Independent Oilmen: Why They Take The Risks
Lemann, Nicholas
Independent Oilmen: Why They Take the Risks by Nicholas Lemann On the southern edge of Amarillo, Texas, on an access road beside a highway, sandwiched between D&B Equipment and Pools by...
...I would have nodded approvingly when Howe quoted Marx on the repulsiveness of rich men and added, “This speaks to a visible reality, the reality of J. Paul Getty, Howard Hughes, H.L...
...The majors have tremendous overhead costs that prohibit their drilling smaller wells to find smaller fields...
...The liberals preach expansion of the welfare state and controls on business...
...Independent oilmen generally concentrate totally on drilling, and for the most part theyjust don’t care what somebody they’ve never met in New York has to pay for utilities...
...If it’s already under lease to someone who’s not drilling it, he can arrange to sublet it (this is called a farm-out...
...Once he was hitchhiking home from his base and was picked up by an old oil wildcatter from Homer, Louisiana, named Franklin B. King...
...but the forum for each side’s plans for America is the large bureaucratic organization, either the federal government or the big corporations, depending on your persuasion...
...I have men who take care of that for me...
...All that, however, is the concern of the drilling contractor and not Jones, as are the minimum wage and workmen’s compensation...
...that aside, their interest in money shouldn’t be seen as a sign of fatal moral defects...
...The romantic and acquisitive sides of the independent’s character combine in a rich hatred of the federal government that practically all of them share...
...Farther on over to the right, in the Jack KempArthur Laffer tax cut camp, the theory is that the only way to create an innovative, prosperous society is through maximizing individual financial incentives...
...So as the war continues to rage between liberals and conservatives, one of the rare points of agreement is the writing-off of the entrepreneur...
...Before actually encountering any of them, I had a pretty firm idea of what a Texas oilman was like...
...That’s one of the last frontiers where you can start out poor and become wealthy...
...An independent oil company, by the standard definition, is one involved only in the exploration and production end of the business, as opposed to the large integrated companies that refine and sell oil as well as finding it...
...the independents, 1,485...
...He plans now to operate more wells and to drill higher-risk projects, staying away from areas near previous finds and trying for bigger scores...
...1 fly my own plane...
...In the oil business, especially, you might think, this is a time when the advantages of the corporation are most readily apparent because oil is desperately needed but very expensive to find, in terms both of drilling costs and of expertise...
...Part of the answer is to create an atmosphere where entrepreneurship is more widely appreciated, a more common feature of the dreams of the and prestige for the fully grown...
...It was in that spirit tnat Fortune recently explained that any attack on the tax-deductibility of businessmen’s entertainment costs is really an attack on “excellence itself...
...This kind of wealth is crucial to the government’s ability to heal the sick, feed the hungry, and push upward the disadvantaged...
...Many of them can be found in the pages of Fortune, supposedly the epitome of capitalism...
...There are no cheering audiences...
...In 1957 there were about 20,000 independents in the country...
...Another great problem with all the motivational schemes is that they don’t t a k e i n t o sufficient account the tremendous power of simply liking what you do-whether or not ‘it’s profitable, whether or not it helps society generally...
...People like Jack G. Jones, far from being dwarfed by the big corporations in their business, are the ones who find most of the oil and gas in this country, despite having far smaller resources at their disposal...
...His batting average so far is excellent-in his career as an independent he has been involved in 20 wells, of which only three have been dry holes...
...Encouraging people like Jones ought therefore to be a central part of the program of those who want to expand the state’s benefits to the people who need them...
...To drill on private property in Texas, Jones has only to fill out a one-page form from the Texas Railroad Commission...
...Liking What You Do The misapprehension of the importance of ’ the entrepreneur in policy discussions is mirrored-maybe based-in similar misapprehensions about human motivation...
...Of course, the majors’ oil finds-the North Slopes and Baltimore canyons-are generally much larger than the independents’, but even so the independents drill about half the oil and gas in America...
