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  2. Now vs Previous

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- So let's look at now versus previous corrections. Ok, in 18 I'm not that old. But I'm wise. No, I'm kidding. Not really. In 1985, in the late 1980's, high interest rates, artificial pricing for deep gas, extreme overproduction, and there were a few technology paradigm shifts, so we had a situation that was very structural, and there's not really an ability to be very flexible because there was not really the same amount of technological flexibility that we can employ now. I think the silver lining here is that we can use technology in ways that we haven't really, really done yet to really do some sweet spot production. In 1998, I don't know if you remember, I was in Azerbaijan during much of that time, and we were working with Azeri oil companies. I was with the University of Oklahoma, and we were kind of matchmaking between experts at the University of Oklahoma, and talking about, not just planning and avoiding the dutch disease, or over dependence on primary products and commodities, but also optimizing and planning production, etc., in Azerbaijan, which had become independent from Russia, and it was very interesting to be there at the time. We also went to St. Petersburg at the time of the collapse of the ruble, and that had a lot of impact on the price of oil. If you remember, there was a lot of overproduction and there was also a collapse of demand. There was a little bit of a downturn, even though we were in the height of the dot com boom, it was starting to already turn down a bit. That was something that lasted not too long. I don't know if you remember those days, the price dropped. The interesting thing between that time and now is the industry had already gone through some shrinkage, or starvation for already, at least, ten years, the industry was small, so the impact wasn't really widespread in the same way that it is now. Banks weren't as affected, Wall Street was not as affected. the scope and size of the plays is not really the same as when you get into today's world. Ok, 2008, correction in price was really due to the global economic collapse and demand collapse. We saw a drop from 140 dollars a barrel to, at one point, around 35. The 35 didn't last too long, and it wasn't too long before it went up to about 60. Again, the difference there is that, although the oil industry had been expanding because things were starting to happen with Mitchell and others, and then Chesapeake, and others were starting to do the resource plays and do extreme conceptual massive, massive leasing, and lots of drilling to have everything held by production. It hadn't really kicked in in the way that it did later. And then also, we saw the example of there was a lot of overproduction in a lot of the middle eastern countries to fund underground military activities, A.K.A., terrorism. So, we saw a lot of that as well. And then, because of that, then, from 2008 to about 2013, we had a lot of countries that just were not able to produce because of the result of funding terrorism or issues. So Libya, unable to produce because of violence. Obviously many countries in the middle east just weren't able to produce. They were curtailed and limited production due to instability in their countries. So, it's interesting now, now, everybody's stable. Is that good? Well, it won't last because well anyway. So now, we're seeing something a little bit different. We see demand slow down, and we see that due to many different factors. We see it due to whatever the reality is in China, and nobody knows, really, but we see a demand slow down. We do see that we do know that China's demand has slowed down because many of the efforts to bolster the growth had to do with the central economy, encouraging growth by means of infrastructure production. I don't know how many of you have been to China. Recently, I've had the chance to be there, like, three times in the last 18 months and it's been quite interesting Beijing, but also Chengdu in western China where there's a lot of oil and gas production. It's just amazing infrastructure, amazing infrastructure. Everything is new, but a lot of things are, frankly, they're kind of abandoned. But, the local governments were incentivized by the central government to make sure that they had eight, nine percent growth. How did they do that? They did that by infusing what we would call fiscal policy, by funding huge projects. So, that created a lot of jobs, and consequently, a lot of demand for oil and gas. And since that has slowed down, then we see much less demand. We also see overproduction to fund military activities. And so, we see a lot of that. A lot of that's not apparent on the surface, so we see a lot of it percolating up in unpleasant ways. Also, technological breakthroughs. Obviously, horizontal drilling and multi-stage and 30 stages, padded drilling, incredible production, at least for 18 months. Unfortunately, we see incredible decline curves as well. And also, we see indiscriminate... We've seen in the last five years what amounts to indiscriminate drilling. Indiscriminate drilling just to make sure that everything's held by production. The idea that, "Ok, well, we can go back in "and fine-tune this later, "but let's just get this "drilled so we at least can "hold our acreage "so that we don't have to write down a reserves "because of SEC requirements "of either expiring leases, or "because something is not proven reserves." So, we have the SEC actually contributing to the sort of indiscriminate drilling that led to extreme production at first. And then, also, the extreme need for a company, such as Continental, to continue to drill just to have that cashflow, and the average daily production. And, really, really masking the fact that, once you stop drilling, things will, and have, dropped. 200 00:07:08,366 --> 00:07:11,366 Ok, so we have consequences of what I'd like to call "Wall Street plays". The large IPOs going to Wall Street raising a lot of money based on a map that we have a play the size of Rhode Island, maybe even Connecticut. And then, doing whatever you have to to get that acreage, and also again, the drilling. The consequences of that, the first consequences are inflated stock, because it goes up whenever you first do that, and the second consequence is enormous debt. Enormous debt that is like, "Ok, let's just..." And you can do that for a while, but eventually, eventually there's a correction. What's happened is that everybody's using the same strategy, everything's collapsed at the same time. Massive debt, we also have low interest rates, which contrast with the 1980s, which means that there was a lot more money available for investing in the oil industry because of not having like 7% or 5% CVs. You have Wall Street, you could SAP, but everybody's like, "Ok, when's the bear market "going to happen?" Correction. In the meantime, "Hey, "let's get into oil and gas." And also, refining and storage bottlenecks. Ok, so, initial results of all this collapse all at the same time, perfect storm, no drilling. So, as you all know, drilling has just basically hit the wall, except perhaps little places, like Permian Basin, and whatever. A lot of people are drilling, but they're not completing as well, so that's another phenomenon that has happened. People are drilling horizontal wells, and they're waiting to complete. One, to kind of squeeze the service companies and negotiate better prices, but, also, just to basically conserve cash. And then, there's the time of wait and see. Getting through the pinch points, looking for opportunities, developing a strategic approach.