Shale Bloodbath?

This guy says the situation in the shale patch is very dramatic. While he does make, I think, some valid points about shale well exhaustion rates and capital intensity, is it really as bad as this?

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Art Berman is a notorious shale hater, you know that. :D (I like Art Berman) Did you say "alternative facts"? Oh, no!

Now on a serious note: Berman's calling out WSJ's rig production error is hilarious. OK, that wasn't serious. But I do wonder the same thing: if you're losing money why continue boosting production? 

I do see now why all the supermajors are flocking to the shale patch: they can survive temporary losses more easily than independents.

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If I was a share holder of a super major, I would expect them to be entering projects with a rate of return around 20 to 30% so why are they involved in these marginal or loss making projects.  Therefore I am back to the same question I asked last week "why produce oil at a loss".  The only answer suggested, was that this is a strategic activity by America to reduce the price of oil and boost its economy.

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15 minutes ago, Marina Schwarz said:

Art Berman is a notorious shale hater, you know that. :D (I like Art Berman) Did you say "alternative facts"? Oh, no!

Now on a serious note: Berman's calling out WSJ's rig production error is hilarious. OK, that wasn't serious. But I do wonder the same thing: if you're losing money why continue boosting production? 

I do see now why all the supermajors are flocking to the shale patch: they can survive temporary losses more easily than independents.

I have said they before and I will now say it again : Shale is short-cycle. It is almost like a natural swing. This is a game-changer. 

Traditionally, if you wanted to produce oil you needed to first explore then design a development plan and raise money etc. It could take years and would need massive upfront investments. You can set a shale company up and start producing in few months. 

I personally believe that we will see a future where conventionals and deepwater will provide a base-load and shale will handle the margin. The size of the base-load and margin depends on how quick renewable tehcnology develops. 

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People have set up companies and started to produce oil, the only issue is that the money they receive from the oil sales does not cover their costs.  This in a basin with existing infrastructure and close to markets.  If oil shale cant make money in America!! 

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1 hour ago, NWMan said:

If I was a share holder of a super major, I would expect them to be entering projects with a rate of return around 20 to 30% so why are they involved in these marginal or loss making projects.  Therefore I am back to the same question I asked last week "why produce oil at a loss".  The only answer suggested, was that this is a strategic activity by America to reduce the price of oil and boost its economy.

A friend of mine is a Geologist with one of the European Supermajors and he said the returns on shale are too small to be worth the investment hence the reason most of his companies investment is going into deep water

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1 hour ago, Rasmus Jorgensen said:

I have said they before and I will now say it again : Shale is short-cycle. It is almost like a natural swing. This is a game-changer. 

Traditionally, if you wanted to produce oil you needed to first explore then design a development plan and raise money etc. It could take years and would need massive upfront investments. You can set a shale company up and start producing in few months. 

I personally believe that we will see a future where conventionals and deepwater will provide a base-load and shale will handle the margin. The size of the base-load and margin depends on how quick renewable tehcnology develops. 

Good point. However speculation frenzy into otherwise low quality resource (Art Berman calls it "a retirement party") resulted in it to be priced into red as a whole. Shale oil can be produced profitably at a right oil price, just have to treat each well individually and not hide losses/pass it to the next idiot.

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4 minutes ago, DanilKa said:

Good point. However speculation frenzy into otherwise low quality resource (Art Berman calls it "a retirement party") resulted in it to be priced into red as a whole. Shale oil can be produced profitably at a right oil price, just have to treat each well individually and not hide losses/pass it to the next idiot.

But that's the name of the game in shale and explains to me why most of the operators in this area are small - medium size and why the big boys stay away. The SMEs won't be around by the time the wheels fall off the wagon and all the liabilities rise to the surface (both financial and environmental) so the taxpayer will pick up the tab9_9

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3 hours ago, Marina Schwarz said:

This guy says the situation in the shale patch is very dramatic. While he does make, I think, some valid points about shale well exhaustion rates and capital intensity, is it really as bad as this?

number of companies hedged their production - something Steve is not discussing.

image.thumb.png.f0e3c546ae6acce00b1ecd88168ab7aa.png

But yes, situation is grim - with few exceptions.

image.thumb.png.b1b52fa3e5fea8cd98d2afcd0ee5f22d.png

Glad Steve refrained from shale oil EROI discussion...

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3 minutes ago, NickW said:

But that's the name of the game in shale and explains to me why most of the operators in this area are small - medium size and why the big boys stay away. The SMEs won't be around by the time the wheels fall off the wagon and all the liabilities rise to the surface (both financial and environmental) so the taxpayer will pick up the tab9_9

Majors are moving in - they cannot afford to miss on low geological risk reserves they desperately need to show replacement ratio. Whether they can have better discipline and make money - remains to be seen, BHP chose to cut losses.

