Industry Downturn Research Articles

Safety leadership and collaboration in the Queensland natural gas exploration and production industry

The industry in Queensland operates within a common geographical area and uses similar technologies with common hazards and risks. In terms of safety companies must be seen as one industry and not separate entities. As a result, collaboration on safety is a natural outcome, and in 2014 this led to the creation of the Queensland Natural Gas Exploration & Production Industry Safety Forum (known as Safer Together), an inclusive member-led organisation of a range of operating and contract partner companies. Initial emphasis was on the set-up/organisation and getting early engagement. With more than 80 companies signed up as members in the first 12 months, Safer Together made a strong start. The emphasis has now switched to delivery, and with all member companies feeling the strain of the industry downturn, working together has never been so crucial to ensure that safety is never compromised. This extended abstract presents a case study of what Safer Together is learning about the fundamental prerequisites required to ensure long-term sustainability and the success of the forum. Challenges discussed include: maintaining and increasing membership in tough times; ensuring senior leaders continue to be actively engaged, regardless of other business pressures; ensuring simple solutions don’t become too difficult to implement when rolled out to many different companies; avoiding initiative overload; and, demonstrating tangible value to member companies. This is not an easy journey, and more challenges lie ahead. But the enormous safety benefits make it the right thing to do as an industry.

University Research and Development Steady in Industry Downturn

R&D on Campus University research and development is continuing at a steady rate, despite sustained low oil prices. For now, money allocated by the oil and gas industry in previous years is still available for many academic institutions. However, oil prices may eventually take a toll on funding if they remain low when it is time for companies to renew their existing commitments. “Next year is when we will look and see if we have our sponsors, or (determine if) some of them cannot continue,” said Manika Prasad, associate petroleum engineering professor at Colorado School of Mines. Other universities around the world are facing the same pressures and uncertainties. University of Aberdeen Located near the North Sea in one of the world’s major oil and gas capitals, the University of Aberdeen employs more than 150 professors working on energy-related research. “We are not just an oil and gas school at Aberdeen, we have a very broad range of sciences being taught and worked on. So, sometimes the interaction between them produces something unusual,” said John Scrimgeour, executive director of the university’s Aberdeen Institute of Energy. University of Alberta For decades, operators have attempted to use buried electromagnetic coils as an alternative to steamflooding in heavy oil reservoirs, but they consume a great deal of energy and take a long time to work. Tayfun Babadagli, who heads the University of Alberta’s Enhanced Oil and Gas Recovery and Reservoir Characterization group, is leading research to make electromagnetic heating a practical process with the use of nanotechnology. Colorado School of Mines As the industry’s ability to create numerical models of the subsurface continues to improve, one fact remains unchanged: Models are only as accurate as the data used to create them. Manika Prasad, associate professor of petroleum engineering at the Colorado School of Mines, started the Rock Physics and Petrophysics of Organics, Clay, Shale, and Sand initiative in 2011 to improve the accuracy of subsurface models by creating standards for rock physics and geomechanical data collection. Texas A&M University This year, Texas A&M University’s Crisman Institute for Petroleum Research has been shifting its research focus toward projects that will improve recovery in shale reservoirs. The institute was founded in 1982 with the broad directive of producing advances in upstream technology. However, the industry demand for goal-based research that offers a higher return on investment has led the faculty to narrow its mission.

From the Other Side

I would like to comment on the reaction of large oil and service companies to the low price of oil. I have lived through several “downturns” and was fortunate not to be one of those who was discharged as a result. I remember that the academic people were almost on strike against the hiring policies of oil companies during those times. Recruiting went on with hiring targets as low as one or zero. Today, the price of a barrel of oil continues to fall, and I can't say much in the face of that. I was president-elect (the first one) of SEG in 1986–1987, a year after the price of oil touched $10/bbl. The Society went through a period of cost cutting and watching the membership sharply decline. Perhaps there is something eerie going on. I was with Chevron during my presidency. Today, the president-elect is Bill Abriel, who was with Chevron (recently retired), and the price of oil tanks again. (Oil tanks, used as a verb … like a boxer loses intentionally or gives up in competition. It's slang.) Therefore, when the next Chevron employee gets elected president-elect of SEG, we can expect a downturn in the oil industry (based on statistics).

