The history of the oil and natural gas industry in North America is in many ways intertwined with the history of the railroad, which in the mid-19th century became the main means of transcontinental transportation for Americans and Canadians.
As these great railroad systems were constructed across the continent, the companies building them gained ownership of great swaths of land, and, as importantly, obtained ownership of the minerals beneath the land. In the United States, as oil and natural gas began to be discovered across the Midwest and Rocky Mountain states, a good deal of it lay beneath land owned by rail companies like Burlington Northern, Union Pacific and Santa Fe.
These companies all eventually created subsidiaries to manage their oil and gas royalty holdings, and those subsidiaries eventually evolved into some of the country’s largest independent producers: Burlington Resources, Union Pacific Resources and Santa Fe Energy. Those companies are all gone today, having been merged with or acquired by ConocoPhillips, Anadarko Petroleum and Devon Energy, respectively, but their place in history is firmly established.
In Canada, a similar progression took place with the nation’s largest east-west rail company, the Canadian Pacific Railway (CPR). Indeed, the very first natural gas discovery in the province of Alberta was made in 1883, when workers for the CPR who were drilling what they thought would be a water well discovered a pocket of natural gas instead.
CPR’s oil and gas-related assets grew over time; and by 1958, the company made the decision to create its own subsidiary to manage its oil and gas-related royalties. The Canadian Pacific Oil and Gas Company (CPOG) then embarked on an aggressive program to develop the company’s mineral assets and eventually grew into one of the largest producers in all of Canada.
In 1971, CPOG merged with Central Del-Rio Oils to form the largest independent oil and gas producer in Canada, PanCanadian Petroleum Ltd. (PCPL). PCPL continued to grow and diversify until 2002, when it was merged with Alberta Energy Company to form Encana.
By 2008, with the price of natural gas booming, the Encana board of directors decided to split what had grown into a major integrated oil and gas company into a large, independent producer of natural gas — Encana — and a fully integrated oil and refining company called Cenovus Energy Inc. Thus, Encana embarked upon a new life as one of North America’s largest independent producers, a company that was at the time, and would remain for several years, almost solely focused on the development of natural gas resources.
The Natural Gas Market Collapses
The price for natural gas, which had risen to above $12 per MMBTU in 2008, collapsed in 2012, falling to around $2 MMBTU in May of that year. By mid-2013, it had become apparent to many companies with a heavy natural gas focus that the time had come to diversify their asset base. One of those companies was Encana. In June 2013, the company announced a new President and CEO, Doug Suttles, a veteran with over 30 years of experience in the industry with companies like Exxon and BP.
Suttles came into the job with a sense of urgency. He likes to say that one of the key learnings he took away from his role in managing BP’s response to the 2010 Macondo crisis in the Gulf of Mexico was that “time is not your friend.” Thus, the winds of rapid change began to blow through the halls of the Encana office buildings very quickly. By November, the company announced a new corporate strategic plan; and by early 2014, transactions designed to diversify and high-grade the Encana portfolio of assets began to roll out. In very short order, natural gas-focused positions in the Haynesville Shale, Jonah Field and Canada’s Bighorn Basin were divested, with more liquids-rich assets in the Permian Basin, Eagle Ford Shale, and Montney play in Alberta replacing them. Today, Encana remains one of North America’s largest independent oil and gas producers, but now with a much more diversified asset base that gives the company the options that Suttles believes it must have to compete and grow successfully. We recently caught up with Suttles on a very cold day at the company’s office in downtown Denver.
“The Problem Is Not What You Know. It’s What You Don’t Know.”
“We undertook a big strategy effort when I joined in the middle of 2013, starting with first principles,” Suttles begins, seated at the head of the table in the company’s boardroom. “So, one of the things we looked at is where do you need to be in terms of asset base to be competitive in the world going forward? And that wasn’t just in North America, but globally.
“We have a deep belief here that you have to be out on the low end of the supply cost curve,” he continues. “When you’re out on the high end, you’re kind of riding the curve. So we did a lot of work and looked at places that non-state oil companies could participate in and said, ‘Where do North American shales or unconventionals compete?’” Through this process, Suttles and his management team became convinced that these North American shale and other unconventional plays were already competitive, and would become more competitive over time, with other plays across the globe.
