In Oil & Companies News 17/06/2016
As Mark Twain said: “History may not always repeat, but it often rhymes.” I think about that line a lot these days when people ask me how today’s oil bust compares with prior downturns. The history of America’s oil and gas industry has always been colorful, dynamic and resilient. Since Twain’s days, when the first commercial well was discovered in Pennsylvania in 1856, the oil and gas industry has seen its share of booms and busts. In many ways the current downturn resembles the downturns of a hundred years ago, and in other ways this one is unique.
I’ve been a lawyer focused on oil and gas finance for 35 years. I grew up in Houston, where my father served as George Mitchell’s chief financial officer for almost 50 years. I’ve been so intrigued by the business that over the last five years I researched and wrote a book on the financial history of America’s oil and gas industry. That book, “Oil Capital: The History of American Oil, Wildcatters, Independents and Their Bankers,” tells the story of the relationship from the first wildcatters up through today’s independent producers with their bankers and other capital sources.
Every downturn has been the result of oil supply exceeding demand – basic Economics 101. The causes for excess supply over history have been different. Early booms were caused by new discoveries that flooded local markets with excess production, sometimes literally, when oil overflowed the earthen storage tanks. Today’s boom, and bust, was caused more by a flood of capital chasing technological innovation.
I didn’t set out to write a book. Originally I was preparing a short presentation for a May 2011 meeting with Houston oil and gas lawyers on current financing structures. Oil prices had broken the $100 per barrel mark in early March and would hover there for the next three years.
In order to make sense of and explain the current market trends I reviewed old presentations by bankers and lawyers on energy finance since the 1950s. The similarity in their comments was striking. Early bankers talked about the challenges of evaluating collateral buried underground that could neither be seen nor measured. Later, as reservoir engineering developed, by the 1970s bankers and lawyers were addressing issues created by volatile price environment triggered by the rise of OPEC’s market influence. What was missing was the historical narrative that tied the early oil capital sources to today’s complex, trillion-dollar industry. I did not know that when I began in 2011 to write the industry’s financial history that we were heading for the biggest oil bust since the 1980’s.
The 1930 discovery of the East Texas Field created such a crisis of oversupply that producers, bankers, courts and regulators had to work together to harness the brute force of oil gushers. The challenge then was too much oil, but after awhile markets finally settled in to a long period of fairly static prices dictated by major refiners with the assistance of state regulatory bodies, principally the Texas Railroad Commission. But by the 1970s it was a different story – with changes in U.S. tax laws for oil financing, declining excess domestic production capacity and the rise of OPEC market power, producer access to capital was transformed.
Today’s oil and gas reserve-based financial structures are the evolutionary product of financial inventions introduced in the late 1970s and the capital landscape devastated by the 1980s decade of destruction for the oil industry. In the 1980s stalwart producers and traditional local energy banks disappeared, replaced by new companies and new capital sources. Today’s two-year downturn has similarly taken its toll on scores of producers filing bankruptcy with aggregate debt of more than $56 billion as of June 2016.
The latest bust, like so many before, is a result of excess supply. But this time it was brought about by the incredible success story of American ingenuity developing new technologies of hydraulic fracture completions combined with long-reach horizontal well bores to extract hydrocarbons from unconventional sources.
The common theme throughout its financial history, the very foundation upon which the industry has been built, is that only in the U.S has there been the combination of an open economic system that rewards investment and innovation combined with private mineral ownership and ready access to capital – the oxygen that sustains producers and rewards their investors.
There will no doubt be much destruction of capital with this latest downturn. As companies adjust to the new price environment, jobs will be lost, investments wiped out, and activity levels reduced. But from the downturn also will come, as it always does, new companies, jobs, innovations and technology — and, importantly, new sources of capital and capital providers.
While the producers, bankers and other investors may change over time, the rocks stay the same. The hydrocarbons formed millennia ago remain waiting to be produced by new producers with new technology financed by new sources of capital.
Source: Forbes
