Guest “Shedding light on the Big Lie” by David Middleton
While most of my recent posts have focused on Biden’s lies about the oil & gas industry, there is one BIG LIE that has become so pervasive, that has effectively become common knowledge.
U.S. producers reluctant to drill more oil, despite sky-high gas prices
BY IRINA IVANOVAUPDATED ON: MARCH 25, 2022
Consumers battered by sky-high gasoline prices shouldn’t expect relief from the oil industry anytime soon.
Many oil and gas executives say they have little interest in increasing oil production — even at crude’s near-record prices, which make extraction very profitable for their companies.
The price of crude oil has been steadily rising since the start of last year. It hit $100 a barrel in March after Russia invaded Ukraine — the first time in 12 years it breached three digits.
At that price, oil companies would normally race to snap up land and drill new wells. But a sizable number of oil and gas executives are saying they won’t increase production at any price, according to a survey released this week by the Federal Reserve Bank of Dallas.
[…]
CBS News
To be fair to the mainstream media, they are too stupid to understand the difference between not increasing production and maintaining capital discipline. This particular journalist totally misread the Dallas Fed’s survey. The survey did not find that “a sizable number of oil and gas executives are saying they won’t increase production at any price.”
“What West Texas Intermediate crude oil price is necessary to get publicly traded U.S. producers back into growth mode?”
Dallas Fed
Saying that the decision to get “back into growth mode” isn’t dependent on price, isn’t even remotely close to “saying they won’t increase production at any price.” Firstly, oil companies can’t just flip a switch and increase production. Oil companies, have to increase capital expenditures (CapEx) and drill more wells in order to increase production. And… Guess what? Oil companies are increasing CapEx and drilling more wells. Secondly, getting “back into growth mode” is a 100% subjective phrase. Shrinking is sometimes a prerequisite for growth (shrink to grow).
CapEx
In my previous post, I focused in Pioneer Natural Resources Co. (PXD) because Biden specifically lied about what their CEO said about oil prices and increasing production. Today, I’ll expand it to include two other large independent “shale”-focused oil companies, EOG Resources Inc. (EOG) and Devon Energy Corp (DVN). First, let’s take a trip back to when “shale” was getting beaten up for not making big enough profits. Just prior to the onset of the shamdemic*, the “shale” sector actually started to generate free cash flow.
- Shamdemic: Pointless government-ordered economic lockdowns in response to ChiCom-19.
US SHALE INDUSTRY TURNS CASH FLOW POSITIVE
August 21, 2019In a remarkable turnaround, the second quarter of 2019 is the first three-month period on record when US shale operators achieved positive cash flow from operations after accounting for capital expenditures, according to Rystad Energy.
Rystad Energy – the independent energy research and consultancy in Norway with offices across the globe – has studied the financial performance of 40 dedicated US shale oil companies, focusing on cash flow from operating activities (CFO). This is the cash that is available to expand the business (via capital expenditure, or capex), reduce debt, or return to shareholders.
In the second quarter of 2019, 35% of operators in the peer group balanced their spending with operational cash flow, and reported an accumulated $110 million surplus in CFO versus capex.
[…]
Rystad Energy
I don’t have time (or the inclination) to try to recreate Rystad Energy’s “40 dedicated US shale companies,” but I did have the time to look at three of the larger independent “shale players”.
As can easily be seen on the chart above, the three companies roughly doubled their CapEx as the price of oil rose from $48 to $78/bbl. However, they did so in a financially disciplined manner. They not only maintained positive free cash flow, they grew their free cash flow as oil prices rose. They did exactly what they were bashed for not doing from 2008-2019. These companies will be releasing their Q1 2022 financials over the next few weeks. I’ll try to update this graph with those numbers.
Drilling
U.S. Oil Companies Have Increased Drilling By 60% In One Year
Robert Rapier Senior ContributorMar 27, 2022
One of the latest lines of attack in the finger-pointing over rising gasoline prices goes like this: U.S. oil companies are sitting on a huge number of permits, content to reap enormous profits while they refuse to drill for oil.
This is mostly false, but with a kernel of truth that is never taken in context. So let’s discuss what’s really happening.
