Open Choke

The Best of Times and the Worst of Times.

No, it's not the Tale of Two Cities, it's the Tale of the US Oilpatch.  During the last few years, I have been lamenting to my friends that this was a "bad boom" because the cost of services went up lock step with prices.  While the politicos got all hot and bothered by "windfall profits", the oxygen in the room was being efficiently sucked out by the service companies that made the last four years of living in the US oilpatch look like living in Argentina in the late 1980's, when 100% inflation abounded.  We were faced with the charge that we were "Not Reinvesting" enough back into our business when our dollars bought a lot more in industries other than our own.

"What?" you say?  "We all know that oil and gas has been at historically high prices, how can you bitch?"

 

The graph above illustrates the Cost to Drill vs Commodity Price very well.  Note the year long lag between price upturns and service cost increases AND decreases.  Then note the huge acceleration in costs between 2005 and 2008 over the cost of hydrocarbons.  This is where the hogs began to elbow out the pigs.  In 2006 until 2008, the cost to add a barrel of oil or MCFG per gas began to increase much faster than the commodity price of the product.   When this happens at low commodity prices, you don't have the worries that prices will be cut from under  you by 75%.  You are in a much less risky environment.  When it gets out of whack in high price environments, you are double whammied by the increased risk of price floor collapse.  Lots of wells drilled in 2007 and 2008 that will never pay out today.

The graph below shows the  Drill Cost to Commodity Price Index.  Historically, the E&P business has been healthy and sustainable at an index no higher than 400, while the service companies depend on high price environment to proliferate.  In essence, this creates a band between 200 and 400 where things get done sustainably.  Below that band, service companies cannot exist, and above it, the cost and risk of the oil business does not support investment from a non-feverish investment climate.

 

The green bars represent times of lowest commodity price (less risky), and the red bars of highest commodity price (more risky).   The spikes generally correlate to the lag between services and commodity prices.  Costs have a long way to go down before we meet 2009 projections.  By my calculation, drilling and completion costs will need to drop 61% before we enter the grey sustainable zone for $50 BOE.  Either the service companies need to meet that cost reduction, or we are in for a real collapse of US energy deliverability.

Merry Christmas!

Danny Boy...

It is with great sadness that I report that Dan (Danny Ray) Robertson died this last Friday.  His memorial service will be Thursday the 18th in Midland, and his graveside memorial will be tomorrow, Tuesday the 16th in his birthplace of Spearman, Texas.

Dan was one of the lobbyist guys I wrote about last week.  He served major time with Arco before retiring and becoming "one of us".  He was the President of 180 Oil and Gas in Midland, and still lobbied a bit for the Alliance, TXOGA, and others.  Dan was a hell of  a nice guy, and I am going to miss drinking whiskey with him.   He leaves behind a lovely wife and two outstanding sons.  For those of you that knew him and liked him, his family requests that donations be made in his name to the Permian Basin Petroleum Museum in Midland.

Dan, it ended before it should have, but you lived a life well...

Idealist Oilman

I wanted to be an oilman since I was in college.  I had a fresh BS degree in Geology in 1983, not the best time to have one of these bad boys, and was fortunate enough to work for a couple of old wildcatters for a year as a $5.00 an hour geotech/jr. geologist, before heading off to, what I supposed at the time, law school.

That year changed my life.  The guys I worked for drilled 2 or 3 discoveries during that year, and I came up with my first prospect.   These guys loved their jobs... and I loved mine.  For the first time in my life, I saw that a career was NOT necessarily something you do between 9 and 5 Monday thru Friday, but something you woke up to excited about doing every single day of your life.  Ideas of law school were quickly discarded and applications for graduate school in geology or geophysics filled out the rest of my year.

You know what I liked about the oil and gas industry?  It isn't a zero sum game.  In college, and I guess in high school before that, I had a perception that in business there were winners and there were losers.  That the world was a big pie that everyone fought dog eat dog for their little piece.  In the oil business, I saw how untrue that was.  The people that invested in my old bosses deals ALL made a great return when they hit, and they ALL lost their dough when they drilled a duster.  New money.  Supporting New Jobs.  All supporting an industry that is tight knit and supportive of those in it.  We close ranks against the crooks among us, and we do deals with those that have treated us well.  

I loved that about this business then and I love it now.  I know dozens of folks I have lost money with in this business, and, except for a couple of exceptions, we are still great friends.  I know dozens I have made money with, and we are still great friends.  I have only made a couple of mortal enemies, and they were in one case a crook, and the other an idiot.  I can number a few folks I enjoy drinking a beer with that I would never do business with again, though.  Unlike a business where you sell widgets, none of which can change your life, lots of the deals you do in the business can "buy your freedom", or, if you get obsessed in a deal, bankrupt you.  It is in these red zones of life and business where you see what people are made of.  Do they shatter or do they galvanize?  In the end, you do one or another.  I imagine it is a lot like what happens in the trenches during wartime, except economically, not existentially.

