17 January 2013

Drill, Baby, Drill

A non-literary digression for today. While I no longer work in or write about the investment business, I still take a desultory interest in a few areas, and energy is one of them. This revealing comment was posted to The Oil Drum by the user "Rockman" (a petroleum geologist) a couple days ago:
Someone asked why so many companies are chasing the shales if they really weren't all that profitable. If the hype is on and there's investor money being pushed your way you drill whether you have enough viable prospects or not. I started in 1975 just as the boom started. Being a pup then I didn't realize at first just how crappy most prospects were. Probably half those 4,500 rigs were drilling prospects that had almost no chance of working. But I learned quickly. I handled a joint venture for a pipeline company that invested in 18 wildcats with a small operator. And they drilled 18 dry holes in a row. Why did the p/l company hook up with such a poor performer? They were desperate to take advantage of the surge in oil/NG prices and didn't have an exploration staff in place to do it. And why did that operator drill all those bad prospects? Easy answer: because they made a small fortune from their partners in the joint venture. They didn't invest a penny in the drilling effort but got big front end fees for running the JV. The senior guys with the operator retired millionaires.
Later in the same comment, he calls these kinds of ventures "MDWs", short for Money Disposal Wells.

There is another interesting post on The Oil Drum by actuary Gail Tverberg on why Thomas Malthus (1766-1834) was wrong.