U.S. Shale Oil Debt: Deep the Denial

[Tom Kirkman + 8,860]

54 minutes ago, ronwagn said:

My new topic is listed under the Natural Gas topic. 

 

[Auson + 123]

On 10/20/2018 at 5:36 AM, Tom Kirkman said:

Good question.  I can't answer it, though.

Hi Tom,

What if the US government guarenteed the loans ( unofficially ) as shale is strategically important to the US. Profit and breakevens are less important ?

[Tom Kirkman + 8,860]

6 minutes ago, Auson said:

Hi Tom,

What if the US government guarenteed the loans ( unofficially ) as shale is strategically important to the US. Profit and breakevens are less important ?

Interesting possibility.

The thing about the U.S. independent shale oil industry, is they tend be a herd of wild cats.  Not in the least a cohesive cartel.  

Seems to me it would be fairly difficult for the U.S. government to unofficially guarantee loans to indie shale oil companies.  Too many have gone broke already.

@Mike Shellman  to the white courtesy phone (again) please.

[Auson + 123]

24 minutes ago, Tom Kirkman said:

Interesting possibility.

The thing about the U.S. independent shale oil industry, is they tend be a herd of wild cats.  Not in the least a cohesive cartel.  

Seems to me it would be fairly difficult for the U.S. government to unofficially guarantee loans to indie shale oil companies.  Too many have gone broke already.

@Mike Shellman  to the white courtesy phone (again) please.

I meant the government have underwritten the risk to any bank or institution lending for shale production.

Tin foil hat time I also think the government is supporting Tesla as the Halo EV product takes the heat off future oil demand hence lower WTI for all.

[Rasmus Jorgensen + 1,169]

On 10/21/2018 at 4:13 PM, Mike Shellman said:

In my article, or post, I attempted to give some perspective on the role that long term debt plays in shale oil development in the US and found that 1.5MM BOPD just to service that debt was a shocker. Using the same breakeven prices the shale industry uses I have in the past determined that the shale oil industry will have to produced 9G BO in the future just to get OUT of debt, to get back to even, an equal shocker. So for all the good shale oil has done our nation the past decade, it has not even been paid for yet.

Why does this lending continue? Both grantor and grantee believe they can drill they're way out of all this debt and they are both penned up like goats now with no other alternative but to keep going. Both hope for higher prices. I don't think that will happen high enough, or long enough, to solve the problem. A debt-ridden world, full of debt-ridden consumers simply cannot cope with $100 oil anymore and I do not see a pathway for ever paying this debt back now, short of sending all rigs to the barn and selling assets. If you are a shale company that is the same as liquidating yourself and nobody wants to do that. How can we expect the shale oil industry to find Jesus and start returning profits and paying back debt? It has done nothing of the sort in the last 10 years, It made promises just a year ago to angry investors and has done the opposite of what it said it would do. It is still adding rigs and outspending revenue.

As interest rates increase lenders will be looking for better venues to park their money than debt saturated shale plays that have NEVER made money. Coming shale debt refinancing is going to be neat to watch. 

Its becoming clear that terminal decline rates are increasing and the case for long fat DCA tails is losing its luster. I do NOT believe marginal shale oil wells will be  assumed by smaller operators given those decline rates, the incredibly high cost of plugging wells and decommissioning tens of thousands of locations, and the fact that MORE money would have to be borrowed by the buyer.

Water going in and water coming out of wells in the Permian Basin is, in my opinion, going to be the next big wake up call.

Its painful all this; America was promised decades of shale oil, energy independence, and the oil isolationism policies now be implemented by this administration are a disaster. Exporting America's last oil resources away at $20 bbl. discounts to Brent is really dumb.

If this is the end of the oil era, it better hurry because shale oil is NOT going to get us to the end without a lot of hurt.

Thank you, Tom Kirkman.

Mike Shellman

 

 

 

 

 

 

 

Mike, 

Could I ask you views on shale efficiency gains? I know that a lot of the lower cost that that shale has been boasting came from squeezing oil services companies, but I was still of the impression that there were real efficiency / productivity gains? And  my understanding is furter that shale is at the beginning of this journey. This is what economic historians call american exceptionalism - the abillity to turn things into a manufacturing process. There are a lot of research into this and if this dynamic applies then shale is set to grow... 

[BillKidd + 139]

1 hour ago, Rasmus Jorgensen said:

Mike, 

Could I ask you views on shale efficiency gains? I know that a lot of the lower cost that that shale has been boasting came from squeezing oil services companies, but I was still of the impression that there were real efficiency / productivity gains? And  my understanding is furter that shale is at the beginning of this journey. This is what economic historians call american exceptionalism - the abillity to turn things into a manufacturing process. There are a lot of research into this and if this dynamic applies then shale is set to grow... 