The truth is that the number of rigs drilling for oil in the U.S. is steadily climbing. The year-over-year increase in the Baker Hughes North America Rig Count is now about 60%. In fact, historically it has rarely climbed at a faster pace than this. Clearly, the notion that oil companies are just sitting on their hands, content to withhold production and squeeze American consumers is false.
[…]
Finally — and here is the bit that contains a nugget of truth — many oil companies have said they are going to be more financially disciplined than they have been through previous boom and bust cycles.
Critics of the oil and gas industry have seized on this financial discipline as proof that oil companies are holding back production. However, one of the biggest criticisms about the shale boom over the past 15 years is that the oil companies never make consistent money. Indeed, if you look at the financials of many oil companies, they lost money in four of the past ten years.
[…]
I can assure you that each oil company wants to produce as much oil as they can at current prices, because they will indeed be very profitable with oil prices above $100/bbl. But they can’t immediately toggle production higher, and they don’t have crystal balls. They don’t know where oil prices will be a year or two from now, and that’s the reason you don’t see them ramping up drilling at an even faster pace.
You may disagree with their decisions, which is your right. But you should at least understand the reasons for these decisions.
Forbes
As Mr. Rapier goes on to note, there is a lag time between drilling and production. However, oil companies are increasing CapEx and they are spending more money on drilling.
St. Louis Fed
While still below the pre-shamdemic peak, oil & gas drilling activity is growing at about the same pace as it was from 2017-2019.
Production
US crude oil production has been slowly rising. It’s currently about 1 million bbl/d higher than it was in September 2020. Although it’s still about 1.4 million bbl/d lower than it was just prior to the shamdemic*.
The most prolific oil play, the Permian Basin has already exceeded it’s pre-shamdemic* level.
Here is a zoomed in version of Permian Basin oil production (lower left panel):
Maybe if Biden hadn’t been unlawfully blocking lease sales and slow-walking permits, the second most prolific US oil producing region, the Gulf of Mexico, might be doing the same thing.
No Crystal Ball
After 41 years in the oil & gas industry, if I’ve learned one thing, it’s that almost all oil and natural gas price predictions are wrong.
We think gas prices will stay in this $9 to $11 range, there’ll be times like in July when they’re above it, there’ll be times when they’re below it and of course the weather will matter a lot as well. But we’re pretty confident that much below $9 you’d see a drop off in drilling activity particularly among the conventional drilling and then those pretty aggressive 35% to 40% first year declines are going to kick in and rebalance the market.
I saw something the other day where some analysts had come up with production in 2010 was going to be up by something like 8 to 10 BCF a day and gas prices were going to be $6.25. That kind of analysis I think can only come at the dangerous intersection of Excel and PowerPoint, it can’t happen in reality.
Chesapeake CEO Aubrey McClendon, August 1, 2008
NEW YORK (Reuters) – Texas oil billionaire T. Boone Pickens said on Thursday crude prices may soon fall as low as $110 a barrel amid falling gasoline demand, but should not sink below $100 because the United States depends heavily on oil imports.
“I don’t think it’ll drop below $100,” Pickens told Reuters in a telephone interview. “I would say $110 is where it might go, something like that.”
T. Boone Pickens, August 14, 2008
Needless to say, the late Aubrey McClendon’s and the late T. Boone Pickens’ predictions of permanently high oil & natural gas prices were wrong. This is not a criticism of either man. They were both brilliant oil & gas industry pioneers. They were just wrong.
We may not have a crystal ball, but we do have a futures market. Why would any sane oil company be spending money under the assumption that $100-$130/bbl oil was here to stay, when the same sorts of investors demanding financial discipline think oil prices will be back down in the $80’s next year?
Last Updated 05 Apr 2022 03:06:10 PM CT
I have a suspicion that whatever politicians and the media say the capitalist system is coming to our rescue.
If the price is high due to shortgage then someone somewhere will produce more.
The capitalist system is not dead.
Neither is the US private business system, which is Free Enterprise, not capitalism.
