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Physics shapes corporate strategy in the Shale Revolution

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The Shale Revolution is affecting oil and gas (O&G) operators and service suppliers. Several examples explore how to improve organizational strategies and survive in the ever-changing global O&G market.

jp chevriere & anabel daily

By JP Chevriere – CEO Transmar Consult Inc. & Anabel Daily – President Daily Thermetrics

Size matters in nature and business; larger is not necessarily better than small. The laws of biology and physics apply to the corporate world. The capability to adapt and act to new conditions separates leading organizations from the rest. The Shale Revolution is affecting oil and gas (O&G) operators and service suppliers. Several examples explore how to improve organizational strategies and survive in the ever-changing global O&G market.

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Science trumps strategies

Changes in physical size alter the shape of any animal. The same is true for organizations. Using geometry rules, the surface area of an object, animal or business, increases by powers of two or with the square of its diameter. Any item’s mass or volume, such as a business, increases with the diameter’s cube. As the diameter increases from 2 to 3 to 5, the mass grows from 8 to 27 to 125. Mass always grows faster than the surface area of any animal or organization.

What does this mean? A company’s size, structure, and strategy are all interconnected.  When the size of an industry or company changes, different policies, strategies, and organizational structures are required. A “right” or “wrong” size does exist for industries and companies. Unfortunately, the Shale Revolution shifted many O&G operators and contractor firms into the “wrong size” category, thus resulting in many failures.

Under the radar

The Shale Revolution is a United States (U.S.)-based phenomenon. O&G producers had discovered shale reserves. But, drilling technologies failed to develop the shale geologies cost-effectively.

Several small, independent oil companies knew the value of shale reserves. They directed significant R&D efforts to fine-tune a new fractionation solution—hydraulic fractioning or “fracking.” It is the key to stimulate O&G flow in shale fields effectively.

These small companies lacked the size and resources held by major oil organizations. But, they had plans and flexibility. These innovative companies used hydraulic fracturing to cost-effectively produced shale O&G fields. The Shale Revolution transformed global O&G production almost overnight. More importantly, the Shale Revolution occurred because leadership recognized opportunities and seized the advantages possible through hydraulic fracturing.

Size matters in business dynamics

The magnitude of changes from the Shale Revolution is quantitative and qualitative. Moving from a small- to medium- or large-size business is not straight nor linear. A medium-size business is not a larger-sized small business. The differences between small, medium, and large companies are qualitatively profound.

Size and limits. Insects are among the smallest living creatures. Structurally, an insect’s hard skin holds its mass. Tiny pores in the hard skin allow air molecules to nourish the insect’s organs. So, why are there no insects as large as a cat or dog?

Physics dictates why insects remain small. If an insect grows significantly, its mass would grow by powers of three, while the skin area only grows by powers of two. For a large insect with a greater mass, the skin is much thicker; consequently, air molecules travel a longer distance. Unfortunately, this distance is too great, and the larger-size insect suffocates. 

Consequently, small insects with hardened skins are the “right” or optimum size. If insects were larger, then they would require a skeletal structure like a mammal. Moving from hardened skin to a skeletal system requires an evolutionary jump. There are optimum sizes for insects and mammals; thus, there are “right” and “wrong” sizes for companies. Unfortunately, too many O&G operating and service companies are the “wrong” size.

Size shapes strategy in the Shale Revolution

A small-size firm can do things that a large company can’t, as proven by the Shale Revolution. A smaller organization can make quicker decisions, is less complex, and is more agile. Conversely, a large company with enormous resources can do things beyond the capability of small outfits. It can fund long-range R&D projects, undertake global projects, or compete in multiple business markets. Consequently, different size firms need various strategies and structures.

Different strategies and company sizes offer additional opportunities and threats. For example, gravity is no threat to a normal-size human. A 6-ft man can fall to the ground without harm.  However, a 50-ft goliath falls to the ground and is undoubtedly dead from the event. For a small creature like a mouse or spider, gravity is a non-threat. The small do not fear gravity; however, the large creatures do.

Big over small

Large-size animals retain warmth or heat better than small creatures. Why? At rest, all animals lose the same amount of heat per square inch of skin. Thus, large-size mammals need a food source proportional to their skin surface, not their weight.

Company size determines the course

Large-size animals and companies have inherent advantages. Their surface area represented by multiple markets provides risk diversification. Furthermore, a large-size company has ample financial resources and political connections. Smaller firms have other advantages and must adopt strategies and organizational structures that fit their core strengths. Biological and physics concepts can help guide the needed changes that contractors and O&G operators of all sizes must address.

Can the O&G operating companies create new business models and adapt to a shale-driven market? Will service companies develop the “right” size, strategy, and structure? The answers to these questions are still unknown. There is enough light for industry leaders to see that change is necessary. However, enough darkness remains for those who prefer to delay evolving with new conditions under the Shale Revolution.

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