Aristotle Weighs In On EIA Getting Some Things Wrong….

Bear with me on this. And forgive me for bringing up Aristotle in this context, but alas, this is how some of our minds work. If you were a philosophy major, you understand. If you weren’t, that’s ok too (probably better actually….) but please indulge us for a moment.

Aristotle, among other things, developed a comprehensive philosophical framework that encompassed various aspects of existence. He was the first truly comprehensive philosopher. The West wouldn’t be what it is without him. Among his key concepts were potentiality and actuality 1 . These concepts provide a lens through which we can examine many things on a day-to-day basis. For example: the implications of official data sources underestimating the existence and potential production capacity of drilled but uncompleted wells.

Again, bear with me because this is important.

Aristotle’s philosophy revolves around the fundamental notion that everything has a purpose or telos (an extraordinarily important Greek word) and strives toward actualization. Central to understanding this is the distinction and relationship between potentiality and actuality.

Potentiality refers to the capacity of an entity to become something else or to possess a certain quality, while actuality represents the realization or fulfillment of that potential.

Now, if the Energy Information Administration (EIA) has consistently underestimated the number of drilled but uncompleted wells in the Permian, we encounter a situation rich with (misunderstood) potentiality and actuality. Drilled but uncompleted wells embody the potential for increased oil and gas production.

They have been drilled, indicating the existence of untapped resources, but are yet to be completed and brought into actual production. But they can be completed, and completed quickly. They are basically dry ammunition.

The EIA’s underestimation of these wells therefore embeds an unrecognized potential into industry projections – and into global crude markets. Markets cannot correctly predict the actual if they don’t have accurate numbers on the potential – any more than a farmer can predict yield without (among other things) an accurate number of how many seeds he has. 1 He discusses these in both Physics and Metaphysics. Neither of these are easy works.

But in my experience, Physics is the more comprehensible work. In law school, I had the privilege of taking a graduate level philosophy class with the great Ralph McInerny on Thomistic Metaphysics. I had no idea what was going on in that class, but, I did get to spend some time with Prof. McInerny. He was so gracious, accessible, and kind. I ended up with a good grade – but that’s a testimony to his graciousness, accessibility and kindness.

There are several ways which this skews what happens in the world at a later time. The most obvious is that underestimation of uncompleted wells could lead to market oversupply if all of these wells start producing. Too many people show up at the party, and this creates downward pressure on prices. E&P companies know this vicious cycle and would like to avoid it, but bad data makes it more difficult.

But more subtly, if there is a push to bring all of these wells online (because everyone thinks no one is showing up at the party) this could result in environmental concerns, more flaring, and even accidents, spills and so on – depending on how fast everyone moves to get to the party.

This is only bad for the industry.

On the other hand, this underestimation could lead to some positive results – but that is just good fortune not a reason to carelessly produce data. It might also turn out that the production actuality of the Permian may be more sustainable than has been (consistently) predicted. This might complement nicely the era of capital discipline we have entered in E&P. It may also enhance future exports from the Gulf Coast – though there is going to be continual infrastructure catch-up to be played and good data would have been preferable.

So there are lots of implications (in this context, and in most other contexts) about moving from potential to actual, including ethical implications – which Aristotle certainly appreciated.

Bottom line of Aristotle’s thinking here? Actuality brings forth new opportunities and developments, but even more so when you understand the potential accurately and earlier. (Plant that acorn in the right place….).