Jim Haag wasn’t looking for a career in the oil and gas industry. Pittsburg, Pennsylvania, where he grew up, has “the most bridges of any city in the country,” and Haag wanted to build bridges. But as he was graduating with a major in civil engineering, he discovered there weren’t any jobs in bridge building.
But there were jobs in oil. In the mid-1970’s, while the Arab oil embargo led to price increases, United States oil companies desperately needed petroleum engineers to manage exploration and production projects, but there were only around 250 degreed petroleum engineers, according to Haag, and the industry needed 1,000. They began to hire other engineers, and Haag found a job with Texaco.
“I started in the industry because it was my only job opportunity, but after cross-training, trips to the oil and gas fields, and working on challenging projects with capable co-workers I saw the potential for a rewarding career and was quite pleased at the luck I had in how a path that was completely unplanned brought me to a great job,” he says.
Now recently retired, Haag spent around 40 years in the industry. He worked for Texaco for 27 years, became Director of Field Exploitation at Talos Energy, and wrote a book, The Acquisition and Divestiture of Petroleum Property. He’s worked through industry ups and downs, while oil prices fluctuated and policies shifted as presidents from both major political parties led the country. During his last years at Texaco, he focused on acquisition and divestiture (A&D), and after he left in 2001 when they were acquired by Chevron, consulted and taught an industry course on the topic.
If you don’t know much about A&D, or buying and selling petroleum properties, you’re not alone. Haag said universities rarely teach the subject, even though the amount of money spent in A&D rivals what’s spent on capital projects, depending on the year. Since there’s so much money in A&D, the little-studied topic can be crucial for some petroleum engineers.
Haag taught the A&D course over two years, and his handout swelled to comprise enough material for a book. An associate suggested he do just that: write a book. Fortuitously, PennWell Books had just asked the industry for a manuscript on A&D, and once again, Haag got the job. One year later, in 2005, they published the first edition.
“While working in the industry, from literally the first week to my last, I wrote reports that ranged from a paragraph to hundreds of pages. There was always a need to be a good engineer, but if an engineer could not communicate the need for an evaluation, the steps taken to perform the analysis, the results and the impact on others and existing operations, in writing, the work wouldn’t see the light of day. So, I’ve been writing for a long time,” says Haag.
His years in the industry afford him perspective on topics as far-ranging as the recent downturn to American politics. He weathered elections and falling oil prices well before the crazy events of 2016. The topic of oil is often politically charged, especially in an election year and as a new president is inaugurated. When asked how Donald Trump’s election might impact the oil industry, Haag says, “I’ve never been one who has studied these matters as much as others, but I’m led to believe that the President, as powerful as he or she may be, must still coerce Congress to approve much of what he or she wants to do or change for the laws or regulations of our country to change. Having said this, some presidents have favored the industry more, for example by accelerating or expanding the leasing of federally owned property for oil exploration. At times the approval of long pipelines that cross state or international boundaries are mired in regulatory purgatory, but this is mostly a local rather than federal situation.”
He says under President Barack Obama, new regulations have made things harder for the oil industry and he would have expected that atmosphere to continue if Hillary Clinton had been elected, “so the industry is definitely better off with Trump.”
“Here is a good example of a political spin few Americans know. During President Obama’s tenure, oil production in the continental U.S. rose dramatically beyond anyone’s expectations. The whole world was watching as we added several million barrels of oil per day. The president noted in his speeches how healthy the industry was, putting thousands of people to work, revving up the economy. He was very proud, what a success story,” says Haag. “What he didn’t say was that 100% of the increase in production was from privately owned land with zero government assistance, achieved despite the additional regulatory burdens placed on the industry. During this same time period, the production from federally leased land (Alaska and the Gulf of Mexico) dropped significantly due to his administration’s increased regulatory requirements and fees. He chose to not advertise the performance of the domestic industry in its entirety.”