The government Washington DC crony capitalist system is going gang busters, what with 6 trillion of more of Brandon administration controlled spending going to their Cronies.
Government picking winners and losers in the market place has nothing to do with capitalism.
A better description would be crony socialism, or even more accurately, socialism.
It has never been the crony capitalism, it is always socialism
Government getting involve in business is called fascism.
Capitalism is the communist word for the thing they hate, the correct term is free market. Capitalism is the word used to destroy the free market by people that believe government should control the market.
The left has done such a successful propaganda campaign that even the people advocating for free market use their word without noticing, unaware that by doing so they have already lost the argument.
I agree with that, Free market it is.
I disagree. It is only leftists who think “capital” is a dirty word. Private enterprise requires capital to create business. And business creates jobs and improves living standards. I am a proud capitalist.
What is happening is the drillers are not speculating in borrowed money. Given political risks, that seems wise. And most of these problems are political.
And… The lenders aren’t lending as freely as they were back in 2008-2014. Mostly, this is due to the destruction of capital caused by the previous two price crashes. However, an increasing factor is political and activist pressure on them to not finance fossil fuels.
ESG is bad and very hard on lending 🙁
In this bizarro world, tangible ESG results are rewarded in much the same way successful drilling programs once were.
Why can’t the industry come out and definitively say that this is due to gov here and elsewhere in the West slagging the industry and interfering in markets financing and passing repressive regulations! Why would they invest if govs plan to shut them down! Rex Tillerson was a huge timid disappointment and the rest of the industry has followed suit. This should be an unabashed Atlas Shrugged moment
We can’t control what Wall Street wants… And publicly traded corporations can’t ignore what Wall Street wants.
ESG is not a government creation.
https://www.msci.com/esg-101-what-is-esg/evolution-of-esg-investing#:~:text=The%20practice%20of%20ESG%20investing,the%20South%20African%20apartheid%20regime.
Even though it’s been demonstrated that ESG investing yields lower returns, companies with better ESG ratings tend to outperform companies, within their sector, with low ratings.
https://insight.kellogg.northwestern.edu/article/esg-news-market-reaction
Reality doesn’t have to make sense.
You’re absolutely correct. It’s marketing bullsh*t.
See my comment above: https://wattsupwiththat.com/2022/04/05/did-you-know-us-oil-gas-drilling-up-60-this-year/#comment-3493053
It is the government that created the climate hoax that led to ESG. Plus billions in government loot for wind, solar, and ethanol.
Government didn’t create the “climate hoax”, they fed off of it… And it isn’t entirely a hoax, just a massive exaggeration of a relatively easily solved long term problem.
Would the MSM print it?
ESG is a marketing gimmick.
The asset gatherers, the institutional investment consultants, the pension funds, the endowments have all swallowed this stupid creation that is nothing more than sales bullsh*t.
ESG is as stupid and as asinine as investment obscenities like the “Asian Mid-Cap[italization] Value Fund.”
All these categories (eg.,”Value”, “Growth”, “Large Cap”, “Small Cap”) are the inventions of marketeers and haven’t a damn thing to do with the actual practice and process of investment.
Whatever it is it has corporations by the ballz. At United Health, they hired a climate czar to get them to net zero. A effn Climate Czar with a 6 figure salary trying to eliminate carbon at an insurance company.
May 20, 2020
The number of active U.S. crude oil and natural gas rigs is at the lowest point on record
(339)
https://www.eia.gov/todayinenergy/images/2020.05.20/main.svg
Now up to 670 active rigs drilling (and growing):
The thing that I find most interesting on this chart is the evolution of well types. The vertical wells are mostly onshore conventional plays, the directional wells are mostly in offshore conventional plays and the horizontal wells are mostly in onshore unconventional plays.
Another thing to keep in mind about rig counts is productivity. Back in 2017, the average Permian Basin well IP’ed at ~100 bbl/d, now it’s ~1,000 bbl/d…
The well productivity gains are nothing short of astonishing and nearly miraculous— particularly gas wells in the Marcellus.
https://www.eia.gov/petroleum/drilling/pdf/appalachia.pdf
The U.S. should divert all renewable subsidies to incentivize oil and gas production, so the world doesn’t have to buy Russian oil. Subsidies usually are bad for the economy, but this is a national defense mater. If NATO countries depend on Russian oil, that’s not good for us. Also, if we replace half of Russia’s oil sales with U.S. oil sales, that will be good for the economy, so it’s probably a wash.