...An independent oilman’s primary objectives in steering a well through the labyrinth of funding is to raise venture capital and to hang on to as large a percentage of the ownership as possible, a financial problem most of us never run across...
...I can operate heavy machinery...
...In an affluent society like ours, where most people can afford life’s essentials, money is mostly symbolic and relative-and therefore quite elastic-in value...
...For all these reasons, we ought to be looking into what it is-in financial, legal, and social terms-that keeps the Jack G. Joneses of the world in action...
...Hunt, and a thousand others...
...The independents account for about 30 per cent of the oil industry’s expenditures, drill 88 per cent of the wells, and have a 47.3 per cent success rate in exploratory drilling, as opposed to the majors’ 30.8 per cent...
...The main thrust of these ideally would not be giveaways to one special group or another (the oil business was for years the beneficiary of one of the most generous of these, the percentage depletion allowance), but across-theboard incentives to entrepreneurship...
...1 never see the forms...
...They’re all in the act...
...Except in the rarest of circumstances, banks won’t lend money for exploratory drilling-it’s too risky...
...Most recently, in discussing the rash of mergers among investment houses (which has led to the demise of many small and regional houses), a Fortune writer brought up the argument that fewer brokers will produce fewer ideas, soberly considered it for maybe half a sentence, and then pronounced it wrong...
...We might take away the tax deductions for interest on loans to buy consumer goods like washing machines while allowing those deductions for the person who takes out a loan to start a laundromat...
...In 1967 a female auditor from the IRS called on Jones and, he says, “inferred I was lying...
...These formulations leave gaping holes...
...A less quantifiable but nonetheless important reason f o r t h e success of the independents is that they're less bureaucratic than the majors...
...But it’s also worth looking into actions the government could take, actions that would involve financial rather than emotional incentives...
...Money has an importance for the independent that it doesn’t have for the aspiring actor or ballplayer because it’s his single standard of success...
...Some of the independents are large companies, but most are small operations with one or two principals...
...He first went into business as a beer distributor but failed after six months...
...Though the majors have more money, the sheer numbers of the independents greatly increase the odds of their finding new oil...
...If the land is privately owned, he has to talk the owner into selling him an oil lease...
...For one group, a fully-vested pension might be a tremendous incentive to work toward...
...You don’t get your picture in the paper...
...Independents complain bitterly about being bogged down in a sticky morass of paperwork and regulations, in a tone that would be familiar to readers of Ayn Rand novels...
...Like the independent himself, these are people who like to take chances with their money...
...Not every conservative deserves to be tarred with the accusation of not really understanding free enterprise, but examples certainly abound...
...the independents, 317...
...That was when he became an independent oilman...
...They almost never seem to see poverty or need or stagnation without prompting from the left...
...Then he went to work for Amarillo Oil, a large independent, for four years, leaving when the company got a new president he didn’t like...
...There’s no such thing as a well that loses money but is a critical success...
...The majors had 562 exploratory successes in all that year...
...They can be relied on to oppose any tax, any price control, anything that interferes with the untrammeled drilling of wells and selling of petroleum...
...Jones not only helps heat people’s homes, he stimulates employment and creates taxable wealth that, were he to retire tomorrow, might never be generated...
...For instance, I’ve always dreamed of having an airplane and now I have one, a little Bonanza...
...The role of the independents in the oil business is similar to that of the old, pre-farm-club minor leagues in baseball, Off-OffBroadway in the theater, or state legislatures in national politics-they produce many of the discoveries that keep the large, dominant institutions strong...
...He had an office he’d built in his backyard and $700 in the bank...
...In 1972 the major oil companies found 38 new domestic oil fields...
...Instead of free enterprise, we’ve got bureaucratic regulations...
...Certainly a large part of why he does it is the money...
...Jones started out by acquiring leases and selling them to bigger independents, who operated the wells...
...Swaggering, boastful, greedy, by day he raped the landscape in search of slimy crude, by night returned to his mansion, swimming p o o l , and Cadillac, to revel (in the company of his mink-coated wife, or perhaps a flossy showgirl) in the abundant fruits of his meager labors...
