An Optimist's Look Back and Ahead

January 3, 2020

After a few days to relax, read, ski and other holiday activities I started to reflect on the challenging times the oil and gas industry has faced over the past few years.  Lots of colleagues have gone several years without remunerative work in the field they love.  Those lucky enough to have jobs are finding themselves stretched thin.  And glad to be so if that is what it takes to stay employed.  Here are some of my thoughts.  As the saying goes, they are worth what you pay for them.

 

What does the future hold?  I have no idea.  And anyone who says they know to any degree of confidence is like the person who says they understand quantum mechanics.  But you can invert Uniformitarianism and recognize that the past is the key to the future.  Commodity based industries see plenty or cycles.  I have seen several downturns throughout my career.  Remember the "Gas Bubble?"  "If only we could get the Alliance Pipeline built."  "If only WTI would stabilize at $18/bbl."    The early '80s sucked.  As did the early 90s.  Then the second half of the 2010s said "hold my beer."

 

But the industry always came back.  And it will again.  There will still be a need for oil and gas, but I doubt it will resemble the industry from the last boom cycle.  Each downturn is a chance for an overheated system to cool down, cleanse itself and retool for the new needs of the economy and society it serves.  We don't chase Devonian Reefs anymore but we sure do love Woodbend source rocks.  Investors aren't willing to fund growth stories as much as they are interested in the return of free cash flow.  Environmental, Social and Governance (ESG) investor concerns are real and going to grow.

 

Cycles usually start with companies that are able to successfully apply innovative thinking to grow while returning money to their shareholders.  The mantra of shallow gas companies in the 1990's was $0.50/mcf.  If they could achieve that FInding and Development cost goal, they could continue to grow and have happy investors.  That formula worked until they ran out of resource proximal to pipelines.  The last cycle was started by innovators who figured out to make very tight rocks produce oil and gas through multi-stage hydraulic fracturing of horizontal wells.  That methodology worked until their inability to make a return on investment turned the banks sour.

 

The next cycle will also start through all manner of innovative thinking.  I touched on one aspect of this type of thinking in a three part series.  What else might kick start things?  As I said earlier, no one really knows.  But we are going to need to find a way to consistently make money from Unconventional Plays, and I think the future lies in geomechanics (I can say this because of my total lack of credentials in the field).

 

The pace of advancement in fracturing methodologies has slowed and we have, for the most part, exploited the sweet spots in Unconventional Plays.  These plays did not make money largely because the costs were so high.  Companies are realizing that a lot of the money spent on fracturing doesn't provide any benefit.  But we will still need fractures to produce from these rocks. Only we have to find and exploit them without multi-million dollar frac jobs.

 

And that is why geomechanics might be the seed that jumpstarts the next cycle.  And not the Easy Button Geomechanics, but real advancements that people haven't even fully conceptualized yet.  I wouldn't be surprised if even the geomechanicists haven't completely nailed down how they can lead the way. [Editor's (Amy's) note: Yep, it's true.]

 

On another ESG front, the Canadian industry is characterized by its ingenuity and resourcefulness.  If the challenge facing our industry is low-carbon energy, I expect we will start to see all sorts of innovation on that front too.  We are at our best when we take on challenges and leap over hurdles rather than gripe about changes.  This is what we have always done and this is what we will continue to do.

 

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