Oil producers adjust to fallen oil prices

Since the spring there has been considerable volatility in the price of energy-both oil and natural gas.The price of oil has come down from the $80 and $90 per barrel to $65 at first and then to around $50 per barrel.For awhile it went back into the $65 per barrel range and now has returned to the $47 to $50 per barrel.This volatility has had a dramatic affect on the Canadian oil producers.For awhile they were adjusting to $50 per barrel but then the price moved back up.Now it seems to be "zoned" in the $50 price range.
      Strategies
 There are really only a couple of strategies that a producer can have.The most likely strategy is to cut the capital expenditure program.This will reduce the number of drilling rigs and the number of wells drilled.This strategy  doeshave it's problems .Over time the production rate of all wells starts to decline.Less oil in the well and less pressure lead to a natural decline.If new wells are not discovered to find oil to replace the oil  decline then overall production will drop.This will cause the price of the company's shares to drop.This reduces the ability of the company to finance future activities and to buy equipment.
      One strategy used is to sell off non-core assets for cash..Although the price of acreage will be down somewhat from peak times it drops in price slower than the price of oil does.Certain companies have purchased in the past a tremenduous amount of acreage and will not likely use it for quite a while.Other companies with more cash on hand find this a good time to buy acreage at a reasonable price and build their inventory of oil producing lands.All of this land has already been explored to some degree;so there is little probability of a sizeable oil company acquiring uneconomical acreage of  oil or natural gas bearing lands..All of the companies in the oil patch know or can find easily good estimates of likely oil reserves on any land they are interested in.But some companies are still doing enough exploratory drilling to increase the value of their undiscovered land.The price of oil goes down but the likelihood of a bigger reservoir goes up.                                Penn West is an example of a company that has kept it's exploratory drilling up and has increased the value of it's proved and probable reserves and the land that contains it.There are three categories of land-proven,almost proved and probable.Exploratory drilling will increase(sometimes dramatically) the reservoirs in probable acreage.One or two wells may increase the size of the reservoir and the value of the acreage                                                                                              In addition,horizontal drilling can expand the size of the reservoir in proven and almost proved acreage.And horizontal drilling is usually cheaper than vertical drilling.Horizontal drilling goes horizontally from an existing well and explores the dimensions of the reservoir.Sometimes the reservoir is bigger than originally recorded. This is the strategy that Twin Butte Energy has used.The extra oil discovered has allowed it  to dispose of non-core assets. But  the increase in the  value of their existing assets has caused a reduction in the value of total assets to a lesser extent.Cash obtained from non-core assets will be used to pay down debt.Debt goes down by 15% but  the total value of assets is reduced by less than 15%. This is a necessary strategy by producers to preserve value.
 The second Strategy- Productivity 
  Not all companies are in the position of  having good unexplored land or oil pools that are larger than originally recorded.Many companies have reasonable information on the size of their reservoirs.Extra drilling may not increase the probability of having a bigger oil pool.Then the best strategy is to try and reduce the cost of exploration or delivering oil to market.Twin Butte reports that it has reduced the cost of drilling a well by about 22%.Other companies are looking at using new drilling rigs with lower costs of production.So even with a lower price per barrel a reduced cost of production will minimize the drop in the netback per barrel of oil or natural gas.This will help producers to survive in a low price environment and thrive once the price of oil goes back to the long term trend.