The Shale Oil Fiasco for Beginners

Although slightly dated at this point, I thought this article explained the shale oil operational and financial issues, from a layman's perspective quite well. Regardless of the access to financing and how the multinationals will have easier access to capital, they will still be handcuffed by the need to continuously drill to maintain production. 

https://www.resilience.org/stories/2019-01-27/has-u-s-shale-oil-entered-a-death-spiral/

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(edited)

10 hours ago, Douglas Buckland said:

Although slightly dated at this point, I thought this article explained the shale oil operational and financial issues, from a layman's perspective quite well. Regardless of the access to financing and how the multinationals will have easier access to capital, they will still be handcuffed by the need to continuously drill to maintain production. 

https://www.resilience.org/stories/2019-01-27/has-u-s-shale-oil-entered-a-death-spiral/

Would you rather I gave you  (a) qty 1 - one hundred dollar bill ? . . .   or  I gave you (b) qty 125 - one dollar bills. 

That's the difference btw conventional vs shale (tight oil)

Chevron CEO said that their shale operations provide  the best return on capital of any oil production opportunity they have world wide.

The irony is that the Majors (like OPEC) underestimated and missed the beginning of the shale revolution, with the Majors preferring to sink hundreds of billions in Canadian Tar sands. 

I remember the Saudi oil minister was asked back in 2012 or 2013 if he was concerned about US shale. He laighed and responded ," . .  It cost more than $70 barrel just to get it out of the ground. Our analysis shows oil going to $200 bbl." Also , Conoco CEO Ryan Lance spoke at an OPEC meeting June 2013 warning what was coming from US shale.  OPEC laughed at him too.

In the beginning of shale oil (2010 thru August 2014) shale operators enjoyed a return on capital (IRR) of 70% , 80% and even more than 100%. They were like Rock Stars . . . "Money for nothing and the chicks for free"

It was too good.  Virtually nobody saw what was about to come.  So why not expand. . . make millions more. In retrospec 2 major mistakes were made.

1. The operators took advantage of low interest rates and huge cash flow to secure all the drilling rights they could find. Every rancher, every farmer ever business that they could find with land in popular basins were pursued.  They went all in.

2. They were all competing for the same landowners to provide drilling rights. They bid up royalty payouts as a result. Their margins were massive, so plenty of room for royalties. They over paid.  The lessee is not now going to renegotiate lower. 

Back in 2013 the EIA stated the shale reserves had the potential of 1.6 Billion bbls.  CNBC's Jim Cramer said oil companies were looking in other basins but that 95% of production would come from Bakken and Eagleford.  BOTH WERE VERY WRONG. 

Remember with oil at $100 bbl oil business was great. ALL "experts" projected ever increasing oil prices. Oil prices just don't go down . . . or so they thought.

It all ended. They walked into a huge debt trap with no way out.  Now US shale producers are with Saudis hoping for a conflict in Mideast so as to save their butt.

* EIA SHALE RESERVE ESTIMATE 2013 1.6 BILLION TO 100 BILLION TODAY. 

* WTI DROPED FROM $100 bbl to avg $57 bbl FIRST HALF THIS YEAR.

* U.S. SHALE PRODUCTION WILL HIT ANOTHER RECORD OF 8.5 bbls/day THIS MONTH.

* NEGATIVE FREE CASHFLOW AS RESULT OF EXCESSIVE DEBT PAYMENTS AND EXORBITANT ROYALTY PAYOUTS.

* CAPITAL HAS DRIED UP.

Shale struggles .  It's a matter of the natural order of Free Markets , with natural selection and survival of the fittest.

An analogy used by others of a debt hamster wheel accurately describes the situation. There is no easy answer.  Shale operators can survive but not thrive at $60 bbl oil.  But $60 avg won't last long. Production costs are dropping and worldwide supply is increasing faster than demand.

 

Few saw this coming. 

 

Edited by Falcon
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What is required to make this side of industry healthy and assure longevity, is it sustainable?

Looks like it’s been built up too quick and seems to have a shaky foundation?

Normally when things seem too good to be true they aren’t?

A lot of big calls, geopolitical are being made on the back of shale oil.

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