It’s not so much the crude oil that is a NatSec problem, because crude is globally fungible since moved internationally mostly by tanker. It’s the EU natural gas, which moves mostly by pipeline (only Alt is LNG), and where the EU pipeline fill end is now about half in Russia since the EU’s North Sea and Groningen natgas fields are depleting.
Good on ya, Rud.
It’s ‘complicated’ and Joe Average, standing there at the pump with eyes watering as their wallet empties, can only go by what the lyin’ YSM tells them that they should be mad at.
But when you are so gol’danged mad that you are afraid for your next paycheck, that’s when the GEBs and Powers That Be get uummmm… nervous.
‘The U.S. should divert all renewable subsidies to incentivize oil and gas production…’
Prices are information – high prices tell producers to produce more and consumers to use less. No need to subsidize oil and gas, but if you just want to eliminate direct renewable subsidies and other government preferences, I’m with you.
I am pretty sure there is a factor beyond shale companies finally achieving financial prudence. A decade earlier, They were chasing McClendon’s Chesapeake company mad dash for shale leasing rights. Audrey started the ‘use it or lose it’ craze where if you didn’t drill, in say two years (an implicit royalty timing promise to landowners), you lost the lease. So there was a lot more drilling and production than the market could support, so crude prices fell sharply since demand is fairly inelastic. All that is now long in the past.
And since shale wells (especially oil) have very steep decline curves (often down to between 10 and 20% of initial production in just four years —compared to the 700 largest conventional oil fields declines measured at 5.7%/year by IEA back in 2008) so the resulting oversupply has also shrunk to zero.
And nothing gets shale companies drilling and fracking again like for sure profits at $100/bbl.
Let’s see the same for Canada, the other land of policy misdirection plays up north.
Our “retard factor” is higher.
Behold, Justin.
4th largest Reserves in the world, transported in Warren Buffet’s railroad cars after he told Biden that shutting down Keystone XL would save the Ogallala Aquifer from pollution.
I hear Biden wants to increase the rail shipments of oil from Canada. No pipeline in the works, though.
60% increase? You conveniently fail to tell us from what to what, and from when. FYI folks, the 2015 rig count was nearly 3* as high, and it was ~twice as high in the teens. Mr. M’s. faux comparisons to the pandemic depths are a sign of desperation. Said it before sir, “You should’a saved up”.
Separately, yes, there are paired cost/price schedules that would get us back to drilling at replacement rates. What Scott Sheffield, and others are telling us, when they shorthand comments about having price inflexible plans, is that costs, prices (and reduced per well recoveries) are unlikely to line up properly to produce beat their economic hurdle rates.
BOB, there is a lot of stuff you apparently are unaware of. See my comment just posted above. One thing you just proved is that you do NOT know a lot about BIG OIL inner workings. Like the economically ‘insane’ use it or lose it leasing craze instigated by Audrey McClendon’s Chesapeake O&G company about 2012 that led to ridiculously high US rig counts (which induced Imelt’s disastrous GE oil field services gambit) by 2015, and then a crash in crude prices and rig counts and GE circa 2017.
You want credibility here amongst real industry players, up your game.
Immelt and GE have made some bad Betz. I see that now they’re getting out of Baker Hughes, it’s beginning to turn around. (I have a GE pension coming in a few years if they don’t mess up. I probably should have taken their buyout when offered.)
Haliburton is interesting.
‘…made some bad Betz.’
Very limiting, in fact!
Hard to believe it’s almost been 5 years since Suez bought GE Water.
All true. All irrelevant w.r.t. the current situation.
