A Reminder Of How The O&G Industry Has Changed and How That Will Impact Prices

Over the last week or so my Internet alerts daily bring me old articles by the company, Natural Gas Intelligence.  NGI is a good source of industry reporting.  I am sharing this one because it reminded me how much the industry has changed and how it is highly likely to impact the price of oil and natural gas.  Here's the article.

Independents Better Majors by a Long Shot in Texas

By NGI Staff Reports on June 13, 2007 at 4:00 a.m.

Published in: Daily Gas Price Index

Independent producers are playing an increasingly more important role in Texas and its energy future after drilling 96% of the oil and gas wells in 2006, according to a study conducted by the Texas Alliance of Energy Producers (TAEP).

The independents also produced 88% of the natural gas and 92% of the crude oil in Texas last year, according to the alliance. In 2005, the independents produced 86% of the gas and 90% of the oil in the state.

"Contrary to the popular public perception in Washington and across the country, Big Oil isn't very big when it comes to onshore oil and gas drilling and production in Texas," said TAEP President Alex Mills. "It is small business -- the independent -- that keeps the oil and gas industry moving forward in Texas."

Even though the number of independents has declined drastically, independents still are responsible for most of the drilling activity in Texas.

Those who were early members of GoHaynesvilleShale.com will remember that it was the major and minor independent O&G companies that drove the emerging shale plays.  Aubrey McClendon not only announced the Haynesville Shale but also the Barnett Shale, the Fayetteville Shale and the Marcellus and Lower Huron Shales in Appalachia.  This was the beginning of unconventional development and the rise of horizontal drilling and hydraulic fracture stimulation.  This was driven not by the super major O&G companies but by the independent companies.  In the Haynesville play, Encana had SWEPI (Shell Exploration and Production Inc.) as a joint venture partner but SWEPI was the lone Big  Oil company and soon sold out.

Now, the ranks of developers of unconventional basins are dominated by the super majors: Exxon, ConocoPhillips, Occidential Petroleum and Chevron.  Mergers and Acquisitions (M&A) is consolidating much of the proven acreage in the hands of a few very large companies.  This is more true in oil basins but M&A in gas basins like the Haynesville is also consolidating the number of major operators.  Chesapeake and Southwestern being the most recent example. So how does this impact, the prices of oil and natural gas?

GHS.com members and Haynesville mineral lessors have lived through a roller coaster price environment since the emergence of the play.  The same was largely true in oily basins when independents dominated.  Those independents borrowed heavily and built up huge piles of debt.  I suspect we all recall Chesapeake's bankruptcy.  The problem created by the independents was one of over supply.  Too much drilling.  Too much natural gas or oil served to crater the price.  Then a long period of depressed prices followed until supply decreased until it matched demand.  Independents had to drill to meet debt obligations and cover all the operating costs for drilling lots of wells.  They couldn't cut back enough to stem the falling commodity price.

Over time the banks, investors, stock holders and Wall Street had enough and threatened to reduce or in some cases stop providing capital unless CEOs agreed to reduce production and balance it with supply so that price swings were minimal.  Now that those independents have been largely replaced by the super major oil companies, the situation is quite different.  The super majors don't have to drill in low price periods.  They can cut back on supply to maintain a targeted price range.  They have abilities that the independents never had and can maintain prices simply by their pace of drilling operations.

As more M&A occurs, as it is projected to do in the coming years, significant price swings will be history.  Good for the oil companies, investors, stock holders, etc. and better for royalty owners but not great for consumers who were treated to cheap oil and natural gas prices every time the industry over produced.  The moral of this piece is that federal energy policy has little or nothing to do with the price we pay for oil and natural gas.  It is supply and demand that determines the price.  In other words, The Market.  I hope that the public comes to understand this because a much more aggressive federal policy on drilling for oil and gas (Drill Baby, Drill) will have zero impact on the prices consumers pay.

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