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Is Crude Setting Up for Something Big?

6/22/2014

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http://bit.ly/1ingSx8

Our friend and colleague Harris Kupperman recently wrote an article about Kashagan and the massive delays being enjoyed by this particular project. The problem is that Kashagan is a poster child for the sector as a whole. This isn't an anomaly.

Let me copy a few key paragraphs from his article:

Ever since oil prices bottomed in 2002, people have wanted to believe that new supply would reduce prices. Over the past decade, they’ve talked about increased Iraqi and Libyan oil; there has been the promise of tar sands and Brazilian pre-salts and now they’re talking about shale oil. Yet, despite all of this talk, world oil production has plateaued for years.

The simple truth is that much of the world’s easy oil has now been exploited. The world isn’t running out of oil any time soon, but we will need much higher prices to bring new supply online.

The oil industry is not dissimilar to large scale infrastructure, something I will never invest in for all the reasons I laid out here.

Further evidence of just how easily things go wrong in this industry landed in my inbox a few weeks ago from a friend, who is a technology expert working on an oil and gas deal.

Chris,
I'm working on an oil/gas field project these days. That industry has an amazing amount of waste - recently a series of shale oil wells were dug with pipe measured (manually) by a tape measure with 3" of the length project off - no one noticed. So all of these pieces of the well pipe were 3 inches short and thus the assemblies for 11 different wells came up short. In all cases, bits didn't make the end so all the wells had to be filled with concrete and started over.

A $100 tape measure cost $100M in damage with almost a month in delays, pulling bits back out of the wells, concreting them, starting over etc.

Laugh, or cry, this sort of situation, while anecdotal shows us the immense numbers involved and when something goes wrong it costs a HUGE amount of capital.

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