Willful Destruction
The point in market rebalancing is to reduce the supply in the long term to better match demand. And based on the EIA’s recent Natural Gas Weekly Update we see that the shale gas volumes are behaving in the “desired” manner. In early 2016 shale gas formations peaked at approximately 44 bcf / day and have declined to the current 41 bcf / day. Conventional gas volumes and Canadian imports seem to have made up the difference. Total supply is 79.9 bcf / day which is consistent with last years. The graph below shows the decline clearly. What can also be seen is that the declines appear to be mostly from the Marcellus, Haynesville, Eagle Ford and Barnett shale formations.
If I were a producer I would not be jumping up and down at this time. This does not deal with the issues that the industry must address in any sense of the matter. The first issue is the existing producers uncompetitive cost structures. Prices could skyrocket and they will not defer the losses and cash costs that have been incurred in the past. You carry your legacy with you. At some point you will need to address the past. Producers cost structures and cash demands will force the producers to demand much higher commodity prices in order to be profitable. Or even to be cash flow positive, which is the terminology they use in the industry. You have debts and equity positions that need to be addressed. Those will demand cash to be distributed from an ever smaller pool of “rebalanced” market production. Investors are aware of who they line up behind. If they see a long line of debtors and other investors feeding at the trough, what’s in it for them if they dump their money in?
The second issue of course is that 17% of shale formations exist in the United States. Those 17% have created the global collapse of both the oil and gas prices over the past decade. What happens when the countries that have the other 83% of the shale formations begin to use their resources. Already the LNG market prices are in line with North American natural gas prices. A big change from when everyone began developing the multi-billion dollar LNG facilities to access those export markets. Another look at that graph and we can see that in as little as six years, from 2010 to 2016, production of natural gas from shale increased from approximately 10 bcf / day to 44 bcf / day. A period of time when the natural gas business was on its knees. If prices do come back, how long will this natural gas production decline curve go on? Will it be measured in years or minutes?
It is the same situation for oil. Producers need to think of 17%, and only 17%. The way in which they operated their firms in the past won’t work anymore, your losses are telling you that. We have shifted from a world of scarcity to one of abundance. Without production discipline being exercised at each and every producer the industry will continue to be a no man zone. Production discipline based on profitability is the only reasonable, fair, equitable and manageable way in which it can be implemented. Alternatively you could have the government come in and tell you which areas produce and which areas won’t. How would that fit? The Preliminary Specification enables the industry to implement production discipline based on profitability. It is the only way forward in the industry, everything else is a an exercise in further destruction and delusion.
The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer 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 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.