July 6, 2010
Somewhere over the Wind Farm
Somewhere over the wind farm, way up high, there's a land full of oil, so why did the industry die?
The oil patch has always had its ups and downs, but it has always provided well-paying jobs to a wide array of employees. From divers to doodelbuggers, technicians to toolpushers, geoscientists to general counsel, cooks to...you get the picture. While the oil patch has always been a scapegoat for greed, high gas prices, and overall inflation, it is now under threat of extinction. Environmental fascists and an ideological government, with help from an uninformed public, using overblown threats of planetary disaster, are the predatory warriors.
Increased government regulation; removal of tax breaks, especially those enjoyed by other industries; restrictions on offshore and onshore drillable acreage; and windfall profits taxes will make it impossible for many private-sector exploration companies to function. Many would argue that the push for cleaner energy will, as Obama put it, "necessarily cause energy prices to spike," resulting in favorable commodity prices. However, the war on fossil fuels will negate the benefit of these higher prices.
Many private-sector firms typically analyze the profit-to-investment ratios (P/I) prior to drilling exploration prospects. This is calculated by dividing the mean expected value (minus taxes and operating expenses) by the real and estimated investment costs (land and leasing, geological and geophysical, drilling, and completion expenses). Mean expected value is the probability of success (POS), or risk, multiplied by the mean reserves at a certain commodity price. Both POS and mean reserves are estimated by geologists, geophysicists, and engineers and are derived by interpreting many attributes and elements of an exploration prospect. A POS can range from 10% for a deep wildcat to 90% for a simple development or infill well. Often these estimates of POS and reserves can be subjective and based on experience. The mean expected value is therefore a risked estimate.
Anything that increases the investment (I) expenses, like increased drilling or completion regulations, higher lease costs, etc., reduces the P/I. Increased operating regulations and taxes, and post-BP spill, the potential for exorbitant liability expenses, directly reduces profits, further decreasing P/I. What this means is that companies will explore and test only prospects with huge mean reserves. These are the prospects in the deep-water Gulf of Mexico, and despite the POS of only 20%-25%, they are still economic. Unfortunately, only the large multinational firms like Exxon, Chevron, Shell, and other foreign-owned companies will be able to absorb the increased liabilities and risk necessary to drill these prospects. These elephants will thus be off-limits for small- and medium-sized companies, even though several have been successful.
Another result of higher costs and regulations will be that the smaller, conventional targets, onshore and on the Gulf of Mexico shelf, become uneconomic and therefore stay in the ground. This is when many small- to medium-size companies either merge or go out of business. Each of these options creates more unemployment and less energy output. As energy prices continue to soar and Americans finally realize that the conveniences enjoyed over the past several generations are rapidly diminishing, the clamoring demand for more energy will force the government to act. And continuing down the socialistic path, they will act, resulting in the creation of Big Government Oil Co. (BGOC).
For petroleum geophysicists like me, BGOC will be a blessing. No longer will we have to worry about the economics of exploration targets. One word never mentioned on a government agency mission statement: "profit." If it glows (anomalous event), drill it! Too small, drill it! Too risky, drill it! Decisions are easy when someone else is paying the tab. Especially when it's the American taxpayer!
One must wonder if this scenario hasn't already been planned, especially considering the awkward comments of Congresswoman Maxine Waters, who in 2008 told energy executives that "the government will take over your companies." Who would be in charge of BGOC? Perhaps it will be Nancy the Wicked Witch of the West, Harry the Wizard of Nothing, or Barack the Scarecrow. Whoever it is, this dream will certainly not win an academy award.