The Engineering Gold Rush in Investment Banking

HR Discussion In the wake of the 2008 financial crisis, the investment banking industry was vilified by most of US (and perhaps rightfully so) as one of the main facilitators of “The Great Recession.” We cheered on as the industry was subject to an onslaught of new federal regulation, forcing many investment banks to slash thousands of jobs and drastically cut compensation for those on Wall Street. It is almost poetically ironic that with the recent downturn in the energy industry, investment banking (specifically energy investment banking) is well-positioned to not only weather the storm, but flourish in the current environment. Those who have followed the market closely in recent months are likely aware that the drop in commodity prices has forced many operators and service providers to slow production, cut costs, and restructure their current portfolios. The general consensus of industry experts is that it is only a matter of time before the industry sees a sizeable wave of merger and acquisition deals and consolidation. Consequently, energy investment banking groups are not only capitalizing on said restructuring, but will be one of, if not the main, beneficiaries as many companies in the industry will be forced to sell off assets and/or consolidate. Before diving into the specifics of what this means from a hiring perspective, it is important to understand how the energy investment banking industry, and particularly acquisitions and divestitures (A&D) groups, have evolved over the past 10 years. Before 2005, any type of transaction facilitated by an investment bank that required nuanced, technical due diligence was almost always outsourced to a third party engineering agency. For example, if an operator intended to divest an asset, an investment bank would be engaged to represent and advise on the divestiture, with any technical analysis likely handled by an independent advisory. The investment bank would take the findings of the third party agency and incorporate its analysis in determining the price/ fair market value of said assets. Senior level investment bankers would then pitch the potential acquisition to prospective buyers. As the energy investment banking industry became increasingly competitive, many investment banks began to realize a competitive advantage by conducting in-house technical analysis and evaluation for their clients. One example of this was Jefferies acquiring Randall & Dewey, a large and reputable independent oil and gas advisory firm, in February 2005. Through this acquisition, Jefferies was able to realize the value of conducting in-house technical analysis. Moreover, having seasoned reservoir engineers and geologists accompany traditional investment bankers as they pitched to C-suite executives (many of whom are engineers or geologists by background) proved to be paramount in winning new business.

URTeC showcases integration

The third Unconventional Resources Technology Conference (URTeC), held in July 2015 in San Antonio, Texas, proved to be a successful meeting in spite of the current industry downturn caused by the drop in the price of oil and gas. The technical program continues to evolve toward the integrated exchange of experiences that is the targeted objective of this annual conference. Although there was a drop- off in attendance from the initial conferences, which were held during a more favorable economic climate, the presentations were well attended. The emphasis toward the integrated team approach gave valuable information for the attendees to take back and incorporate into their approach to develop unconventional reservoirs.

Business Groups: Are They More Efficient than Conglomerates and Stand-Alone Units?

This paper argues that groups reduce bankruptcy costs with respect not only to stand-alone units (thanks to coinsurance) but to conglomerates as well (thanks to corporate limited liability). This allows groups to save on contagion costs, thereby generating more value than conglomerates despite a higher cost of debt due to a lower recovery rate for their lenders. We also show that group survival skills paradoxically generate a value discount if they are matched to other organizations without accounting for their lower mortality during industry downturns. This insight may reconcile contrasting findings about group relative efficiency.

Executives’ professional ties along the supply chain: The impact on partnership sustainability and firm risk

This paper investigates the effect of management-level professional ties between suppliers and customers on the sustainability of business partnerships. We find that the presence of cross-firm professional ties between directors and senior executives along the supply chain significantly reduces the probability of relationship termination around customers’ industry negative shocks and during financial crises. The results are robust using professional-tie strength as an alternative measure. Exploring contingency effects, we find that, for suppliers who lack R&D, face high competition, are smaller in size, or are less important to customers in terms of sales, such professional ties are more helpful in sustaining such relationships. Furthermore, we find that professional ties also significantly reduce firm risk during periods of market turbulence. Taken together, our results suggest that professional ties along the supply chain can facilitate information flow and build mutual trust, which can lead to healthy long-term relationships and can help firms survive economic and industry downturns.

