By John Kemp
LONDON, March 5 Asking petroleum engineers and
managers used to working offshore and on complex engineering
megaprojects, the equivalent of building Ferraris, to start
developing shale plays, the equivalent of building VW Golfs, was
never going to work.
BP's decision to form a separate business to manage
its onshore oil and gas assets in the U.S. Lower 48 states
acknowledges shale production is more like a manufacturing
process than traditional petroleum exploration.
Shifting onshore assets into a separate business unit could
pave the way for an eventual sale if their financial performance
does not improve, as the Financial Times explains ("BP creates
new U.S. onshore oil and gas business" March 4).
The company's chief executive insisted the assets would
"remain a critical part of BP's portfolio" though he admitted
the reorganisation "creates optionality for us".
But focusing too much on the possibility of an eventual sale
mischaracterises what the company is trying to achieve.
Production of oil and gas from shale formations is
conceptually quite different from exploration and production
from conventional oil fields.
The output is the same but the process and capabilities
needed are not the same.
SHALE IS DIFFERENT
In the rest of the world, and even in offshore areas of the
of the United States, BP has to negotiate for production rights
with a single mineral owner, usually the government.
But onshore in the Lower 48 states BP must strike agreements
with a plethora of private landowners.
Offshore, BP is hunting through large volumes of rock for a
small number of very large oil and gas accumulations, and needs
to a carefully target a small number of wells so that each will
yield enormous quantities of petroleum.
In onshore shale plays, the oil and gas are much more widely
distributed, and the aim is to identify the most productive
areas and saturate them with tightly spaced wells.
Offshore wells are expensive to drill and present tough
Onshore wells are simpler and cheaper, but with so many
needed and each one yielding less oil, it becomes essential to
control costs tightly.
Developing an offshore oil field is an engineering challenge
similar to designing and building a high-performance sports car.
Developing a shale play, in contrast, is more like a
manufacturing process in which automation, standardisation and
exceptional cost control are critical to success.
BP's exploration and production business can identify
accumulations and sink wells 20,000 feet below the seabed with
But running a successful shale operation requires the skills
and mindset of a Henry Ford.
BP has now recognised the problem. The company's press
statement referred to the "unique characteristics" of U.S.
It repeatedly emphasises the need to run the onshore
business very differently. It will have a separate management
team, at a separate location with "separate governance,
processes and systems designed to address the unique competitive
and operating environment in the U.S. Lower 48 onshore".
The focus throughout the announcement is on the need to
operate differently from the rest of the world and even
The engineering, financial and environmental risks in the
rest of the business are an order of magnitude higher than U.S.
onshore oil and gas production. Consequently, they need strict,
hierarchical control mechanisms by engineers and managers.
By contrast, the focus onshore is on the need to be nimbler,
more innovative and operate with far less cost, with faster
decision-making and shorter project cycle times.
By insisting that the unit report separate financials from
2015, BP will be able to hold it accountable more easily.
BP has belatedly recognised there is not a good cultural fit
between shale buccaneers and the petroleum engineers and MBAs in
the rest of the organisation.
Interestingly, ExxonMobil seems to have known this
from the start, and maintained its XTO shale unit as a separate
business with a separate headquarters after buying it in 2010.
Managing shale development separately will not solve all the
problems besetting BP and the other latecomers to the U.S. shale
It cannot alter the fact BP, like the others, appears to
have overpaid for assets at the height of the boom or that gas
prices may never reach the levels assumed when the deals were
But it is an intelligent way to reorganise the business and
recognise, however late in the day, that shale plays really are
very different and require culturally distinct organisations to
develop them successfully.