...Jones is a leathery, friendly, voluble man of 47 who wears polyester suits, cowboy boots, and wraparound sunglasses and drives a midnight blue Lincoln Continental...
...It takes, you would think, huge companies with huge capital reserves and substantial borrowing power, and generous incentives from the government, to keep America running...
...Conservatives also fail to be convincing in their stated devotion to the idea that healthy business is a means to an end (a healthy country), rather than the end itself...
...Conservatives generally appreciate production but don’t see that it springs from several different sources in the free enterprise system...
...1 drive my own trucks...
...Even among those to whom money is important, there’s a tremendous difference between wanting the steady, dependable salary increments that people who work for government and big business receive, and the risky, high-payoff gambles that independent oilmen and other entrepreneurs are after...
...If the independents’ political vision of themselves as tied-down Gullivers doesn’t ring very true, it’s no surprisethey don’t fit into anyone’s political cosmology very well...
...Since 1973 about 1,500 new independents have entered the business, and domestic drilling has been booming...
...Well then,’’ King said, “why don’t you become a geologist...
...By studying these, a geologist can make a good guess as to where along the concrete pipe there might be oil or gas...
...I’ve done everything...
...This seems reasonable in the case of the oil business until you take a closer look at the role the independents play...
...Jones chose to quit...
...What makes the independents go might be, if writ large, what could make America go too...
...for an independent oilman, it’s measured in equity...
...I hire a few people part time, but mainly I like to do it all myself...
...Traditionally, liberals have felt that government operates with the public interest in mind and business with only the profit motive, so that the ability of anyone who makes a profit to contribute to the betterment of society is suspect (and, conversely, the devotion to the public good of anyone who works for a nonprofit organization is unquestioned...
...We might give tremendous capital gains breaks to investors in new enterprises while taking away the breaks for trading in old stock...
...When you’ve been poor all your life,” he says, “money is an important factor...
...when an independent oilman does, it’s for his livelihood...
...Even so well-thought-out and impressive a liberal call to arms as Howe’s in The New Republic just doesn’t mention the issue of encouraging production...
...Its roof and walls are made of aluminum siding...
...He went to high school in Nashville, Georgia, worked as a newspaper boy, a drugstore clerk, a night watchman, a shoe salesman, a factory worker, and a tobacco harvester, and then joined the Navy...
...Another independent told me he has to file “many, many thousands of forms for the government...
...Fortune always stoutly defends economic concentration, missing or disagreeing with the point that diversity in any business is a great generator of ideas...
...it has to go on in schools, at dinner tables, in newspaper columns...
...He then brings in another contractor, who lowers explosives to precise depths in the pipe and blows holes in it...
...When I asked him to tell me what, specifically, some of the paperwork was, he thought for a minute, couldn’t think of any good examples, and told me to talk to his accountant for the particulars...
...We might allow investors in new businesses to deduct these business losses from their personal income, a break now available only to investors in partnerships and very small companies...
...King, Jones says, looked like a thin Colonel Sanders...
...for the other, it would matter not at all...
...I asked Jones how many federal agencies he deals with, and he said, “Just pick a number...
...More than that, for a person without a salary, whom a bad year could utterly wipe out, what seems like an awful lot of money is necessary to provide the security that everybody else already has, along with the freedom to thumb your nose at the world that’s so important to most independents...
...For myself,” he says, “I don’t need it...
...Recently, the neo-conservatives have begun to attack this notion by weighing in with their own version of the motivational scheme: while business is out for profit, liberal professionals, civil servants, and professors comprise a “new class” that lusts, no less self-interestedly, after power instead of money...
...If you’re a liberal like me, a Texas oilman like Jack Jones is one of the most potent symbols of what’s wrong with America...
...What non-speculative evidence there is is hard to judge because the years since the embargo have been such good ones for the oil business anyway...
