[Editor's note: A version of this story appears in the June 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

Occidental Petroleum Corp.’s $38 billion acquisition of Anadarko Petroleum Corp. revives the simmering conversation advocating for industry consolidation.

The deal’s rationale includes acreage access, cost reduction and an opportunity to achieve manufacturing efficiencies long-promised but infrequently realized. Shale plays evolve in a progression from discovery and delineation to optimization to full-field development. Each phase requires different management and technical skills. The ability to amass acreage or nimbly respond to geological and engineering challenges is different than the skills required to transition organizationally from geologic prospecting to reservoir engineering or full-field harvest, where supply chain mastery dominates.

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The industry begins shale play development as Aubrey McClendon’s ‘Chesapeake model’ but exits on the long tail of gradual decline as the ‘EnerVest model.’ Different management teams excel at different stages. Organizational challenges generally prevent a single management team from being the best across all phases of shale evolution, whether the benchmark is capital efficiency or technical proficiency. It took a village of multifaceted and diverse management approaches to accelerate shale development. Indeed, the absence of a diverse universe of players accounts for the slow traction of tight formation progress outside North America.

And that makes calls for industry consolidation a curious theory. Does the Haynesville need just two players instead of 12 to 15? How about the Marcellus, or the Permian? Reality suggests that one or two acreage conglomerates seldom yield the same stimulus to successful development found in a regionally Balkanized industry. Outside the post-World War II move to bifurcate the industry into specialty sectors such as standalone oil service providers or E&P companies, the call for consolidation has been the main theme for the past six decades among those offering opinions on just what the industry needs.

When times were tough in the late 1990s, consolidation provided a way forward, giving us Exxon Mobil Corp., Chevron/Gulf/Texaco, ConocoPhillips Co. and BP Amoco. The ensuing acreage spin-offs provided an opportunity for growth for the Devons, Apaches, Chesapeakes, Ranges and Continentals that spurred the tight formation revolution.

Later, the multinationals jumped into the shale revolution after the influx of cash from international joint ventures ran its course. Integrated international oil and gas companies injected nearly $100 billion in the 2006 to 2011 time period, illustrated by M&A involving ConocoPhillips/Burlington ($35.6 billion), Exxon Mobil/XTO ($41 billion) and BHP/Petrohawk ($15.1 billion). All entered to pursue natural gas development.

Indeed, consolidation has been the recommended solution to every problem facing the industry regardless of circumstance, sort of the Aramco approach for developing oil and gas reserves. Obviously, the business model works for Saudi Aramco, the world’s largest and most profitable business. But is consolidation the best model for U.S. oil and gas? After all, the last large consolidation round found Marathon and ConocoPhillips splitting upstream and downstream operations, Shell buying in and then exiting onshore U.S. tight formation gas, while BP sold out but is now buying back in. BHP, which spent $15 billion to buy in, exited with a $10 billion sale. Meanwhile, oil replaced gas as the main industry objective after all that IOC spending.

On the other hand, small, nimble independents provide disruptive change in all industries including oil and gas, a sector challenged by discontinuities between commodity price and technical prowess. At the end of the day, creative entrepreneurship stands separate from the benign evolutionary contributions in supply chain management and capital allocation by committee that find expression in the largest companies.

Furthermore, selling, general and administrative expense reduction doesn’t mean net fewer players or result in aggregate sector cost reduction. Rather, consolidation spins out astute management teams who, with private-equity backing, deploy specialized technical knowledge to create the next round of industry progress. ConocoPhillips may have acquired Burlington Resources’ assets, but displaced Burlington human capital begat Diamondback Energy Inc., Oasis Petroleum Inc. and skilled leadership for a handful of independents. For Anadarko Petroleum, the king is dead. For industry progress, long live the king.

Richard Mason can be reached at rmason@hartenergy.com.

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