THESE VITAL SPEECHES

20
CICERO SPEECHWRITING AWARDS
So far, they’ve shed cost and workers,
slashed investment, and, when
necessary, liquidated assets to preserve
cash flow and profitability while regaining
control over debt. Some have gone
bankrupt. Others will follow.
Maybe that’s what OPEC hoped
to achieve. Maybe OPEC wanted to
chase competitors out of business,
especially producers active in the highcost
North Sea, deepwater frontiers, oil
sands of Canada, and tight-oil plays of
Canada and the United States.
In fact, explanations need to be no
more pointed than the one offered
many times by Saudi Oil Minister Ali
al-Naimi.
If OPEC members cut production
and the crude price rises as a consequence,
Al-Naimi says, some other
producer will just raise production,
elevate supply, and lower the price yet
again. OPEC then will have sacrificed
its low-cost market share to higher-cost
competition and have nothing, in the
way of a strengthened crude price, to
show for it.
That dynamic always has applied.
Before now, though, the cycle stretched
out over years. Producers prompted
into action by a crude price jump had
to find oil and gas—never a certain bet.
Or, more recently, they had to excavate
an oil-sands mine, steam a reservoir in
a thermal bitumen project, or develop
a deepwater field on the fringe of commerciality.
Shale and other tight-oil plays radically
compress the timing. In those geologic
environments, producers know
where the hydrocarbons are. Once
they’ve optimized lateral placement
and completion parameters, they can
bring new production on stream in the
time it takes to drill and fracture wells.
This short-cycle supply—of which
quite much awaits development—is
new to the oil market. And it’s supremely
important. It vacates one of
those conditions essential to success
of OPEC supply management that I
mentioned a minute ago: production
by non-OPEC suppliers at near-term
capacity rates.
Non-OPEC production capacity
isn’t fixed like it used to be. By their nature,
tight-oil resources give the market
new, upside supply elasticity, control
over which is unmanageably diffuse.
OPEC leaders—the savvy ones,
anyway—understand the ramifications.
I don’t believe this is the only reason
they—led, as always, by Saudi Arabia—abandoned
supply management.
Undeniably, though, the new ability
to bring incremental, non-OPEC oil
quickly to market at high rates makes
coordinated supply management by
OPEC self-defeating.
What, then, will align supply with
demand, prevent ruinous surplus, and
enforce order in the oil market?
I can confidently predict the Texas
Railroad Commission won’t reinstate
prorationing. And Washington, DC?
Of course not.
Can you imagine a politician of
either party calling for supply restraint
in service to the elevation of oil prices?
For most politicians, being blamed
for four-dollar gasoline is worse than
getting caught with coal slag in their
carbon footprint.
Producers themselves can’t restrain
supply collectively. Price collusion is
illegal in this country.
Unless a more-formal mechanism
not now in view materializes, supplydemand
balance will have to reflect the
individual decisions of all the world’s
producers of crude oil—and only those
decisions.
So those decisions better be good.
In the new world of oil and gas supply
subject to rapid expansion from numerous,
uncoordinated sources, every
producer faces a new risk. It’s the risk
that a decision to bring production on
stream to meet new demand indicated
by price elevation will be matched by
supply from other producers responding
to the same price signal, creating
a surplus that lowers the oil price yet
again and wrecks profitability for all
but the lowest-cost projects.
In this new environment, producers
have to start paying closer attention
than ever to what their competitors
do—or, more importantly, what their
competitors can do.
New supply has to come from the
producer able to meet new demand
most profitably. The newly disordered
market I’ve described will punish
higher-cost producers who try to bullrush
competition.
Production restraint now has
to come from producers willing to
respond to incremental demand with
incremental caution, yielding when
necessary to competitors able to deliver
supply at lower cost and greater efficiency.
This requires an expanded role for
competitive intelligence in the market
assessments on which producers base
investment decisions. It imposes new
complexity on the quantification and
analysis of risk. And it creates competitive
advantage for producers most skillful
with modern tools for data management
and integration.
Producers, of course, have increased
their use of data to manage risk for
decades.
I remember when producers were
content to drill four dry holes for every
one productive well.
Then 3D seismic technology
became affordable, and producers
learned that a survey could pay for
itself by preventing the drilling of a
single hole in the wrong place.
And the one-in-five standard for
drilling success is ancient history.
Nowadays, too, producers of all size
use sophisticated analytics to assess
project risks, manage work flows, and
support drilling and development decisions.
And they accumulate data on
seemingly everything: machines, work
flows, logistics, the subsurface, and
much more.
In a fascinating paper published
in May by the Manhattan Institute,
Senior Fellow Mark P. Mills predicted
the application of big data analytics
will inaugurate the next wave of supply
from unconventional resources, which
he called Shale 2.0.
Data used now to improve efficiency
and optimize operations are unconnected.
Big data can link disparate data
sets and identify patterns helpful in
decision-making.
In Mills’s words: “Big-data analytics
can already optimize the subsurface
mapping of the best drilling locations;
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