The Questionable Staying Power Of The US Fracking Boom
By Dajahi Wiley, Oilprice.com:
Between 2008 and 2013, U.S. oil production surged by 64 percent. U.S. natural gas production increased by 42 percent between 2005 and 2013. Both increases were driven by the boom in shale oil and gas production.
The boom has led BP and Exxon executives to claim that the U.S. will be self-sufficient in energy within two decades. Energy economist Philip K. Verleger, Jr. argues that American energy independence will allow the country to become a net exporter of oil and gas and to enjoy a cost advantage in energy supplies over the rest of the world that will translate into serious economic benefits.
However, there are three major red flags that should curb this unconstrained enthusiasm: shale depletion rates, decreased oil and gas prices due to the glut, and the extent to which upstream oil and gas companies in the shale space are overleveraged.
Shale oil and gas wells have rapid decline and depletion rates. According to Pete Stark, a geologist and analyst at IHS, Inc., production from the average shale oil well declines by 50 to 78 percent after its first year, and by 50 to 75 percent after the first year for shale gas wells. The Serenity 1-3H oil well in Oklahoma, owned by Chesapeake Energy, produced over 1,200 b/d in 2009; in 2013, it produced less than 100 b/d. Continental Resources’ Robert Heuer 1-17R well in the Bakken fields saw production plunge 69 percent in its first year. In order to maintain the same level of output in the face of such drastic decline rates, upstream companies must constantly drill new wells.
For natural gas, increased supply has exerted downward pressure on prices. Lower prices have given the U.S. a cost advantage over other countries and allowed for decreased imports since 2007, but they also cut into the profit margins of upstream natural gas companies. This may push these companies to cut back on drilling, as in 2009.
Related Article: OPEC Doubts Sustainability Of North American Oil Boom
In the case of oil, the shale boom has helped stop prices from soaring in a hectic geopolitical environment. American supplies, in effect, have offset insufficient production from Libya, Nigeria, Venezuela, and other major producers. However, moving forward in the medium-term, production is projected to outpace demand as major producers such as Iraq stabilize. This glut in oil will push prices down. In the long-term, it is becoming increasingly difficult and expensive to identify and exploit supply sites. Companies will face a conundrum of lower prices for oil but higher costs to find and obtain it, cutting into revenues and profits.
The third red flag is how overleveraged oil and gas companies in the shale space are. It is a capital-intensive business; extracting oil from shale wells using horizontal drilling costs between $3.5 and $9 million. For gas in the Haynesville Shale, a well costs about $8 million. Companies borrow heavily to finance their operations. A Bloomberg News analysis of over 60 companies found that these companies’ debts doubled between 2010 and 2014, while their revenues increased by only 5.6 percent. Interest expenses are also proving to be a large burden – the companies considered in the study racked up almost $2 billion in Q1 2014 alone.
Shale depletion rates and falling oil and gas prices compound the overleveraging problem. Shale companies have to constantly drill new wells to offset well-decline rates, which requires financing, often in the form of debt. Falling oil and gas prices can force companies to take on more debt to continue operating, if they choose to stay in business. Low oil and gas prices also hinder the ability of companies to pay back the debt they already accumulated. Further, shale drilling is made economical by high oil and gas prices – price decreases will undercut the economic rationale for such operations.
Considered together, these three red flags suggest that a more measured and nuanced analysis of the American shale boom is required. The staying power of the American shale boom is limited by natural, macroeconomic, and microeconomic factors, none of which will disappear on the strength of unconstrained enthusiasm. By Dajahi Wiley, Oilprice.com
Slashing the smoke-and-mirrors hype of the Monterey shale by 96% socked not only oil companies but also the state of California that was dreaming of $24.6 billion a year in revenues and 2.8 million jobs, now dissipated into thin air. Read….. The Big Losers in the California Shale-Oil Fiasco
The Big Losers In The California Shale-Oil Fiasco
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The L.A. Times spilled the beans last week that the Energy Information Administration is set to severely downgrade the Monterey Shale in California in an upcoming report. Once thought to hold 13.7 billion barrels of technically recoverable oil, the EIA now believes only about 600 million barrels are accessible. Slashing technically recoverable estimates by 96 percent could be enough to kill off the shale revolution in California before it really got started.
