Company style, people shaped success

GOM A Big Player in ‘Shell Game'

Tyler Priest believes to understand the history of offshore exploration in the United States, you have to understand the story of Shell in the Gulf of Mexico.

Some of that is understandable - Priest worked for Shell as the company's historian - but his point is based more on production than public relations.

"Next to Prudhoe Bay, the most significant additions to U.S. oil and gas reserves have come offshore in the Gulf of Mexico," says Priest, director of Global Studies in the Bauer College of Business at the University of Houston.

Priest, as keynote speaker for the All-Convention Luncheon at the recent AAPG Annual Convention in San Antonio, described in colorful detail how Shell played the key role in extending the domestic petroleum base.

"It not only generated new investment opportunities - for other oil firms and service companies in addition to Shell - but provided for a measure of energy security as overall production declined and as the nation became more dependent on overseas sources."

According to Priest, the most important theme in the postwar history of the U.S. petroleum industry, on the E&P side, "was the effort to fight the decline in domestic oil production."

So the question: How and why was Shell at the forefront of that battle?

Priest laughs, saying it would require a full-length book to tackle that subject (a book he's actually written: The Offshore Imperative: Shell Oil's Search for Petroleum in Postwar America: Kenneth E. Montague Series in Oil and Business History).

Nevertheless, as he said in San Antonio, the answers have to do with Shell's unique relationship with its parent company, Royal Dutch, and its own competitive position within the industry.

People Who Need People

Priest said some of what made this possible was need, some circumstance.

"First, Shell Oil inherited a technological orientation in E&P from the Royal Dutch side of the group," he said. "Shell got a late start (1912) in the United States, and the Dutch representatives sent to this country bred into the organization a commitment to finding technological solutions as a way to gain competitive advantage."

Moreover, he adds, Shell's late start in this hemisphere actually proved to be an advantage.

"Shell Oil did not have the kind of huge onshore lease positions along the Gulf Coast and California that its larger competitors did," he said. "Company leaders thus had to look to virgin frontiers, and offshore beckoned."

And, according to Priest, dealing with such a virgin took individuals with a unique combination of determination, creativity, stubbornness and resilience (see sidebar) - especially considering the region's potential.

"Since the 1940s, the Gulf of Mexico has been the offshore laboratory and proving ground for new technologies, advancements in petroleum geology and geophysics, and innovative engineering and commercial practices," he observed.

"Shell recruited and hired the smartest people they could find, exposed them to all parts of the business and gave them the support and latitude to seek technological solutions to upstream challenges," he continued. "The technical staff worked in cross-disciplinary teams long before "teamwork" became a fashionable business-school buzzword.

"One offshore engineer who worked on early floating drilling designs recalled that 'we were limited only by our imaginations.'"

The executives were both engineers and geoscientists, enabling them to understand both the technical and business side of oil exploration.

"These executives had a firm grasp of the market, geological and political characteristics of oil development in the United States, and they aggressively pursued the company's core mission of not only replacing but adding to its hydrocarbon reserves."

It All Adds Up

Priest said the GOM is unique as much for what it is as what it's not.

"Unlike most petroleum provinces in which discoveries have been concentrated in a short span of one to three decades, substantial discoveries have been made in the Gulf basin for the past nine decades."

To use a baseball term, the GOM has played more "small-ball" than other vast reserves in the hemisphere.

"In contrast to the major provinces of the world where hydrocarbons are concentrated in a small number of world-class 'giant' fields (fields with a known recovery of more than 500 million barrels of oil equivalent)," Priest said, "the Gulf basin has yielded thousands of smaller fields of less than 50 million boe, as well as ‘large' fields of 50 to 500 million boe and giant fields."

This unique dynamic created opportunities for a wide range of companies and oil hunters - and for an even greater number of subsidiary businesses.

The GOM's gradually sloping, deltaic plain permitted experimentation with building freestanding structures and other technologies in the open water, according to Priest.

No Slam Dunk

Presently there are nearly 4,000 active platforms servicing 35,000 wells in the continental shelf waters off Louisiana and Texas, and 29,000 miles of pipelines (now routinely exploring in 10,000 feet and producing in 5,000 feet).

The GOM, on an oil equivalent basis, provides close to 25 percent of U.S. oil and gas production, Priest said - which already exceeds Texas and will soon surpass Alaska.

