Looking Beyond Traditional Indicators

With energy being an international business, we've been reading a lot about what happens in North America lately. The two key centers are Texas and Alberta where Peter Tertzakian of The Calgary Herald has been important lately for telling us to ignore what the few bulls around tell us to fear for:

During times of major change in an industry it’s easy to be fooled by traditional indicators. For example, misinterpreting falling rig counts—especially for rigs that are drilling horizontal wells in today’s prolific shale plays—can lead to incorrect conclusions about natural gas production trend.

This is all about how pointless using traditional indicators to "tell the future" is about "unconventional" gas production. Everything else has changed, why should traditional indicators have any validity?  A key past indicator of both gas and oil prices has traditionally been the rig count, i.e. the number of drills being used. That worked with vertical wells. But shale gas is drilled horizontally.  We like to think of it as lateral thinking, or drilling outside the box. And one horizontal well can do the work of many vertical wells, so a rig count is no longer applicable.

...the historical relationship between rigs and production will no longer be valid. More natural gas production will result with a smaller increase in the rig count, and conversely less of a decline should be expected when the rig count falls.

There is a clear strategic lesson here for upstream oil and gas companies: winning in this game over the long term is not about waiting for prices to rise. As in any other rapidly changing industry that reluctantly welcomes new entrants, staying competitive is about being unrelentingly paranoid about offering a better or equal product at progressively lower cost.