But why is the difference between the two estimates so staggering? Much of the hype surrounding the Monterey was based off a rudimentary 2011 assessment by Intek Inc., an engineering firm based in Virginia. The firm was so off on its projection of recoverable oil reserves because it used some shaky assumptions – and essentially concluded that the shale revolution going on elsewhere in the United States could easily be replicated in California despite there being key differences.
However, there have been warning signs before this report. According to an impressive report put together by geoscientist J. David Hughes late last year, the Monterey has very little in common with the Bakken or Eagle Ford, and he concluded that the Monterey formation would never live up to its billing.
For example, with less than a few hundred feet of thickness, the much older Bakken and the Eagle Ford formations are predictable and straightforward. The Monterey, on the other hand, is often over 2,000 feet thick. Also, it’s unlike the flat layered formations in the Bakken, which makes drilling relatively easy, the Monterey has a series of layers that are folded on top of each other. And the Monterey was established in a tectonically active area, making it highly unpredictable and geologically complex. This presents enormous engineering difficulties, and essentially seals off much of the oil located in the Monterey given today’s technology and prices.
But without its own survey, the EIA relied upon Intek’s inaccurate estimates back in 2011 and it has been the baseline from which everyone has been working.
Moreover the error-filled 2011 estimate of the Monterey was used in a 2013 economic analysis by the University of Southern California, which found that the state of California could reap as much as $24.6 billion per year in tax revenue, and create as much as 2.8 million jobs by the end of the decade by allowing shale development. Such heady estimates are too big to ignore for state policymakers, and Governor Jerry Brown has publicly supported hydraulic fracturing in a standoff with environmentalists.
That means that with the massive economic projections now deflated, the political tide could also turn against oil and gas companies in the state, further adding to their woes. The legislature is considering a statewide ban on fracking, a move that will no doubt pick up some momentum on the news that the Monterey actually will not deliver huge benefits to California. And with 100 percent of the state suffering from drought, using millions of gallons to frack a single well is drawing the ire of such disparate factions as farmers, ranchers, environmentalists, and average residents. A recent poll indicates that a majority of Californians now support a statewide moratorium on fracking.
“The cost-benefit analysis of fracking in California has just changed drastically,” State Senator Holly Mitchell, sponsor of anti-fracking legislation, recently told ABC News. “Why put so many at risk for so little? We now know that the projected economic benefits are only a small fraction of what the oil industry has been touting. There is no ocean of black gold that fracking is going to release tomorrow, leaving California awash in profits and jobs.”
Although it was merely one estimate, the erroneous 2011 projection fueled a land rush that may now come undone. It was published in an era when shale oil and gas was positively booming in other parts of the United States. If the industry had figured out how to get oil and gas out of shale in the Marcellus, the Bakken, and the Eagle Ford, then surely the same was in store for the Monterey. The industry jumped in.
But now with much of the Monterey’s oil out of reach for now, the bubble that inflated the value of many companies holding acreage in California could be set to burst.
The biggest loser from EIA’s downgrade is going to be Occidental Petroleum (NYSE: OXY), the largest acreage holder in the Monterey. The 1.2 million acres under Occidental’s control is spread up and down the Central Valley and also outside Los Angeles. The prospective revenues expected to flow from those holdings was thought to be huge.
Currently trading at around $96 per share, the company hit an all-time high in 2011 when it announced a big California discovery. Occidental was thought to be sitting on 10 billion barrels of oil, and some analysts speculated that the stock price could jump to nearly $200 per share. But drilling results and production have been disappointing since then.
Occidental has been trying to spin off its California operations into a standalone business, and the value of such a company was estimated to top $16 billion, according to a Deutsche Bank estimate last year. But if Occidental is only able to recover a very small fraction of what the market previously thought it could, its value could take a huge hit. And with a market cap of $76 billion, its theoretical $16 billion worth of California assets going up in smoke could do real damage.
Venoco Inc., a company that used to trade publicly under the ticker symbol VQ but was taken private in 2012, is an independent driller that has focused on the Monterey – with little to show for it. It owns 46,000 acres in the Monterey and drilled 29 wells between 2010 and 2012, but was not able to produce anything. It has since paired back capital expenditure due to the poor results. The latest EIA revision merely confirms the terrible experience Venoco has had in the Monterey.
Other companies are not as exposed to the Monterey as Occidental. Freeport McMoRan (NYSE: FCX) holds about 70,000 acres in the Monterey, but much of it is legacy oil and gas acreage for conventional production. The prospect of Freeport seeing much production from its shale acreage just took a bit of a hit, but the company hasn’t done much drilling and wasn’t putting much in the way of new capital expenditures into shale exploration anyway.
