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Guide to surviving the boom: Resist the eternal mistake

An eternal mistake in the oil and gas business is believing some current trend will last forever. The ruinous mistake is betting money on it.

Most people know an oil and gas boom is under way in North America. Fewer probably know part of it already has fizzled.

The boom, of course, relates to development of unconventional resources. Natural gas is the fizzling part. Gas deliverability has overshot demand, depressing price. Gas drilling has slumped.

But the boom continues for oil and gas liquids in shales and other tight reservoirs. Oil activity is so hot that someone not looking closely at shifts behind robust drilling numbers might not realize how chilly gas work has become.

None of this will last forever. Cheap gas will expand existing markets and open new ones and become less cheap as demand rises. Oil drilling will subside as competition for services, supplies, and people makes costs intolerable. If the price of crude suddenly drops, the reversal will be painfully swift.

Anyone smirking at the suggestion of a crude-price slump hasn’t worked in the oil business long enough to respect its mean streak.

Marc Maddox, president of the Society of Independent Professional Earth Scientists, writes about boom-bust leasing gyrations in the current issue of his group’s quarterly newsletter.

In booming areas, more acreage is being leased than can be processed during primary lease terms, writes Maddox, of Midland. He adds, “As the speculators run to the next play the market distortions tend to readjust.”

In the first quarter of 2010, leases in an area where he was working sold for more than $700/acre. In a sale of state leases in the same area last November, nearby leases sold for $12/acre.

“The challenge as an independent,” Maddox writes, “is to buy $700 acreage for $12 rather than get stuck with a bunch of $12 acreage that you paid $700 for.”

Good advice. But the SIPES president adds, “That’s not so easy to do sometimes.”

(Online Mar. 30, 2012; author’s e-mail: bobt@ogjonline.com)



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