Perceived efficacy of sustainability strategies in the US, Italian, and Spanish wine industries

Purpose– This purpose of this investigation is to compare the perceptions of competitive advantage through cost leadership and differentiation with sustainable practices of wineries from the USA, Italy and Spain.Design/methodology/approach– Data are collected via self-report web-based surveys in California, Tuscany and Catalonia in 2010-2011 during a severe economic downturn in the wine industry.Findings– Of the 260 respondents among the three country samples, over 75 per cent are family-owned and family-managed. Respondents indicate who has implemented a clear business case for an Environmental Management System (EMS) and who has not. Benefits and challenges of implementing sustainability practices are also addressed.Practical implications– A comparable percentage of respondents across the three countries indicated a “clear business case for EMS”. Wineries in all three countries perceive that they have competitive advantage through implementation of EMS and commitment to sustainable practices. Top perceived benefits for respondents from the USA and Italy are focused on cost reduction strategies, while top perceived benefits for Spanish respondents are focused on differentiation strategies.Originality/value– Activities that create competitive advantages for wine businesses in different countries are understudied; this research bridges that gap.

Making the Most of Good Times: Shareholder Rights and Performance Revisited

I provide a new explanation for the abnormal returns to governance and their disappearance after 2001 by demonstrating that firms with strong shareholder rights outperform only in good times. Specifically, they capture higher profits than poorly-governed firms in the same industry when that industry is in a period of high profitability, but both groups have similar profits during weaker industry conditions. Further, I show that this pattern is anticipated by investors. Consistent with such expectations, and with an updating of valuations as anticipated industry conditions change, positive abnormal stock returns to good governance are concentrated in periods of high industry returns, and are at least partially reversed during industry downturns. Additional evidence supports a causal interpretation of the results.

Technology Focus: Unconventional Resources (July 2015)

Technology Focus At this time in the industry, it is worth reflecting on what drove Steve Jobs, who was one of the most inspirational and innovative thinkers of recent times. Apple’s chief design officer, John Ive, had this to say about Jobs: “The defeat of cynicism. The rejection of reason. The rejection of being told 100 times, ‘You can’t do that.’ So his, I think, was a victory for beauty, for purity. And as he would say, ‘for giving a damn.’ ” With the industry downturn, the same resolve is necessary to find the technical solution that allows the unconventional business to thrive despite severe economic headwinds. And the past is evidence of our capabilities. In the mid-1990s, with low gas prices, ultratight gas was developed from vertical wells. Water-fracturing technology was developed in this economic environment. The large volumes of proppant previously used were proved not to be necessary in many reservoirs. Significant cost savings were the result, without noticeable effect on production. In this low-gas-price environment, fracture-staging methods were also developed that were cost effective and promoted operational efficiency, such as induced stress diversion. As gas prices improved in the early 2000s, the number of fracture stages increased. Methods such as flow-through fracture plugs were promoted, which, while costing more, led to more-effective cleanup and recovery. Finally, as gas prices continued to increase in the 2000s, horizontal wells increased dramatically in shale gas and then in shale oil. History shows that technology adapts to the economic conditions. The optimum technology in a high-price environment is not optimum for a low-price scenario. The only limit to unconventional development is our imagination. So, with a dramatic drop in oil price, unconventional-reservoir development is again ripe for innovation. The path to developing these new technologies requires a sustained focus on innovation and resilience to potential early setbacks. “And when the ideas didn’t come,” Ive continued about Jobs, “and when the prototypes failed, it was with great intent, with faith, he decided to believe we would eventually make something great.” Do you have the faith? JPT

The Dawn of a New Automation Consortium

Automation Consortium Researchers at the University of Texas at Austin (UT) have set an audacious goal to halve the time, cost, and number of rig personnel required for drilling every type of well, from unconventional shale to ultradeepwater. The Rig Automation and Performance Improvement in Drilling (RAPID) research consortium is envisioned by its creators as an accelerator of technologies that can address “any and all” aspects of automated well construction. Launching a new research and development (R&D) group in the middle of an industry downturn may seem like bad timing. But program director and petroleum engineering professor at UT, Eric van Oort, emphasized that low oil and gas prices should serve as motivation, not trepidation. “There is a big carrot out there. Operators have done everything to reduce cost, to reduce activity, to lay down rigs, to work with suppliers on price reductions,” he said. “The dust is settling on that, and the question now is what are you going to do to make these operations at [USD] 40, 50, 60 a barrel profitable?” RAPID’s plan is to develop, field test, and assess the commercial viability of new technologies that deliver value for the companies who join the consortium and to get this done in a relatively short time. The far-reaching effort will leverage the experience of a multidisciplinary group of UT research scientists, talents of top engineering students, high-tech facilities, and mountains of drilling data from participating oil and gas companies. The senior research team includes seven PhD-level engineers with extensive backgrounds in oil and gas, robotics, data analytics, and aerospace. Program director van Oort spent 20 years in various technical capacities at Shell before taking on his role at UT, and is a former SPE Distinguished Lecturer. In May, he addressed representatives from more than 30 upstream companies at a kickoff event on campus to make the case for why they should support RAPID. To join the consortium and have access to its work, companies pay an annual fee of USD 75,000, prorated this year to USD 50,000. Once they become members, the hope is that the companies will provide critical drilling data and feedback on the direction of the research projects. Aside from helping companies expand their profit margins, van Oort said automation will make drilling complex wells easier, improve safety, and help attract a new breed of engineers to replace those being lost through the recent layoffs, as well as those retiring amid the great crew change.