Bigger oil and gas companies have thus far been eyeing the Monterey without dropping huge outlays to get in. That leaves Occidental as the odd one out. The company thought it was getting in on the ground floor, but will have to face up to the fact that the Monterey formation – which was billed as holding two-thirds of the entire shale oil resources in the United States – will turn out to be a massive disappointment. By Executive Report with ISA Intel, Oil & Energy Insider. To find out more on how you can get a legal inside advantage in the energy markets please take a moment to visit: Oil Price.com Premium
The US shale oil and gas industry is in trouble. Drillers have to borrow more and more just to stay on the fracking treadmill, even as production and revenues disappoint. And some of them could be heading toward bankruptcy. Read… The Fracking Shakeout
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The Fracking Shakeout
By Nick Cunningham, Oilprice.com:
The U.S. shale industry may be a lot less healthy than many people think. A new analysis from Bloomberg News found a startlingly high level of debt in the shale industry, with companies’ borrowing more and more money as revenues disappoint.
According to the report, debt among shale oil and gas companies has nearly doubled over the last four years. While drillers often need to borrow in order to expand, revenues have not kept pace, growing at a mere 5.6 percent over the same time period.
The problem is that many shale oil and gas wells offer an initial burst of production over the first year or two. After that, output drops precipitously, and if companies have not paid down debt, they may have much more difficulty in later years than they may have anticipated. They fall into a downward spiral in which a greater share of their revenue must go to paying down debt.
Bloomberg concluded that out of the 61 companies surveyed, around a dozen are spending more than 10 percent of their revenues on debt interest.
What’s the significance of so many shale drillers struggling to turn a profit? It means that the zeal with which investors poured money into so many shale companies may be at an end. The industry is due for a shakeout.
The companies in the worst shape – those that are highly leveraged without a growing production portfolio – could be heading towards bankruptcy. As the weakest links drop out, the industry will consolidate and leave only the strongest and healthiest producers.
A shakeout is normal in any industry when the hyper-growth phase begins to slow. But unlike in the tech industry, for example, the shale industry’s economic fortunes have ramifications far beyond individual companies, their employees, and investors.
If drillers begin to go belly up, oil and natural gas production growth could slow or come to a halt. The Energy Information Administration projects in its latest Annual Energy Outlook that U.S. natural gas production will grow at a steady rate of 1.6 percent per year through 2040. That would mean that over the next 25 to 30 years, natural gas production would expand by an astonishing 55 percent.
But that may be wildly optimistic given the fact that so many companies are struggling to be profitable right now in the shale patch. Or put another way, production may not be sustainable at current price levels, and would have to rise in order for growth to continue.
Either way, a lower growth trajectory or higher prices would seriously alter the expectations about the U.S. energy picture. For example, if natural gas prices need to significantly rise in order to maintain growth, the opportunity to export significant volumes of liquefied natural gas (LNG) overseas may be smaller as well. That’s because U.S. companies would not be able to arbitrage American gas as easily by liquefying it and selling it at a higher price to hungry consumers in East Asia.
Related Article: Is This Shale’s Power-to-the-People Moment?
As a result, the companies investing money into building LNG export terminals that costs billions could begin to look a bit inflated.
A shale shakeout would also reverberate through the electric power sector since plateauing shale gas production would be a boon for renewable energy. Natural gas was expected to gobble up an ever-increasing share of electricity generation because prices were expected to remain stable even as production rose. But if those expectations turn out to be wrong, that leaves a lot of space for other forms of generation. And with coal and nuclear power becoming increasingly uncompetitive in 21st century America, that leaves an enormous opportunity for renewable energy.
As for oil, lower production from shale would also mean that the U.S. would continue to rely on imported oil instead of domestic production. While that does not mean much on its own, the fact that the oil industry can no longer offer trite promises of “energy independence” means that Congress may have to face up to the fact that the U.S. needs to find alternatives to oil for the long-term.
The shale revolution has been an opiate for many of the U.S.’s energy problems for several years now, but that could begin to change if the industry begins to falter. By Nick Cunningham, Oilprice.com
And here’s why vision of US liquefied natural gas exports to free Europe from Russia’s clutches or make big bucks off energy-starved Japan is nothing but a juicy lure in the big money game. Read…. Why The Promise Of American LNG Exports Is Gassy Hype