Drainage

Schlumberger’s Oilfield Glossary defines drainage as “The process of forcing a non-wetting phase into a porous rock” and drainage area as “The reservoir area or volume drained by the well. When several wells drain the same reservoir, each drains its own drainage area, a subset of the reservoir area.”

These scientific definitions are certainly worthy, but I think that Daniel Plainview’s description will stick in my mind much longer. Plainview is the successful oilman from Upton Sinclair’s 1927 novel “Oil!” In the movie adaptation, There Will Be Blood, Plainview finds oil, becomes rich and increasingly evil.

The images of the oil industry in the early 20th Century reflect tenacity, cunning and compromise. Daniel Day-Lewis is brilliant in his portrayal of the oilman whose evil core finally surfaces in his treatment of partner-son “H.W.” and final conflict with Preacher Eli Sunday.

This is one of those movies that grabs hold of you and refuses to let go until Plainview announces that he’s finished.

The images of the early days in oil patch remind us of how far we have progressed as an industry in terms of technology (rotary drilling, blowout preventers, 3-D seismic) but how dangerous the business of finding oil remains.

This is must viewing for any student of the oil and gas industry.

My favorite movies with oil industry themes are:

Syriana (2005) – A chilling portrait of how oil companies influence global politics.
The Kingdom (2007) – The dark side of life in an oil company compound in Saudi Arabia. The introduction provides a good overview of the history of the oil industry in the Middle East.
Chinatown (1974) – Corruption and intrigue in 1930s and 40s in California’s oil fields with Fay Dunaway, John Huston and Jack Nicholson.
Giant (1956) – Mandatory viewing for those who want to become “naturalized” Texans. The movie stars Elizabeth Taylor, Rock Hudson and James Dean. The movie portrays how the oil industry transformed the Texas ranchers into the super rich of their generation.
Local Hero (1983) – Burt Lancaster is Felix Harper, CEO of Knox Oil Company, who wants to build a refinery in Scotland.
Armageddon (1998) – Bruce Willis is an offshore driller saves the world by destroying an asteroid. Enrollments in petroleum engineering schools increased after this movie.

Doing the Right Thing

The ability to attract and retain top people is a critical challenge facing the oil and gas industry. As an asset-based business, employees are a small part of the costs but a big part of success. That’s why a new book by James Parker, the former CEO of Southwest Airlines, provides some good lessons for oil and gas leaders.

Parker’s book, Do the Right Thing: How Dedicated Customers Create Loyal Customers and Large Profits, advocates the simple credo “take care of your employees and everything else falls in place.” Southwest employs the same low cost strategy (cost leadership) that is the keystone of the oil and gas industry. In spite of this philosophy, Southwest often “scored better in customer service rankings than its bigger, higher-cost competitors.”

Parker says that the secret is dedicated, spirited and hard working employees. He says that “distributed leadership,” the concept of having leaders throughout the chain of command, provides initiative throughout the organization. Parker also emphasizes the importance of the team, which is a concept long-embraced by oil industry management.

I believe that establishing an environment where employees become dedicated, enthusiastic team players requires management to demonstrate the same qualities. Creating such a workplace will help assure that those top people will stay and contribute.

Not surprisingly, his book contrasts the styles of Southwest with rival American Airlines. In dealing with problems at American “the primary focus of communications was blaming and avoidance of blame – in contrast when something went wrong at Southwest, the focus of communications was problem-solving.” This is a critical issue in companies that want to encourage innovation and “point-of-service problem resolution.” Too often companies preach creativity, but practice CYA and DSU (don’t screw up).

Please visit Oil and Gas Library to order your copy of James Parker’s Do the Right Thing.

[Source: “Former Southwest CEO shares lessons in new book,” Terry Maxon, The Dallas Morning News, January 21, 2008]

2008 Crude Oil Prices

This is the time when people want to know what oil prices will be in the coming year.

As a 40+year veteran of the oil price forecasting wars, there a couple of caveats that need to be presented. First, oil price forecasting is a fundamental budgeting requirement for energy producers and consumers. Second, no matter how clever, insightful and lucky you are your forecast will be wrong.

The U.S. Energy Information Administration in their updated Short-Term Energy Outlook released January 8, 2008, projects West Texas Intermediate “prices to average about $87 and $82 per barrel, respectively, in 2008 and 2009.”

The Energy Information Administration (EIA) has been preparing price forecasts since 1982 and the percent error has ranged from a low of 22.3% (2003 forecast) to a high of 126.3% (1998 forecast). The forecast error has averaged 53.7%. (See Annual Energy Outlook Retrospective Review) This is not a criticism of the EIA analysts, but rather a reality check on all oil price forecasts.

I am certainly not going to tell you that my batting average is any better. If it was I would be spending my day poolside in some Caribbean paradise. Anyone who tells you that they have a track record of producing highly accurate forecasts is probably looking to sell you a subscription. I would avoid these sources unless you have a weak spot for sports forecasting services.

So given the inherent problems of price forecasting what should you do? The need for forecasts cited above requires you to have a credible and acceptable projection. Down at the ranch we would describe this as a “CYA” number. People are committing a lot of money based on what you say, so you better have a lot of company in your forecast. Using published and/or your banker’s forecasts are generally desirable. When the cost or revenue projections are wrong you’ve got some basis (excuses) for the error.

Another issue here is your perspective. If you are a consumer and trying to manage fuel costs, being on the high side has merit. If you are a producer and estimating future earnings, low side projections are called for. Another approach is to use a range of forecasts. This allows you to consider the consequences of lower and higher than prices. Analysts must use care in developing the price range to avoid unrealistic extremes.

We’d like to hear your thoughts on 2008 prices and pricing methodology and philosophy.