American Oil and Gas Reporter - March 2016 - 38

have the production base to unilaterally
affect the price of crude without completely
undermining their net production rates,
and the U.S. regulatory environment is
focused on efficiency and safety, not
price (until recently, the United States
alone among these three nations was
thought to be a net beneficiary of lowpriced crude oil).
Tired of being the only player ceding
market share in an organization composed
of members that continually and habitually
cheat on their production allotments,
Saudi Arabia is flexing its global geopolitical muscle to enforce its control over
the organization and affect the amount

of money available to global exploration,
drilling and production projects in light
of the new beta in crude oil pricing that
is recognized today.
So, as a result, the United States finally
sees production declines in the celebrated
unconventional resource plays, and Iran
and Russia are starved of cash along with
the rest of OPEC's members, some to
the point of existential crisis. How big a
stick does Saudi Arabia wield right now?
Very big, I think, making OPEC's strategy
a definite major market driver.
So what about the U.S. oil patch? Global
crude oil is priced as ridiculously today as
it was at $120/bbl. A 2 percent "oversupply"

in a world where one cannot even measure
actual supply with any certainty within 5
percent drops the price of crude more than
70 percent. It also has every analyst who
claimed only two years ago that we would
never again see oil below $100/bbl now
claiming that we will not see oil higher
than $40/bbl anytime soon. They were
wrong then, and they are wrong now.
What is different is that the cost of
capital in the United States has gotten
much higher. That will not be changing
soon. Banks and other lenders already
have started changing the cost of capital.
Warrants are being demanded at closings.
Even when oil recovers, this will not
change rapidly.
Watch the industry get a lot better because its break even for cost of capital
will have gotten worse. The oil field services sector has suffered more than a
glancing blow. It will not be able to ramp
up as quickly as it was laid down. A lot
of its equipment is shot for lack of proper
maintenance.
The Federal Reserve is reported to be
advising banks to push for asset liquidation
in lieu of bankruptcy. This is actually a
good idea, if the point is to preserve
value for lenders and equity holders.
There is nothing more damaging to producing oil and gas assets as a bankruptcy
trustee.
Great for the eventual acquirer, bankruptcy trustees know how to make sows
ears from silk purses by their reluctance
to fund what Texas Independent Producers
& Royalty Owners Association Chairman
Raymond Welder calls the "recurring,
nonrecurring" expenses such as the
workovers necessary and common in the
oil field.
❒

ALLEN
GILMER

Allen Gilmer is co-founder, chairman and chief executive officer of
Drillinginfo. He is active in all aspects
of Drillinginfo's new product development and is widely recognized for
his industry leadership and vision.
Gilmer holds several patents in multicomponent seismology. He received
a B.A. in geology from Rice University
and an M.S. in geology from The University of Texas at El Paso.
38 THE AMERICAN OIL & GAS REPORTER
American Oil and Gas Reporter - March 2016

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