When business conditions are relatively stable, predicting the near future is easier. Now in the oil industry, the large step-change in oil prices has thrust us into turbulent times with wonderful new opportunities for success and frightening possibilities for financial ruin. The fortunes of both companies and individuals will change dramatically depending on the choices they make.

A large fraction of new business ventures are relatively simple extensions of current business activities. Most players in the industry can see and appropriately analyze opportunities that are direct extensions of existing lines of business. Incumbents have a significant advantage in capturing and exploiting incremental ventures. However, when opportunities can be easily identified and understood, competition reduces the rate of return on investment.


In contrast, in times of rapid change, new players, who are less constrained by pre-existing business models and prejudices, can have major advantages. Great fortunes can be won and huge companies created by new entrants who are willing to accept greater risks and can move rapidly. A classic example would be the rapid evolution of personal computing capability, which led to the emergence of Microsoft and the rapid decline of the dominance of IBM. Times of change are times of great opportunity.


The step-change in oil price has created opportunities for those who can see beyond the old rules of the game and are willing to embrace new risks. Clinging to old business models and terms of engagement may limit the downside, but relative to the risk takers, the old guard will lose power and influence.


The surge in oil prices is transforming pre-existing relationships. The leap upward has changed the relative value of people and technologies and altered access to financial resources. Let’s look at some of these changes.


Since the end of the last great oil boom in 1986, technical experts and technology have been relatively undervalued in comparison with commercial skills in the petroleum industry. This has played out in the form of declining investment in technology development by major oil companies and lower compensation for technical talent relative to business talent. Now the tables have turned.


Skyrocketing rig rates mean that drilling and completion experts, who can do more with less rig time, are in hot demand. It doesn’t take much time savings at current rig rates to justify hiring an expensive consultant. Thus technical experts who are willing to be free agents can command a much higher price than in the recent past.


Specialists who anticipate working only another 10 years or so can gamble that even if the boom lasts only another few years, they may make more as a free agent for the duration of the boom than they would finishing out their career with their current employer. For globally mobile older workers for whom long-term job security has little meaning, stay bonuses may be among the few effective retention policies.


Access to capital has also changed dramatically. Just as oil companies are enjoying record profits, so too are national oil companies (NOCs). Investors eager to get a piece of the action are willing to pour funds into unproven independents. Through years of low oil prices, international oil companies (IOCs), were able to use their strong balance sheets and access to capital as the lever to secure access to hydrocarbon resources around the world. With the industry-wide profits, IOCs have lost their capital advantage. NOCs may still need technology and technical experts, but in the last couple of decades, IOCs have relinquished their commanding control of those assets.


Around the world the large IOCs are encountering new competition. Some of the new competitors have different value drivers. The NOC of an oil importing country, which is seeking a secure oil supply for the home country, may be willing to accept much less favorable economic terms than an IOC. The NOC is playing a different game.


Small independents backed by investors eager to get a piece of the oil industry action are willing to take on more political risk. Little companies are rushing into Iraqi Kurdistan.


The small independents with their limited scope of operations are not balancing relationships with as many stakeholders as the IOCs.


In surveying the competition, we must look beyond the players focusing on hydrocarbons to those promoting alternative energy technologies. Higher prices not only allow development of previously non-commercial oil and gas resources; they also open the door for alternative energy supplies. At the same time that high oil prices revive oil shale and tar sand projects, they reinvigorate interest in energy efficiency, biofuels, wind, solar, geothermal, ocean and other forms of energy. With the cost and availability of equipment and skilled manpower rapidly changing, previous economic evaluations and comparisons must be updated to identify which new energy supplies are least expensive.


As the incumbent, oil has a major advantage. However, hydrocarbons are not the only game in town. Technology is bringing down the costs of the alternatives. At some point, the next best alternative will be something other than hydrocarbons. To paraphrase Sheikh Yamani, just as the Stone Age did not end because of shortage of stones, the oil era will not end because we ran out of oil. It will end when a better alternative emerges.


The oil price will not keep climbing until we run out. Although oil with its high energy density has an overwhelming advantage as a transportation fuel, hydrocarbons are minority players in electrical generation. Nuclear, large hydro, wind, geothermal, and other renewable energies are currently economically used to generate electricity. When an electric vehicle matches the price and performance of vehicles fueled by oil products, the whole energy game will change.



Eve S. Sprunt, evesprunt@aol.com, is 2006 president of the Society of Petroleum Engineers and an oil industry executive.