Is it wiser to adapt to the world around us, or to adapt the world to suit us? Environmental campaigners would probably opt for the former, but the technological progress of the human species is largely bound up with the latter, at least thus far.
The oil and gas industry provides a case in point. In 2010, most people would have scoffed at the notion that the US would overtake Saudi Arabia to become the world’s leading oil producer within a decade. But that is exactly what has happened. In September 2010, the US was pumping out 5.56m barrels of crude oil per day (bopd). Just prior to the economic slump brought about by the Covid-19 lockdowns, output had increased to 13.1m bopd. That is a remarkable rate of increase by any standard, made possible by gradual improvements to drilling techniques that can trace their history back to the 1800s.
At the end of the American Civil War, Edward Roberts, a Southern veteran inspired by watching Confederate artillery rounds explode in a canal at the Battle of Fredericksburg, came up with the concept of using water to dampen the explosion caused when an explosive device is used to fracture rock and stimulate oil flow. The use of water or other liquids became increasingly important in the fracking process, and the industry’s eventual commercialisation rests largely on the efforts of a Texan oil engineer, George Mitchell, who developed the hydraulic fracturing techniques familiar to us today, whereby water, sand and chemicals are forced into layers of low permeability shale, cracking the rock and releasing trapped oil and gas in the process.
Mr Mitchell's technique, however, was only commercially viable within a relatively limited number of formations. But the rapid development of horizontal drilling technologies – which can serve far broader areas than their vertical counterparts – triggered widespread adoption, reflected by a sixfold increase in the number of wells through 1989-90. By 2010, the number of horizontal wells had overtaken those drilled vertically and directionally for the first time.
But although horizontal drilling technqiues have undoubtedly improved the efficiency of onshore drilling, fracking remains an incredibly capital-intensive process. Meanwhile, political concerns continue to weigh on the industry – the Biden/Harris campaign platform includes a ban on new oil and gas permits on public lands – and industry heavyweights are increasingly turning towards renewable energy projects, suggesting a change in sentiment.
For commodities and oil and gas services investors, that change in sentiment has been further compounded by the recent oil price collapse. And so, the question looms larger than ever: should investors continue to believe in the historical trend that we can adapt the world to suit human needs, or is the new future one in which we will need to adapt to the world?
Sticking with the oil services industry provides an example in favour of the latter. British group Hunting (HTG) moved early to exploit the expansion of fracking, when it completed a marquee deal in 2011 to acquire the parent company of Titan Specialties, a US manufacturer of perforating gun systems, for $775m (£578m).
That purchase price now represents more than double Hunting’s current market capitalisation, as investors reacted to a two-thirds fall in the US onshore rig count in the first six months of 2020. The group reported a $50m (£37.3m) fall in adjusted half-year operating profit to $5.7m, while signalling that it is looking to broaden its exposure to hydraulic fracturing. The company's mistake was to make a bet on an industry trend that was already well on the way to its peak. Fracking was innovative in 2011, but without technological progress to advance the industry further, it has become stuck. Today, the oil and gas production industry and the companies that service it are at risk of being overtaken by increasingly innovative energy solutions.
So while environmental campaigners encourage us to match our needs to those that can be provided by the world, innovators work to create solutions that make the world better for us. Companies should always keep an eye on where new solutions are coming from and the direction of consumer sentiment that drives that innovation. Making a large investment in a technology that is not much changed since the American Civil War seems a little foolish, even without the benefit of hindsight.