...King told Jones that if he studied geology at either the Colorado School of Mines or the University of Oklahoma, and if he made straight As, there would be a job waiting for him when he got out...
...That’s a big part of what drives the wildcatters and actors in the world, and just creating an atmosphere where they can do what they love freely is a tremendous incentive to the production of larger social goods...
...While the majors do many things, the independents can concentrate on one-they plow back 95 per cent of their revenues into the oilfields, as against 56 per cent for the majors...
...Tax breaks for investment, for most of us, can be an incentive to play the market...
...As is true in life generally, the former approach can often produce results that the latter doesn't...
...Price regulations are where the government’s effect on the oil business rises above the symbolic level...
...Of course, there’s a definite point where that kind of freedom is reached, and oilmen shouldn’t be allowed to get away with convincing the world that they need i n f i n i t e millions t o feel truly independent...
...If there’s oil or gas there, it will seep up the pipe to the wellhead, where it is stored and eventually taken away by the company that buys it...
...I asked Jones whether it had been frightening going into business for himself at 40, having been on a salary for most of his working life, having failed to set the world on fire at Exxon, and having gone broke in his previous attempt at self-employment...
...Perhaps at dinnertime, while tearing into a thick slab of beef, he’d complain about bureaucrats and welfare cheaters, interrupting himself to order his trembling servants to bring him another Scotch...
...They habitually undersell their own drive to drill, which is much too strong for a little paperwork to kill...
...For that reason,thereoughtto beaway topersuadealot more ofus todoit all by ours elv e s to 0...
...Most independents are in it for the romance,” another independent told me, “but most of them won’t admit it...
...The amount we’ve got now, in fact, seems more than ample...
...We might take away the tax exemption for interest payments on state and local government bonds, which takes capital away from risky enterprises...
...When most of us make an investment, it’s for a house or a car or stocks or bonds...
...An independent oilman is by definition someone who doesn't mind taking a gamble and can drill on a hunch if he so desires...
...It’s not...
...No, I wasn’t,’’ he said...
...As a result, in a producing state like Texas where under normal conditions intrastate gas would be cheaper than interstate, in fact the reverse is true...
...Independents who think they’re crippled by paperwork and held back from drilling by regulations are far more numerous than independents who actually are so constrained...
...Or it might be a dry hole, in which case the $300,000 and the independent’s time are for naught...
...at the majors, exploratory efforts have to go through the usual channels to be approved...
...His accountant now handles all his dealings with the IRS“I don’t care to see ’em because I get a little emotional . ” Besides taxes, there are some regulations governing drilling sites...
...The best vehicle for such incentives is the tax system...
...With the money, the independent will hire a drilling contractor to drill in a particular spot, to a specified depth, and to encase the hole in a concrete pipe...
...the independents can operate much more cheaply and can therefore profitably drill a million-barrel field on which a major would lose money...
...And if an independent should stumble onto a major field, the majors can always buy him out or buy the surrounding land...
...They might be local businessmen or doctors, friends or relatives, professional oil investors, or a “fund company,” which finances wells and then sells its investments to other investors...
...a decorative Nicholas Lemann is a contributing editor of The Washington Monthly...
...King asked Jones if he was planning on making the Navy a career, and Jones said no, he wasn’t...
...In recent writings, both Irving Howe and Irving Kristol have pronounced him dead as a significant factor in American economic life-“a handy myth for conservative ideologues,” Howe called him...
...They see themselves as self-reliant, tremendously productive people under constant attack from lily-livered, parasitic bureaucrats...
...I would have agreed fervently with Irving Howe, when he said, in a recent issue of f i e New Republic, “My strong impression is that most of the people who have done the most to make our life betterfrom Jonas Salk to George Balanchine, from Walter Reuther to Arthur Schnabel-have been content with relatively modest material rewards...
...The typical independent got his start working for a major company, getting a free education in finding and drilling oil, and left in mid-career because he wanted to be in business for himself...