“They have the scale you need and plenty of running room,” he says, “So, this reconfirmed we wanted to be in shale. The second thing is, we realized the problem in strategy and driving your future is not what you know but what you don’t know. It’s unpredictable,” he says, referring to the dramatic collapse in the natural gas price in 2012, as North American producers had been so successful at tapping the immense reserves of natural gas from shale plays that they had overwhelmed demand for the product. “Now, the consumer and the country are the big winners. Everything from low-cost electricity to security to jobs — it just enhanced any dimension you could imagine, and the country has been a huge winner in this.”
But, despite the low price at the time for natural gas, especially when compared to the $100-plus price that oil was then commanding, Suttles and his leadership team did not want to just completely turn the portfolio over to a liquids focus similar to the natural gas focus the company had previously maintained. Instead, they decided to create more of a balance between oil and gas assets. “We wanted to have increased optionality in our portfolio. That would give us a better chance of having a robust business even around things that were difficult to predict. It’s not that we weren’t confident in the future; but, for example, with oil, we thought things could happen — and did happen at the end of 2014 — that changed that outlook. So, having this optionality is critical.”
The next thing that Suttles and his team decided was that “great management, no matter how great it is, can’t make bad rocks good. If you are in the wrong places, you are fighting from behind and with one arm tied behind your back. So we have this deep belief that we want to have our portfolio to be in the best parts of the best places. That became a huge driver for us going forward.”
The first step in the asset-transition process was to redirect a portion of the company’s capital toward oil in a limited number of plays. The second step was to sell some high-quality natural gas assets with the goal of redeploying those funds toward high-quality oil assets. “So, we exited things like Jonah, exited things like Haynesville, exited the Bighorn play up in Canada. All of these things were billion-dollar-plus transactions, and we took that capital and redirected it into the Permian Basin and Eagle Ford Shale plays.”
“We Don’t Have Hats and T-shirts.”
Suttles knew that re-balancing Encana’s portfolio of assets was only the first part of the job. The next parts involved putting the right organizations and processes in place, and perhaps, most importantly, implementing a culture shift at the company focusing on innovation. “When we launched this new strategy in the fall of 2013, we actually said that we need to bring four things together to make it work:
● First, we had to have what we felt was the right strategy;
● Second, we needed the right organization structure to deliver that strategy, so we made some really big changes in the fall of 2013 as to how we were organized;
● Third, we needed to change some of our core processes, the single biggest being how we allocate capital;
● Finally, we needed a culture consistent with the strategy.” Before continuing with that last point, he pauses and smiles. “We did a lot of work on this, but you might find it interesting that in the three years we have been working on this, we have never held what you might call a ‘culture workshop.’ We don’t have hats and T-shirts, that sort of stuff.”
He knew that any real culture change in any large organization must be led from the top, “and it would start with me and my direct reports. Once we felt we were starting to embody it and role model it, we would engage the next level, and so on and so forth.
“And it’s worked, because we all know the cynicism that comes out of the culture workshop, but we also know the impact it has when people look up at their boss and see that, wow, their behavior is different than it used to be. How they’re acting is different; the things they are emphasizing and reinforcing are different.”
The major focus in this culture shift for Suttles and his direct reports was on creating what he calls a “culture of innovation.” Their belief is that instilling a bias for constant innovation in every Encana employee, from the mailroom to the senior management team, is crucial for the company’s success. Ongoing innovation, of course, has been at the heart of the history of the oil and gas industry since its very beginning. As Suttles puts it, “We can’t stop innovating, we can’t help ourselves.”
“Here at Encana, we’ve heard some people talk about shales as being a ‘manufacturing process.’ When we hear that, we smile because we disagree entirely. We believe it’s an ‘innovation process.’ Manufacturing implies that we want to standardize. But the reality is that we get so much better each year at what we do that the worst thing we could do is standardize.”
Suttles is so passionate about maintaining this culture of innovation that he made sure it became embedded in the company’s quarterly performance management process. “Every asset, when they report to me and my COO each quarter, they not only have to talk about safety, cost and production, they also have to talk about innovation. They have to describe what we call their Design of Experiments, or DOEs, and they have to have those running all the time. They must be focused on things that matter and that we can scale. So, we’ve embedded it, and people know that they are expected to innovate as a part of their job.”
