Dispelling Myth's
This rebalancing of the marketplace has been going on in natural gas for six years. And if you look at the deliverability of the U.S. natural gas production it is beginning to turn downwards. (This is mostly attributable to deliverability declines in the Marcellus shale region. An area that receives at best $1.20 for its gas.) However, that is after six years and a price decline from $15.00 to $1.75 just before Christmas. As I have always stated “rebalancing is a very blunt tool. However, in the age of shale based reserves we won’t see the return of any profitable natural gas prices based on the behavior of the current producers. There are now over 18 bcf / day of deliverability in what are called DUC’s (drilled but uncompleted wells). This was an attempt by the bureaucrats to drill wells at lower costs, taking advantage of the misery in the service industry during these difficult times. What they didn’t realize is that these wells would be considered as part of the inventory volumes of natural gas that are ready to join the other 74 bcf of daily production. Rebalancing the marketplace is what was attempted in the 1980’s and 1990’s. That took roughly 15 years to be effective. In the era of shale reservoirs it will never be an effective means of dealing with overproduction. As soon as the prices rise those 18 bcf / day will race to the market faster than you can blink. Only the Preliminary Specification provides the industry with the capability to allocate production based on profitability at the Joint Operating Committee. Profitability based on an actual accounting.
The second myth that I mentioned is really two myths in one. The first is that the oil and gas producers are innovative. This is not so much a myth as an absolute farce. Ask anyone who has tried to bring anything of value into this industry and they will tell you of the decades that they’ve spent trying to convince a producer to try and build value for themselves. As exhibit a, I would use myself and my 25 years in this endeavor. Providing a value proposition of $45.7 trillion in exchange for our budget is too much math for the bureaucrats to deal with. Too many zero’s to carry I guess. I can remember the stories in the late 1990’s from the coil tubing people begging producers to try their product. Or just look into the history of Packers Plus to see how frustrating it is to deal with these bureaucrats. All the innovation that occurs in the industry comes from the service industry and is as a result of decades of screaming at bureaucrats. Bureaucrats are not innovative. Bureaucrats sit and do nothing but watch the commodity prices fall. What else could they be doing?
The second aspect of that myth that the bureaucrats innovations are responsible for bringing the costs of oil and gas down from the $75 - $80 / barrel before the price collapse to the $25 / barrel today. Is something these people are going to pay dearly for in May 2016. This is a myth and they will be held responsible for stating that these costs behaved this way. Think of the situation. You drilled, completed and equipped a well in 2013. That is a historical, factual capital cost that has been incurred. Based on the production in 2013 these capital costs including the operating costs, royalties and overhead totalled the $75 - $80. In today’s environment, recall that oil and gas is a capital intensive industry, the only change to the costs would be some operating cost efficiencies and a severe drop in the royalties. Maybe $20 in total.
So how does a bureaucrat move from $75 - $80 costs to $25. There are a variety of names for it but I will use the term that I feel is the most common “recycle costs.” Recycle costs are calculated when you take the current price of oil is $33 and to produce a profit at that price your cost would need to be $25. Therefore the producers costs on a go forward basis are $25. Subject of course to some innovations in terms of the capabilities of the producer. That is recycle costs, the myth.
The last myth we listed was that as soon as production is deemed unprofitable it will be shut-in and removed from the marketplace. First, with the phenomenon of recycle costs there will never be any loses as those costs are always lower than the prices. Second the deliverability continues to increase. And more bankruptcies will be announced in 2016 then at any other time in the history of the industry.
This mindset is the one that is operating in the industry today. If you don’t believe me, take a look at the price of oil and natural gas. There is no adult supervision going on. It is bureaucratic, self interested, thoughtlessness at the highest level. These people will need to be preparing their stories and their financial statements for the 2015 annual report and general meetings. These myths are present in the marketplace today. How will they deal with the reality of their actions in 2015, their lack of plans to deal with it and the dispelling of these myths. It’s going to be a good year for People, Ideas & Objects, our user community and service providers. If you think I’m being too harsh, that I might get funded faster by being nice. The truth has to come out about what’s been going on here. How to fix it. And who is going to fix it. Being nice to the people who created this much destruction, after the treatment that they provided to me over the past decades, particularly when they could've saved themselves by building the Preliminary Specification. Is beyond my level of compassion. They need to account for their behaviors, actions and decisions.
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.