Falling Oil Prices May Be a Good Thing … For Some

ByAndrew Inkpen and Michael Moffett

Falling Oil Prices May Be a Good Thing … For Some

The current down cycle in oil prices is causing a shakeout in the global oil industry. Down cycles always lead to change and we believe that the current cycle will leave many oil companies stronger and better prepared for the future. The companies that will benefit the most are those that know how to learn and innovate. In the oil industry, the most innovative companies are those in the private sector. In particular, companies competing in the U.S. and Canadian oil and gas sector are well positioned to come out of the downturn in robust competitive shape.

Government-controlled companies serve many masters. Consider how the major oil producing nations and their national oil companies (NOCs) may respond to falling prices. As a source of employment, NOCs will be under pressure not to reduce jobs. As providers of funding for their governments (e.g., 70% of Nigeria’s government revenues come from oil and gas production) they will be pressured to expand production to make up for the fall in prices. As large producers of refined products they will be expected to continue to supply the local market, often at subsidized prices.

Compare the NOC response to the U.S. and Canadian oil industry markets where private sector companies are the producers. In the U.S. and Canada there are no NOCs and the state does not own and control all hydrocarbons. Private sector companies operate in a highly competitive market with risk and reward tradeoffs. The recent boom in the development of areas like the Bakken and Eagle Ford reflects the fluid dynamics of a highly competitive market where firms innovate, change, compete, succeed, and sometimes fail. Failure is not an option for NOCs and their government owners.

The rapid rebirth and growth of oil production in the U.S. occurred because entrepreneurs took risks. With falling prices firms will be forced to innovate to survive. Those with insightful leadership and innovative cultures will become leaner and more efficient. They will drive down production costs, invent new technologies, and acquire new acreage – in short they will set themselves up for future success. The CEO of EOG, the largest shale oil producer in the U.S. recently noted: "Our goal at EOG is to exit this downturn in better shape than we entered it. The current environment brings more opportunities to lower our finding costs, improve our returns and add high-quality drilling inventory. As prices recover, EOG will be poised to resume strong U.S. oil growth."

As EOG’s leadership knows well, if they don’t change, they won’t survive. But it is up to them. Meanwhile, NOCs will be pushed by their government owners to cut costs and become more efficient. NOCs will pressure their suppliers to cut prices and their partners to revise contracts. But, the civil service cultures of NOCs are not innovation incubators. New ideas and change are not traditionally required or rewarded. NOCs cannot turn their managers into entrepreneurial risk takers – at least not overnight.

The global oil market is a competitive landscape of change, winners and losers. Our money is on those who are the most experienced and prepared for competition - the street-smart entrepreneurs of the U.S. and Canadian oil and gas industry.

Further information: www.thunderbird.edu/execed

About the Authors
Andrew Inkpen, Ph.D., is the Kenneth and Jeanette Seward Chair in Global Strategy at Thunderbird School of Global Management in Glendale, Arizona. Michael H. Moffett, Ph.D., is the continental Grain Professor of Finance at Thunderbird. They both work closely with oil and gas clients for Thunderbird Executive Education.

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