How Lousy Shale Oil Economics Will Pull Down The U.S. Economy

[Tom Kirkman + 8,860]

This article is a bit feisty.  More than a bit, actually.  Pretty sure quite a few readers here will disagree. And that's perfectly OK. 

Give it a read, consider what the author says, and go ahead and disagree by all means, but please be helpful to others and provide counter-evidence to refute the evidence presented in the article.

Side note, @shaleprofile aka Enno Peters' site is referenced in the article.

THE SHALE OIL PONZI SCHEME EXPLAINED: How Lousy Shale Economics Will Pull Down The U.S. Economy

Few Americans realize that the U.S. economy is being propped up by the Shale Oil Industry.  However, the shale oil industry is nothing more than a Ponzi Scheme, so when it collapses, it will take down the U.S. economy with it.  Unfortunately, the reason few Americans understand how lousy the economics are in producing shale oil and gas is due to the misinformation and propaganda being put out by the industry and energy analysts.

... In the video, I show just how quickly two of the largest U.S. shale oil fields decline.  The chart below was developed by Enno Peters at the ShaleProfile.com website.  The Permian, the largest shale basin in the United States, decline rate was a stunning 60% in just two years.  Thus, the companies producing oil in the Permian are forced to spend boatloads of Captial Expenditures (CAPEX) to grow or just maintain production:

[Tom Kirkman + 8,860]

P.S. to members and lurkers... I'm very much pro Oil & Gas.  I am, however, suspicious of the economics of U.S. Shale Oil.

As of the end of last year, most U.S. Shale Oil companies had still not earned more than they spent since 2008.

How Wall Street Enabled the Fracking ‘Revolution’ That’s Losing Billions

 

[xposure + 13]

The U.S. shale industry is going to cause a lot of repercussions when all the players go bankrupt. I am normally against government regulations and interference, but the continual abuse of the systems in place by the executive teams on Wall Street and the shale industry need to come to an end. Normal everyday people will be the ones paying for the mess as usual, while the executives walk away with millions.

I took a quick look through Continental Resources 2017 annual report and it doesn't look that great. They seem to have sold it off as a solid place to invest your money as (IMO) their stock is way over valued. They always seem to be talking about the future, but unless oil gets to over $100 a barrel it doesn't appear that in their current state that can make a profit and try to pay down their debts.

[Tomasz + 1,608]

I totally agree with both of you - maybe in this price environment of wti above 70 $ per barrel shale will be profitable. Maybe. But I would like to point out that we talk about 70 $ per barrelof wti oil  not 25 and not 40. Just 70 and we can start a disccussion about profitable shale. So we are probably talking about 80 $ per brent - perfect long time price for oil in my humble opinion.

[Rodent + 1,424]

One analysis I recently read (which I neither agree/disagree with) intimated that the higher price of oil post-OPEC agreement merely opened up financing opportunities to the industry, lending credence to the notion that US shale is overly reliant on borrowing to survive because the breakevens are not there. If this is indeed true, the question is: who will be left without a chair when the music stops?

Shareholders, I presume.

[Rodent + 1,424]

@Tom Kirkman How do DUCs factor in here? Wouldn't it skew any snapshot of shale economics, since these are technically half paid for already.

[Guest]

The decline rates coupled with the projections for increased production are interesting. The IEA is making very bold predictions in regards to how much production will increase, and is basically forecasting shale growth to offset demand increases for the foreseeable future. 

I think it might be a giant house of cards. If the financials start to go sideways, or if they can't continue producing a million more new barrels of production per year ( in an industry with a 60% decline rate over 2 years ) it could put us in quite a predicament. 

[Tom Kirkman + 8,860]

7 hours ago, Rodent said:

@Tom Kirkman How do DUCs factor in here? Wouldn't it skew any snapshot of shale economics, since these are technically half paid for already.

Rodent, from memory there are around 5,000 DUCs (Drilled but UnCompleted wells, for those lurking).  I believe most of these DUCs are required to be completed within a few years, as per lease clauses.  I'm not sure of the legal specifics.  But my general knowledge of land leases for drilling is that you normally can't drill a well and then let it sit idle for 10 years, production is supposed to start within 3 years or so.

Any landmen out there want to correct me?  I really don't know the specifics of how long DUCs are allowed to sit idle.

When these DUCs do finally get completed, then shale oil & gas production could get interesting, as there is already a pipeline bottleneck for producing wells.

[Eric C. Alldritt + 18]

How is this still happening? Don't these bank analysts and hedge fund managers look at the companies' financials before investing? As Warren Buffet once said — ‘Be Fearful When Others Are Greedy and Greedy When Others Are Fearful’. A lot of shale companies are acting greedy, so I am fearful.

[DanilKa + 443]

Steve is a long-time skeptic on shale oil (so as Art Berman) but he does have a point here, in my (remote from the action) view.

I've asked high-ranking industry insider from one of the concerned companies in Permian and although he agrees on how companies financing the drilling, on average it works out even if half of wells are not economical. Says its a numbers game and most companies showing ROI in investor presentations. I wish to have his optimism...

It is not all doom and gloom. Process is sound and getting better (still lots of wasting with slickwater, excess rate, geometric spacing, blind drilling etc) - just distorted by cheap financing and greed. One example how chasing high Initial Production (IP) damages ultimate recovery (EUR) - wells are opened up too fast and proppant either produced out of NWB zone or crashed. Hearing more companies are controlling cleanout rates. Excessive cost of acreage resulted in reduced spacing - interference is reported (frac hits).