Environmental concerns/liabilities are often overblown as anti-carbon lobby descended on mighty "fracking". There are legit issues with amount of water/sand used in the process as well as produced water disposal. Nothing without solution.

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6 minutes ago, DanilKa said:

Majors are moving in - they cannot afford to miss on low geological risk reserves they desperately need to show replacement ratio. Whether they can have better discipline and make money - remains to be seen, BHP chose to cut losses.

They are moving in big time. BHP was forced to leave, didn't do it voluntarily. We've yet to see if it was the right decision but activist investors couldn't care less, I guess.

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1 minute ago, DanilKa said:

Majors are moving in - they cannot afford to miss on low geological risk reserves they desperately need to show replacement ratio. Whether they can have better discipline and make money - remains to be seen, BHP chose to cut losses.

Environmental concerns/liabilities are often overblown as anti-carbon lobby descended on mighty "fracking". There are legit issues with amount of water/sand used in the process as well as produced water disposal. Nothing without solution.

If you can hold the land and operate it in the fashion Rasmus describes as a sort of short response - peak load operator when the price is right then yes I would agree but you need deep pockets to ride through the low price periods and need to have the equipment and personnel on standby.

Forget the anti carbon 'joker card' in this. The environmental legacies will likely be contaminated land, contaminated water, abandoned infrastructure, and fugitive VOC and gaseous emissions.

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"There are legit issues with amount of water/sand used in the process as well as produced water disposal. Nothing without solution"

Totally correct but it costs money.  Money most of these companies don't have.  I thought that oil shale would have crashed a couple of years ago but I think it is up to 4 mbopd now.  I suppose the longer it goes the bigger the crash.

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I am kinda lost as to what is going on, the wells keep producing and the price is going down. Why haven't they shut them off? I was reading that after a certain amount of time they can shut those wells down and just run them a couple of days a month to make them break even for the month, so wouldn't that be a better option than giving the oil away at less than cost? I understand the drillers are in debt, but losing money AND product just doesn't make sense to me, just giving it away. Before too long you are out of money, and now no one will lend you any more, so the bank ends up with something it can't manage, just an asset to sell off at a loss. I guess what I am saying is that maybe OPEC won a little more than the shale producers want to admit? Is it like a matter of pride for the shale producers? We will show OPEC and just keep pumping. Meanwhile, tens of thousands, and into the millions really, depend on a decent oil market for a living. And every time this major slowdown happens, more people get out of oil and refuse to come back, so the skill set is on a downward trend as well. At least on the machining side of things. Some of that down hole stuff can be made by trained monkeys, but a lot of those parts require a highly skilled machinist to make, especially when it comes to the sensing equipment used while drilling because of the materials and complexity of the parts.

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11 minutes ago, SERWIN said:

I am kinda lost as to what is going on, the wells keep producing and the price is going down. Why haven't they shut them off? I was reading that after a certain amount of time they can shut those wells down and just run them a couple of days a month to make them break even for the month, so wouldn't that be a better option than giving the oil away at less than cost? I understand the drillers are in debt, but losing money AND product just doesn't make sense to me, just giving it away. Before too long you are out of money, and now no one will lend you any more, so the bank ends up with something it can't manage, just an asset to sell off at a loss. I guess what I am saying is that maybe OPEC won a little more than the shale producers want to admit? Is it like a matter of pride for the shale producers? We will show OPEC and just keep pumping. Meanwhile, tens of thousands, and into the millions really, depend on a decent oil market for a living. And every time this major slowdown happens, more people get out of oil and refuse to come back, so the skill set is on a downward trend as well. At least on the machining side of things. Some of that down hole stuff can be made by trained monkeys, but a lot of those parts require a highly skilled machinist to make, especially when it comes to the sensing equipment used while drilling because of the materials and complexity of the parts.

There is your answer.

If they don't keep up the interest payments to the banksters their cost of borrowing will rise and the impending bankruptcy becomes a self fulfilling prophecy. Its all about kicking the can down the road.

 

kick-the-can.png

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12 hours ago, Marina Schwarz said:

They are moving in big time. BHP was forced to leave, didn't do it voluntarily. We've yet to see if it was the right decision but activist investors couldn't care less, I guess.

I was in banking for over 30 years,  and so i tend to think of things in terms of LOAN PORTFOLIO BALANCE PRODUCTION.

In finance,  your portfolio balance MUST ALWAYS BE GROWING,  OR THE PERCENTAGE OF LOSS WILL INCREASE.

I tend to think the oil production business is much the same:    YOUR PRODUCTION MUST GROW IN ORDER TO AVOID DIFFICULTIES.