Art Berman has written in several articles over the past few years that the efficiency gains were NOT due to tech improvements, that it was mostly the squeeze on service companies. I do, however, realize the technology DOES take us to places we didn't know about. Supposedly, the Haynesville shale is seeing much better EUR/ft due to tech. Well, that, plus more sand/ft.

I also note that Haynesville shale is not anything close to drilled up with infill wells. Each time I have read an article talking about the Permian being past its prime already, I just find that unbelievable. That play is huge and they didn't really get started in a big way until a few years into the shale revolution. If they really do have as many benches as they say, there's many decades of drilling. Heck, the Haynesville is ten years old and not even close. Probably at least 20 years of drilling there. If they have tech improvements, more.

In the grand scheme of things, Berman says that even with optimism about U.S. shale plays, it isn't really that much as a percentage of global reserves.

[zbest1966 + 10]

Will this(US Shale) cause the next financial crisis? 

[Dan Warnick + 6,100]

1 minute ago, zbest1966 said:

Will this(US Shale) cause the next financial crisis? 

I wouldn't think so, because if there is cash being made at current Oil Prices in the fields they should be able to at least service their debts.  They may or may not make profits, but they should be able to service their debts.  It's when other factors come into play (big drop in Oil Price, banks going under, Italy crashing down to junk debt rating, etc.) that the domino effect could hit.  But I'm no specialist when it comes to the shale business; I only look at debt levels, bank exposure, Oil Prices and deliveries, etc.

[zbest1966 + 10]

What industries will benefit once US shale wells are almost depleted. I think coal and nuclear will start to become of most importance.  

[Dan Warnick + 6,100]

2 minutes ago, zbest1966 said:

What industries will benefit once US shale wells are almost depleted. I think coal and nuclear will start to become of most importance.  

I suppose that would depend on when shale wells become depleted and what energy and technology is in favor at that time.  Perhaps some other readers can help you with that question.  I have no idea.

[Dan Warnick + 6,100]

3 minutes ago, Marc J. Rauch said:

I agree with the assessment that "other peoples' money" ( Wall street investment funds: retirement funds, hedge funds, banks themselves using customer savings and deposits) is how and why this continues.

I wonder, in order to secure those loans would land and mineral rights be put up as collateral?  If so, would insurance be required?  Similar to getting a loan to purchase a house?

[ronwagn + 6,290]

1 hour ago, zbest1966 said:

What industries will benefit once US shale wells are almost depleted. I think coal and nuclear will start to become of most importance.  

Coal and nuclear are dying in America. They are not financially competitive. Not even close. Natural gas is the logical winner.Natgas, propane, and associated gases can do anything that oil can. Add biogas etc. Customers are already paying to keep old nuclear plants in business.Coal is not able to solve its solid waste problem.Nuclear plants cannot afford to shut down, and the public will end up paying for that and for guarding nuclear waste.

[Jamie Wins + 5]

I could be completely wrong and am expecting some backlash for my comments but hasn't the fracking industry vastly improved their techniques and economics via horizontal drilling & spacing? Some of the wells drilled recently have achieved payout in the space of 11 months maybe less in some instances. Break even costs per barrel in some areas are $40USD a barrel.

Surely the oil and gas frackers can turn a profit given the info above?

 

[Tom Kirkman + 8,860]

1 hour ago, Dan Warnick said:

I wonder, in order to secure those loans would land and mineral rights be put up as collateral?  If so, would insurance be required?  Similar to getting a loan to purchase a house?

Nope.  Not that I'm aware of.

[Tom Kirkman + 8,860]

10 minutes ago, Jamie Wins said:

I could be completely wrong and am expecting some backlash for my comments but hasn't the fracking industry vastly improved their techniques and economics via horizontal drilling & spacing?

No worries, nothing wrong with asking honest questions.

Try starting here:

http://www.artberman.com

[Kay Uwe Böhm 0]

USA shale oil snowball invest bubble already much bancrupcy and losses also BHP Biliton australia alone 19 billion $ payed for cheap oil talked down by EIA but not possible in cold winter reality New York colder Vladivostok.

All unneeded nonsense not building new HTR zero risk and cheap with new turbines all steam power plants with efficiency near 100% for eternal global 1 Cent-€/kWh also for 700bar CNG out of water H2 and air CO2 cheaper fracking, agrar tower, seawater desalination etc. worth more all oil, gas and coal in world.

RBN-Th pebble bed HTR with RBN same white diamond cubic boron nitride only isotopes B-11 and N-15 latest lucky only 1/100 absorption of C-12 graphite for only ThO2 30 years pebble runtime and endstorage hard up to 2800°C insoluble unburnable open still secure baking nuclear fuel powder into BN without QuadTriso needed or Li-7 Th HTR.