“You Have to Wear a Hard Hat and Steel-Toed Boots If You Want to Go to Our Lab.”
When asked whether or not he can point to examples that show that this culture of innovation gives Encana a competitive advantage in acquiring and developing resources, Suttles doesn’t hesitate: “Yes, I can. We absolutely believe it works, and we have empirical data as evidence. A great example is we entered the Permian in 2014. It was the biggest deal to date in the Permian with a price tag of $7.1 billion. We saw that great stacked play potential, and we could see the opportunity to apply technology and innovation to make it better. And guess what? It’s worth more today — a lot more — than what we paid for it in 2014, yet the oil price is half today what it was then.”
That really is an outstanding outcome. But what led Suttles and his team to risk that much capital in a single play area in the first place? Again, there is no hesitation as he describes the decision process in detail: “In 2013, we looked at some of the big shale plays across North America at that time and studied their history. One of the things that we observed was the performance difference between the best operator and the poorest operators was about 40 percent. If you look at our third quarter 2016 operating results, we show data that demonstrates that the best operator in the non-core area of the Midland Basin wasn’t as good as the worst operator in the core area of the basin. Which just shows that the quality of the rocks also matter.
“The second thing we observed is that, in the core area of the Midland Basin, the spread between the best operator and the worst operator was, again, 40 percent. And we believe that the main difference between the best and worst performing operator is generally innovation. The companies at the front are generally the companies that are working to find a better way to do it.
“We joke here in the company that we don’t have a technology arm; we don’t have an R and D arm. We joke that you have to wear a hard hat and steel-toed boots if you want to go to our lab, because our lab is in the field. And the cool thing about shale and other unconventionals is, you can try things in real time; they’re not really expensive; and if they work, you know really fast. You know in like 90 days — you don’t have to wait three years or five years or 10 years. What you want to do is to be trying things all the time.
“When we observe competitors, there are a few of them who do this all the time, and they tend to be consistently at the front end. There are some who never do it, there’s a few who do it in little spurts, think they’ve figured it out, and stop. We believe you have to do it all the time.”
“It May Have Shocked the World That We Didn’t Just Disappear, But Instead We Got Better.”
After a two-year downturn, the industry in North America is beginning to show signs of life once again. The U.S. rig count has been on an upward trajectory since June, drilling and completion costs have dropped dramatically, and the industry’s workforce situation appears to have stabilized. We asked Suttles if he is optimistic that a turnaround can continue in 2017.
“I think the answer is yes, but I think it will be modest. What has happened is that the industry here in North America has always shown that it is incredibly resilient. It is more innovative here than anywhere else in the world; it’s more creative here than anywhere in the world; and when the price moves lower, many operators figure out how to live within a lower price.
“So what we’ve seen happen, over the last 12 months in particular, is that the efficiencies delivered across the industry are now making investments economic at these lower prices, where a year or two ago they would not have been. A great example is that if you look at the price of oil and the price of gas in the third quarter of 2016 and the third quarter of 2015, they’re almost identical. But in the third quarter of 2015, it was ‘How do we batten down the hatches in order to survive?’ Now you have some people talking about expanding and growing. So even though the prices were basically the same, third quarter to third quarter, it doesn’t feel the same to us as an organization as it did a year ago. It’s a testament to this industry and the men and women who have done a great job of finding smarter ways to work. It may have shocked the world that we didn’t just disappear, but instead we got better.
“Here at Encana, we feel great about where we are. We just launched a five-year growth strategy that was incredibly well-received by the market. Our organization takes a lot of pride in the changes we have gone through that are working and putting us in a better place where we can actually build and grow at today’s price deck. We don’t have to have prices going up in order to be successful and that feels great.”
“I’m a Third-Generation Oil and Gas Guy.”
If it sounds like Doug Suttles is proud to have been a part of this industry throughout his career, there is good reason for that. He grew up around the oil and gas industry; being part of the industry is something of a family tradition. It’s more of a way of life than just a job.
Prior to joining Encana, Suttles held several roles managing operations in various parts of the world, including the North Sea, Russia’s Sakhalin Island, Trinidad and Alaska. We asked him to talk about how those roles helped to prepare him for his current responsibilities at Encana.
