In the introduction to the 2007 edition of Wildcatters, a history of Texas and New Mexico's independent oilmen that first appeared in 1983, Roger Olien and Diana Davids Hinton wrote that the independents were more important than ever:

As major oil companies rationalized their operations and focused on their most profitable sectors [in the late 1980s], they began to part with a significant proportion of their domestic reserves of both oil and gas. They aimed at geographical rationalization of production, keeping a presence in areas with large and profitable reserves and selling off scattered, less important properties. Sales served the main element in the majors' exploration and production strategy, that of moving away from the domestic arena to find and exploit much larger reserves offshore and overseas. For independents of all sizes, the majors' strategy opened opportunities to grow by picking up properties long locked in major company inventories at bargain basement prices, reflecting low prices of oil and gas. At the same time, as the majors downsized their professional staff, independents were often able to pick up the highly trained professionals as well as properties. Independents thus positioned themselves to take on the smaller, more challenging projects that did not appeal to the majors--getting more production from old wells, bringing in oil and gas from narrower pay zones bypassed in earlier years, taking on technologically challenging tight formations with less certain returns. They could see profits in what the majors passed up.

Among the promising prospects, they note, was the technology that allows for horizontal drilling, which opens up plays that would be unattractive if you could only drill vertically (for example, a formation four feet thick). This is, of course, what has happened--and the past few years have been boom ones for the big independents that were hitting the scene at the end of the 80s, like Devon, Apache, and Chesapeake.

What's interesting is that the independent producers are to some extent struggling with their own revolution: the rise of shale gas has effectively clobbered natural gas prices. Horizontal drilling and hydraulic fracturing have opened up so much supply in the United States that gas is going for less than $4/MMBtu—less than it costs to produce, in many cases. The reason people keep producing gas, then, it is that oil is doing great, and the new extraction methods mean that gas is in many cases a byproduct of oil. That is, if you’re fracking for shale oil, you’re also going to get shale gas, so even if gas isn’t particularly lucrative, it’s still being extracted. (There's also an odd regulatory circumstance wherein you can lose your drilling lease if you're not actually drilling, so some of the companies can't dial down production because they don't want to lose the asset.)

The upshot is that Big Oil has a lot of natural gas that’s effectively worthless to them. In some cases, they're simply “flaring” the gas—burning it off at the wellhead and paying the fees for the emissions that results--because it's more cost-effective than shipping it to market and selling it for peanuts. And with oil prices so high, it isn’t really hurting the bottom line. That's why you see players like Exxon announcing that given the long-term view, they're going to keep the same production mix in the United States.

There is, however, a problem at hand for “small” producers like Devon Energy (now America’s number-two producer of natural gas), Chesapeake, or Apache. Most of their business is in natural gas. You might think they could just export the gas; in Japan, the market rate is about $16/MMBtu, and analysts expect that to remain high because of growing consumption in Asia. But exporting isn’t a viable proposition at the moment because preparing gas for export—converting it to liquefied natural gas or LNG—drives the cost up (to, say, $20/MMbtu). And the United States, having until recently expected to import LNG, has very little infrastructure for its export.

The gas-heavy companies could try to goose domestic demand; if a lot of states or big companies transitioned to CNG-powered fleets, for example, then that could spur the investments in infrastructure (i.e., CNG fueling stations) that might in turn support a consumer market for CNG cars. Over the short term, some of them will try to switch to increased oil and liquid gas, which would mean heavy capital costs. Alternatively, we might see another round of innovation from the independents--just as they pioneered horizontal drilling and hydraulic fracturing techniques.

Not that anyone’s going to shed a tear for Small Oil and Gas, I suppose. I don’t think it’s an existential problem—as the world gets its head around the abundance of shale gas, we will see greater investments in the technologies that take advantage of it—but it is, given the history, a slightly poignant development.
 



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