Just-in-trouble* is just-in-time - gone wrong. It's what happens when a supply chain, honed down to paper-thinness by years of high inventory charges, finally parts. It's the day a specialty steel supplier delays an order, which holds up delivery of a blowout preventer, which delays the drilling of a well, which alters a field development schedule, which impacts a return on investment, and pushes down the rating on a corporate debt instrument.
When surplus conditions dominate, just-in-time conditions are easy to prescribe. When fundamentals begin to tighten up, as they appear to be doing in the petroleum industry, rigid supply chains become vulnerable. Every adverse condition impacts deliveries far down the chain, and E&P committees rarely leave enough buffer in project scheduling. The tighter the supply chain, the greater the vulnerability.
Thus, the challenge is to engineer the chain or select suppliers that are less vulnerable, in order to achieve reliable delivery performance. Good luck!
A number of indicators point to a global economic downturn - possibly a recession - coming later this year. Let's assume Alan Greenspan's magic has finally worn off, and growing consumption in developed and under-developed countries cannot compensate for an economic slowdown in the US. How will an economic recession impact the petroleum industry?
- Demand for oil could slow by as much as 4-7%, but the resulting 20-30% collapse in fuel prices should help recover a sizeable portion of that lost demand. A price drop of this magnitude is more affordable at $30/bbl than at $15/bbl.
- Natural gas, as an environmentally preferred fuel, is less vulnerable. Gas is just beginning a long demand expansion as a replacement fuel for stationary power plant and home heating. Economic cycles will not alter that eventuality.
- Without additional capital investment, OPEC oil producers are largely tapped out for increases in oil supplies. With a recession developing, that investment is not likely to materialize. However, such a supply limitation is likely to put a $15-18/bbl floor under weakening oil prices.
While an economic recession may be difficult to avoid, the petroleum industry does not appear as vulnerable as in years past.
Missing reserve barrels
The US Geological Survey has recognized what oil producers have known for some time, but kept quiet for competitive reasons: there is more oil in the ground than has been counted - everywhere on the globe. Oil producers are conservative about drilled reserves to begin with, but are reluctant to add outlying estimations. Experience is beginning to raise that confidence level.
Years ago, pursuing outlying reserves was an expensive process - requiring a full drilling unit and a complicated completion. Today, coiled tubing units can drill out multiple radial holes in days and install multi-zone producing strings that require little or no downhole intervention.
Gas producers were the first to utilize the new technology because gas-producing intervals exhaust rather quickly. Then small independents began making a meal out of outlying accumulations left by larger producers.
Based on producers' experiences, the USGS has estimated that 612 billion bbl will eventually be added to initial estimates on existing fields around the globe. This figure is large enough such that, when combined with new higher estimates of undiscovered reserves (deepwater, Arctic, etc.), peak global production could be pushed back by years, if not a decade or more.
Will reserve volumes continue to be under-estimated in the future? Probably, because producers' exploration divisions have little else with which to compete. Outlying barrels are the cheapest to produce and there is no incentive for producers to tip their hand any sooner than required.
* Term used by Chay Yee Meng of NatSteel Electronics, as reported in the Wall Street Journal.