Take It Or Leave It

7 Nov

Got a blast from the past recently when listening to a conference call in the frac sand sector, a sector plagued by overcapacity and sagging prices. The  sand company in question was discussing the requisite compensation for volumes not taken by the customer under its take or pay arrangement. It got me to thinking about how the very initiation of such arrangements probably were fairly good precursors of bad times to come. We have seen such contracts in a number of industries over the years (natural gas, copper,), ostensibly the contracts were undertaken in order to protect both supplier and customer against interruptions in normal business due to shortages.  The reality however is that environments which lend themselves to shortages also lend themselves to high rates of return to producers, which in turn lead to high levels of capital spend and ultimately excess levels of capacity and surpluses not shortages. So, look to where there is take or pay and that’s where you will ultimately see excess capacity and falling prices. One doesn’t have to look much further than  down the oilfield production chain to find such a situation: midstream shale pipelines. Today’s bottlenecks become tomorrows unused pipeline capacity.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: