Despite the doom & gloom, something new is happening in the oil industry. You need to prepare for the coming surge.
One of the subtlest, most effective moves in sports is the head-fake. It's a thing of beauty when done well. In the energy commodity business, it can be disastrous to anyone who falls for it.
Right now, everyone is focused on low crude oil prices, and the subsequent layoffs and rig shutdowns that follow. I say it's a head-fake, because too many companies are buying into the narrative and scurrying for cover, while the smart money slips past them to victory.
In the past, a downward move of 50% would have spelled disaster for the oil and gas industry. This time, a convergence of new factors suggests a different view of what's happening. If you can read between the lines, you can seize your share of opportunities now, while prices are down, and march into the next cycle well ahead of your competition.
The news gets better the closer you look.
Despite lower prices and dire news, particularly in the American oil markets, the fundamentals generally point to a flurry of need. If oil prices can merely get back to the $60-$70 a barrel range in the next 12 months, and stay there for a reasonable period of time, U.S. production is poised to respond.
Certainly, many wells have shut down. Headcount has been reduced. But, the infrastructure is there to pick up the pace at a moment's notice. The recent volatility has created a much leaner breed of competitor. And from a logistics standpoint, a multitude of options have emerged – including rail, barge and tankers, to name a few – mostly over the past five years.
In 2015, oil field, drilling and information technology have combined to create a perfect storm of capability and agility that will allow American oil markets to respond with a speed typically only seen in the digital realm.
Production is not dropping.
The U.S. Energy Information Administration (EIA) recently reported that oil production in the lower 48 states is stable, despite expected near-term reductions in in rig count. The report says, "Other key factors include the efficiency of drilling…the rate of decline in production from existing wells, and changes in the amount of time between the start of drilling and the completion of the well."
As little as five years ago, it could take as long as nine months to get oil out of the ground. Today, thanks to rapid advances in drilling and information technology, it now takes no longer than 30 days to see results. You can literally go on holiday at the start of the process and come back to a producing well, just like that. Related: Three Reasons Why US Shale Isn’t Going Anywhere
What's more, because production has not dropped, the need for transport to market has not dropped. Oil tankers, pipelines, rail systems and the tracking technology behind these modes have all gotten more sophisticated in the past five years. As a result, there may be no better time to be in the global oil-transportation business.
Moore’s Law arrives in the oil sector
As in many businesses, the 80-20 rule applies. Sixteen per cent of the wells in operation across North America account for 82% of the oil produced. And, generally speaking, production is up.
It is the abundance of supply that is placing downward pressure on prices, with supply growth outside of OPEC nations growing at the fastest rate. According to the International Energy Agency, non-OPEC countries produced 1.9 million more barrels per day in 2014 than they did a year ago, with the U.S. leading the way at 1.1 million barrels.
As producers become more efficient, the number of rigs required to yield the same amount of production naturally drops. So, while the industry freely announces sensational rig count reductions, little to no impact on actual production is seen. That's because the industry is taking this opportunity to shutdown low performing rigs.
In the case of the Eagle Ford region, one of the most prolific in North America, rigs are producing at a rate 18 times more efficiently than they were in 2008, and 65 percent more efficiently than they were in 2013.
Technology is whitewashing old school rules. In many ways, Moore's Law has finally arrived in the oil patch.
Moore's Law, if you are not familiar, was introduced by Gordon Moore, one of the founders of Intel, who, in the 1960s observed that small improvements in technology over time led to a doubling of the density of transistors each year. The numbers exhibited in the Eagle Ford alone suggest that technology is accelerating the capabilities in oil field production by at least that pace, if not greater.
As the months unfold, advancements in pad drilling and rig mobility, among other breakthroughs, will only ensure more of the same, rendering rig counts as a measure of industry health obsolete.
Wells produce more, faster.
It is not unusual, considering advancements in the way wells are drilled in present day, for production rates at any given site to peak early and yield faster than in the past. The peaks are nearly three times higher than they were just five years ago, creating enhanced production rates, even during decline, due to drilling efficiencies realized by more effective horizontal drilling and hydraulic fracturing practices.
Again, to cite the Eagle Ford as an example, the EIA reports that first-year decline rates in the region fluctuated between 60% and 70% between 2009 and 2013, while second-year rates steadily increased to nearly 50% for wells drilled more recently. A recent Wall Street Journal article supports the notion, stating that EOG Resources Inc. reported 4.3 days to drill an average well in the Eagle Ford Shale, "down from 14.2 days in 2012." Related: Could Natural Gas Be A Better Bet Than Oil?
Clearly, the ability to locate wells that promise higher oil output, combined with the speed at which wells reach peak production, is supporting a quality versus quantity approach to the oil and gas business that can be directly traced to improvements in technology. These advancements make it possible for oil companies to turn a profit, even at today's depressed market prices, as the cost of producing oil continues to fall in step.
So have oil prices hit rock bottom?
The question, in light of recent production efficiencies, is moot. Writes Leonardo Maugeri of Harvard University's Belfer Center, "the truth is that U.S. shale production can be turned on and off almost immediately." This, according to Pulitzer Prize-winning author, Danie Yergin, positions the U.S. as the world's new "swing producer," a tag used to describe Saudi Arabia, for its ability to offset prices fluctuations with a counter in production (effectively "swinging" the market out of a boom or bust).
So, if prices are moot, how are you, as a market player, reacting to the media's obsession with low oil prices and industry layoffs? Are you falling for the head-fake? Or, are you sacking the opportunity while it's right in front you?
I believe that there will be two camps who emerge from the current industry cycle characterized by depressed oil prices: those who curtail their innovation and shrink their business in lock step with the price of oil (as has been the practice during prior oil busts), and those who take advantage of the opportunity to trim the fat, beef up on technology and position themselves for aggressive growth when the cycle ultimately breaks.
Do you have the speed and agility to get your product to market efficiently? Are you able to take a macro view of your transport options and create margin, literally in the margins? Where can you tighten your timelines? Improve operational efficiency? Reduce risk exposure and expand the upside?
Now is the time to inspect and assess your technology assets, prepare for increased volume and business complexity, and sunset your old way of doing things. If you lay the right foundation now, you'll be ready to run for daylight the moment the pendulum swings.
By Mark A. Hill for Oilprice.com
--Mark Hill is a vice president of Allegro Development Corporation, based in Dallas.
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