...Similarly, a Jack G. Jones falls into a great gap in American liberalism, the failure to appreciate productivity (growing, perhaps, from an inability to distinguish it from the profit motive...
...When I did, all he could think of was taxes and price regulations...
...Most independents have spent a lifetime in the oilfields, and most of them love it-finding places to drill where nobody else has thought of drilling, putting together a deal, running their own operation the way they think it should be run, and then, maybe, finding a new field...
...But they’re unreal...
...That’s one of the beauties of the oil business-you can get by with a minimum number of people...
...I've Done Everything' Jack G. Jones was born in Warsaw, North Carolina, the son of a tobacco farmer who was killed in a car accident when his son was seven years old...
...Jones was told that if he accepted an assignment in Libya for two or three years and did well there, he could come back to the States with a clean slate...
...He makes a generous living by drilling for natural gasguessing where it might be found, acquiring the right to drill for it, amassing the money necessary to operate a rig, and then, if he finds gas, selling it to a pipeline company...
...Then he has to acquire the right to drill...
...brick facade in front is missing quite a few of its bricks...
...Often little or no cash changes hands in these transactions...
...The majors and the independents have a curiously symbiotic relationship...
...but the most significant point in the dispute between the oil business and the government is whether the price ceilings have lowered the incentive to drill so much that we aren’t getting as much oil and gas as we need...
...Tax policy has generally lumped together all businesses, old and new, large and small, but it need not...
...He may do seismic testing on the land to lessen the odds against him...
...If the independent is a geologist like Jones, he’ll start by poring over maps and past drilling records until he comes upon a place where he thinks there’s oil or gas to be found...
...Natural gas producers sometimes complain that it’s no longer profitable to drill for sale on the interstate market, but Jones makes a handsome living selling natural gas to the interstate pipelines and says he doesn’t know of anyone who has refrained from producing proven wells because of the low price...
...Now the oilman has to get the money to drill, which in Jones’ case usually amounts to about $300,000...
...the independents, 285...
...the conservatives preach economic growth through an unfettered private enterprise system...
...There are also price ceilings on oil-an extremely low one for oil from old fields and a much more generous one for new oil...
...in 1973, following a period when foreign oil was cheap and readily available, there were only 10,000...
...There’s not much I can’t do...
...Drilling on a Hunch All of the reasons for the independents’ success are object lessons in what entrepreneurs can do better than large corporations...
...There are two sets of such regulations, one for oil and one for gas...
...That’s a difficult program to legislate...
...But most of the oil the independents find eventually makes its way (via a series of middlemen) into the hands of the majors...
...Every year since, Jones says, he has been audited...
...The lessor gets an eighth or a sixteenth or a thirty-second of the well instead...
...In a tiny office in the Oil Center, a single room jammed with maps, photographs, geological logs, countrymusic tape cassettes, vitamin pills, and books, works Jack G. Jones, selfemployed petroleum geologist...
...Natural gas is unregulated when it’s sold within a state, but there’s a strict ceiling on the interstate price...
...Independent Oilmen: Why They Take the Risks by Nicholas Lemann On the southern edge of Amarillo, Texas, on an access road beside a highway, sandwiched between D&B Equipment and Pools by Tenorio, stands a building called the Oil Center, which is home to eleven independent oilmen...
...So an independent who doesn’t have capital of his own-as Jones didn’t when he was starting out-has to raise the money from private investors, in exchange for a piece of the action...
...Why is it, for instance, that independent oilmen are flourishing and independent investment houses, which are of enormous helpful potential, are dying...
...Jones chose Oklahoma and did indeed make straight As...
...Texans like to point out, with triumphant illogic, that the Department of Energy spends $20 billion a year and has never found a gallon of oil...
...If, on the other hand, you’re a conservative, you probably regard people like Jack G. Jones as a dying breed-a mix of appealing self-reliance and unappealing unsophistication, but certainly unimportant economically in this age of the large corporation...
...But in the last couple of years he has begun to be an operator himself, and as his capital increases, so does his share of the take when he hits...
