American Oil and Gas Reporter - April 2020 - 33

pages 28-33_Layout 1 4/6/2020 11:16 AM Page 33

Unfortunately, you cannot undo the basic economic circumstances.
There is no place for all that liquidity to go, because whatever
demand you try to generate cannot be realized under the present
circumstances. It is all about the passage of time and getting to
the other side of COVID-19.

From the standpoint of an independent producer,
when we look at differences between this price collapse versus the last one, what are some practical
considerations when your industry is struggling
alone, or is merely one of many feeling widespread
economic pain?
It is easy to contrast now with 2014-16, when our industry-and
those connected to it-seemed to be the only ones struggling. The
economy, otherwise, was still stable and growing throughout the
country and world. There were no calls for coming to the rescue
of oil and gas companies. Contrast that against the economywide
problem occurring now. I don't think there would have been
much talk about anything to benefit oil and gas companies
without the broader discussion about helping the entire economy.
In 2014 for the Saudis, it was not so much a matter of ramping
up production, but simply not lowering it. There was a lot of
chatter about the United States having taken over Saudi Arabia's
role as global swing producer. I think Saudi Arabia actually
bought that mindset and decided to keep producing at the same
level. The Saudis edged it up a little, but there was no global
market flood like they have suggested they are going to do now.
They did not lower production, because-I think there is no
doubt about this now-they assumed U.S. production would fall
sharper and faster than it did.
OPEC-plus, meaning also the Russians, did not act until fall
2016, when it had become apparent that U.S. production
already was on its way back up. The Saudis sat on the sidelines
as long as they could. U.S. production bottomed out without
dropping very much and they realized they had to do something.
OPEC-plus banded together and pulled back on production
while we continued to frustrate its members with our persistently
strong output.
Now our production is probably about to roll over and head
south, though it will not happen quickly enough to suit them. We
are resilient and if this is a market response, rather than a
centralized governmental response, that is simply the way it
goes. Production finally started to drop nine months after prices
started to fall, and then over 17 months from the rollover,
production ultimately went down less than 12% nationally. This
was very telling to the Saudis. It will probably happen faster than
that this time around, and they may well be trying to force that to
happen faster this time with these shenanigans, but if I were the
Saudis and Russians across the table from a U.S. industry representative I would ask how the United States could raise production
from fewer than 5 MMbbl/d to more than 13 MMbbl/d and then
suggest we should not be part of the supply solution. But again,
that solution in the United States is a market-based outcome.
It is a very difficult time for U.S. oil and gas producers and I
understand the emotional response. Although it seems like we

have been in this a while, we are still in a fairly early phase of a
rapidly developing situation. A lot of things are unfolding every
day, but every day something becomes a little clearer. We like
the idea of cooler heads prevailing.

Do you see any silver linings and/or hidden reasons
for optimism for the industry and/or oil and gas markets?
It is going to be devastating, including for the oil and gas
business, but it is a discreet event and not a long-term market
reality. It will end. Therefore, once we get past this event and
we return to something that is more normal, there will be
sustained economic growth.

There might even be initial pent-up demand.
There might be. We already were looking at a scenario,
potentially, where activity declines over 2019 and into 2020 ultimately were going to slow, stop or reverse production growth,
which would intersect with the global growth curve-which
would boomerang prices back north in a hurry. The rationale
for that is that we are not really investing in new energy development now. The rig count is dropping, we are drilling fewer
wells, etc. All this is going to sap production, which ultimately
causes prices to spike. I don't know how far off that is, but this
halt to oil and gas development activity probably slashes U.S.
production faster than was going to be the case under the
previous set of circumstances. Then, when the global economy
starts to normalize, I think there is something to the likelihood
of pent-up demand.

And we end up on the right side of the V?
There you go. Again, you get higher prices. The normal state
of the economy is growth, which always implies more energy
demand. It has been a long time since we have endured a recession, more than a decade, but there will come a time when
the global economy restarts and there will be a recovering
global economy that requires massive amounts of energy. I
look forward to that day.
Another bright side is that U.S. producers have proven extraordinarily competitive on the global energy producing stage. It
may be true that Saudi and Russian physical lifting costs are
dramatically lower than they are in the United States, but that
does not mean they can afford to do this. All I know is, even
with its with much higher lifting costs the United States still
has taken market share over a long time. Honestly, we have
slapped OPEC and Russia around during the last dozen or so
years and it frustrates them. They do not know what to do with
the United States' fabulous market economy, which has done
things in oil and gas that no one thought physically or geologically
possible. The conventional wisdom before 2008 was that it did
not matter how high prices would go, geological reality would
not permit crude oil production growth. Everyone who thought
that was wrong.
❒
APRIL 2020 33

American Oil and Gas Reporter - April 2020

Table of Contents for the Digital Edition of American Oil and Gas Reporter - April 2020