Chesapeake was indeed irresponsible, leading Aubrey to leave his mark on the bridge pillar. But shale was Ponzi’ing even with the high prices of the early teens. The only things that kept them swinging from tree to tree were:
Now:
Mr. Sheffield knows all this better than just about anyone. That’s why, even though he probably has the best acreage, and certainly gets the best Halliburton Ben Dovers, he’s going to spend just enough in 2022 to tread water. The rest of the lot are Sixth Sense dead psychiatrists. Sooner or later, they’ll notice their frosty breath….
Still with the “most improved”, “everybody gets a medal” pimping. If I could run only 60% faster than I could last year, with the bum knee I had then, I wouldn’t be bragging about it here. But then, I’m not you….
Whew straight over your head 🙂
I guess bigoilbob missed this as well,
“Another thing to keep in mind about rig counts is productivity. Back in 2017, the average Permian Basin well IP’ed at ~100 bbl/d, now it’s ~1,000 bbl/d…”
“ Back in 2017, the average Permian Basin well IP’ed at ~100 bbl/d, now it’s ~1,000 bbl/d”
Source? Not Rystad, that’s for sure.
https://www.rystadenergy.com/newsevents/news/press-releases/supermajors-drive-the-Permian-to-record-heights/
But I’ll bone throw. Newer well EURs are slightly higher because of the longer laterals, but as I already said, the dEUR/dlateral length is already dropping fast. Between the time, costs, added complexity of increased lateral length, they won’t be getting any longer. Put another way, declines are faster, and the areas under the curves from IP to shut in uneconomic are not much higher.
Also, you skate on both the overall decreasing candidate quality, and the ever increasing well to well interference, both from competitive drainage and from frac hitting. Neither the geoscientists nor us engineers have economic solutions for either.
Sorry to step on your collective buzzes folks. But I’m happy to rejoin you all for a year end review. Have your “Bbbbuttt, BRANDON…!!!” fact free excuses ready….
The reference is to IP’s, not EUR.
Top left panel, brown curve…
Let’s go build more windmills 😉
Word salad is in the house…missed you
Missed him too, Derg.
A day without BOB is a day without
sunshinedoom and gloom.The Australian press must have got a rocket yesterday for not reporting the latest UN horror story because it was blazing the UN “we’re burning in hell if we burn more carbon” latest rant as a leading story.
Australia’s green federal politician was imploring that we cannot dig up any more coal. It has to stay in the ground.
The concerning aspect of this story on US oil is that the greens (read Biden) do not even see the blatant hypocrisy in what they are saying. To them it is big oil that is always evil. Pumping up too much carbon one day and then not pumping enough carbon the next day. It is always big oil, or big gas or big coal that is at fault – not their lack of knowledge.
Or their stupid policies.
Not sure if it’s sort of like a rule, or just a theme, but with current administration nothing is ever their fault. If they can’t blame it on Big _____, they’ll just pick someone/thing else.
This is what CBS news’s article should have said (at least they would be honest):
“Gas prices are high because of Russia and the greedy evil oil company and not the fault of our gods in the democrat party. Please vote for our gods and support Joe Biden, blessed be his name. Never you mind that our gods keep publicly saying that they want high gas prices. Never you mind that our gods are openly doing everything in their power to stop domestic oil production. It is Russia and the greedy evil Big Oil. And capitalism. We know an election is coming up, so please vote for our gods in the mid-terms. There is a war going on. Now is not the time to abandon the most blessed democrat party! The party knows best. Worship them, obey them. Even if they command you do to do the exact opposite, the democrat party knows best. So worship our gods. And don’t blame gas prices on them.”
UN is gradually replacing the Catholic Church as the arbiter of all wisdom. There was a sermon from the New Pope Antonio Guterres splashed across Australia’s evening news bulletins yesterday imploring his disciples to stop burning evil carbon so we could avoid hell on Earth.
I thought it was not right that the New Pope of the Climatology faith should not be more aptly attired. I was thinking this image shows a would-be Pope more appropriately decked out:
Another in a long list of 💩 s.
There’s oil and there’s snake oil.
Without the green snake oil, we’d be in fine shape.
https://wattsupwiththat.com/2022/04/05/did-you-know-us-oil-gas-drilling-up-60-this-year/#comment-3492390
Mods: That comment has now been stuck in moderator limbo for an hour. After it is approved, please delete this message.