Regardless of political party, Haag does take issue with how some politicians use the terms ‘energy security’ and ‘energy independence’ interchangeably.
“This is terribly misleading,” he says. The country does have energy security, but we will never have energy independence. America does not produce enough natural gas and oil, in the sulfur content that our refineries can process, in the geographical areas where the hydrocarbons are available and marketed. We require a unique blend of imported oil and gas to specific refineries and markets to be secure and guarantee supply where we need it when we need it.”
In addition to navigating different political climates, the oil industry faces the threat of another downturn in the future, but the A&D market can actually be strong in a downturn. It all depends on oil prices: “Quite simply, the A&D market momentum tracks the oil price.”
Haag says as oil prices rise, sellers want those high prices but buyers are more cautious because the oil price could tank the very next day, so not as many deals will occur. On the flipside, deals will also likely be limited as prices fall, since sellers desire the old higher prices but buyers have to assume the oil price will keep on falling and will try to not overpay. It’s when prices are stable that it’s easy for buyers and sellers to agree, so more deals tend to happen.
“When the prices are low, as in the downturn of 2014 – 2016, successful buyers are happy because they are buying reserves cheap relative to the past. There are many sellers because the low oil price has caused them to have far less cash flow than their expectations and cash may be needed to repay debt or fund investments that may be lost to the company if they go unfunded. These are the reasons the market is strong in a downturn, or low price period: the primary beneficiaries are the buyers, not the sellers. This is not to suggest deals don’t happen in all price environments because they do for many reasons,” says Haag.
Much has changed in the oil industry since 2005, and in 2014 PennWell asked Haag to update his book. He added information on reserves determination and economic analysis and drew in a large amount of fresh data. “I learned something unexpected, that updating the book was much harder than writing the first one,” he says. “The need to constantly weigh what I wanted to write now versus what was written before was draining. The overriding positive impact was knowing that edition two was going to be light years better than edition one.”
Haag’s book offers thorough information on what an oil property buyer or seller needs to know, whether or not they have experience in the oil industry. “The target audience for the book is anyone who is asked to work on acquisitions of producing assets, and they will be able to understand how their contribution to an A&D effort fits into the whole and what could happen if they are not thorough or make an error,” he says. “Anyone who reads the book could participate in or manage an effort to buy or sell property in the U.S. or overseas, from conventional or unconventional reservoirs, during an up or down oil price cycle. It would also be a good read for someone who isn’t an employee of an oil company who finances deals, or for someone who has no ties to the industry who wants to invest in oil property.”
He also offered advice for anyone venturing into the A&D world, drawing on his decades of experience. “Strive to learn the whole process, what the role is of everyone who is working with you, and don’t be afraid to fact check your work with someone else. It helps to have the approach of a detective because the other company selling a property is usually not forthright in sharing information that is harmful – that adds risk or lowers the true value of the asset – to your valuation,” says Haag. “Knowing your company’s growth strategy is important also, to know whether an entry to a new geographic area or a bolt-on field in an existing area is preferred, and to know if the new asset should be similar to an annuity or similar to a growth stock.”
He would have offered that same advice years ago, but to those in today’s A&D market, he’d add another bit of advice: focus on new technologies.
He says, “Someone on the team should be on the cutting edge of the seismic evaluation, reservoir analysis, and the drilling, completion, and production techniques that are best in class in the geographic area of the property under consideration.”
Haag says his previous employer, Talos, focused on excellence in technology and were able to identify oil deposits that other lease owners had never drilled. “There are very few companies, if any, that have the successful track record that Talos has had in the Gulf of Mexico during the past few years. Their acquisition of huge blocks of highly prospective property in Mexico by being competitive in 2016 took the industry by surprise,” he says. “I’ve learned that with changing technology a commitment to lifelong learning is essential for success. Anyone who thinks a college education gets you what you need to know and isn’t committed to continued study will be left behind very quickly. The degree just gets you a ticket to the dance.”
Haag’s book is available through PennWell Books.