The oil and gas industry may be at the leading edge of a fundamental change in technology and economics, said Southwestern Energy Co. chief executive officer Steve Mueller during a program at NAPE 2011. He predicted that the techniques used to develop tight gas and shales could have the same effect on oil reserves, not just in the U.S., but worldwide. If developments in tight oil prove to be the new normal, the total asset base would increase enough to render the strategies that E&P companies have traditionally used much less effective.

“The good news is there are a lot of ways to win, if this is a paradigm shift,” Mueller said. “A few years ago, none of us believed you could move oil through this kind of rock. Today you have significant oil plays that have proven this wrong. That’s disruptive.”

But this shift could be double-edged for E&P businesses operating comfortably at present. And what’s more, the underlying economics of the commodity could be changed significantly by resulting increases in supply.

?“In a true paradigm shift, your learning curve is reset. Is what we are doing now in unconventional resources a paradigm shift?” asks Southwestern Energy Co. chief executive Steve Mueller.

“Just because these unconventional drilling and production techniques were developed here doesn’t mean that they won’t migrate globally, and therefore significantly increase reserves globally and result in a lower commodity value,” he said. Global resource bases could grow, causing devaluation for all, with specific impacts on business models for E&Ps.

Mueller outlined the two basic business strategies most people recognize: first, capturing market share (by acquiring competitors, lowering costs, taking advantage of economies of scale, and margin control); or alternatively, increasing the total market, or size of the pie. In the E&P case, this is done by increasing output through technology and exploration.

Finally, he cited a third strategy unique to extractive industries, “buy-and-hold,” which can be successful even when asset purchases are made below the economic price range due to the effects of depletion. These strategies are much less effective if what companies are seeing in the unconventional oil plays is the rule and not the exception. Mueller said this would be a case where disruptive technology changed the game and caused the industry to change how it thinks.

“Part of a paradigm shift is changing learning curves. In a true paradigm shift, your learning curve is reset. Is what we are doing now in unconventional resources a paradigm shift?”

Mueller said that if the methods the industry now uses in tight-oil plays are not at the top of the existing learning curve, but are in fact the bottom of a new curve, then business models implemented around cost savings and efficiency must be reconsidered. He pointed to the data-storage industry as an example.

“It wasn’t that long ago that we had floppy drives. Those guys who built floppy drives were very efficient, and they did all the right things to drive out cost.” But floppy disks were on their way out years ago, due to a fundamental shift in technology. The data-storage industry found it was actually at the bottom of a new learning curve, not at the top of a mature curve.

While cost-cutting and efficiency seem like a safe bet in the E&P business, if the rules are actually being redefined, these will be untenable, and management teams will be forced to adopt more aggressive strategies.

The implication for risk, if the technology of unconventional plays is a true game-changer, is that companies are going to have to operate in a risk area they have historically shied away from, he suggested.

?Right, at the top of the learning curve, where conventional oil and gas development arguably reside, with depletion in play, the “mature-mature” combination is the biggest quadrant of the grid, as well as the least risky.

“There are really only a couple of ways to make the pie bigger,” he said about increasing supply. The methods for that can be seen in a chart with four quadrants: the four combinations of old (mature) or new technology, and old or new objective, such as a well, field or play. At the top of the learning curve, where conventional oil and gas development arguably resides, with depletion in play, the “old-old” combination is the biggest quadrant of the grid, as well as the least risky. This quadrant also represents the business model based on commodity price.

“If you are going to do old things in mature areas, that’s basically a (commodity) price play. The reason I put an X in that box is, I’ll contend, you can do that in any of the other boxes because of depletion.”

Using new technology to pursue a new drilling objective is the riskiest business model and the quadrant where independents usually like operating the least. However, if the industry in unconventional development is at the bottom of a new learning curve, “old-old” or “mature-mature,’ then becomes the smallest area of the four combinations, and the riskiest quadrant is now the largest. Independents will therefore be increasingly thrust towards using new technology in new areas, a plan traditionally deployed only by capital-rich majors, while smaller companies played it safer by using old technologies in mature plays, he said.

Mueller also said the E&P industry will be pushed out of its comfort zone as it interacts with communities, municipalities, the media and other constituents. New geographic regions that are not used to having E&P operations in their backyards have different expectations. New methods of unconventional-resource development may lead to working relationships with new entities as the scope of operations expands, and municipalities try to determine where hydrocarbon development fits into their systems.

?If the industry in unconventional development is at the bottom of a new learning curve, “mature-mature” then becomes the smallest area of the four combinations, and the riskiest quadrant is now the largest.

“If you are working in Pennsylvania, you will fix the roads. How many of us in our careers had to work directly, every day, with the transportation department?”

Interaction with departments of transportation is not the only new relationship operators will need to develop. Citing Southwestern Energy’s water use in Arkansas’ Fayetteville shale, Mueller explained how building small ponds, accounting for less than 0.1% of water in the state, attracted the attention of new people and community groups to their operations.

“The Corps of Engineers is now involved in the process because we are affecting the amount of water in the watershed, and the Corps of Engineers is responsible for the watershed. From nothing more than entities trying to figure out if they have a part in (the process), we have to work with them as an industry.”

Paradigm shifts are not common in the E&P industry, Mueller said, so its people are not experienced in operating low on the learning curve. This is a cultural problem that may have short-term implications, as some companies’ cultures mesh better with this kind of work than others. There could also be impacts in the near term if the industry is forced to redefine its expectations of normal.

“There are very few of us in the room that have ever tackled these problems. The people that have are in other industries, and they had a really bumpy road through the process.” Mueller said most everyone in the industry today has been trained to operate high on the learning curve, as he was.

“The closest I ever came to the bottom of the paradigm curve was when I drilled a new basin or tried a new technique, and I had a little shift on the curve because it may have worked or it didn’t work.” But the kind of change he outlined is much more transformative than marginal changes within a narrow band on the learning curve.

Mueller noted that young people in E&P are used to learning, so they just need to remain flexible. Adapting is paramount, he said, lest the E&P industry go the way of the floppy disk.

“If you are one of us old guys, well, we are going to either have to change or die, if it is a paradigm shift.”