Hope we'll see positive cashflow some time before $300 oil.

[Tom Kirkman + 8,860]

19 minutes ago, DanilKa said:

Steve is a long-time skeptic on shale oil (so as Art Berman) but he does have a point here, in my (remote from the action) view.

I've asked high-ranking industry insider from one of the concerned companies in Permian and although he agrees on how companies financing the drilling, on average it works out even if half of wells are not economical. Says its a numbers game and most companies showing ROI in investor presentations. I wish to have his optimism...

It is not all doom and gloom. Process is sound and getting better (still lots of wasting with slickwater, excess rate, geometric spacing, blind drilling etc) - just distorted by cheap financing and greed. One example how chasing high Initial Production (IP) damages ultimate recovery (EUR) - wells are opened up too fast and proppant either produced out of NWB zone or crashed. Hearing more companies are controlling cleanout rates. Excessive cost of acreage resulted in reduced spacing - interference is reported (frac hits).

Hope we'll see positive cashflow some time before $300 oil.

Thanks DanilKa for your more Centrist view.

[DanilKa + 443]

On ‎5‎/‎24‎/‎2018 at 9:15 AM, Tom Kirkman said:

from memory there are around 5,000 DUCs (Drilled but UnCompleted wells, for those lurking). 

7677 as of April https://www.eia.gov/petroleum/drilling/#tabs-summary-3

[Tom Kirkman + 8,860]

4 minutes ago, DanilKa said:

7677 as of April https://www.eia.gov/petroleum/drilling/#tabs-summary-3

Thanks for the actual number, DanilKa.  Seems to have gone up since last year.

[Siri 0]

I need some ideas about next week the oil price is up or down than last week.

[Mike Shellman + 548]

New mineral leases, or conditional conveyances of old minerals leases, to new shale oil developers pretty much all have continuous drilling provisions in the them whereby you must drill wells to "earn" acreage. DUC's come in handy to meet these continuous drilling clauses. Some assignments of old leases do indeed have term limits regarding uncompleted to completed wells and they range from 120 days on out to several years. DUC's also represent "reserves" that can be booked with the SEC and borrowed against. The SEC rule is 5 years; in other words they have to be completed within that time frame or the "paper" reserves are lost.

Imagine a business model whereby one borrows $4M to drill a DUC, it sits there for 2-5 years not earning any revenue, but DOES require interest on the borrowed $4M, then one has to borrow yet another $4M to frac the well and finally get it to earn income. 5,000 DUC's in the Permian, if they exist, will cost the industry $23B to complete. The DUC phenomena exists only thru use of other people's money. One can't make a pair of $4M shoes and have them sit on the shelf, in inventory, unsold, for years. What other business in the world can do that, all on borrowed capital, very long?

In spite of lower incremental D&C costs, greater efficiencies and cute things like "cube" drilling, much higher well productivity and higher oil prices, thanks to OPEC and Russia production cuts, in 2017 the shale oil industry STILL did not make any money. Don't be confused by FCF BS due to asset sales and one time tax charges that made the picture look rosier than it is. Few, even with good hedge decisions, are getting $60 per BO in the Permian with takeaway differentials and gas is getting the snot flared out of it, also because of bottlenecks, so axe the E in the BOE thing. Good wells are not good enough to pay for bad wells and will never be good ENOUGH to pay back all that massive amount of old debt. Things are not getting better. They might seem that way because of higher oil prices reported on CNBC, and CEO rhetoric, but remember... we lost $5 a barrel this week and 15 more rigs were added to the party. Trump needs higher oil prices to "dominate" the world with US LTO exports, but lower gasoline prices for critical midterm elections in November. He called in a chip on Thursday and the KSA paid up by blurting something about increasing production. It is still a very volatile oil price situation and the US shale oil industry is still in very deep financial doo-doo.

https://www.oilystuffblog.com/single-post/2018/05/09/Saudi-America-My-Ass

 

 

Edited May 26, 2018 by Mike Shellman

[Tom Kirkman + 8,860]

Thanks Mike, I was hoping you would show up and correct me on my guestimates about DUCs.  You know far more about U.S. shale oil economics than I do.

[Mike Shellman + 548]

Tom Kirkman, you know more about oil well economics that 95% of the "analysts" do that study it, I assure you. 

[Tom Kirkman + 8,860]

7 hours ago, Mike Shellman said:

Tom Kirkman, you know more about oil well economics that 95% of the "analysts" do that study it, I assure you. 

Thanks for your kind words, Mike.  Your site is one that I regularly read.

For some comic relief, Rasco and Joey are at it again; these guys laugh at everything:

https://www.linkedin.com/feed/update/urn:li:activity:6405825126864080896

[Jason Lavis + 55]

The bubble is caused by human nature, all industries go through booms and busts and the same types of people get rich, or lose their shirts. Economic history is full of this. As for pulling down the economy, if it's pulled down a moderate amount, short sellers will make a fortune. If there is a risk of systemic collapse, bailouts will happen. 

Just got back from my time machine... Here's a headline from the news in 2050:

"Opposition party says that the current administration is responsible for the national debt going from 150 Trillion to 170 Trillion in only 4 years"

Edited May 27, 2018 by Jason Lavis

[Billyjack + 58]

I'm still trying to figure out how the Permian is a shale play when the primary horizons are the Wolfcamp, a carbonate, the Spraberry, a silty sand, and the Bone Springs, a carbonate. 

[Dennis Coyne + 82]

billyjack,

I think of it s a tight oil play.