In the end, it comes down to grace.  The E&P side has it in spades, while the A/D side has had a problem with this particular concept.  Recently, I encountered an exception.  A mega independent made a deal in September for a very large deal I was lucky enough to have a small piece of, for a mid November closing.  Every other deal on the table in the industry at the time had buyers dropping out and crawfishing like, well, a crawfish.  This mega independent closed on the deal they signed.  They have not publicized the acquisition, so I don't think I will name them, but, to the CEO of that company, who has a long reputation of doing the right thing, I tip my hat.  Our business is great because of guys like you.

A Different Take...

The common theme in newspaper, magazine, and Senatorial press conferences is that Lobbyists are Really Bad People and the World Would Be Much Better Without Them.   Like all casual Americans, I had heard this theme so many times that I figured it was true.  Over the past few years, I have been unfortunate enough to see the sausage factory that is Federal and State Government.

And I can tell you this.  This pervasive viewpoint is Dead Wrong.

Now don't get me wrong.  The kind of person that goes into lobbying is often very similar in nature to the kind of person that goes into politics.  Not necessarily your first choice for a son or daughter in law, although probably a great choice for a drinkin' buddy.  That said, it is these people that keep the "What's Great About America" train on the tracks.  Without them, you and I and this sweet country of ours would be buttered and jammed Toast.

Every legislative session, at both Federal and State level, every industry and personal right is attacked from every direction.  Not just oil and gas, but nearly everything.  

Most of these attacks aren't intentional, just the unintended consequence of yet another goddamn rule our brainiacs are considering adopting... some rule proposed by someone with a grievance. Often times, the grievances are legitimate, but the solution proposed would accidentally kill an industry or destroy a precious right.  This happens multiple times EVERY legislative session, when the whiskey and the handguns of legislative power are handed out to the 8 year olds.  Bad things just happen in this scenario.

Then you have the Enemies.  For us, it would be the radical arm of the environmental lobby.  These are the trained assassins that slither into the melee and aim right for the heart of their enemies. It's not business as usual... this part is on a Holy Crusade, a Jihad, against industry, especially extractive industries. These folks intentionally throw Weapons of Mass Legislative Destruction into the mix in the hopes that one sneaks by.  And these WMLD's all go by titles such as "Patriot American Children and Cute Animals Protection Act", and all contain Ebola.  

Of course, it's designed so that if you oppose it, you are immediately labeled a hater of children and the environment.  Politicos play this game as a contact sport.  Clinton passed an executive order in his last 5 days in office cutting the limits of arsenic in the water in half.  Of course, he didn't sign it during the guts of his administration because the positive effects were very dubious and the cost enormous... so much so that he knew that Bush would have to rescind that executive order.  When Bush did so, he was immediately branded as a Hater of the Environment by these slithering liars, and  by the press that blindly repeats this drivel.  As an example, imagine that I stick a baseball bat up your ass and called the 12" of handle sticking out of your pants a Spotted Owl habitat.  Then, when you pulled out that uncomfortable hunk of hickory, I loudly proclaimed you as an Owl Hater and all the newspapers picked up on the story that you are clearly not environmentally friendly.  Nice, huh?  Hardball politics, yes, Truth, uhhh, not even close.

Welcome to Our World in the oil and gas business.

In any case, the lobbyists on our side do what the lobbyists on every side do.  They scour all the proposed bills to see if they contain whacks upside or bullets to our heads.  They look at every scenario, and look for the sneaky and beautiful language that the most poisonous contain... legslative equivalents to the brightly colored poison frogs in South America.  And most of the time, these heroes  find them.  They bring them to the attention of the legislators that actually give a damn, and they get the language changed to make sure we are still in business tomorrow.  These Lobbyists, these guys and girls, far from being the slithering evil portrayed by the folks most trying to fool you all the time, are often times the only thing standing between you and the abyss. In our industry, the job is 99% to 100% defensive.  Our offensive wins, the very few we get, are the ones loudly decried as "Corporate Welfare" by those that hate industry, are in the realm of "you can write this capital expense off in 3 years instead of 7".  Pretty big stretch in seeing the "welfare" there.

I mean, it sure as hell wasn't you or I reading the hundreds of pieces of legislation targeting our industry and anticipating the sneaky and catastrophic effects contained therein, is it?  It is cheap indeed to support as many of your industry organizations as possible.  Give deeply to those organizations where your produce... TIPRO, PBPA, PPROA, The Alliance, OIPA, LIOGA, COGA, TOGA, and the many others that do the thankless work we take for granted.