Who's Looking At Natural Gas Now? Big Oil
4:3 Digging a shallow natural gas well in Clarksburg, W. Va. - Gastar Exploration, a small Texas company, is digging a shallow natural gas well in Clarksburg, W.Va. Gastar's business strategy is to limit its exploration and drilling to a minimum in the Appalachian region until it sees how larger gas companies fare in the area. (Tom Gjelten/NPR)
Second in a series
In the energy world, Big Oil has long been the key player — with one notable exception: The natural gas business in the United States is dominated by small, independent companies. More than 80 percent of U.S. natural gas supplies are produced by companies with a market capitalization of less than $500 million. On average, these companies have only a dozen employees.
(Robert Nickelsberg / Getty Images)
But their business is booming. New production techniques in recent years have enabled companies to extract natural gas from shale rock formations deep underground. As a result, estimates of accessible natural gas reserves have been revised dramatically upward. Small gas producers can justifiably take the credit for the transformation of their industry.
"The major oil companies haven't been paying attention to the U.S. for decades," says Robert Hefner, a 50-year veteran of the natural gas business with a company of his own, GHK Exploration, in Oklahoma City. "It's been a lot of independents like us that have found all this gas, developed the technology and made it happen."
Hefner attributes the proliferation of small natural gas companies to the fact that individual landowners generally retain the mineral rights to their own property. "In America, if [your] dream is to drill a well, you can go out and drill a well," Hefner points out. "As a result, there's been about three-and-a-half-million wells drilled in America over the years, versus about a million and a half for the rest of the world."
Mom-And-Pop Businesses
Many of those natural gas wells are mom-and-pop operations, or began that way. Often they evolve into slightly larger companies, but even the publicly traded companies are generally small. Those that survive in the energy world have learned to leverage their size.
"We certainly don't have an advantage when it comes to capital," says J. Russell Porter, chairman and chief executive of Gastar Exploration, a Houston-based company with just 23 employees. "The large companies can spend a lot more money than we can. But we can be very quick on the draw, if you will, to seize an opportunity and buy into a new concept or a new area that we think could be prospective for natural gas. If we do that, we usually have a first-mover advantage."
(Tom Gjelten/NPR)
The agility of small companies is an important strength in a field where the ability to move fast is key to maintaining a competitive edge. But there is also a more practical reason small companies dominate the U.S. natural gas business. Typically, a new gas well produces in abundance in the year after it's opened, but then production begins to decline. If a natural gas company is to keep production and revenue steady, it has to keep drilling new wells. The energy majors may not have the patience for that effort.
"Big oil companies like big projects that they can manage over 30 and 40 years," says Nikos Tsafos, natural gas analyst at PFC Energy in Washington. "They prefer those over the project that you need to stay on top of every single day, every single month."
There's no dispute on that point from the oil majors. "With a company our size, we have to have a larger scale," says Patrick McGinn, spokesman for Exxon Mobil's exploration arm. "We have to have a potential resource that has more capability for us to go after."
Managing Innovation And Risk
The natural gas industry, in fact, serves as a case study demonstrating how business strategies vary according to a company's size. From small to large, energy companies manage innovation and risk in ways appropriate to their own circumstances.
Gastar Exploration, like many other natural gas companies, is currently focused on the Marcellus shale formation in the Appalachian basin, perhaps the most promising area for natural gas development in the United States today. But the company has so far limited its activity in the area to a few shallow wells in West Virginia, choosing to let a few larger gas companies take the lead in the area.
"We look at what they're doing," says Gastar CEO Porter. "[We] let them drill some of the early wells, try to determine which drilling techniques work the best, and then once they have done that trial and error and established a pattern that works, we can go in and design our wells without having that trial-and-error phase, which can be very expensive."
The challenge of managing risk is important in any new industrial venture. In the natural gas business, the smallest companies in some ways can be the most adventurous. The new investments they make are tiny compared with what a large company would make. But they will still try to shift as much of the risk to their rivals as they can, just as Gastar is doing.
