November 2017, Vol. 244, No. 11
Features
Insider’s Perspective of an Industry in Transition
Chris Banning has an insider’s feel for the increasingly intricate pipeline industry as the shale revolution has led petroleum companies to transition into different roles and strategies.
The result has changed the entire landscape of the industry, either through mergers and acquisitions (M&A), or complex negotiations involving landowner contracts and mineral-rights agreements.
Banning has worked since 2008 as a commercial negotiation consultant for The Gap Partnership, a global negotiation consultancy involved in 50 countries, in particular the oil and gas business. Here, he discusses the deals that are actively shaping the pipeline industry.
P&GJ: The price of oil is hovering around $50 per barrel and has not exceeded $60 in nearly three years. Is the industry expecting this to continue? If so, what strategies are available to midstream companies looking to increase profit potential as they weather the downturn?
Banning: The general expectation within the industry is that the price of oil will remain in the $45-60 range likely well into 2018. The best strategy for midstream companies looking to marginalize costs and increase profits in the midst of the current downturn is to explore new technologies that unlock efficiencies. Tech innovation is revolutionizing the oil and gas industry by replacing manpower and slashing the time required to complete jobs.
P&GJ: So, in your view, what’s the single most important technological advance adopted by pipeline companies within the past five years?
Banning: Geographic information system (GIS) technology is transforming the midstream sector. By eliminating much of the guesswork involved in planning routes, GIS saves time, lowers costs and, most importantly, reduces risk. It allows decision-makers, engineers, and other key players involved in pipeline construction to more efficiently map out and visualize routes. Identifying potential obstacles in topography and other environmental concerns before ever breaking ground helps to decrease the chances of a mandatory rerouting.
Tech developments that improve safety for workers and civilians are also critical – the value of technology designed to mitigate risks of leaks and tech that can immediately detect and notify a company when there is a notable change in pressure are very valuable.
P&GJ: How frequently are game-changing technologies introduced? Other than pipeline companies, who else is affected by the changes and does their ability to adopt new tech affect potential contracts with pipeline companies?
Banning: We’ve seen new and innovative technology introduced pretty regularly in the last few years – now we’re seeing considerable tech advancements for pipeline operators as well as the midstream sector. For example, horizontal drilling tech is significantly reducing the time it takes to get oil and natural gas out of the ground. It’s also easier to negotiate contracts with landowners, the city/state/national governments and other key players when the number of drill sites is reduced.
Business relationships and partner selection are heavily influenced by new technologies – pipeline operators are likelier to work with producers leveraging new tech as opposed to those still using traditional processes. Given the impact on their bottom lines – the faster and easier it is to get oil and gas out of the ground and into the pipelines, the greater the profit potential.
P&GJ: What’s the next big thing you see taking shape that has the potential to transform the pipeline sector – and perhaps has implications for the broader oil and gas industry?
Banning: In addition to technology, we expect to see “big data” begin playing a bigger role in sector-wide cost-reduction strategies. In fact, Microsoft and Halliburton joined together on a big data project recently. If companies analyze the data from the wells more efficiently, they can build algorithms for commonalities to help predict better yields. The industry is ripe for big data help, and we’re just starting to see its benefits at work.
Machine learning and augmented reality plays will also be key as E&P players look for competitive insights for reservoir estimations, modeling, and simulations. For an industry that has been hesitant to share data, this is a big shift as key players are realizing the value big data can have in helping reduce costs and increase production yields
P&GJ: Oil and gas M&A transaction volumes surpassed $700 billion as of the first quarter of 2017 — which the industry hadn’t seen since 2007. What is encouraging such a significant increase?
Banning: With oil prices at $50-60 per barrel, energy companies need to carefully consider their areas of focus. Divesting used to be standard practice, but now many oil and gas companies are becoming leaner and selecting specific types of plays to establish a niche deatheir strategies, smaller, specialized companies are attractive – that’s one of the largest contributing factors to the current influx of M&A activity in the market.
P&GJ: The Trump administration has removed barriers blocking the Keystone XL Pipeline and the Dakota Access Pipeline (DAPL). Does this effect other companies that may be considering cross-border ventures? What logistical factors are at play and what challenges must companies conquer before completion and putting pipelines into service?
