2016January/FebruarySafety and ESG

Drilling Ahead: Boom/bust: Nothing new under the sun

By Mike Killalea, Editor & Publisher

The reviews are in, and this is the worst downturn since the 1980s. After the baby bust of 2008-09, it was easy to think, “This too shall pass.” But, as one frustrated exec told me on the cusp of the Great Downturn, “We worked every angle from the 2009 playbook, but nothing succeeded.”

During the 2009 downturn, gas went flat as swollen inventories cratered prices. But liquids and crude prices still soared. We don’t have an escape route this time.

At this writing in early January, prognostications range from an uber-bleak sub-$20 oil price to a recovery into the $70s by year-end.

Nothing new under the sun

When I joined the industry in 1981, dumb as a bag of rocks, I bought 100% into the conventional wisdom of the day – $100 oil and $10 natural gas before the end of the decade. Working rigs abounded. By late 1981, more than 4,500 rigs were drilling in the US. Consumers switched to high-mileage cars, better home insulation, alternative energy and practical conservation. Sound familiar?

Obviously, events did not play out as envisioned. December 1981 proved the high-water mark of the 1970-’80s boom, after which the rig count began steadily declining to a low in July 1986 of 663 working rigs. That nadir is not the all-time low, but considering where it was less than five years earlier, it marks historically our most precipitous slide.

We rebounded into a series of comparatively prosperous cycles, each with deadly companion downturns. Following a modest upturn in the early 1990s, rig activity in the US fell to a new record in June 1992 of 596 working land and offshore units. Industry recovered in 1996-97, a boomlet that prompted the drive into ultra-deepwater. Still, the US rig count barely topped 1,000, and those occasions were all late in 1997. The road led straight downhill from there, reaching an all-time low of 488 in April 1999.

Today, dire auguries reminiscent of the 1980s present themselves. For instance, Barclays has reported that in the first half of this year, global upstream spending will decline for the second consecutive year. This only happened once before — in 1986-87. When else?

We have zero power to change industry’s macro-economics. We are stuck with reality for the long term.

Get used to it, but be contrarian

We must learn to live with it. Trent Latshaw, President of Latshaw Drilling & Exploration Company, speaking at the 2015 IADC Annual General Meeting during November, supplied 13 points on surviving a downturn.

First, we might as well get used to it. “All commodities have their cycles, and they tend to swing to the extreme on both ends,” remarked Mr Latshaw, who has weathered six cycles over 42 years in the business.

Next, be contrarian. “Don’t follow the crowd,” he said. “When oil is at $100/bbl, and everyone is saying it’s going to $150-$200/bbl … start backing up and looking behind you … because the next bust has just started.” With further relevance to today, “When oil is at $40/bbl and everyone is saying it’s going to $20, you’re seeing the beginnings of the next boom.”

And don’t drown in debt, whether personal or corporate. Says Mr Latshaw, “It’s easy to get caught up in the frenzy of a boom, thinking this is a rocket ship to the moon that will keep going. It doesn’t.”

Click the QR code below or type the URL in your browser to read all 13 of Trent Latshaw’s hard-earned tips. Also, check out Trent’s interview on Page 24. DC

Email Mike Killalea at mike.killalea@iadc.org.

Click here to read all 13 of Trent Latshaw’s points on surviving downturns.

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