Manic Times
Today we hit the high water mark in terms of the manic - depressive cycle that North American producers have put themselves on. With a fresh extension of the OPEC agreement, prices close to $60 / bbl, things haven’t looked so good in the industry for years. Ever get that feeling of deja vu all over again. Buoyed by a compliant and cheerleading media the producers have world dominance at their fingertips. There’s just nothing that can’t be done by them. Their costs are down and they’ve learned to believe in profits which is what they believe their investors are asking for. From my point of view there is only one major difficulty. It’s not working.
The nature of this overproduction and oversupply issue is not something that can be ignored and assumed to fade as OPEC clears up any global inventory overhang and consumers demand more energy. There will always be consumers and there will always be inventories. There will also always be the other shale producers who are responsible for the overproduction. Each and every producer will ensure anyone that will listen that they are not the source of the overproduction issue. Each of the North American producers believe they have it within their domain to control themselves. Clearly they don’t, they need the cash.
What surprises me is the number of producers who have stated that their costs have been reduced. Nothing could be more incorrect. Almost all of the producers have increased the number of years in which they are depleting their property, plant and equipment accounts. Increasing the number of years by 30% since the end of 2016 for our sample of 23 producers. That will make an impact on the income statement and the appearance of reduced costs, and higher profits however this is accounting shenanigans. The probability that any of the producers actually reduced their historical costs is zero. Once you pay $1 to drill and complete a well that is what it costs. Any attempts to reduce the costs in the current period would have to be fraudulent. You can’t change historical facts. It is possible that the field operations are more refined and downhole work more efficient which has brought about some cost reductions. These would only apply to the current work in progress which may account for all of 5% of the producers properties.
Which brings up the rationale of why are the high cost North American producers crowding out the low cost OPEC producers? The logic doesn’t exist for this to continue in a market economy and it is therefore reasonable to assume that OPEC won’t be the one to always withhold production. Shale producers are proving to be resilient in terms of production growth and for lack of a better word aggressive in terms of their entitlement to first priority in the marketplace. Can this continue? What if the belief is true that the Saudi’s are only playing nice for now until they complete their Saudi Aramco IPO. Then once that’s complete they can sell their production at whatever price the market provides. Understanding that the overabundance of oil over the next 50 years will only provide for the lowest cost producers. Will the cooperation being expressed by the North American producers towards who is entitled to produce now earn them a seat at the table tomorrow when low cost producers are just looking for revenues?
The Saudi oil minister said after yesterday’s meeting that finding equilibrium in oil markets will take another two to three years. A sober reflection of the issue at hand. Contrast this with the attitude of the North American producers who appear hell bent on world domination. I think it is a clear reflection of the desperate financial position that they’ve put themselves in. Their outlook is towards the next payroll and to sell as much production as they can. The business of the oil and gas business doesn’t concern them. They can produce unprofitable production at investor expense for ever. That is just as soon as the investor's return.
The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.
The nature of this overproduction and oversupply issue is not something that can be ignored and assumed to fade as OPEC clears up any global inventory overhang and consumers demand more energy. There will always be consumers and there will always be inventories. There will also always be the other shale producers who are responsible for the overproduction. Each and every producer will ensure anyone that will listen that they are not the source of the overproduction issue. Each of the North American producers believe they have it within their domain to control themselves. Clearly they don’t, they need the cash.
What surprises me is the number of producers who have stated that their costs have been reduced. Nothing could be more incorrect. Almost all of the producers have increased the number of years in which they are depleting their property, plant and equipment accounts. Increasing the number of years by 30% since the end of 2016 for our sample of 23 producers. That will make an impact on the income statement and the appearance of reduced costs, and higher profits however this is accounting shenanigans. The probability that any of the producers actually reduced their historical costs is zero. Once you pay $1 to drill and complete a well that is what it costs. Any attempts to reduce the costs in the current period would have to be fraudulent. You can’t change historical facts. It is possible that the field operations are more refined and downhole work more efficient which has brought about some cost reductions. These would only apply to the current work in progress which may account for all of 5% of the producers properties.
Which brings up the rationale of why are the high cost North American producers crowding out the low cost OPEC producers? The logic doesn’t exist for this to continue in a market economy and it is therefore reasonable to assume that OPEC won’t be the one to always withhold production. Shale producers are proving to be resilient in terms of production growth and for lack of a better word aggressive in terms of their entitlement to first priority in the marketplace. Can this continue? What if the belief is true that the Saudi’s are only playing nice for now until they complete their Saudi Aramco IPO. Then once that’s complete they can sell their production at whatever price the market provides. Understanding that the overabundance of oil over the next 50 years will only provide for the lowest cost producers. Will the cooperation being expressed by the North American producers towards who is entitled to produce now earn them a seat at the table tomorrow when low cost producers are just looking for revenues?
The Saudi oil minister said after yesterday’s meeting that finding equilibrium in oil markets will take another two to three years. A sober reflection of the issue at hand. Contrast this with the attitude of the North American producers who appear hell bent on world domination. I think it is a clear reflection of the desperate financial position that they’ve put themselves in. Their outlook is towards the next payroll and to sell as much production as they can. The business of the oil and gas business doesn’t concern them. They can produce unprofitable production at investor expense for ever. That is just as soon as the investor's return.
The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.
