As mentioned in my column, when I became president of Africa Region two years ago the price of oil was $97/barrel. At the time, companies were closing deals to purchase high-priced leases and marginal producing assets that, in hindsight, was a move that drove many into bankruptcy. These companies will re-emerge as a stronger entities, but the human and financial cost has been tremendous.
I mention this as an example of how easy it is for us all to get caught up in the moment. That moment was $100 per barrel oil, and believing it was here to stay. Despite the fact that historically the oil price over the past 100 years has averaged an inflation-adjusted $50/barrel,* companies ran economic models on $100 or, to be conservative, or so they thought, $80/barrel. Bankers, private equity and financial entities were eager to lend money to companies who believed that whatever inherent oversights they made on reserve assumptions and lifting costs would be smoothed over because $100 oil was here to stay.
Indeed, in a financial environment of lower global interest rates, money flowed freely.
Industry and financial executives had a not-unreasonable expectation that oil would remain near $100 since the global economy was growing, fueled by low interest rates, and demand for hydrocarbons was booming. The emergence of industrial China in the 1990s stimulated demand for oil and gas and our industry responded by finding and producing more and more oil and gas. Advances in oilfield technology, driven largely by harnessing computing power, meant we could visualize the earth in remarkable detail, which lead to huge discoveries and allowed us to drill deeper, faster and, for the most part, safer. We are good at what we do.
So what happened two years ago?
Traditional roles of supplier and consumer, which had held sway for decades, were thrown out of balance by new unconventional and deepwater production. These suppliers saw their market share slipping away as the rise of new oil came onto the market. So how do you preserve market share? The easiest way to take a new competitor out of the market is to flood the market with product and undercut the price. It's a fundamental business tactic. And it usually works. Whether the competitor is a neighbor or half way around the world, it makes no difference.
Once the competition cuts back on production and new investment, and natural decline sets in, the supply verse demand equation will balance. But will each side of the equation be as before? Or will markets dictate structural changes in the roles of producer vs. consumer?
We already are seeing traditional roles changing as countries look ahead to the day when there simply is no more new oil to be found in their territorial space. Renewables will increasingly take center stage and batteries will be able to power not only cars but airplanes and cargo ships.
Until then, the supply vs. demand ups and downs will just be part of our industry.
*Bloomberg, 15 January, 2015