Outlook 2015: Q and A with oilpatch veteran Jim Gray

With oil prices sliding downward, Jim Gray — a veteran of Alberta’s energy business — provides perspective.

1. There has been a lot of gloom and doom over the oil price slide. What do you make of the 50 per cent drop in the price of oil since June?

There are many precedents for a 50 per cent slide in oil prices. Just since 1983, there have been four principal slides. When you look at the history of oil prices since 1983, you’ll see the rate of recovery is tied to how quickly prices fell. In 1986, prices dropped between 55 and 60 per cent, stayed down for six months and came back about 50 per cent. The one in 1999 took about two years to go down, stayed down between six and nine months and about two years to come back and it came back about half.

You shouldn’t look at 2008, when prices reached $147 (US) a barrel. Most companies were using about $70 price for budgeting purposes at that time. So, from there, the prices dropped to $33 and then came back within six months.

The faster it comes down, the faster it comes back. In terms of today, we started at $107 in June — and we are now in the $55 (US) range, and I think it could go down to $45, plus or minus in February … could be down for six to nine months and then I don’t know if it’ll come back 50 per cent, 100 cent or 150 per cent. OPEC will keep prices down until they have disrupted the investment cycles for the high cost producers. I think the six month period is no accident. They need to keep it down for a certain period of time until people “get the lesson.”

2) What do you think the next year will look like for the Canadian oil and gas industry?

I think activity will slow down. All my life I have heard people say ‘it’s different this time’. I don’ think so — it’s still about supply and demand and geopolitics — there are so many moving parts.

I think Canadian companies should be putting strategic plans in place that prevent them from capitalizing on opportunities. In other words, you should not make plans with the assumption that this is going to stay down for two or three years. Companies need to do what they can to keep their balance sheets as strong as possible. They need to keep their momentum, keep their options open, back-end their commitments as much as possible, and keep as much of their core skills and strengths together because it is established again and again that when you have a precipitous fall, it comes back quickly.

I think history can be a teacher. Each one of them (the price drops) have characteristics but there is a consistency … it’s usually related to supply and demand and geopolitics. You could argue there are more moving parts than there used to be. The world is a more violent place and we are more interconnected than ever before. On the other hand, technology has given us the ability to develop plays that never thought would be economic, and the characteristics of those shale plays have had an impact on the industry. The deliverability life index of our reserves has been getting steeper and steeper … when shale oil came in with its vast depletion, it added to that. But it’s part of that, because it’s been getting steeper, anyway.

4) Why can’t the oil and gas industry seem to shake its history of boom and bust cycles?

Because we are price takers. The only thing we can do is be as competitive as we can possibly be. We have had it so good. I believe it was Churchill who said ‘we have run out of money so now we have to start thinking.’ That’s Alberta. We have been solving our problems with money, not creative vision and brain power.

5) Is there reason to worry the fracking boom could do to oil prices and drilling what it did to natural gas in North America?

We don’t have a lock on tight oil and tight gas production — but we have a lock on the infrastructure, the sand, the engineers, the pipelines, the roads, etc. We are fast adapters in North America. The rest of the world is much slower in various stages of adapting, but there are opportunities in other parts of the world. I believe there will be shale oil in Europe, Argentina and tight gas in the Middle East, but it’s going to take time. And what this means, potentially, is downward pressure on prices over the very long-term.

I keep looking for a pony under the pile of crap. I don’t see a return to the heady days of the last two years in Shale anytime soon. I got my first victim resume on Friday. There will be a lot more of them and mostly from the shale business. I’m very afraid that the almost never ending shortage of engineers and such is going to become a true glut.

I forgot who was on Bloomberg but he gave a pretty rational evaluation of shale... projects, not oil fields. His group has never invested in shale. He understands the decline rates and the economic model of shale. Few others seem to. Shale now is like a 35 day trip in a lifeboat with 30 days of water. If the well does not pay out in the first 6 months to a year it never will... there just isn’t enough production left after that to make a decent rate of return.... The best wells are able to payout in that time all the way down to about $50 but the mean well is not... the quality of the mean well all depends on where you are in the area.... sweet spot or not.

Anyway. Without the shale bump global decline at “normal” drilling rates is about what, 2 to 3% a year? Shouldn’t take long to work off a mere 1% surplus so often referred to as a GLUT... how foolish that seems to me. 1% excess supply is so easy to remedy. We don’t need 100 plus oil, we need steady 80 or so in real dollar terms. When the Saudis said the target was 90 I felt pretty good about that. Thinking it might be a healthy blend for economies and production.

There was no more reason for 100+ the last three years than there is for 50 now. Oil has been too high and it has made me about as uncomfortable as the low price does now because I knew it would discourage demand and hurt the economy. It did both. The largest industry in the world allows themselves to b price takers and constantly pilloried by a bunch of snot nosed traders.

Oh for the days of the Texas Railroad Commission and allowables. We had a pretty good oilfield in those days. Steady, quiet, reliable, good prices to the consumer, predictable. We have lived on a roller coaster in so many areas of the economy for so long. It seems like things were more stable a few decades ago before the 70s.

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