Bob’s Blog – Equilibrium

A few days ago I was driving, for the first time in over a decade, through lower Manhattan. It was typically crowded with cars. What amazed me was the complex fluidity with which drivers efficiently reacted to the chaotic environment. It felt organic.

About a year ago I predicted a “decline curve event”, where the total production output would fall off due to the reduction in new development just as the usage would increase as the economy came back on track. Prices would increase, so the smart move would be to develop now, by now I mean August 2020; crews, equipment and supplies were readily and cheaply available.

About 2 years ago Jay Young of King Operating suggested in a podcast that American oil operated better at a stable $55/bbl than oscillating between $75 and $40 (IIRC) in part because it keeps the dreamers from messing with the market for rights, crews, equipment, and supplies.

The dance of players, development, production, consumption, finance, and policies is a beautiful, complex, dynamic puzzle. And unfortunately, nowhere near as sensible as Mr. Young suggested would be most effective. The macro-economic result of increasing demand and decreasing supply worked out pretty much as I and others predicted, and we got to the range of $75/bbl, some in the industry predict double digit quarters of $100/bbl oil. Now we have $3/gal at the pump, a request to increase OPEC production, another clamp down predicted, Nord Stream 2 back on track, increased instability in the middle east, and higher inflation than we’ve seen in years.

Mr. Young was exactly accurate that the most effective business environment involves stable prices, and it doesn’t look like that’s not on the menu for a while. So, what to do? There are a few constants.

The money guys will continue to loan on production rather than proven reserves. They will continue to prefer proven, low cost, cost controlled operators developing in proven formations. Unless the lockdown is more extreme and widespread than last time, consumption should steadily grow. Domestic production will improve from the nadir, but it’ll be hard to replace the wells coming off first flush that were developed when monies were flowing more freely. OPEC with an open tap and a US chit to produce enough to keep consumer under a rapid boil should keep the lid on supply inadequacies, but the chaotic equilibrium presented makes it all the more important to know what you know, can react quickly in this dynamic environment, and be prepared to execute quickly and accurately.

At TexhomaLand (.com) we work with our clients using our extended suite of landman services to acquire rights, develop and optimize business processes and take advantage of the wealth of information at your disposal, so in busts you don’t spend monies unwisely and in booms you are the best choice for new investment as you react quickly to new opportunity.

Our landman services can include an amazing GIS integrated solution, which is both highly customizable and incredibly well priced. Call me, Bob Rahm, at 432-254-3329, or email me at bobrahm@texhomalp.com. I hope we talk soon.

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