Hockey Stick Thinking

In the late 70’s, the oil industry used an optimistic oil price forecast when calculating the economics of a new oil development. They assumed the price of oil, then a little over $10 per barrel, would show a slight increase for several years, but after that, the price would increase dramatically, maybe 4 or 5 times. This pricing scenario was to become known as “The Hockey Stick” because the shape of the curve over time looked like that particular sporting implement. The hockey stick price projection, which everyone thought was the absolute truth, made even dog projects look good.

Of course, we now know that the price of oil did not increase dramatically in the 80’s. There was a period in the early 80’s where the price seemed to follow the prediction (there was that little problem with Iran), but by the mid 80’s, there was an oil glut and the price had fallen. The result was that oil companies became less and less profitable as their predictions of riches failed to come true. This resulted in a severe contraction of the industry. Lay offs and “early retirement packages” followed as companies downsized. Small service companies went out of business. Young people saw their parents out of work and did not follow them into the oil industry. Enrollments in reservoir engineering and geology curriculums dwindled to almost nothing at some universities.

Oil companies adjusted and revised their oil price predictions to be more of a flat line. In other words, they no longer assumed that the price of oil was predestined to increase every year. This made their economic evaluations much more conservative. The result was that only a worthy few projects made it through to the annual budget. But these projects made money and lived up to their economic predictions. Oil company profits increased. And it was a good thing because the industry was beginning to venture out into deeper water and the technology for that deeper water was not going to be cheap. The development costs were going to be much higher and mistakes made during project economic evaluation could have disastrous effects. Conservatism was the best way to proceed unless you wanted to break the company.

Even with today’s oil price over $100 per barrel, I doubt that you can find an oil company executive that would use those figures in his economic evaluation. He knows from past history that the price will not hold at those levels.

It looks as if the housing and mortgage industry got caught in their own version of Hockey Stick thinking. They assumed that housing would always increase in price. No one, it seems, took a step back and considered “What if?” Had they done so, or had they taken a lesson from the oil industry, we might not be in this situation today.

Ike Damage Report

The MMS reports the following:

Minerals Management Service (MMS) reports that as of September 17, 2008, 49 of the 3,800 offshore oil and gas production platforms in the Gulf of Mexico have been destroyed by Hurricane Ike. Currently, MMS has no information on whether any of the destroyed platforms will be rebuilt by any operator. Oil and gas operators are also reporting damage to offshore infrastructure other than destruction. These reports are being analyzed by MMS and damage statistics will be released next week.

Initial estimates are that the 49 destroyed production platforms produced a total of 13,000 barrels of oil per day and 84 million cubic feet of gas per day.

Additional damage reported includes three jack-up and one platform drilling rigs destroyed and one jack-up drilling rig with extensive damage.

On-going reports indicate that there are five gas transmission pipeline systems with damage. The full extent of damage will not be available until operators are able to test the systems. MMS is analyzing the impact that this may have on resuming production.

Production Statistics are here

http://www.mms.gov/ooc/press/2008/press0922.htm

The Old Ways

Like most people of my generation, my parents grew up during the Great Depression. Grandpa was a farmer up in Maine and NH until Grandma put her foot down. I have a picture of my father and his siblings on the old farm. They were dressed in burlap sack cloth - literally. Playtime for them was jumping on cow flops in the field. (If you don't know what those are, you've got to get more fresh air) Dad joined the Navy (before the war) and some of the money he sent home built an indoor flush toilet in my grandparents house. It was tucked away under the stairway. When I got older, I had to duck my head to take a pee. When we would visit my cousins in Maine for Thanksgiving, we had to walk out back to the privy. It was cold in Maine in November and you didn't linger over the morning paper. To say they hard a hard childhood followed by war is an understatement.

Dad never had a credit card. He paid cash for everything. If you wanted something, you saved your money until you had the purchase price. Or you developed some skills and built it yourself. He built three houses during his lifetime. Credit was something you just didn't do. He finally got a credit card in his old age when he found he needed one to get a hotel room or a rental car. The balance was always paid off immediately. He was a Yankee's Yankee. He had no patience for idiots. The best reliance was self-reliance. I suspect his experience during the Depression was the cause of this philosophy.

I wonder what he would think about the latest economic debacle. I can't imagine he'd be too pleased about having to bail out a bunch of people who mortgaged themselves to the hilt or granting a pass to the fat cats who got rich off the situation.

Comprehensive American Energy Security and Taxpayer Protection Act

It was overshadowed by the recent problems on Wall Street, but your congress critters passed the Comprehensive American Energy Security and Taxpayer Protection Act last week. It’s now on its way to the Senate. The Dims want you to believe that it provides a basis for an energy policy. Lets take a look.....

It purports to open more offshore areas to drilling. The gotcha is that these areas must be 100 miles or more offshore. There is still no drilling allowed within 50 miles of the shore and permission from the coastal State is required to drill between 50 and 100 miles offshore. And the Eastern Gulf of Mexico, which has the best potential, is still entirely off limits (thank you, Florida). The areas opened up will be in deep water and will be expensive to develop. They won’t be attractive to oil companies. And the states have no incentive to allow drilling off their coast because they will not get a share of any oil revenues.

It eliminates a royalty relief provision that was enacted several years ago to provide incentive to develop deep water and drilling for deep gas. It means the government is reneging on an agreement they made with industry several years ago. If there is one thing oil companies do not like, it’s a country that changes their agreements on a whim. It puts the USA on the same level as a third world dictatorship. Eliminating royalty relief will stifle high-risk, high cost developments in the Gulf of Mexico.

It mandates that 15% of electricity must be generated by renewable means by 2020. This sounds like a good idea, but who is going to pay if the electricity you get from wind farms costs more. Ummmmm, you!

It requires selling oil from the Strategic Petroleum Reserve to reduce the price of gasoline. Those of us who sat in gas lines in the 70’s remember that the SPR was built to provide a reserve of oil that could be used in times of national emergency (say, a war, for example) when certain foreign producers may not want to sell oil to us. It was not to be used to manipulate the price at the pump. The word “Strategic” should be a clue.

Oil companies have a choice where they explore for oil. They can easily shift their money to overseas opportunities where they will be welcomed. If you like the idea of more jobs going overseas, increasing our dependence on foreign oil and higher cost electricity, then urge your Senator to vote for this bill. If you want energy independence from foreign imports, tell them to vote against this bill.

Ike Damage Report

Early overflights after Ike indicate that 28 platforms in the GOM have been totally destroyed. (That's 28 out of 3,800,folks). These platforms account for about 11,000 BOPD and 82 MMSCFD of natural gas.

More information will be forthcoming as platform inspections take place.

Oil

Hurricane Ike shuts in production in the Gulf of Mexico and refineries across Texas and Louisiana. Nigerian rebels attack Shell facilities. Major business failures on Wall Street.

The price of oil is $93.

Go figure.

GOM Production Statistics

Ike evacuation is underway and the GOM is shutting in.

http://www.mms.gov/ooc/press/2008/press0911.htm