.

On Friday, we visited the Cameron facility.  If the previous day was all about the engineering and technology needed in shale plays, the Cameron visit underscored the importance of the business side of the equation.  Cameron is about pressure control and fluid management.  Learning the underlying value chain in this business is fascinating.  Not only are several players involved in this process from drilling to hydraulic fracking to flowback and well testing and finally to the production, but the economic drivers are not the same. The presentation by Brian Matusek, VP for Business Development, was informative for several reasons.  At Cameron, the process begins with an evaluation of the business model and the return on investment.

While the risk of a ‘dry hole’ seems less of an issue with shale plays and horizontal drilling, there are, we were told, gradations of shale ranging from Tier 1 through Tier 5.  Once the business model is evaluated and the economics make sense, the facility is built, and the operations team takes over.  As technology improves and regulation changes, the customer’s requirements change.  Cameron’s goal is to provide value in this changing environment.  They operate in several countries around the world, including Argentina, France, Poland, Germany, Algeria and Australia.

While technology required for shale drilling has made significant strides, the investments needed are large and time to completion is key.  Drilling in shale plays has gone from 75-day cycles to 25 days.  In addition, utilization rates can make a big difference in the economics.  Cameron’s goal is to help customers reduce the number of days it takes to drill and also manage completion in short cycles.  In short, their business model is built around their customer’s model.  As a result, Brian explained, customers buy integrity as much as they buy equipment. That said it all.  A great lesson indeed for me and our students.

How do you build a culture of business agility anchored around integrity?  At Cameron, the folks we met understood their part of the business, and they also had a genuine appreciation for what others around them did. The team culture seemed more than just a business necessity.  It was also apparent that grooming the right talent and succession planning were built into business operations at Cameron.  The right leadership makes all the difference, and it did us proud to remember that Cameron’s CEO, Jack Moore, is one of our very own — he is a Bauer graduate.

Most importantly, we learned at both site visits that safety is never taken for granted.  At all points during the visits we were instructed about safety rules and encouraged to report unsafe conditions.  Every person we met, whether at the drill site, the completion facility, or the pumping site, had safety as their top priority.

No doubt the industry has had its challenges, but the story is one of human error, not one of intrinsic risk.  The industry needs more spokespeople to get the facts out and let everyone appreciate that while human error is always a possibility, a strong culture, rooted in integrity is consistent — rather is key — to building a sound business model.  And it can be done.  It is being done.  Talisman Energy and Cameron, we salute you.  Thank you for a great learning experience.