Do Something

One thing is certain when it comes to trying to understand economic maters – the more you know, the more likely you are to accurately predict and react to trends. Automated trading and panicked reactions to events have aggravated already serious situations, and we’ve seen unimaginable amounts of value wiped out in a single day – and at times, for several days running.

It’s been painful to watch the extreme fluctuations of the markets swing of late. Whether “crisis”, “crack” or “crunch”, the ultimate result is that world business has begun experience to the effects of a quickly cooling economy. And for many companies, a cooler economy means near-zero or negative growth. No CEO wants to stand before stockholders to explain poor quarterly results.

Typically, fear of negative quarterly results leads to plant shut-downs and lay-offs, which in turn feeds additional fears. This tactic can work to raise the coming quarter’s results, and for some industries it’s an easy matter to pick up where they left off when the economy begins to turn around.

But industries that require a long-term perspective – with planning and investment that may not show a result for decades – find this strategy more difficult to pull off. An oil company CEO who stands before the stockholders may speak of the most recent quarter, but much of what’s being said is the result of strategies and actions that took place perhaps a decade before the CEO stepped into the office.

This year has been a record year on the Norwegian Continental Shelf, with more exploratory drilling than ever before. This world-wide trend – fuelled by increasing oil prices up through mid year – has been marked by a boom for drilling rig operators. Part of this boom has been due to the “rig crunch” – that there hasn’t been enough rig capacity to meet exploration and development demand. Rig owners who were ahead of the trend by christening new rigs have done very well, and many newer rigs have already more than paid for themselves.

But the recent rig supply shortfall could seem very minor if the industry pulls back from investments and projects that may not be economically popular in the current short-term.

In the World Energy Outlook 2008, the IEA warns that our current economic situation offers one very dangerous pitfall for the oil and gas industry – that near-term inaction can lead to an “oil crunch” once the economy begins to pull itself out of its slump. Current low oil prices mean that some companies may put projects on hold – projects that would otherwise help cover shortfalls that will result from declining production and increasing demand.

By 2015 – just six years from now – the IEA asserts that increased demand and decline in existing production will require that approximately 30 million barrels of oil per day will needed to have come on-line from fields that are not producing today. This oil may lie in fields that are now undergoing exploration or in fields that are now in the planning stage.

No matter where this “new” oil is located, it won’t be “easy oil”. It will most likely be more expensive to produce, requiring the latest technological know-how. It may require technologies that have yet to leave the drawing board. It may be the result of ongoing research into increased recovery. Fence-sitting now won’t make it happen.

Doing less at this moment may make things look a little better on the next quarter’s spreadsheet, but it will do little to improve our long-term perspective. The industry must pace itself. For companies, a lower oil price makes going off-line to perform major maintenance tasks less damaging to the income flow. For governments need to continue to support basic research and development of applied technologies that support energy production – both for alternative sources and for the oil and gas industry. What ever the answer, “wait and see” isn’t it.