What are you doing sitting around reading magazines? You should be out exploring for hydrocarbons!
That seems to be the message of the pundits who provide yearly predictions to their clients about what to expect in the energy industry. This year they finally seem ready to accept the fact that oil prices won't be heading down to the US $11/bbl range any time soon. Exploration and production (E&P) companies will remain flush with cash. And after spending the past few years padding their balance sheets and being called on the carpet for it, these companies are likely to start spending that cash on new exploration and development plays.
But it won't be easy. Several factors stand in the way of a huge dash out the door in search of new prospects. Among these:
A lack of available conventional prospects. According to a letter from Booz Allen Hamilton, "Remaining hydrocarbon resources recoverable with known technologies are largely concentrated in the hands of Opec and other NOCs (national oil companies)." The company's analysis indicates that, in fact, only 7% of global oil reserves are accessible outside of the NOCs.
Rising costs and equipment shortages. A report from Pickering Energy Partners Inc. called "The Wild Ride Continues" states that the 6% gain in commodity prices wasn't enough to offset the 15% to 30% increase in costs. And even with new equipment, rigs will be in short supply. "Companies with contracted rigs and equipment get gold stars," the report states.
Adoption of technology. Service companies beef that oil companies are very slow to embrace new ideas, but that will have to change as the new "resource plays" involve more unconventional reserves. "Given the tightness of access to new resources and increased resource extraction challenges, technology is being touted, particularly by major players, as a source of competitive advantage," states the Booz Allen Hamilton report. "But money isn't everything when it comes to innovative success." This is resulting in a move toward "technology centers" and away from headquarters-based research and development labs. The Pickering report adds that the new resource plays will include shale, coalbed methane and sub-basalt.
Despite these challenges, however, the Pickering report contains a paragraph that will be music to the ears of frustrated explorationists who haven't been able to get funding for their bright ideas in the past. "Flush with coin and confident in the energy cycle, expect more E&P willingness to take risk," the report states. "Prepare to spend more time well-watching and hearing more rumors about 'the big one.'" Oh, and I particularly like this part: "Really want the scoop? Get familiar with the best bars in oilfield towns." A good tip for any savvy investor, to be sure.
What about the people crisis? The Booz Allen Hamilton report predicts "more creative management of human capital." The writers of the report seem to feel that companies are doing a better job of matching technical and strategic demand with human resources supply. They list several innovations: articulating the value proposition for employees at various career stages, removing glass ceilings in the technical career path, managing staff resourcing strategically on a global basis, tapping into non-traditional talent markets, developing local workforces, and having a clear near- and long-term learning strategy in place. This is also music to the ears - if it's actually true. I think that these kinds of human resource-driven innovations will be critical to success down the road, but with mergers and acquisitions also expected to be on the rise in 2006, it remains to be seen how "long-term" these strategies really can be.
But have a good year, find lots of oil and gas, and let me know how it went next January.

Clarification
After reading my column "Lights! Cameras! Geophysics!" in our January issue, Glen Muse from Crush Interactive Inc. wrote to give us some more details about "Reflections in the Field," the DVD that was distributed to attendees at the 2005 annual meeting of the Society of Exploration Geophysicists. Muse wanted our readers to know that the production was created in high definition, that it was created as dual standard for international compatibility, that it was a special hybrid format that performed completely differently when played from a PC instead of a DVD player, and that it was formatted to be compatible with high-definition media players. I apologize for not including this information and thank Mr. Muse for his letter. I now plan to watch this thing on my computer - it sounds fun!

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