New approaches to microbial natural product discovery

Microbial natural products have provided some of today's most important medicines. Despite an industrial downturn in natural product research, recent advances in the field have provided a new impetus to re-visit this resource for drug discovery. These advances have been driven in large part by ready access to genome sequence data, which has revealed that most bacteria maintain considerably more genetic potential than the compounds discovered to date, would suggest. Coupled with advanced bioinformatic tools and analytical approaches, it has become possible to mine genome sequences and link pathways to products in unprecedented ways. The results have provided unprecedented insight into the evolutionary processes that generate structural diversity and rapid methods to detect known compounds and target new molecules for characterization. Working with a model group of marine bacteria, it has been possible to apply these approaches to natural product discovery in ways that have provided insight into the relationships between secondary metabolism, biogeographic origin, and taxonomic diversity. The results are providing new opportunities to explore microbial diversity and capitalize on the wealth of biosynthetic potential that has yet to be exploited for natural product discovery.

Guest Editorial: SPE Provides Support During Industry Downturn

Guest Editorial SPE has served members through the ebbs and flows of the oil and gas industry since 1957. The exploration and production business is inherently cyclical. Our current E&P industry downturn is a result of our industry’s relentless effort to find new oil and natural gas resources and develop the technology to unlock these resources from challenging reservoirs. Through every industry cycle, SPE is steady and supportive. I know this to be true because I was a member long before I became the CEO. When the industry experiences a downturn, companies react. That can result in layoffs, budgets tightening, mergers and acquisitions ramping up, and similar responses. All that sounds logical, but when you are the one caught in the cross fire, the obstacles can seem insurmountable. I know that all too well since I found myself in that dilemma in 1987 when I was unemployed during an industry downturn. At a time when petroleum engineering job openings were scarce, I turned to the contacts I gained as an SPE member. I attended the SPE Annual Technical Conference and Exhibition (ATCE), networked with fellow colleagues, and was able to find another opportunity through these contacts. I appreciated my membership in SPE and viewed its benefits as tangible and valuable then. Years later, now as SPE’s CEO, I strive to assure the commitment the Society has to serve its members in broad and specific ways. SPE exists to serve you, our members, throughout your career. We are here for you whether you are a seasoned engineer, a young professional, or a student member. As the industry reacts, we want you to know that your Society is proactive with resources and programs to serve your needs. At times like these, there are a few specific things you should know about: SPE is launching a new job board that will include jobs in the oil and gas industry that may be of interest to members who are out of work. Members can request a dues waiver if unemployed or for other financial hardship reasons. SPE offers health insurance for members, including a private health exchange for US members. Members who are out of work will receive a free one-day registration to attend the exhibition and special programs designed for them during the last day of ATCE in Houston in September. SPE offers approximately 100 free webinars annually for members on topics that help them improve their skills. E-mentoring programs are available for young professionals who have not experienced a downturn previously. PetroWiki is an ideal way for retired or unemployed members to stay engaged and demonstrate their expertise. SPE offers a free, online competency management tool for members to assess their current professional capabilities utilizing 22 key E&P job competency models covering geosciences, reservoir engineering, well engineering, production engineering and operations, project and facilities engineering, and HSE. Members will be able to use the self-assessment results to generate an individual development plan to address competency gaps. Access.to a tailored development plan can serve as an ongoing resource for members who want to keep their skills current and credentials consistent with prevailing standards. Rig counts may decline, but the demand for innovation in oil and gas E&P is increasing. As the industry constricts, SPE is here for our members, providing services and resources efficiently and effectively. The risks and rewards of a career in energy may be unpredictable at times, but know that you can always count on SPE. If you have additional ideas about ways SPE can help our members during the downturn, send me an email at ceo@spe.org. JPT

Financing Constraints and the Amplification of Aggregate Downturns

This paper shows that during industry downturns, firms experience significantly greater valuation losses when their industry peers' long-term debt is maturing at the time of the shocks. Across a range of tests, the analysis addresses the endogenous determination of peer debt-maturity structure. Overall, the evidence suggests that the negative externalities financially constrained firms impose on their industry peers can significantly amplify the effects of industry downturns. The evidence also provides support for the view that these amplification effects are driven by the adverse effect that financially constrained firms have on the balance sheets of their industry peers.

