by ROCKMAN » Wed 14 Jan 2009, 11:17:54
I can answer that concerned: it’s zero except for the certifiable insane or the liars. I’ve been a petroleum geologist for over 30 years and can tell you the entire oil patch has been well aware of the approach of PO for most of the last 20 years. Except we’ve never used the term “PO”. It has always been the “reserve replacement issue”. Since the late 80’s we’ve known that sustained company growth could not be maintained with the drill bit except for the very few lucky and aggressive operators. At least not in the USA. The only debate was the timing. That’s why I think their poll could have been more meaningful if the question was: will the industry be able to continue to meet demand in the long term? Take the timing issue off the table and those execs would have been all the more uncomfortable answering.
I spent much of the 90’s involved with production acquisition and divestiture. Essentially the big companies were selling of fields to smaller ones to generate cash flow. The smaller companies could establish reserve growth with more acquisitions since they were often unable to do the same with the drill bit. One of the great handicaps the oil patch has suffered for at least the last 20 years has been the shorted sighted effort focused on y-o-y reserve base growth. The stock market has insisted that companies be evaluated by this parameter over all others….often including profitability. Growth was everything. I’ve seen more then one company pay much more then a field was worth because they were desperate to show a reserve base addition even if the acquisition never recovered its cost. Think of it as the sub prime of the oil patch. I know that seems insane but those were the rules that Wall Street required us to play. Break the rule and your stock value would be talked down. The surge in unconventional NG drilling in the last few years has been, to a degree, fueled by this rule. The rapid decline rates (and the loss of reserve base) of these plays requires an ever increasing drilling rate to maintain reserve growth. But now many of these operators (including my current client) are cutting back significantly. IMO they are taking advantage of the fallen stock market (including energy stocks) to NOT replace production with new reserves. NG prices have softened somewhat but not anywhere to the degree oil prices have dropped. Oddly enough, the associated decrease in drilling cost (as perhaps as much as 50% of the NG drilling rigs are idled) may actually provide much improved profitability for wells drilled in 2009 then seen in 2008 even if prices stay soft.
That’s why you have to take public statements by oil execs with a big grain of salt. Not one can afford to admit that his company’s growth (over the next decade or two) will at best be flat and more likely in a somewhat continuous contraction. But don’t judge them too harshly: if you were a shareholder you would insist on him maintaining the illusion…at least until you sold you shares. I am also surprised with the percentage who acknowledged PO was even a valid concept. I suspect they are also taking advantage of their current weakened value to start a mild thread of reality.
