Understanding The State of Today's U.S. Upstream Oil & Gas

First thing first: my industry (the oil and gas industry, of which I have been a part for nearly 15 years) is filled with impressive individuals who dedicate their time, energy, effort, grit, and expertise toward finding, producing, and refining a critical raw product that drives the World’s economy. We are a diverse group that is talented and hardworking and, for the most part, has good intentions -- there are bad apples in any industry.

That said, we (those within the industry, especially those in the onshore US market) must be honest with ourselves and recognize that we are in the penalty box, struggling with a severe contraction in our industry because (i) we sold a bag of goods (shale plays) that was not what we represented, (ii) we let greed get the better of us, and (iii) we refuse to accept that our industry is not what it once was – and never will be again.

The truth is: In the past decade+, we destroyed tens of BILLIONS of dollars of value by pushing a group-think shale development fallacy that was pawned as a profitable wave of the future. Savvy professionals screamed about the lack of financial viability of most shale developments at commodity prices less than $75/$5 over a decade ago, and instead of coming clean about the economics of our shale projects and plays, we dismissed those individuals as misinformed dinosaurs or misguided tree-huggers and told all who would listen to bet on the future of us. We raucously solicited big bets on our ability to get more efficient and consistent. We placed our own bets on a future of technological advancements, a roaring economy, and/or a failure of green energy to keep our shortcomings hidden. We bet that we could make money (and improvements) before the light of day revealed the sad fact that the majority of our plays were marginal or uneconomic at any reasonable commodity price-level. Yet here we are – a decade+ later – and it turns out those dinosaurs and tree-huggers were mostly -- not completely -- right. We were/are not sustainable in the purest sense, but it turns out we are not sustainable in the financial sense either. Especially today, most of us are not a good investment.

Bottom line: Much like the ‘clean’ energy that we deride for being heavily subsidized, we have been the beneficiary of enormous de facto (and actual) subsidies for the last decade. How you ask?  For years we were enabled to fund operations and/or companies that were severely unprofitable and unsustainable. In addition, we benefited from waivers for near-record levels of reported venting/flaring (not to mention the unreported volumes); we benefited from several tax exemptions or credits for “tight” developments, “enhanced oil” efforts, “marginal” developments, “heavy oil” developments, and many other activities. All of this is on top of the preferential tax treatment for intangible drilling costs. So, let’s stop with the “clean energy can’t compete without subsidies” arguments; the reality is we can’t compete on an un-subsidized basis either.  The primary and most important difference between us and the “greenies” is they are on their upswing, and we are on our downswing. This is not being critical; this is fact. That is not to say our industry is going away anytime soon (it isn’t), but we are going the way of the coal mines/miners. Soon, many, many more will be looking for jobs, lamenting about the heyday, and begging for some policy – any policy – to get us back to the way things were. It is time we realize our industry is drastically shrinking, likely, forever. 

So what now: Check back tomorrow for three things we can/should do in response to our new normal.