Focusing On Royalties May Cost You Your Business

Date PublishedNovember 26, 2015
CompanySunwapta Solutions Inc.
Article AuthorDoug Wagner
Article TypeNovember 2015 Issue
CategoryArticles, Oil & Gas
Tags, , ,
PULSE Interactive

Focusing On Royalties May Cost You Your Business

When you focus on things that are out of your control, you tend to go into victim mode rather than solution mode.

When Kevin Turko asked me to contribute to this month’s issue of the Oilfield PULSE with a “Royalty Review” themed article, the first thing I did was go and reread the open letter by Jonathan Wright, who is the President and CEO of NuVista Energy Ltd.

alberta-royalty-review-2015The big producers have teams on this issue, so I was going to do some research and try to add some insight about where things are headed or what you can do to change the outcome as a small or mid-sized service company. Then, I realized something. The royalty review is not the issue most executives in those service companies should be focused on.

Sure, it matters. Yes, you can do the things outlined in that very comprehensive open letter. Indeed, you should do the things that fit your values and will help your business.

But that is not where your primary focus should be. When you focus on things that are out of your control, you tend to go into victim mode rather than solution mode.

The Macro Trends

Right now supply is much higher than demand. New technologies combined with shifts in global demand have made that happen.

The public is tired of the impact of an industry with boom and bust cycles. They perceive someone is getting rich, but it isn’t them. People are concerned about pollution and global warming.

This has shifted the political landscape. Unless the politicians intentionally want to destroy the industry, they will at least try to make things somewhat competitive.

The other assumption everyone is relying on is prices are cyclical and will rise again even if the exact timing is uncertain. Certainly, supply and demand will eventually balance. However, if innovation has disrupted the industry, that doesn’t mean high prices will happen in the next cycle. The next cycle could stay lower overall until another macro change occurs. What will your company look like if prices stay fairly low and costs go up over the shorter-term? What if it stays that way for the next three to five years?


A business must find enough customers or clients for its product or services and become profitable. If losing one or two clients will kill your business, you are still at risk. The only scenarios for any business are:alberta-royalty-review-2015

Not viable: Sell or liquidate for as much as you can.

Viable in the current market or industry: Innovate and create efficiencies to become profitable.

Viable in new markets: Innovate, create efficiencies, and enter new markets.


Back in the early 1900s, the railway industry dominated. As the automobile industry started to pick up and move into building trucks, the railway industry ignored that trend. They were in the railway business. As we all know, the trucking industry has surpassed the railway industry regarding shipping goods, and airlines and cars have replaced trains for moving people.

Had the railway industry realized it was really in the transportation industry early enough they could have owned the trucking and airline industries as well.

As is typical in any mature industry, especially a monopoly, innovation stops. Now, this is a simplistic example. Due to the competitive nature of the oil and gas industries, innovation within that industry has not stopped. In fact, innovation has led to the ability to produce from formations that were previously not viable. Those sources were quickly brought to market. Ironically, innovation is partly to blame for the current situation.

Innovation goes both ways, so it may also open up further opportunities. How can your business innovate or tap into trends happening in other industries? How can your business take your innovations into other industries or markets?


If you are in it for the longer haul, you will likely go through a few cycles and surprises, so a little diversefication could be good.


alberta-royalty-review-2015When times are good, the oil and gas industry tends to throw money and people at problems. When the margins are lower or negative, the tendency is to trim the workforce quickly.

Because the workforce has shrunk, many business leaders think they have automatically become more efficient as a natural outcome. Reducing payroll is not the same a becoming more efficient.

Expecting a smaller group of people to produce more without changing anything else just means they will work more hours, make more mistakes, and become even more stressed.

Using approaches where you look at all the functions needed to get things done, optimize them, and then use competency based training to make sure the entire team can perform well can change the game. High performance comes from improvements at individual, team, and leadership levels.

New Markets

If you are in it for the longer haul, you will likely go through a few cycles and surprises, so a little diversification could be good. As a service company, you can look at your core competencies and skills, and see where else you could deliver value in other industries or look at other markets.

Your Action Plan

There is no guarantee this time is like all the other times. If your business plan revolves around staying in survival mode until “something” changes, you might want to rethink that mindset.

Focusing on Royalties - Oilfield Pulse Interactive 2015 October IssueThe great entrepreneurs tend to thrive in the world as it is and make opportunities happen despite what everyone else is doing. Make events like the royalty review insignificant to your success. Take action to innovate, become more efficient, or find a new market.

What specific actions are you going to take to survive and thrive today that are within your control?

Doug Wagner






Originally published in the 

November 2015 issue of Oilfield PULSE