A Magnet For Big Oil
Paradoxically, the biggest energy companies follow a similar strategy, though in their case they try to shift risk to their smaller rivals. Shale production in the United States looks so promising right now that the big oil companies are thinking about getting back into the natural gas business. Exxon, for example, is looking at some possible shale "plays" in the United States, but — like Gastar — the company is biding its time before making a big move.
"We've taken a couple of years to really work on the technology that's required to do the exploration and production of these kinds of shale plays," says spokesman McGinn. "Doing the homework and doing the technology development takes some time for us, and we are willing to wait for that."
The possibility of Exxon's entry into the U.S. shale gas business would have major implications for a "micro-cap" company like Gastar Exploration, but Porter, Gastar's CEO, is not overly concerned.
"We can live on the fringes if necessary," he says. Or Gastar could just let the big oil companies take over some of its gas operations — for the right price.
"If Exxon came in and wanted to become a dominant player in the Marcellus shale, I'm sure there are lots of small operators who would be willing to sell out to them if they were willing to pay full value," Porter says. "There's always going to be another play for us to go invest in and start creating value all over again."
It's all part of the natural gas business game.
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Modern Shale Gas Development In The United States: A Primer by the U.S. Department of Energy (PDF)
The American Clean Skies Foundation is a nonprofit devoted to educating the public about natural gas and its relation to renewable energy and energy efficiency.
The Ground Water Protection Council monitors regulation of natural gas drilling and production in the U.S.
Worldwatch Institute, an independent research group based in Washington, D.C., conducts research about energy and climate change.
STEVE INSKEEP, host:
We're taking a look this week at an old energy source that's getting new attention: natural gas. New production techniques now make it possible to get gas out of underground rock formations. As a result, there is more accessible natural gas in the United States than people even thought was possible. And here's a fact: most natural gas is produced by small, independent companies. This is one game where big oil got beat.
NPR's Tom Gjelten has the story.
TOM GJELTEN: Not long ago, it seemed the United States was running out of natural gas. The big oil companies got out of the U.S. gas business partly for that reason, but then gas producers figured out how to get gas out of shale rock. That opened up whole new opportunities. In the backwoods of West Virginia near Clarksburg, for example, Randy Sleeth(ph) has a crew digging a gas well.
Mr. RANDY SLEETH: You look at the number of companies that are here from other states, everybody's, you know, kind of flocking the Appalachian Basin.
GJELTEN: Sleeth has been drilling gas wells in West Virginia for 30 years, but he's never seen so much outside interest in the local gas deposits.
Mr. SLEETH: People from out west starting up new businesses here pretty much on a monthly basis.
GJELTEN: Randy Sleeth is under contract to Gastar Exploration, a small Texas company with only 23 full-time employees - none of them on the East Coast.
It's not an unusual situation. The energy world as a whole is dominated by a handful of enormous oil companies, but the U.S. natural gas business is a notable exception. Eighty-two percent of all U.S. natural gas is produced by small, independent companies with just a dozen employees on average.
In part, this is a story about how innovation occurs, at least in this industry. Robert Hefner is a 50-year veteran of the natural gas business, and has a company of his own, GHK Exploration in Oklahoma City.
Mr. ROBERT HEFNER (Owner, GHK Exploration): The major oil companies haven't been paying attention to the U.S. for decades - really, since the '60s and '70s. And it's been a lot of independents like us that have found all this gas, developed the technology and made it happen.
GJELTEN: Hefner says one reason small companies have come to play such a big role in the U.S. natural gas business is because individual landowners here generally retain their own mineral rights. They can get a gas well drilled on their own property.
Mr. HEFNER: In America, if that's the dream is to drill a well, you can go out and drill a well. As a result, there's been about three-and-a-half-million wells drilled in America over the years, versus about a million and a half for the rest of the world.
GJELTEN: Many U.S. gas wells are mom-and-pop operations. Often they merge, evolving into slightly larger companies, but even the publicly traded gas companies are generally small. Take Gastar, the Texas company behind the gas well in Clarksburg, West Virginia. Russell Porter, the company chairman, says Gastar has had to learn how to compete with the big energy companies.
