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February 5, 2015

Despite price drop, oil industry needs the long view

Interesting Associated Press story this week about oil giants Exxon and Chevron planning to increase production despite the fall in oil prices. Sounds crazy, but it makes sense.

Because it takes years to develop a new projects, oil and gas producers really have to take the long view. So do their suppliers, which could be good news for the Rushmore Region.

These new properties will be producing for decades, regardless of crude prices. If they don’t development new sources, the swings in prices will be wilder.

The same thing happened in the Powder River Basin in the 1980s. Big demand pushed the price of oil to $25 (a lot back then) and the industry rushed to meet the demand. They did, and by 1986, the price had fallen to less than $10. It was painful at that time, but today Gillette, Wyo., is thriving.

Producers in the Williston Basin know this, and although new development might slow in coming months it will continue. They have to tighten their belts, cut costs and ride out the current slide in prices. Eventually, the supply-demand balance will turn in the other direction.

Meanwhile, the industry’s suppliers and vendors need to make their own operations as cost-effective as possible. Rather than trucking equipment from Texas, it might be good to set up shop in the Rushmore Region, where you can deliver goods to Bakken, the Powder River Basin and the Niobrara from one location.

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