Splitting differences provides a remorselessly unscientific perspective on a question important to oil and gas producers and comes with a possibly instructive or at least amusing analog in downstream-business history.
Upstream, an industry-wide negotiation is in progress.
For many months, producers have been hailing impressive cost reductions that have lowered break-even oil and gas prices in prime areas.
They know costs will rise as activity recovers. But most producers assure investors the increases will be modest.
A different story
Oil-field service providers as a group tell a different story.
They naturally see much more scope than their customers do for future cost hikes.
Costs eventually will reflect the combined effects of negotiations between individual producers and individual service firms, of course.
Now, though, general negotiations seem to be under way at industry scale through press releases and investor presentations.
In a recent Oil & Gas Journal article, Jackson Sandeen of Wood Mackenzie Ltd.'s Houston office attached numbers to the divergent consensuses of the producing and service-providing communities.
Exploration and production companies, he said, expect cost inflation this year of 10-20%. Service companies expect 15-40% inflation, depending on the product (OGJ, June 5, 2017, p. 51).
In its base scenario, WoodMac puts the overall cost rise this year at 15%.
That's 6.25 percentage points below the midpoint of the midpoints of the producer and service-firm ranges and doubtlessly reflects analysis more sophisticated than merely splitting differences this way.
If an industry really can be construed as in negotiation with itself, though, difference-splitting demands consideration. It's essential to negotiation. Never mind that it's flimsy business.
No one should forget how the process shaped deal-making behind US biofuel mandates.
When Congress entered the 21st Century in the mood to commit comprehensive energy legislation, ethanol makers and their farm-state representatives sensed opportunity.
Grain ethanol already received a tax credit when blended into gasoline and was in demand as an octane booster and oxygenate.
To these advantages early energy bills added a requirement that fuel ethanol sales more than double to 5 billion gal/year.
At first, oil industry opposition to the mandate helped stymie the complex legislation. Then, in 2002, oil companies, ethanol producers, and other interested parties assembled a compromise that accepted an ethanol mandate in exchange for elimination of the requirement for oxygen in reformulated gasoline.
Congress didn't pass the energy bill until 2005. At times in the meantime, recommendations for the ethanol requirement reached 10 billion gal/year.
Eventually, the Senate passed a bill requiring 8 billion gal/year, the House held firm at 5 billion gal/year, and Congressed passed the Energy Policy Act of 2005 with an ethanol mandate of 7.5 billion/gal.
A triumphant Congress and president who craved a new energy law pranced in the glittering vestments of bipartisanship, unalarmed by the reinstatement of politically motivated energy choice.
Negotiations had been conducted. Differences had been split. A comprehensive law had been passed.
Those were the things that mattered.
And 2 years later, when Democrats controlled Congress, the Renewable Fuel Standard zoomed to 36 billion gal/year in 2022, of which 15 billion gal/year is "conventional biofuel," mostly ethanol.
The 2022 target won't be met. The US consumed 16.5 billion gal of biofuel last year, 14.4 billion gal of it ethanol. That fell short of the US Environmental Protection Agency's discretionary standard of 18.11 billion gal, which undershot the statutory target of 22.25 billion gal.
The problem is excessive ambition for biofuels other than grain ethanol, such those made from cellulose.
Congress set unattainable targets in 2005. So refiners must buy credits to pay for failing to do the impossible. Some differences need to be split permanently.
But lawmakers no longer are in the mood.
A random world
Alas, difference-splitting is probably no better at predicting oil-field costs than it is at producing durable law. The world's too random.
But if upstream costs do turn out to have risen by 21-22% this year, remember: You read it here first.