“I’m a third-generation oil and gas guy — my dad worked in this industry, my grandfather worked in this industry and now my daughter is working in the industry, so we’re on our fourth generation in the family. So, I’ve been around it my whole life. When I started in the industry as an engineer, I just thought I’d be an engineer, and found it fascinating and loved the work. Our history as an industry is kind of neat, because you tend to get a lot of responsibility early on, and you can see the impact you’re having pretty quickly. I found that to be incredibly motivating and exciting.
“Then, as my career progressed, I found myself … traveling around the world, which was interesting because I hadn’t flown on a commercial jet until I was 22 years old, while interviewing for a job. I didn’t have a passport until I was 27 or 28. So I had never envisioned that I would go to 25 different countries, some of which you normally wouldn’t really want to go to [laughing].
“I was put into some unique roles. I started out with a pretty good operating background, which gives me an advantage really right up to today, because I can understand some of the opportunity and the risk and can communicate well with that part of the organization.
“But I also got to work some more strategic roles. At BP, I worked on the merger with Amoco and through that got to see strategy in action in a real way. Then, by working all around the world, I got to see how you manage both below-ground risk and above-ground risk. And the big thing you learn when going around the world is that the rocks aren’t really that much different, but the risks sure are. You also learn that if you get the right team, the right knowledge and you build good relationships, that most of these risks are manageable; and if you can identify them and manage them, you can be successful.
“So, I’ve seen a lot of things in my career, and I’ve been able to build up this information in an internal database, if you will, that you begin to call on when you get into the kind of role I’m now in. How did I think about this problem back then, and how can I use that to address this one? What you learn is to be really clear on strategy, build a great team of people around you and figure out how to align and motivate others to get to where you want to go. I am always conscious of the fact that our employees do all the work; my job is just to make sure we’re pointed in the right direction. And if they’re not doing the right stuff, the guy I’ve got to look at is me.”
“In a Crisis, One of the Things You Learn Is That Time’s Not Your Friend.”
While at BP in 2010, Suttles became responsible for leading the company’s response to the tragic Deepwater Horizon incident, which was an intense and emotional time for everyone involved. He reflects on the lessons he learned during that time and how they may have impacted his outlook on safety-related considerations since then.
“One thing I learned is that the skills required to lead in a crisis are no different than those required to lead every day — they’re just on steroids. They’re like hyperdrive, because you don’t have the luxury of time. So what that means is that you have to have immediate feedback loops, you’ve got to be able to make decisions in real time, and to do all of that you need great people around you and you have to listen really, really well.
“In a crisis, another thing you learn is that time’s not your friend, it’s your enemy. Because the crisis is still going on, and the longer it takes to deal with it, the worse it can become. But you also don’t want to make hasty, rushed decisions. One thing you learn is that once you get the right people together and get really clear on what the key questions are, you can make really good decisions quickly. So you try to transfer those learnings to your day-to-day job, and when you get back there you start to ask yourself, ‘Am I taking time to make this decision because I can or because I need to?’
“So, when you look at the things we’ve done at Encana during our transformation, we took the view that time is our enemy, that we needed to get after things. And little did we know, it was. Because if we hadn’t acted in 2014, the downturn that began late in 2014 would have had much greater consequences for this company than it actually did. When the price fell, we were already on that runway of taking the steps we needed to take to make this company stronger and more efficient. We weren’t in the situation of having to shift our portfolio and become more efficient because the prices fell; we were doing those things already as a part of our strategy.”
“Why Do All the People in California Have New Cars?”
Like many executives in the oil and gas industry, Doug Suttles has spent time on assignments in several countries during his career. Trying to raise a family while moving from place to place every few years will create challenges for any family. But the positive side of the story is that it can also create experiences, memories and friendships that will last a lifetime.
When talking about this subject, Suttles relates all of those aspects and more. “My wife, Christy, and I have two grown children now who traveled around the world with us, and it’s interesting in that it probably makes your family closer, because the people you know the best are the ones who are moving with you. So, you don’t live in the same town for 20 years — you might be there for three — but we got to see things that I’m pretty certain I’d have never seen and I’m sure they’d have never gotten to see.”
This experience of moving from place to place and frequently having to become immersed in a new culture and making new friends can help broaden horizons and develop a heightened sense of self-confidence.
“One outcome of that is that my daughter, when she was in college, decided to do a semester in Australia and just got on a plane by herself and flew all the way across the world. Landed in a place she’d never been before and went right to the university there. I’m not certain I would have done that when I was her age, but they’d done that growing up and realized that these things were very doable.