The purpose of OPEC was to disrupt the process of what i said above by creating a MONOPOLY.,  therefore OPEC members could make a nice profit even when they let their production drop,  AS LONG AS THE OPEC MEMBERS ACTED IN UNISON.

Well,   OPEC is fractured,  and the US has upset the market that OPEC built,  SO,  THE MAJORS NOW ARE BACK TO NORMAL,  AND HAVE TO KEEP THEIR PRODUCTION VOLUME UP... 

So,  by my reasoning,   while the Majors do not appear to like shale,   THEY HAVE NO CHOICE BUT TO USE IT IF THEY WANT TO KEEP THEIR PRODUCTION UP.

But then what do i know.

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Oil prices are falling as the Fed continues to raise interest rates. Maybe the Shale Boom was only viable with higher oil prices combined with the loose monetary policies that followed the Great Recession? 

https://www.businessinsider.com/the-history-of-fracking-2015-4

"In conclusion, what enabled the oil and gas industry to extract oil from shale rock over the past 7 years was higher prices. If it weren't for higher oil prices, the capital investment needed in the oil and gas sector, wouldn't have occurred, and US oil production would have continued to decline."

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Impressive.

No worries about "peak oil".

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Great map but if shale oil in America which has a proximal market for sales and a highly developed infra structure due to previous conventional production, cant make money then none of the areas on the map are profitable.  They can only be described as technical volumes.  Reserves of oil should refer to oil that could possibly be produced at a profit. 

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Also it is as if these technical volumes have just been discovered.  The oil industry always knew they were there because they are the source rocks for the conventional reserves.  The oil industry has studied them in detail.  Recently with advances in drilling and with oil prices above $100/barrel it made sense to start to try and get oil out of these rocks because in America the conventional onshore reserves are almost gone.  To continue to try and develop these reserves at $70 to $50 is a non economic activity which is proven by the balance sheets of the companies doing it. 

The other thing concerning the map is I don't see any tight oil technical volumes in Saudi.  Saudi must have the most shale oil.

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23 hours ago, NickW said:

If you can hold the land and operate it in the fashion Rasmus describes as a sort of short response - peak load operator when the price is right then yes I would agree but you need deep pockets to ride through the low price periods and need to have the equipment and personnel on standby.

 

 

I think the way it will play out is that particularly the majors will keep some production in shale (there seems to be some pipelines put in that needs some flow). But have the abillity to quickly ramp up. The majors will still invest in high CAPEX low-lift-cost projects but they will focus on what BP calls "advantaged oil" - i.e projects that are economically very attractive. The X-factor in this is high quickly renewables develops. The fact that there is looming "threat" that renewables will expand quickly will make IOCs only pick the most attractive CAPEX projects. And they then keep shale as buffer. We will know a lot more in 5 years. 

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1 hour ago, vad.mm said:

Мне кажется что ваша система кредитования бизнеса работает неправильно. Пример: компания разрабатывающая сланцы в отчётах показывает рост добычи и это единственный хороший момент, другое состоит в том что цена на нефть падает и в какой-то момент перестанет покрывать издержки добычи (не говоря уже о транспортировке и других сервисах). В последнем случае можно определённое время работать в убыток в надежде что ситуация на рынке изменится, но в текущей ситуации ждать этого не стоит благодаря Дональду Трампу который решил поссориться со всем миром, в частности обрушить цены на нефть. В таком случае банки не смогут бесконечно закрывать глаза на отрицательную доходность выданных кредитов, им просто придётся искать варианты хэджирования или страховки от банкротства кредитора. ОПЕК как картельная организация стабилизирует цены регулитуя добычу между своими членами и показывая ориентиры цены для других производителей, а Дональд хочет преследовать эту организацию. Так кто по вашему прав?

Hello @vad.mm and welcome to OP. Per community guidelines, let's keep the posts in English-only so everyone can join in!

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On 12/21/2018 at 2:23 AM, NickW said:

A friend of mine is a Geologist with one of the European Supermajors and he said the returns on shale are too small to be worth the investment hence the reason most of his companies investment is going into deep water

However, returns are returns, and money re-invested are taxes deferred, no? Sp, let's add together the rate of return, plus the additional percentage of taxes deferred on income. Oil and commodities are big business, ran by very intelligent people, with big money. They didnt get there by not making money or making I'll fated decisions. They wouldn't keep dumping billions If it were not turning a profit. Also, capital sitting is capital depreciating. A return is a return. I feel a lot of this crying wolf is hodge podge, just like any other business. No one ever admits they are making money, as sometimes it adds a negative perception. 

I'm in the retail gas business, insiders will tell you they dont make any money, cry wolf, all while padding that margin with illusion. Dont fall for it. None of us would be in any business if it weren't making money, or did not have a potential to make a sum at a point in time. Your length of return depends on how patient, and how large your money is, of course. 

Dont fall for the games.

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