By John Kemp
LONDON, March 5 (Reuters) - Asking petroleum engineers andmanagers used to working offshore and on complex engineeringmegaprojects, the equivalent of building Ferraris, to startdeveloping shale plays, the equivalent of building VW Golfs, wasnever going to work.
BP's decision to form a separate business to manageits onshore oil and gas assets in the U.S. Lower 48 statesacknowledges shale production is more like a manufacturingprocess than traditional petroleum exploration.
Shifting onshore assets into a separate business unit couldpave the way for an eventual sale if their financial performancedoes not improve, as the Financial Times explains ("BP createsnew 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 admittedthe reorganisation "creates optionality for us".
But focusing too much on the possibility of an eventual salemischaracterises what the company is trying to achieve.
Production of oil and gas from shale formations isconceptually quite different from exploration and productionfrom conventional oil fields.
The output is the same but the process and capabilitiesneeded are not the same.
SHALE IS DIFFERENT
In the rest of the world, and even in offshore areas of theof the United States, BP has to negotiate for production rightswith a single mineral owner, usually the government.
But onshore in the Lower 48 states BP must strike agreementswith a plethora of private landowners.
Offshore, BP is hunting through large volumes of rock for asmall number of very large oil and gas accumulations, and needsto a carefully target a small number of wells so that each willyield enormous quantities of petroleum.
In onshore shale plays, the oil and gas are much more widelydistributed, and the aim is to identify the most productiveareas and saturate them with tightly spaced wells.
Offshore wells are expensive to drill and present toughengineering challenges.
Onshore wells are simpler and cheaper, but with so manyneeded and each one yielding less oil, it becomes essential tocontrol costs tightly.
Developing an offshore oil field is an engineering challengesimilar to designing and building a high-performance sports car.
Developing a shale play, in contrast, is more like amanufacturing process in which automation, standardisation andexceptional cost control are critical to success.
BP's exploration and production business can identifyaccumulations and sink wells 20,000 feet below the seabed withstunning precision.
But running a successful shale operation requires the skillsand mindset of a Henry Ford.
DISTINCTIVE CULTURES
BP has now recognised the problem. The company's pressstatement referred to the "unique characteristics" of U.S.onshore production.
It repeatedly emphasises the need to run the onshorebusiness very differently. It will have a separate managementteam, at a separate location with "separate governance,processes and systems designed to address the unique competitiveand operating environment in the U.S. Lower 48 onshore".
The focus throughout the announcement is on the need tooperate differently from the rest of the world and evenoffshore.
The engineering, financial and environmental risks in therest 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 fasterdecision-making and shorter project cycle times.
By insisting that the unit report separate financials from2015, BP will be able to hold it accountable more easily.
BP has belatedly recognised there is not a good cultural fitbetween shale buccaneers and the petroleum engineers and MBAs inthe rest of the organisation.
Interestingly, ExxonMobil seems to have known thisfrom the start, and maintained its XTO shale unit as a separatebusiness with a separate headquarters after buying it in 2010.
Managing shale development separately will not solve all theproblems besetting BP and the other latecomers to the U.S. shalerevolution.
It cannot alter the fact BP, like the others, appears tohave overpaid for assets at the height of the boom or that gasprices may never reach the levels assumed when the deals weredone.
But it is an intelligent way to reorganise the business andrecognise, however late in the day, that shale plays really arevery different and require culturally distinct organisations todevelop them successfully.
BP (BP.)