Acceptance of the Society of Economic Geologists Ralph W. Marsden Award for 2013

Madame President, SEG members and guests: I thank Larry Meinert for his citation for the SEG Ralph W. Marsden Award, both for what he said and what he left unsaid. It was Sam Adams who, as chair of the Committee on Committees, invited me to work on the SEG Membership Committee under the leadership of Bruce Bouley back in the early 1990s. This was the time when SEG had committed to build membership worldwide after its only period of membership decline, which followed the industry downturn of the late 1980s. The appointment was my first service to SEG, and it got me …

The G & K O'Connor Lockout (1999) and its Aftermath: A Case Study of a Union Avoidance Campaign in the Australian Meat Processing Industry

The G & K O’Connor lockout of the Australasian Meat Industry Employees’ Union (AMIEU) members in 1999 was an example of a change in employer strategy with the objective of removing the union from its Pakenham abattoir. Chris Briggs’ research on the recurrence of the lockout in Australia sees it as an example of a “big bang lockout” which occurs against the background of legislative changes, a downturn in the meat processing industry, and other factors. This article examines the G & K O’Connor lockout in detail. It identifies legislative change in the form of the introduction of Australian Workplace Agreements (AWAs) under theWorkplace Relations Act 1996in providing the company with the opportunity and legal framework to change its industrial relations strategy and weaken the AMIEU. This upsurge in employer militancy was also associated with use of the Federal Government’s apprentice and traineeship scheme, anti-union consultants, and tactics such as industrial spies and labour espionage. The lockout, which the stakeholders described as a “baseball bat lockout,” and subsequent actions by the employer introduced a “Pinkerton Incorporated” style of culture into Australian industrial relations in which the employer adopted an offensive position against the union using a range of union avoidance tactics.

Swimming Upstream: Struggling Firms in Corrupt Cities

We find that a corrupt local environment amplifies the effects of financial distress. Following regional spikes in financial misconduct, credit becomes both more expensive and harder to obtain for nearby borrowers -- even those not implicated themselves. This is particularly harmful for cash-constrained firms, which cut investment more sharply and lay off more workers during industry downturns. Moreover, we find that local waves of financial misconduct are a risk factor for bankruptcy.

The Real Costs of Industry Contagion

I analyze whether the higher financing costs following the idiosyncratic bankruptcy or default of one firm affect the real investment decisions of non-distressed competitors. Results show that firms which are more affected by the higher financing costs (“treated firms”) reduce investment by around 10% more than their less vulnerable peers. These results are not driven by industry downturns that coincide with the bankruptcies or defaults, nor are they caused by higher refinancing risk or forward-looking managers of treated firms. Results suggest that idiosyncratic shocks can be transmitted to peers through an asymmetric information channel, but not through a collateral channel.

Military CEOs

There is mounting evidence of the influence of personal characteristics of chief executive officers (CEOs) on corporate outcomes. In this paper we analyze the relation between military service of CEOs and managerial decisions, financial policies, and corporate outcomes. Exploiting exogenous variation in the propensity to serve in the military, we show that military service is associated with conservative corporate policies and ethical behavior. Military CEOs pursue lower corporate investment, are less likely to be involved in corporate fraudulent activity, and perform better during industry downturns. Taken together, our results show that military service has significant explanatory power for managerial decisions and firm outcomes.

Asset Specificity, Industry-Driven Recovery Risk, and Loan Pricing

AbstractThis paper examines the relationship between a firm’s exposure to industry downturns that we call industry risk and bank loan pricing. We measure industry risk based on the relationship between a firm’s stock returns and industry returns conditional on an industry downturn. We find industry risk is significantly related to the recovery rates in bankruptcy and the likelihood of the firm experiencing financial distress when its peers are also in distress. More importantly, we find that the spreads on unsecured bank loans are positively related to industry risk measures. These relationships are stronger for firms with more industry-specific assets.