The Probable Scenario
What did you expect? A change in the methodology, strategy, operations or attitude of the bureaucrat? I was on record for this past year that they can't, won't and will not change their ways. This was in contrast to the constant barrage of news and information that the industries production profile would decrease and pricing would recover. I suggested it would never recover, and for proof just look at natural gas. Suggesting, in our scenario above, that in three years oil prices will recover to the point where drilling plans will be dusted off and drilling rigs will be contracted was the most optimistic that I could possibly be about the current situation. I give this scenario around 3% probability of becoming reality in 2018. More likely we will see the court's full with bankruptcy claims of the producers, their banks and the junk bond investors.
Oil and gas has a problem and it’s primarily the bureaucrats. However there are secondary elements to it as well. Shale being the biggest of the secondary elements. It is very expensive. It is prolific. Its flush production overwhelms the commodity marketplace. And is for all intents and purposes a non-commercial exercise. But is it? Today the U.S. derives 58% of its natural gas from shale. And for oil it's at least 25%. The moral of the story is we are junkies and we are hooked on the most expensive stuff their is.
The fact of the matter is that the next leg down in this industries destruction will not be on the oil side. Natural gas volumes in storage will be filled to capacity upwards of a month before the fall demand begins. That will take upwards of 14 bcf / day, or almost 20%, of the U.S. demand off of the market during that time. Where oh where will the producers put it? Expect our friends the bureaucrats to do the most intelligent and constructive thing that is humanly possible at that time. Remember, they don't care about the business so they will say this a temporary situation or an anomaly. Or you could short natural gas futures contracts.
We come back to this. The producer need a means in which to allocate production. The only reasonable and fair methodology is on the basis of profitability. If the property is profitable, then it produces. Otherwise it remains shut-in where the reserves can be held until such time that it can be produced profitably, it removes the marginal production from the commodity marketplace which increases prices and ensures that the producer only produces profitable properties and doesn’t have those profits diluted by having to cover unprofitable properties. The only way that this will happen is if the industry adopts the Preliminary Specifications decentralized production model. This can be done by funding our budget.
BP’s earnings will be released today. It will set the tone for the industry in terms of earnings reports for the producers. Expect to see those magic profits we've talked about here before, maybe for the last time. Hedges will have expired and lower overall prices will become evident in the next quarter's report. Bloated balance sheets will need to be addressed by then as well. What will be interesting about today’s quarterlies is that these companies will have to be honest about their future projections. This could trigger some big blow downs in the stocks of the producers. Also expect to hear the keywords “implement cost controls” from many producers. These are the three magic words that show investors you're focused on their interests. These three words have been able to save some otherwise dismal companies from facing the music this quarterly report season.
Things are happening quickly now for the oil and gas producer. As I stated we are at the end of the beginning of maybe the worst era in oil and gas. And it is all the bureaucrats fault. This situation is all avoidable and fixable. I have been “harping” about this and promoting the Preliminary Specification for many years. Years in which the pain being experienced by everyone could have otherwise been resolved and avoided. Instead thank your bureaucrat, and listen to them carefully in the conference calls and see if you can hear the waves from the lake where their calling in from.
The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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.