I just took the liberty to approve it… I’m not a Mod… But as an Editor, I can do that… though I’m not sure if I’m supposed to do it… 😉
Many thanks, Mr. Middleton.
Middleton: this is a great post.
Could you develop a similarly real-world analysis to illustrate what Trump did with energy policy to favor America?
In my opinion, he had policies to spur domestic production to a level that oil companies would be ok to sell at, yet low enough to: 1 help out businesses, generally, with affordable energy, and, 2 stay friends with Saudi Arabia, and other middle east oil competitors, as he simultaneously laid the foundation for Abraham Accord, AKA “peace in the Middle east.”
If this is generally true, a nice review would be great to read.
I sort of wrote quite a few posts along those lines from 2016-2020.
One of the problems President Trump had was the Republican congressional leadership. Paul Ryan might as well have been a DNC saboteur and, apart from judicial nominations, Mitch McConnell was more interested in getting senators who would be loyal to him elected, rather than delivering legislation to support President Trump’s policies.
The main thing that the Trump administration did, was that it obeyed the laws regarding oil & gas leasing and well permitting.
Yeah, I really misestimated Trump. I expected him to turn out to govern a lot like Hillary would, and whatever he did I expected he would go off half-cocked, issuing E.O. left and right with no research whatsoever. And instead, he was just the opposite, maybe because he (and his best people, some weren’t so good) seemed to know everything he did would get challenged, and consequently everything he did, I could eventually tell, had been carefully researched before hand, trying to figure out what way had the best chance of ultimate success.
While mis-information comes from this government that censors the truth. Build Backwards Better?
Or Build Back Better…for someone else
Except in California Tidelands, where drilling for oil is illegal.
Um… Financial responsibility is a complete mystery to this administration. After all, inflation is transitory, good, only a high-class problem, and all Putin’s fault. What they need to do now is spend more money they don’t have – just print the required new money. What could go wrong? :-/
And of course, blame the fossil fuel industry for high gas prices. How dare those corporations make a profit! Next the administration will try to nationalize them all – because that aways works so well.
I have to wonder if one David Middleton is related in some way or another to G. V. Middleton, 1978 paper on Flow Regimes in The encyclopedia of sedimentology.
Both do seem to know about geological flows!
I think I’m the only geologist in my branch of the Middleton family tree. Although I do know another David Middleton who is a Canadian geologist.
I learned about flows from plumbing… it all flows downhill!
Eventually! Sometimes water can violate that apparent truism if under sufficient pressure. Then it isn’t just the floor that gets wet — the walls and even ceiling can get a shower.
It is certainly understandable why oil and gas companies are reluctant to significantly accelerate their production.
The biggest factor obviously is that we are only two years removed from the largest catastrophic reduction in oil demand in all human history – due to COVID and the COVID-induced recession of 2020. COVID is not completely gone, with the last major wave having peaked just 3 months ago. With the uncertainties induced by the Russian attack on Ukraine, and justifiable fears that the war could escalate to involve NATO or even a world war, it is pretty clear that investors are skittish even while taking in large profits at the moment.
Then there is the current very high rate of inflation, which itself creates a whole lotta instability.
Finally, if the Russia-Ukraine war were to suddenly end … or if a recession hits due to the Fed over tightening the money supply with high interest rates … or another wave of COVID or some other infectious disease hits us again, investors do not want to invest capital today based on $110 a barrel oil should the price drop back to $50 a bbl later this year or next … which is a very real possibility. No wonder their confidence in the market is not high right now.
Investors love stability, and hate instability. And everyone knows that these are extremely unstable times. Nobody knows what’s coming, and when stability becomes a thing again.
This condition does not only affect oil and gas production, but everything else, This is reflected in the ongoing bottlenecks in worldwide supply chains of just about everything.
Most investors love stability but, the big players like Blackrock, JP Morgan, Vanguard, etc. love volatility.
If there is little movement in the market, there is less opportunity to be on the right side of a trade.
In fact, the big players make more money on the downward swings than the upward swings.