“We spent a lot of time in Alaska, and, as you know, Alaska sometimes wants to be part of the U.S. and sometimes seems like it doesn’t,” Suttles says with a laugh. “They like to refer to the rest of the United States as the lower 48. Our kids were born there and when they were about 7 and 4, we went on a holiday to San Diego. We got into the rental car and drove out of the airport, and pretty soon, my daughter was asking, ‘Why do all the people in California have new cars?’ And of course, what she meant was ‘clean’ cars, because when you live in Alaska your car stays filthy for about nine months of the year. So my wife and I looked at each other for an answer and finally realized she just wasn’t used to seeing cars that were clean. So, because of all the things my kids have gotten to see and do, their openness to other ideas, other cultures, other perspectives — there’s no fear there. They have pretty fond memories and a global group of friends to this day.
“I look back on it, and there are trade-offs. For me professionally, being able to move allowed me to gain experience faster. For my family, we’ve gotten to see a great bit of the world together.” Not surprisingly, then, both of the Suttles kids have now grown into adults who are independently building successful lives of their own. “Our 28-year-old daughter has a finance degree. She is married and just gave us our first grandchild. She and her husband live in Utah and own two small oilfield service companies, so they’re learning how to deal with their first downturn. We also have a 24-year-old son who is a civil engineer and is right now working on a highway project in Phoenix. I tried to convince him to come into the industry, but he really likes the idea of building bridges and roads, and so that’s what he does.”
“You Need to Find a Way to Give Something Back.”
Over the years, Suttles has served on the boards of organizations like The Foraker Group and The Nature Conservancy. We asked him to talk about how serving in those roles has impacted his outlook, both in a personal and professional sense.
“Two things that I think help from this: One, when you’ve been blessed to be successful in life, you need to find a way to give something back, and serving with these groups is a good way to do that. The second thing is you get exposed to other stakeholders, and you hear more about what they think of your industry and your company in a way that you wouldn’t get through normal channels. You actually get perspective about what people care about, what they like, what they’re concerned about.
“One of the things I always emphasize to emerging leaders is that you need to build broad, wide networks to give you that information. Because people who are directly around you probably think a lot like you do, probably perceive the world much the way you do, maybe even want to tell you the world looks like the way you want it to look. But when you get outside that group of people you work with every day, these other people have a different perspective, and they have different priorities and things they value.
“So you need to get to know what these people value, what’s on their mind, what they like, what they dislike. And as these people get to know you, to some degree that’s their avenue to learn about your company. So, their perceptions of your company are shaped by you, and they could become an ally or supporter down the road when you need it.”
“If It’s Done Outdoors, I Probably Like to Do It.”
When asked about how he spends his personal time, it quickly becomes obvious that Doug Suttles has a bias for being outdoors. Whether it is golfing, hiking, boating, hunting or fishing, if you can do it outside of the confines of four walls, there’s a good chance he is doing it on a regular basis.
“I’m a huge outdoors fan. I love to fish, I’m a big boater — we do own a boat out in the Northwest and have run our boat all the way from Seattle up to Whittier, Alaska, three different times. We just love the adventure of that and to go into these great, wild places. Hiking is another love. We live in Calgary [Alberta] now, and my wife and I can get up on a Saturday morning and say, ‘Let’s go for a hike,’ and quickly be in some of the most spectacular country in the entire world. And you decided to do this at 9 in the morning and be back home in time for a quiet dinner on the back patio. I also like to golf, bird hunt — if it’s done outdoors, I probably like to do it.”
And then there’s hockey. “If it’s indoors, I’m probably watching football, basketball and ice hockey. It used to just be football and basketball, but when you’re in Canada you have to follow hockey, too. It’s a good sport to watch live, very fast-paced.”
Given the speed at which Doug Suttles has transformed Encana and positioned the company for growth, it’s perhaps no surprise he’s become a fan of the fast-paced sport of ice hockey.
About the author: David Blackmon is Associate Editor for Oil and Gas for SHALE Magazine. He previously spent 37 years in the oil and natural gas industry in a variety of roles, and the last 22 years engaged in public policy issues at the state and national levels. Contact David Blackmon at email@example.com.
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