Tuesday, April 1, 2008

Cambridge Energy Research Assoc. and their unverifiable data

Many of the folks reading my stuff are Wall Street salesman types.  I get a decent amount of email from them, mostly trying to point out how wrong I am and how the energy "analyst" at their firm has published "research" on the subject and how could I be so dumb?

Guys, just because one analyst says 2+2 = 4, and another says it is 5, does not mean you should split the difference, that they are both wrong, or that somehow it does not matter.

Here's what got me all worked up:

The analyst in question reports that:

"On a broader scale, we have made forecasts of capacity additions over the next five years for major oil fields in 26 countries from projects that are already under development. The total five-year addition is estimated to be 17 million BD. We have also assumed that exploration will add another 9 million BD. Factoring in a 4.5% decline rate in existing fields, the net capacity increase would be 8 million BD. If demand increases 1.6% annually, surplus capacity would grow to 7% in 2012 from 5% in 2007."

Now the analyst has some legitimate points here.  It is true that NEW production capacity could very well approach 25 million barrels per day 6 or so years from now (the analyst alludes to 26 million bpd but close enough).  He probably got that data point from Chris Skrebowski's "Mega Projects".  I gotta give credit where credit is due - the analyst can read and Skrebowski has an excellent track record and is quite detailed in his work and disclosures.  So far so good.  The REAL question is the DECLINE rates in the existing 74 million bpd producing fields.  Is it 4.5%, as CERA claims and where the analyst got his data (no production consulting firm used the 4.5% decline rate other than CERA, so by process of elimination), or is it closer to 8% or 9%, as Schlumberger contends, or 10% to 12% as some of the folks on TheOilDrum.com suggest is very likely.

This is important because if CERA is right, we are on easy street for the next 5 years.  If Schlumberger is right we've got big problems.  Hmmmm...... seems somewhat inappropriate for a sell-side analyst to accept the 4.5% CERA number while dismissing the other data points out of hand... Especially when you consider an article I wrote in November of last year discussing CERA's dismal forecasting on energy prices, supplies, and production.

You see, Wall Street brokerage firm's don't have to worry about being RIGHT - they have to have a BASIS for their position.  CERA gave them that basis, it fits with what they would like to believe, and they report it with great conviction.  Does anybody on Wall Street or in the Media question CERA's motivation or track record?  Not once.  Why not?  CERA hasn't made a good call since Noah built himself a boat, but people LIKE what they have to say.

Get your boots on.

Yours for a better no B.S. world,

Mentatt (at) yahoo (d0t) com

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