U.S. Shale Oil Debt: Deep the Denial

[Mike Shellman + 548]

The shale oil industry has improved its initial well productivity vastly in the last 3 years, not from new "technology" but simply from drilling longer laterals and stuffing lots more sand into those laterals. That all costs more money, not less money, and profitability has not improved greatly, this in spite of somewhat lower incremental costs, efficiencies, like one bit drilling in <11 days, zipper frac's, and higher oil prices. IP +180's are improving, if that is what "productivity" means to you, but the jury is still out of UR's.

Short investments cycles are just that; oil and natural gas extraction is still a business, however, and the business must be profitable to be sustainable. Is it now profitable enough to pay down massive amounts of debt? Not at $65-90 oil, no. Think of this debt as having a tattoo on your backside that says Julie when you are now married to Ruth. Its a reminder of mistakes past and will take a hell of a lot to get rid of.

Exxon and Chevron will find soon enough they can't do it any better than Concho and whomever. Integrated companies might have reasons for losing money in shale oil production if they can then use the stuff downstream in their own refineries. Again, M&A stuff is ongoing in the Permian because of large undeveloped acreage blocks, and multiple benches; not so much in the Bakken and Eagle Ford where well location vacancies are getting hard to find. Nobody is going to buy developed acreage with stripper shale oil wells on them, not in my opinion. In the EF, 80% of shale oil wells drilled since 2009 now make less than 40 BOPD and a large portion of those make 25 BOPD or less. AT current prices economic limits are 12-15 BOPD. On rod lift, making water, that's nobody's treasure.

There are geological constraints to shale oil; its not all the same. Don't buy into all the bench stuff in the Permian. Once those guys are forced to move away from their favorite spots, things are going to get more expensive and less productive. Gas to oil ratios in all shale oil basins are going up. In a few months folks are going to be stunned how much in the Midland Basin. One cannot even fathom now how much of that gas is being wasted, flared. I've seen it, its remarkable. Don't be fooled by BOE at 6:1 when doing economic arithmetic.

I am an oil and gas producer. The shale oil industry has driven my costs up 100% (land costs up 1000%) in the past 8 years and caused great price volatility for me. But I don't want the shale oil industry to fail. We as Americans need it to succeed. Its not near as oil price dependent, however, as it is capital dependent. It cannot stand on its own two financial feet without credit/debt. As interest rates increase things are going to change, significantly, for both borrower and lender. I am not so sure it is "here to stay." Not at anywhere close to present production levels.

 

 

 

 

[Rasmus Jorgensen + 1,169]

29 minutes ago, jaycee said:

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

 

Thanks.

Will need to study the technology and talk to a few friends in Norway, before I can comment in a meaningful way. 

51 minutes ago, Mike Shellman said:

The shale oil industry has improved its initial well productivity vastly in the last 3 years, not from new "technology" but simply from drilling longer laterals and stuffing lots more sand into those laterals. That all costs more money, not less money, and profitability has not improved greatly, this in spite of somewhat lower incremental costs, efficiencies, like one bit drilling in <11 days, zipper frac's, and higher oil prices. IP +180's are improving, if that is what "productivity" means to you, but the jury is still out of UR's.

Thanks Mike,

I do not know the tech in detail. I just observe from a distance. What I am on about is the American economy's abillity to turn something into a manufacturing process, where the slow and steady drives down costs. By economic historians this has been termed "American exceptionalism" (http://www.compilerpress.ca/Competitiveness/Anno/Anno Romer Why, Indeed, in America Theory, History, and the Origins of Modern AER 1996.htm).. Even a 2 % efficiency gain Y-O-Y adds up to a lot of money over 10 years... 

I understand that pipeplines etc are being planned in the permain which should relieve some of the bottlenecks. Therefore, it is interesting to me to learn more about / understand the efficiency gains that shale are boasting. Are they real? To me, as an outsider, they seem to be. 

 

[Ricky Bartlett + 1]

If you read Anardarko's Financial Report 2017, it shows that they are in almost the same amount of debt from 31st December 2015 to 31st December 2017 and the oil price has almost doubled. Doesn't look like a healthy profitable business to me. So this must poses some questions, how will the increase in US interest rates effect US Shale? Could shale have been so successful with interest rates at a normalised rate e.g. 5% or has Shale only been able to grow because of the low interest rate environment.

[Tom Kirkman + 8,860]

7 hours ago, Ricky Bartlett said:

If you read Anardarko's Financial Report 2017, it shows that they are in almost the same amount of debt from 31st December 2015 to 31st December 2017 and the oil price has almost doubled. Doesn't look like a healthy profitable business to me. So this must poses some questions, how will the increase in US interest rates effect US Shale? Could shale have been so successful with interest rates at a normalised rate e.g. 5% or has Shale only been able to grow because of the low interest rate environment.

ding ding ding ding   We have a winner!

Good observation, and good question.

My own view is that U.S. Shale Oil is going to be eyeball deep in debt doo doo once interest rates increase.  No more "money for nothing" and previous debts still need to be paid.

My own term for this mess is the U.S. Shale Oil industry neverending hamster wheel of debt.  Run hamster run!