The Rising Influence of Rising Affluence

[OakesCS]

these give %s on sector consumption of oil
https://www.eia.gov/energyexplained/index.cfm?page=oil_use

and contribution of hydraulic fracturing to production
https://www.eia.gov/todayinenergy/detail.php?id=26112


w/ regard to other comments:
The oil and gas industry succeeds in spite of itself. It is an industry full of very smart people that is very slow to innovate and adopt new technology. Much of that is due to risk aversion. Some is due to the fact that regardless of how nifty some technology is, the implementation will always involve some Neanderthal who knows how to do something one way and any deviation from that way usually ends up training new Neanderthals. Some of the Neanderthals r in the field and some r in the supply chain or some other supporting role (and some run the company).

Michael Dell was inadvertently a great contributor to the oil industry cuz he’s the guy that invented ‘connect the purple plug to the purple hole and green to green’. But regardless of how brain dead a system is designed there will always b Neanderthals that think putting bricks into a mud sampling system or leaving electronics in a container in the jungle for 2 months won’t hurt anything (or that it will still b there).

Automation is the obvious solution to many of the problems and nowlurking has alluded to that previously. But that demonstrates my prior point. Russia developed many automated drilling technologies >30 yrs ago and the industry is still working on making those sorts of innovations routine.

Oilfield service companies would benefit greatly by following Amazon’s business model but somehow that concept has escaped them and they still have armies of knuckle-draggers writing stuff on whiteboards and manually transferring information from paper to excel worksheets. And that invariably results in wrong stuff getting delivered or no stuff getting delivered while very expensive people and equipment sit around for 3-4 days. That’s a management and political problem. Much of the business is conducted in socialist countries and countries where making jobs and work is more important than being efficient. The problem is compounded because many of those people eventually end up in the US or Canada and they continue to operate as if they were in the 3rd world (or France, Italy, etc).

And just to be more equitable. Poor management isn’t just a multinational problem. When I worked for CHK one of the 1st things I noticed was a map of their lease holdings which included a huge amount of acreage around the finger lakes in NY. As a kid I spent a lot of time there so I remembered the rocks and now as a geologist I knew that area was worthless wrt to natural gas production but they had been operating on the basis of ‘lease everything and sort out the chaff later’. That approach had also obviously been used in hiring many of the senior management and technical staff.

“Big data” is now a big thing in the oil industry. The logic is that they have more data than they have been able to make use of and that the human processors may have missed connections between data that algorithms may be able to find. The logic is somewhat puzzling - especially if you’ve been exposed to the sophistication of their supply chain software and the whiteboard thing. I find SLB's approach to this particularly humorous because they opened a Big Data center in the Bay Area in the midst of the current market collapse 3 yrs after they closed a similar facility in the same place. Competing with Google, Apple, etc for competent personnel on oilfield salaries in a depressed market seems like a bad conceptual model.

So the bottom line is that when it comes to investing in the o&g business if u have access to investment in non-publicly traded companies, I’d look around the edges. Picks, shovels and blue jeans rather than mining the gold. Some of the best services and technologies are developed by small private companies that fill a niche. “IsoTubes” is an example. Absolutely brain dead yet brilliant innovation for systematically collecting and delivering oilfield fluid samples to analytical labs. Because it was simple, uniform, and met shipping regs it took over that part of the market and became quite profitable. Weatherford eventually bought the company. I don’t know what market share is now or whether it contributes positive income to Weatherford but Weatherford isn’t doing well and I know that SLB’s effort to usurp the IsoTube business never left the launch pad and if it had, it would’ve failed because of their inefficiencies (Amazon would’ve run that business beautifully).

With the exception of CoreLabs, the oilfield analytical chemistry business is a loser but providing the means of getting samples from the well to the lab is a great business. CoreLabs is effectively the McDonalds of the oil and gas industry’s analytical chemistry business. Weatherford’s is Dairy Queen, SLB’s is Del Taco and CHK’s version is the local food truck.

Another example related to hydraulic fracturing involves pumps. Propping fractures involves putting sand into the fractures and service companies somehow thought that putting sand thru pumps was a good idea. Not surprisingly pumps don’t like sand. Since I do chemistry I had a solution that involved chemistry but a private company had a better mechanical solution. SLB eventually bought them but I still don’t think that solution has become mainstream and I’d bet body parts that patents won’t protect it from being copied everywhere.

Some folks may point out that the oil and gas industry has been a victim of its own success in adopting technology, e.g. hydraulic fracturing. However, I see that as another supporting data point for my more critical view. George Mitchell's company was on the verge of bankruptcy when they tried hydraulic fracturing out of desperation. They had nothing more to lose on technology that had been partly developed outside the industry many years before (1940s). It wasnt until after 2006 that hydraulic fracturing became routine.