And while many see these estimates rising to one-third of the U.S. total by 2010 (thanks to production from deepwater), Priest says numbers and yields don't provide the whole story.

"What captures the imagination about deepwater Gulf of Mexico is that it is one of the most, if not the most, costly oil provinces in the world. Yet it also has been, since the mid-1990s, the most profitable oil province in the world for private oil and gas companies. Although the fields do not compare in size to the Middle East, they generate Middle Eastern rates of production."

Not that it's been easy.

Priest talks about the $33 million Shell Oil paid in 1967, which he says was "real money" back then, for three adjoining offshore lease blocks in the Main Pass area east of the Mississippi River. Despite assurances from the exploration manager that the prospect was a "lead-pipe cinch" for finding oil, drilling uncovering nothing commercial.

"It was a traumatic disappointment," Priest said, "but it forced Shell geoscientists to rethink their whole understanding of the factors controlling hydrocarbon traps in the Gulf."


Shell is not the kind of company that "hogs" credit, says historian Tyler Priest, but rather appreciates that only a dedicated and creative team – including geophysics, petrophysics, reservoir engineering and paleontology – could have succeeded in the Gulf of Mexico.

That said, he believes that no list of scientists involved in the history of the Gulf would be complete without the following:

♦ Shell Oil's AAPG Sidney Powers Memorial Award winners: Rufus LeBlanc, James E. Wilson, James Lee Wilson, Albert Bally and Robert M. Sneider, who made up the heart of the company’s Bellaire Research Center (BRC).

♦ M. King Hubbert, known popularly for his “peak oil” papers (see December 2007 and January 2008 EXPLORERs), but also for wide-ranging geological research.

♦ A.J. Galloway, an English geologist and exploration vice president, who pushed the company to acquire leases in the shallow waters off the mouth of the Mississippi River, leading to the discoveries of the huge East Bay (South Pass) fields that established Shell’s stake in the Gulf of Mexico.

♦ Max Burns, president, also an English geophysicist and Cambridge classmate of Galloway, who backed the early moves into the Gulf.

♦ Ronald E. (Mac) McAdams, vice president for exploration in the late 1950s and executive vice president for E&P in the 1960s, who styled himself after Gen. George Patton, under whom he had served as lieutenant colonel during World War II. A no-nonsense, brusque, intimidating oil man, McAdams was devoted to finding oil for the company.

(Priest said when the movie “Patton,” starring George C. Scott, was shown to company executives, associates were startled by how closely Scott’s portrayal resembled McAdams. McAdams, in fact, organized the exploration department’s quest for oil resources much like a general organizing a war campaign.)

♦ Bob Nanz, director of the Bellaire Research Center in the 1960s and vice president for exploration in the 1970s, who was instrumental in getting research and operations to work more closely together. It was Nance who also took the lead in lobbying the federal government to reform its leasing system in the early 1980s, improving Shell Oil’s access to deepwater acreage.

♦ John Bookout, president, Shell Oil, 1976-88. In 1967, AAPG member Bookout became vice president for the New Orleans E&P Area, where he helped steer the company into deeper waters of the Gulf of Mexico and oversee the application of “bright spot” seismic interpretation. In the early 1980s, he led the company into deepwater.

Bookout’s stature within the company (and the industry) convinced the board of directors to support such ambitious plans for leasing, investment and development.

♦ Marlan Downey, past AAPG president, Billy Flowers, Mike Forrest, Tom Hart, Leighton Steward and Jack Threet. Along with countless others, these six helped make Shell Oil a world-class exploration company in the 1980s, paving the way into deepwater.

 

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Meet Tyler Priest

Priest
Priest

Tyler Priest, chief historian for the Association of International Petroleum Negotiators (AIPN) history project and author of The Offshore Imperative: Shell Oil’s Search for Petroleum in Postwar America, is this year’s winner of the AAPG Geosciences in the Media Award.

For Priest, who grew up in Montana, the history of the oil exploration business generally and that of the GOM specifically peaked his interest at an early age – almost too early he admits.

“While other fifth graders were playing video games," he says, "I remember being fascinated by a book about the copper kings of Butte. I grew up in Montana, surrounded by majestic geology and extractive enterprises, both mining and oil.

“In the back of my mind … I thought I should be working on oil, the most important industry of the twentieth century."

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