Mr. RUSSELL PORTER (Chairman, Gastar Exploration): We certainly don't have an advantage when it comes to capital. The large companies can spend a lot more money than we can. But we can be very quick on the draw, if you will, to seize an opportunity and to buy into a new concept or a new area that we think could be prospective for natural gas. And if we do that, then we usually have a first-mover advantage.
GJELTEN: There's also a practical reason small companies dominate the U.S. natural gas business. Typically, a new gas well produces in abundance in the year after it's opened, but production then begins to decline sharply. If a natural gas company is to keep production steady, it has to keep drilling new wells. This routine of constant drilling of small wells generally is not something that has interested the big oil companies.
Patrick McGinn is a spokesman for Exxon's exploration business.
Mr. PATRICK MCGINN (Spokesman, Exxon): With a company our size, we have to have a larger scale. We have to have a potential resource that has more capability for us to go after.
GJELTEN: The natural gas business, in fact, is a good way to look at how business strategies differ for companies, depending on their size. First, on the small end, a company like Gastar Exploration, with its 23 employees down in Texas, proceeds cautiously when it starts up a new operation far from home.
This brings us back to Clarksburg, West Virginia, where Randy Sleeth and his crew are digging a well for Gastar.
Mr. SLEETH: Right now, we're close to 17 hundred feet down. We will be getting into the shale around 3,000 feet in this area.
GJELTEN: This is actually a relatively shallow gas well. Most shale gas wells are deeper, and they turn to proceed horizontally across a shale layer. Those deep wells are becoming the norm in this part of the country, which is home to the enormous Marcellus shale formation.
Gastar's well-drilling operation is basically the minimum a company can do to establish a foothold in the area. This is part of the Gastar strategy. Chairman Russell Porter says his company, because it's small, likes to let other companies take the lead in the new area and learn from their experience.
Mr. PORTER: Let them drill some of the early wells, try to determine which drilling techniques work the best, which completion techniques work the best, and then once they've done that trial and error and sort of established a pattern that works, we can go in and design our wells without having the trial and error phase, which can be very expensive in a new play.
GJELTEN: The issue of how to handle risk is big in any new industrial venture. In the natural gas business, the smallest companies may in some ways be the most adventurous. The new investments they make are tiny compared to what a large company can make. But they'll still try to shift as much of the risk as they can to their larger rivals.
Paradoxically, the biggest energy companies also try to transfer the risk, only they'd like to put it on the smaller companies. And right now, because shale production in the United States looks so promising, big oil is thinking about getting back into the natural gas game.
Patrick McGinn says Exxon is looking at some possible shale plays in the U.S. right now, but just like Gastar, it's biding its time before making a big move.
Mr. MCGINN: We've taken a couple of years to really work on the technology that's required to do the exploration and production of these kinds of shale plays. And so doing the homework and doing the technology development takes some time for us, and we were willing to wait for that.
GJELTEN: And what would happen to a little company like Gastar, were Exxon to move onto its territory, like in the Marcellus formation in West Virginia or Pennsylvania? Russell Porter says his company will still have its niche on the fringes, if necessary, or it could just let big oil take over its operations.
Mr. PORTER: If Exxon came in and wanted to become a dominant player in the Marcellus shale, I'm sure there are lots of small operators who would be willing to sell out to them if they were willing to pay full value. And then there's always going to be another play for us to go and invest in and sort of start creating value all over again.
GJELTEN: It's all part of the natural gas game. There is one big downside to the fact that small, independent companies still dominate the U.S. natural gas industry: It's harder for them to speak with one voice, and that's important if they are to address concerns about the impact of shale gas drilling on the environment, or if they are to be well represented in Washington when energy legislation is written. That story tomorrow.
Tom Gjelten, NPR News, Washington.
INSKEEP: We're glad you're hearing this story on this public radio station. And when you're checking the news throughout the day at npr.org, you can also learn more about U.S. energy consumption and the quest for shale gas. Transcript provided by NPR, Copyright National Public Radio.
