Is the current oil market mayhem beneficial for shale

Wow, the last couple of weeks have been on the very wild side for any oil and gas person. Frankly, I know some old-timers in O&G and even they say that none of them has seen anything similar in about half a century.

So, this is the end-time. But is it?

Sure, when looking at oil prices and the violent gyrations of some futures contracts, and when one assumes that this is all there is, this is bad. Very bad.

But let’s look at it with some hindsight.

I lived through the internet bubble in 2000. I discovered my knack for the law pretty late in life. So I was in my late 20ies when I started law school. I lived in Paris and the city of light costs a pretty penny just to eke out a living. At my age, I could not hope for support by anyone so I had to work full time while I went to law school. 

One of the many jobs I held led me into a Paris based internet startup. I started out by translating English texts into my native German. It was a typical startup of the time. Lots of easy cash and a business model that did not aim at profits. It rather targeted growth at a breakneck pace to attain a dominant position in the market segment we served.

It was one of the better run startups and also decently financed. But when the internet bubble popped wide open, the company I worked for also went down in agony. Like so many others. 

At the time, many thought that this was it. The end of internet businesses. No more internet trade, shopping, ticketing, all the fun stuff. Never mind that Amazon itself was a little startup and I knew the name only because I was in the industry then. Bezos was still far away from being the superstar he is today.

Look at internet-based business today. High street businesses are dying at a rapid clip as the internet eats their breakfast, lunch, and dinner. Its bigger than anybody in 2000 could have envisaged.

Before the crash in 2000, many businesses were nothing but glorified Powerpoint presentations. There were plenty of ideas, concepts, and projections. And many of the businesses failed to translate this enthusiasm into something that would survive.  They needed to become solid, no-bullcrap businesses that serve the world with laser-focused reliability.

In a sense, the internet business world needed the 2000 crash as horrible as it was on a personal level. I was happy to have a stable job that paid well and bang, it was all gone and I had to join the rat race again. That was personally frustrating but on the industry level, the crash also culled an awful lot of deadwood from the industry. 

Before the crash, it was the Wild West. After the crash, it was the desert. Today, its wonderland. Just imagine the COVID crisis without the internet of today. Horrible – wouldn’t it be?

Right after the COVID crisis had hit us, I started to call my siblings to see how they were doing. Two of my brothers have their own businesses. I worried that they might be dragged down by the crisis. But no such thing.

When I talked to one of them he told me that he is overflowing with orders. The reason is that the COVID crisis culls many of his competitors. He told me that there are many that offer shoddy products and services and undercut him on price. Many of them don’t make it through the crisis.

Sure, they will come back once the market is better. But in the meantime, many customers will have switched so this is a good thing for my brother. His company is well-financed and also otherwise very healthy.

And so it happens in shale. 

A couple of years back I was asked by an interested investor to run Due Diligence on a shale oil upstream project he was looking at. After running Due Diligence I firmly advised against the investment. The whole project was totally unbaked. A Wild-West-style project where facts and expertise and careful development had been replaced with sky-high projections.

The investor followed my advice and sure enough, less than half a year after those events, market developments proved me right. Thats was years before 2020. 

Shale is a buzzword. Under this moniker, lots and lots of different kinds of adventurers flock and try to grab a piece of the pie. Of course, a booming business such as shale also attracts a long of shady creatures, some of them have a great game. Some of them are only awful.

I know that kind of actors from the conventional oil and gas business. Big money is like a honeypot attracting all kinds of critters. Those you like as well as those you would rather stay away from.

No wonder that a huge number of different projects and other developments mushroomed all over the shale patch. Many shale players were more dead than alive and just kept moving by using massive amounts of financial and operational trickery.

They make life hard for the solid players in shale. Yes, those exist as well. 

The world likes simple things and thats why all those doing shale are lumped together. At least in the imagination of most non-shale-professionals. And its the crazy and very bad stories that stick in our collective minds. 

Decent operators that deliver on their promises and also solid results are boring. The reckless cowboys are way more exciting to look at.

None of them has any form of longterm strategy. None of them care about their drilling and well management or reserve management. They just want to reduce costs beyond what’s sensible and damage wells, reserves, and the industry as a whole.

They are Casino players that are out for the quick win, the big splash, the one day that will make them rich. 

No industry works like that but all big industries know those casino players.

Big market breakdowns such as the one right now clean out the stables and make sure that the bad players go down the drain. Many of them implode and will go away. Thats an ugly and painful process but its highly necessary for the good of the industry as a whole.

The cowboys will come back once the market recovers but they will have been cut back to size. Many of them will have to start anew and many of them will not make it. The industry turns a page and will one day look at this as the internet businesses look at the dotcom bubble in 2000 today. A historical oddity in a thriving business. 

Shale 3.0 just receives the fertilizer boost they need so urgently.

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