Banning: With Keystone and DAPL enabled to move forward, more companies are considering cross-border opportunities. That said, cross-border projects are very complex and the challenges associated extend well beyond executive approval. On the regulatory front, pipeline operators need to ensure they’re meeting the requirements set forth by the Federal Energy Regulatory Commission (FERC) and any other local and state laws in play. There’s also value in proactive communication with the public regarding a project’s impact on those communities.
If companies have learned nothing else from the Keystone and DAPL projects, it’s that public perception plays a role in high-profile deals. They need to be prepared with a thought-out and thorough approach to these kinds of negotiations – that may include meetings open to the community, with landowners, regulators and other potential stakeholders.
P&GJ: Are you seeing cross-border M&A activity levels pick up at the same pace as domestic M&A? Do you expect to see a shift within the next year?
Banning: With the 2016 lift on crude exports and the administration’s more oil-friendly agenda set forth in early 2017, we saw cross-border activity pick up and an increase in international deals. But in Q2 we actually had a slight decrease in M&A activity, cross-border and domestic. That said, given the low oil prices and significant capex cuts we saw in 2014-15, we still expect to see an increase in deals that involve assets already producing. With prices down, big oil is facing a growing need to focus their attention on getting oil they know is there out of the ground, rather than investing money and other resources in risky plays that may not produce.
Here are three M&A trends we expect to see, given current market conditions:
Increased acquisitions of pipeline operators struggling amidst the downturn by profitable midstream companies looking to expand at lower rates.
Rise in M&A deals targeted at upstream companies with producing assets rather than new plays. We expect producers of all sizes – especially those facing financial concerns – to be targeted both by competing companies and pipeline operators.
Divestitures of non-producing assets. We will continue to see deals involving upstream companies putting assets up for sale, both by domestic companies and international companies with American assets, for example BHP.
P&GJ: When it comes to negotiation – whether with landowners, contractors, joint venture partners, or other key players – what special considerations and best practices should companies apply when making deals internationally?
Banning: Companies need to consider foreign government regulations, the needs of their domestic and international customer base, and the culture of the partners they’ll be doing deals with. The negotiation culture is probably the most delicate of the considerations to keep in mind. Understanding how deals are put together through relationships beyond financing is imperative to any successful negotiation.
In order to conduct effective negotiations, companies must know their audience – and though personal negotiating styles may differ, knowing and playing to one’s culture can have the greatest impact. Before formulating negotiation strategy, begin by identifying the cultural motivations and values by answering these six key questions:
Principle vs. pragmatism: Is value placed on structure, rules and set protocol, or on differences and exceptional circumstances?
Individual vs. community: Is competition, personal fulfilment and unique identity emphasized, or is collaboration, social wellbeing and group harmony?
Specific vs. diffuse: Are work and personal separated, or are they intertwined?
Achievement vs. esteem: What shapes societal views of an individual – life accomplishments or factors such as age, class, education, connections and profession?
Inner-direction vs outer-direction: Does society value individuals who take fate into their own hands and strive to defeat external obstacles, or individuals who listen and adapt strategy based on their environment?
Sequential vs cyclical: What path is taken to achieve goals – a time-sensitive, structured processes, or a flexible, changeable route to attainment?
P&GJ: Shale plays within the Permian and Marcellus basins are a hotbed for M&A and investment activity. But at current prices, many companies barely break even. What needs to happen for them to payout at a level that lives up to the hype?
Banning: Companies invested in the Permian and Marcellus are at a critical inflection point. They need to effectively employ the right technologies to increase profit margins or risk achieving only a fraction of the ROI they are aiming for. Producers should consider taking advantage of increased usage of proppant per square foot and implementing state-of-the-art steering technology for longer laterals. Data and services integration, analytics and automation, and technologies aimed at increasing recovery rates are rapidly gaining momentum in the Permian and Marcellus.
If companies invest in bringing in the right technologies, they can decrease their operating costs and increase profit margins. Using effective negotiation strategies with landowners and partners/contractors is another key factor in improving the bottom line. My best advice on ensuring pipeline operators secure the most attractive deal is to take the time to map out and sequence how these complex deals will come together, especially when it comes to the complex big data projects that could transform the industry.
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