Now I have a Machine Gun Ho Ho Ho

April 27, 2015

(Guest Post by Matthew Ladner)

Must read article in the Financial Times The US Shale Revolution (how it changed the world and why nothing will ever be the same again). The Saudi attempt to wring excess supply from the market is not working in America, in large part because it simply has provided a powerful incentive for efficiency.

Oil producers praying for relief from low prices might take heart from the lost jobs and idled rigs in the US. But the American strengths that made the boom — entrepreneurial culture, depth of knowledge in oil and gas, innovation and supportive capital markets — are now being deployed to keep it alive. Recent history suggests it would be rash to bet against them.

“Look how far we’ve come since 2006,” says Russell Rankin of Statoil. “It’s incredible. So for us to think that we’re through with the technology . . . to say that that’s over is kind of idiotic . . . We’ll always come up with a solution.”

Thus far the U.S. rig count is down but production continues to climb as good ole fashioned American ingenuity extracts more oil from fewer drilling sites.  American drillers have been reportedly putting in new supply but not tapping it yet, waiting for a rebound in prices. Oh and then there is this little problem for OPEC:


Do you really think you have a chance against us Mr. Cowboy?

February 8, 2015

(Guest Post by Matthew Ladner)

The late great George P. Mitchell, winner of the Al Coleman Humanitarian Award among various lesser honors has joined the great rodeo in the sky but those who have taken up his legacy have a very interesting fight on their hands.

First of all, you may have noticed that gasoline prices have collapsed. The vast new supply of oil unleashed by Mitchell had a great deal to do with that, although the immediate precipitating event was a decision by OPEC not to attempt to restrict supply in order to keep up the price. By all accounts, the Saudis drove this decision, and explained it as desire to preserve their market share.

The OPEC cartel has had profound difficulties in the past in actually having members keep to their production targets. When the price of oil increases, so too does the incentive for members to cheat by producing over the caps. Historically Saudi Arabia has had vast production and relatively low extraction costs, giving it the role of swing producer.  In the mid 1980s depending upon which story you believe the Saudis tired of making up for the cheating of other OPEC members or wanted to bankrupt the Soviet Union or perhaps both. In any event, the oil market flooded, the price dropped to $9 a barrel. Stateside the Savings and Loan debacle unfolded and oil-producing states like Texas crashed Icarus-like to earth.

The price of oil tumbled after the OPEC decision, inspiring various theories. The Russians think that the Saudis are out to get them, the Iranians think the Saudis are out to get them, and the frackers also think the Saudis are out to get them.  Note however that these things are not mutually exclusive, and the Iranian theory seems more plausible than others to me. In any case, the general thinking was that all three of these competitors needed prices over $100 a barrel, and with their low extraction costs the Saudis were well situated to wring “excess supply” out of the market.

Good ole fashioned American innovation however thus far is winning the day.

No that is not a shot put, but rather a disintegrating frac ball, made of “electrolytic metallic nanoconstructed material.” It eliminates a step in the fracking process, and it was only one of a number of new drilling technologies discussed at a recent conference in the Woodlands in Houston (probably not coincidentally a property development project of George P. Mitchell). The article linked above discusses how American drillers are busy figuring out how to get more oil and gas out of already drilled wells. The number of new wells drilled in the United States has declined, but total production of oil and gas has not followed suit. Other interesting developments include the development of techniques without water, substituting CO2.

Now to be sure there are going to be some highly leveraged American oil firms who are going to go bust because of the decline in prices. Many of them have been through bankruptcy before, and you can expect them to see them back out in the fields soon. Anyone want to bet on OPEC welfare states displaying this same level of flexibility?

Place your bets- I’m all in on the high-tech wildcatters. Yippie kai yay!

 


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