Remember, buy low and sell high. It helps if you can force something high so you can sell and force something low so you can buy.
Vanguard does not belong in that group. As the only client-owned firm (a true mutual, mutual fund structure), the leading passive (i.e., indexing), low fee investment organization, Vanguard is truly unique and has no interest in trading or volatility. In fact, Vanguard discourages trading by its owner/clients.
In hindsight, the Wuhan Flu (or whatever you want to call it) had almost no effect. The real damage was done by all the knee-jerk lockdown pronouncements that came from king-for-a-day politicians.
Yep… Hence my reference to the shamdemic.
https://www.foxnews.com/us/lockdowns-reduced-covid-19-mortality-by-2-study-finds-lockdowns-should-be-rejected-out-of-hand
But they did something David…they did something.
Is there anything about this administration and Congress that promote stability?
They are anti fossil fuel.
If the government continuously claims that you are evil; that they are going to drive you out of business: Why on earth would you increase your capital expenditures?
This will only get fixed when voters realize that the pols are not on their side.
Unfortunately, it seems that the pols will need to inflict more pain on their constituents before the sheeple wake up.
Good article, but calling the very real pandemic a “shamdemic” is very childish and belittles your authority on the main topic of your post.
Then you didn’t actually read the post.
Just remember we have to flatten the curve 😉
“Two weeks to flatten the curve”… Perhaps Fauci’s biggest shamdemic lie.
Interesting and thanks for the writeup.
The question, however, is not if oil and gas companies are increasing drilling and future production.
The question is whether they’re increasing drilling and future production at similar rates as “booms” in the past.
2 different people have written up that it is different this time:
Harris Kupperman: Will ESG create the next Lehman moment?
https://adventuresincapitalism.com/2021/09/29/will-esg-create-the-next-lehman-moment/
Zoltan Pozsar: Bretten Woods III
https://plus2.credit-suisse.com/content/dam/credit-suisse-research/SearchPDF?DocumentID=1191091&DocumentType=NR%20Publication&documentClick=true&AuthRequired=true&tagFormat=PDF
Kupperman is saying that ESG plus COVID has led to structural changes in oil and gas exploration spend, which in turn is causing this cycle to be exaggerated.
Pozsar in turn is saying that the Five Eyes/EU/Japan self sanctioning against Russia is disrupting the previous worldwide market (and market makers) for all commodities due to Russia’s outsize presence in energy, metals, food and fertilizer – which in turn creates problems which the Fed and ECB cannot solve by money printing.
Re: Kupperman – I’ve seen net articles which say that the public companies (i.e. those for whom ESG matters in earnings statements – increased capex spending at half the rate of private companies.
Re: Pozsar – we’re definitely seeing at least some bifurcation in energy between Russian energy and non-Russian energy even though Russian energy is not actually sanctioned.
Most oil companies are maintaining greater financial discipline during this up-cycle. There are several reasons for this:
That said, the slope of the FRED’s oil & gas drilling activity index looks a lot like the previous up-cycle.
While ESG has become a focus point for many, if not most, oil companies, I don’t see where it’s affecting CapEx. The “S” and the “G” are mostly cosmetic, often HR functions.
The “E” gets a bit more interesting. For most companies, it has entailed detailed reviews of GHG and other emissions, with a focus on fixing things that should have been fixed earlier.
However, a rapidly growing number of companies are diving into CCS/CCUS. This will eventually consume a lot of CapEx; however, the process of getting UIC Class VI permits approved, will take at least a couple of years. Will this divert CapEx away from traditional E&P activities? I don’t think so. From my personal experience, the financial community is eager to finance CCS projects. So, I think E&P CapEx will largely be driven by oil prices.
Now, this could all change, if a protracted period of high oil & gas prices causes investors and the financiers to sour on ESG. As Yogi Berra said…
Thanks for the detailed response!
It happened well before then as well. In my early career, working my way through college as a junior engineer in the ’60s, I worked with a couple of oil patch geologists at Lockheed Missiles and Space Corp, working in the Data Processing and Analysis group for the Agena satellite program. Their stories of being laid off during business downturns, and then their companies re-hiring cheaper recent graduates to replace them when the economy rebounded, influenced my decision not to seek employment in the oil patch when I graduated.