New turbine wihhout wasting unneeded condensor but centrifugal compressor, backflow cooling all thermal isolated only electricity out and CO2 not H2O.

[Tom Kirkman + 8,860]

1 hour ago, Kay Uwe Böhm said:

USA shale oil snowball invest bubble already much bancrupcy and losses also BHP Biliton australia alone 19 billion $ payed for cheap oil talked down by EIA but not possible in cold winter reality New York colder Vladivostok.

All unneeded nonsense not building new HTR zero risk and cheap with new turbines all steam power plants with efficiency near 100% for eternal global 1 Cent-€/kWh also for 700bar CNG out of water H2 and air CO2 cheaper fracking, agrar tower, seawater desalination etc. worth more all oil, gas and coal in world.

RBN-Th pebble bed HTR with RBN same white diamond cubic boron nitride only isotopes B-11 and N-15 latest lucky only 1/100 absorption of C-12 graphite for only ThO2 30 years pebble runtime and endstorage hard up to 2800°C insoluble unburnable open still secure baking nuclear fuel powder into BN without QuadTriso needed or Li-7 Th HTR.

New turbine wihhout wasting unneeded condensor but centrifugal compressor, backflow cooling all thermal isolated only electricity out and CO2 not H2O.

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[jaycee + 348]

I see the future for shale as bankruptcy. We are near the end of the current economic cycle that means we are in for a correction at some point. Interest rates are rising in the US due to Trump’s policies as is inflation which means costs are only going to rise for shalers whereas the oil price I believe is at or is very near its peak barring a black swan event like KSA coming offline etc. What normal happens in downturns is companies with high debt suffer the most as investors look for solid cash flow and low debts that are easy to service, I am seeing it already in property companies I have shares in. They run on large debts to buy the assets just like shale spends large amounts to create assets that produce cash so IMHO shale is running full speed into a brick wall.

Edited October 23, 2018 by jaycee
typo

[Tom Kirkman + 8,860]

18 minutes ago, jaycee said:

They run on large debts to buy the assets just like shale spends large amounts to create assets that produce cash so IMHO shale is running full speed into a brick wall.

We seem to agree on this.

[Rasmus Jorgensen + 1,169]

2 hours ago, jaycee said:

I see the future for shale as bankruptcy. We are near the end of the current economic cycle that means we are in for a correction at some point. Interest rates are rising in the US due to Trump’s policies as is inflation which means costs are only going to rise for shalers whereas the oil price I believe is at or is very near its peak barring a black swan event like KSA coming offline etc. What normal happens in downturns is companies with high debt suffer the most as investors look for solid cash flow and low debts that are easy to service, I am seeing it already in property companies I have shares in. They run on large debts to buy the assets just like shale spends large amounts to create assets that produce cash so IMHO shale is running full speed into a brick wall.

I am not convinced.

However, in my view what is important is the short-cycle nature of shale. It migth be that some shale companies are taken over at bargain prices by Exxon, Chevron or Shell, but the interesting question, to me at least, is whether shale will keep producing. I believe it will due the short-cycle nature. This is simply too attractive to investors (whether wall street or large E&Ps) as opposed to large upfront investment in complex developments with low lift costs. It seems that no-one are really paying attention to this structural change - you no longer need to invest billions of dollars and wait years to see first oil! 

I believe that conventional oil (incl deepwater) still has a large role to play in the energy mix / supply as a baseload supply, but simply hoping that the shale will go bankrupt will not bring a massive investment boom to conventional oil plays. 

[jaycee + 348]

56 minutes ago, Rasmus Jorgensen said:

I believe that conventional oil (incl deepwater) still has a large role to play in the energy mix / supply as a baseload supply, but simply hoping that the shale will go bankrupt will not bring a massive investment boom to conventional oil plays. 

 

1 hour ago, Rasmus Jorgensen said:

I am not convinced.

However, in my view what is important is the short-cycle nature of shale. It migth be that some shale companies are taken over at bargain prices by Exxon, Chevron or Shell, but the interesting question, to me at least, is whether shale will keep producing. I believe it will due the short-cycle nature. This is simply too attractive to investors (whether wall street or large E&Ps) as opposed to large upfront investment in complex developments with low lift costs. It seems that no-one are really paying attention to this structural change - you no longer need to invest billions of dollars and wait years to see first oil! 

I believe that conventional oil (incl deepwater) still has a large role to play in the energy mix / supply as a baseload supply, but simply hoping that the shale will go bankrupt will not bring a massive investment boom to conventional oil plays. 

