COMMENT

"No lease - no grease"

Leonard Le Blanc

Those of us outside offshore exploration and production operations have no idea of the costly risks and unpredictable nature of bidding for government leases/licenses and drilling for oil and gas. Other than rare windfalls, the business is characterized by continuous attempts to rescue profits from disaster.

The closest replica of this type of business risk is a leasing simulation game developed by Conoco for internal education uses. The game models actual leasing and drilling risks. Here are some of the simulated realities:

Walk-away profits are the primary objective of the game, after the leasing, seismic evaluation, drilling, and production are concluded - not the number of leases gained, nor discoveries made, nor money saved.
The second priority in the game is to win the most desirable leases. Conoco's internal advisory - "no lease - no grease" - which is certainly true for producers with downstream operations, places that goal in clear perspective.
The third priority is laying-off risk. Deal-making and partnering among producers and suppliers are critical and necessary functions in leasing and drilling.
Producers winning too many lease tracts (certainly an accident) often have to deal with a terrible reality - there is not enough money in the budget to drill the needed wells.
Producers failing to win enough lease tracts have leftover cash - a commodity prized by companies that have spent most of their exploration budgets on leases.
Producers with drilling units under contract and few tracts in their leasing portfolios are naturally attractive to producers with the opposite dilemma.
Diversification is wonderful, but not in leasing. Concentration and focus are critical to understanding geologic trends, charting "sweet spots," and estimating competitive strength for the desired tracts.
Tract winners who leave too much bid money on the table (difference between the winning and second bids) are valued only by the governments sponsoring lease sales.

Conoco's lease simulation game, entitled "Oil Is Where You Find It," is making its way through the industry, but the game's real value is as an educational tool for those outside the industry. Currently, the (US) National Ocean Industries Association is borrowing the game to educate US legislators, regulators, and the press about the industry's difficulties in negotiating risk and extracting profits.

Because the average human psyche is attracted to game playing and competition where excitement is high and actual losses are only reputational, the simulation game has tremendous potential as an informational tool and perception corrector.

Science and truth

The scientific research community consistently earns the highest public approval ratings of all groups in the US and Europe. Most admired is science's honest search for truth and reality, and the scientific method and peer review process disciplining that search.

The petroleum industry usually feels an unwavering allegiance to scientific methods and findings. However, as it negotiates the twists, turns, and reverses of new discoveries, science may take the petroleum industry in an uncomfortable direction, especially if oil and gas use are found to negatively influence the environment.

Even so, such findings may not be negative over the long run. If the past is any guide, what happens is that as soon as scientific findings doom certain products or functions, technical entrepreneurship generates alternatives to make use of existing infrastructure and repair economic discontinuities. As pure as the scientific discovery process seems to be, there are two disturbing influences inherent in the practice:

Some researchers - fortunately not many - make premature judgements in an effort to gain first professional or public recognition, or simply to obtain new or renewed funding for research.
While no single researcher or gathering of scientists controls peer approval, some groups outside the community sometimes are successful in influencing public acceptance of unsupported findings.

Usually, when the scientific community is in turmoil over an issue, event, or research finding, it is because of these two influences. Global warming is one of the issues, and there will be others in the future.

The scientific community and the energy industries need to pay attention to these influences and how they disrupt the scientific process. At the same time, the petroleum industry's allegiance to science also means that business flexibility will have to be a constant companion far into the next century.