One can rationalize that the companies were simply taking advantage of the 4-year business cycle to get rid of ‘dead wood.’ However, at my age, having worked with a lot of people, my judgement would be that my geologist co-workers were at least as competent as most professionals I have worked with. In any event, the employment practices influenced my career path. I applaud you for surviving for over 40 years.
I have a MBA (50 years ago) and I understood what you wrote, David.
However I believe the eyes of any advisor to POTUS or VPOTUS would glaze over after the first paragraph. (I include Granholm in that group.)
Is there a way to distill what you wrote so if I were to get into a “kitchen table” discussion with friends or family I could get the point across (short of saying Joe is lying again)?
I wish I could be like Feynman…
“If you can’t explain something to a first year student, then you haven’t really understood .”
https://piggsboson.medium.com/5-powerful-study-tips-from-richard-feynman-f7a94dbb35fd
I probably would have been a nightmare for freshman, if I had gone the academic route… 😉
The myth is that the oil industry is refusing to spend money on drilling to increase production and lower prices, while pocketing huge profits.
The truth is that we are slowly increasing drilling budgets, drilling more wells and increasing production. We are just doing so in a more disciplined way than we usually did in the past. The single biggest reason we are being more disciplined is that our owners (investors, shareholders, financiers) are demanding it.
I sense that “the market” regards supply as something more than tanks and pipelines full of oil. The various phases of production (financing, leasing, drilling, pumping, shipping, refining and all the other obstacles the government involves itself in) are just chokepoints to factor into the estimate of readily recoverable petroleum resources. But, I’d be careful about headlining the fact that drilling is up 60% while prices are soaring. A very many someones can reasonably jump to their own conclusions from there.
first draft: “according to the graph, investment will decrease as prices rise!”
second draft:”according to the graph, many will invest at zero dollars!”
third draft:”according to the graph, many won’t invest at any price!”
editor: ugh fine print it
It’s time to clear the black sea for free trade and build the LNG ports on the Romanian and Bulgarian ports and defend them with potent EU/NATO Military might. it’s time to help Ukraine take back Crimea and build LNG ports there. Germany needs to finish the LNG ports they have started…quickly. The Nord Stream deal is dead for the EU. The time to aggressively frack and press US LNG into Northern, Central and Eastern Europe was in 2011-2016 but we buckled under Putin after his invasion of Crimea. The global hydrocarbon corporations were far too happy to make money via Putin and allow him to become the new Cartel head of global hydrocarbon fuel market. Gazprom had been squeezing Europe for a decade prior to Crimea. It’s time to stop the BS. This is the central problem with globalism….free trade it isn’t and everyone gets leveraged and tin horn dictators are allowed to run amok. So much for the stakeholder’s reset, it already happened. The local communities are the one’s that have to pay through the nose. Russia is a poor country with a lower per capita income than India and has only the 11th economy in the world because of it’s stakeholders, that is Russian and the oligarchs of the rest of the world. Our energy Oligarchs have let Putin rule Europe’s Energy policy and cut off our LNG ports in the black sea for almost a decade. Why…because it was vey profitable. It is also time to commercialize CNG to the hilt for local American consumption. It is time to anti-trust the globalized energy markets with the imposition of free trade. Climate change is the hoax Big energy has been using to leverage politician’s with the hope carbon tax revenue and self righteous glory… meanwhile local communities take the hit.
Those predictions must be based on models. 🙂
Excellent summary, as always. Thanks David.
They also have to use the cash to pay off a lot of debt.
On May 10, 2019, 432 Fracking crews were working. The last report issued last week had 273 crews working despite much higher oil prices. The private oil companies are drilling, but the public companies with Blackrock as a significant shareholder are not. Brian Deese comes from Blackrock and is a powerful player in the Biden administration. You add Blackrock’s manipulation and combine it with Biden’s other actions, and much higher prices were guaranteed, Ukrainian war or not. Blackrock’s holdings gain from higher prices. This is true both for the oil companies and the alternative energy plays.