When shale companies go bankrupt the debt will be written off and only large oil companies will be able to afford to buy them off the banks as nobody is going to lend on them again after getting burnt, all I said is they will probably go bankrupt not what happens next. What I would assume would happen next is that big oil look closer at them and work out the real costs of drilling the wells, some are trying it out just now as some own shale plays. So far costs wise all I have seen is shale oilers picking unrealistic low numbers for break even points based on costs that have clearly risen to try and convince their debt holders they are a going concern and their accounts appear to contradict them and show they are not making a profit still. Big oil will have a better idea soon and then you will find out if shale is really going to last.

Regards the 'you no longer need to invest billions of dollars and wait years to see first oil!' point you do realise you can invest millions in shale get oil but its not profitable which is where we appear to be right now? 

By the way where did you get the so we 'but simply hoping that the shale will go bankrupt will not bring a massive investment boom to conventional oil plays.' from I did not say that nor insinuate it all it does is make you sound like a person who is obsessed that everyone is out to get shale rather than one who wants to discuss it rationally. Please desist from the strawman arguments.
 

[Tom Kirkman + 8,860]

2 hours ago, Rasmus Jorgensen said:

I believe that conventional oil (incl deepwater) still has a large role to play in the energy mix / supply as a baseload supply,

Agreed.

 

2 hours ago, Rasmus Jorgensen said:

but simply hoping that the shale will go bankrupt will not bring a massive investment boom to conventional oil plays. 

But I'm not actually hoping that shale will go bankrupt.

Heck, I wish U.S. Shale Oil could get obscenely rich just like a few sand-covered countries that I can think of.  It would certainly solve all sorts of problems if the U.S. Shale Oil industry was filthy rich and rolling in truckloads full of cash.

Unfortunately, fracking is darn expensive.  So is deepwater.  So are Canadian oil sands.

I'm YEE HAH gung ho pro oil & gas.  But I can't change the fact that after a decade, the U.S. Shale Oil industry is still mostly covered in red ink - with a few exceptions.

[Rasmus Jorgensen + 1,169]

31 minutes ago, jaycee said:

By the way where did you get the so we 'but simply hoping that the shale will go bankrupt will not bring a massive investment boom to conventional oil plays.' from I did not say that nor insinuate it all it does is make you sound like a person who is obsessed that everyone is out to get shale rather than one who wants to discuss it rationally. Please desist from the strawman arguments.

Sorry. 

Reason for this comment is that I in business encounter many people who seem believe that my industry, offshore, will be saved any day now, because shale is going bankrupt. I may have read this into the discussion, that was not my intention. 

I view this discussion from the big picture and therefore try to focus on what role shale will play going forward. And so far it seems to me that it is here to stay. 

34 minutes ago, jaycee said:

When shale companies go bankrupt the debt will be written off and only large oil companies will be able to afford to buy them off the banks as nobody is going to lend on them again after getting burnt, all I said is they will probably go bankrupt not what happens next. What I would assume would happen next is that big oil look closer at them and work out the real costs of drilling the wells, some are trying it out just now as some own shale plays. So far costs wise all I have seen is shale oilers picking unrealistic low numbers for break even points based on costs that have clearly risen to try and convince their debt holders they are a going concern and their accounts appear to contradict them and show they are not making a profit still. Big oil will have a better idea soon and then you will find out if shale is really going to last.

I agree on the low breakevens. But I still think that the short-cycle nature of shale is a real game changer. And this is a real structural change.

Additionally, shale to me seems like a manufacturing process that slowly keeps improving productivity. Offshore, and I assume many conventional oil plays, cannot standardize and increase productivity in the same way. 

I recently listening to a briefing from one of the big US offshore services suppliers. An interesting qoute was " we are in competetion with Shale for our clients capital". 

[Tom Kirkman + 8,860]

Good discussions here.  Yes, think global, big picture, longer term.

The short term cycle of fracking really is a game changer.  DUCs can also be brought on line rapidly.

Shale oil is not going away any time soon.  It's an addition to conventional plays.  Just like Electric Vehicles are an addition to the consumer vehicle transportation mix.

[jaycee + 348]

1 hour ago, Rasmus Jorgensen said:

I agree on the low breakevens. But I still think that the short-cycle nature of shale is a real game changer. And this is a real structural change.

It might be :0) So far it appears to be but there are cracks I am not sold yet. I await to be convinced.

 

1 hour ago, Rasmus Jorgensen said:

Additionally, shale to me seems like a manufacturing process that slowly keeps improving productivity. Offshore, and I assume many conventional oil plays, cannot standardize and increase productivity in the same way. 

Would have to disagree there how about unmanned drilling rigs?

https://www.offshore-mag.com/articles/print/volume-78/issue-2/drilling-completion/robotic-drilling-system-improves-efficiency-safety-quality.html

 

Many thanks for clarifying the comment on conventional oil plays.

Edited October 23, 2018 by jaycee