...What can we do to encourage the people who make the country grow and change without simultaneously giving undeserved rewards to people who don’t do those things...
...It’s no accident t h a t none of Howe’s exemplars of virtue were in business or that his three anti-heroes all got rich through oil...
...The building itself is one story high and, aside from a glass door, windowless...
...They’re also far more risk-prone than the majors...
...There’s damn little 1 can’t d 0. ” For most of us, the money in our lives is measured in salary...
...The independents are in fact probably more important to our domestic oil production than these figures indicate, because often a major company will buy up a field and produce from it after an independent finds it...
...So the questions of how they do it and why they’re so successful are important...
...In effect, the majors figure the extra cost of buying this oil instead of drilling it themselves is offset by the risk the independents assume...
...Then the driller leaves and another contractor, an electric logger, comes i n . The logger sends an instrument down the hole and produces a series of logs-endless thin strips of paper with squiggly lines running down them that represent the porosity, electromagnetivity, and other properties of the rock surrounding the hole...
...Instead of encouraging finding oil they’ve tried to stop it...
...Then he went to Dallas and told the regional director there what he thought of the IRS...
...On the advice of a trusted professor, he chose Humble Oil, then an independently operated subsidiary of Standard Oil of New Jersey, now a part of Exxon...
...Every liberal professor can extol at length the wonderfully liberating effect of academic tenure, but few can see that for an entrepreneur, money in the bank is exactly the same thing...
...when he got his master’s degree in 1957 he had eight job offers...
...A key part of the conservative program might be making sure that sizable smallbusiness sectors flourish alongside the corporations in each industry in order to keep the industry strong...
...The new oil-old oil distinction is a complicated one and the source of a lot of litigation...
...In understanding their hatred of federal paperwork, it’s necessary to understand that independent oilmen are not the type who fit comfortably into organizational life...
...For one thing, they all assume that the desire for money is a simple matter, which it isn’t...
...Anyway, Jones says money isn’t the most important factor in his business...
...Encouraging Shell won’t necessarily also encourage Jack Jones, and saving a Lockheed won’t boost free enterprise at all...
...In natural gas, the majors found 127 new fields...
...You have to have a certain amount of organization in America,” says Jack Jones, and he’s right...
...The large-scale social contract, when it touches their lives, makes them feel oppressed...
...Whether or not this is true is the subject of constant debate, in which the main weapons are studies of oil reserves and future consumption commissioned by the two opposing camps...
...to drill on federal parkland requires a lot of paperwork, mostly for environmental reasons...
...Operating this way, Jones can make contributionsit’s hard to believein your heart thegovernment or Exxon could make nearly as well...
...For culture, the arts, reading, anyone’s problems but his own, he cared not at all...
...The aim of both is to keep low what consumers pay for energy...
...for Jack Jones they determine whether or not he can drill...
...The Oil Center is set back behind a parking lot full of potholes, the entrance to which is guarded by two Versailles-style lanterns, both broken...
...They’re a bunch of traitors in Washington...
...After a year with the company Jones was placed in its Amarillo office, doing geological mapping and field work in the Texas Panhandle...
...In 1962 the company put him under a supervisor he didn’t get along with, and as a result he got mediocre evaluation reports and his career stagnated...
...He says it’s “the self-satisfaction of achieving...
...Money was his only goal, and he had accumulated it not through intelligence or hard work, but pure dumb luck...
...I said if she was a different gender I’d rearrange her face, and threw her out of the office...
...me research for this article grew out of a larger writing project on the oil business for Texas Monthly...
...Portable toilets are required, the bottom steps of ladders have to be painted yellow, and sometimes the OSHA inspectors come around...
...In 1965 the company was centralizing, and it decided to close down the Amarillo office...
...The income tax laws are written with the salaried in mind and make few adjustments for the wild income fluctuations and different nature of investments in an entrepreneur’s life...
Vol. 10 • November 1978 • No. 8
