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It’s been only two months since I last -again – addressed the shale industry, but apparently it’s still not clear enough what a predatory scheme it is. Today, Bloomberg adds even more fuel to the fire. If you want to know how the combination of slip-sliding legal standards and ultra-low interest rates has perverted the US – and global – economy, you need look no further than shale.

The central point the Bloomberg article evokes is simple: does the difference between proved reserves, probable reserves and possible reserves (or resource potential), as reported by oil and gas extraction companies, constitute a lie? And the answer is just as simple: no, it doesn’t. But that’s not where the issue ends, it’s where it begins.

That is, if the difference between the two gets too wide, – potential – investors in company stocks and bonds are not getting the information they are entitled to. The industry may claim, as in the article, that investors are aware of the discrepancy inherent in the numbers, but that’s at best true for most investors, and the bigger ones. Still, the companies shouldn’t be able to use that as some unlimited excuse to claim whatever they wish. Because they can basically throw out any number they want in front of investors, no matter what it’s based on, and it’s legal.

And while there may be a kernel of truth in this bit …

“They’re running a great risk of litigation when they don’t end up producing anything like that,” said John Lee, a University of Houston petroleum engineering professor who helped write the SEC rules and has taught reserves evaluation to a generation of engineers. “If I were an ambulance-chasing lawyer, I’d get into this.”

… there’s also something missing. By the time investors can start any litigation, chances are the companies involved may be long gone. The greater public, and some of the investors, may be fooled, but the industry people themselves? They know about the depletion rates typical of shale wells, of the fact that few wells ever make their owners any real profit, and of the $500 billion(!) the industry lost over the past 5 years.

The shale industry runs on debt, not on energy. And as long as these companies can issue junk bonds at low rates, they will. But that doesn’t mean they will ever be profitable. For their owners, sure, they’re raking in dough like it’s Halloween candy, but for investors in those bonds things don’t look so rosy. Shale is a Ponzi.

HOUSTON — Falling oil and gasoline prices have sent oil company stocks tumbling, but oil experts say the boom in American energy production shows no signs of slowing down, keeping the market flush with crude and gasoline prices low.

Even after a drop of as much as 25 percent in oil prices since early summer, several government and private reports say that it would take a drop of $10 to $20 a barrel more — to as low as $60 a barrel — to slow production even modestly.

On the downside, taxes and royalties on oil will decline, potentially cutting into the finances of oil-producing states like Texas, Alaska, Oklahoma and North Dakota. And it will continue to put pressure on the Organization of the Petroleum Exporting Countries to cut output to support prices, as well as cause economic pain to big producers like Russia, Venezuela and Iran.

Current production levels can be sustained in the shale fields in 2015 even if the Brent global oil benchmark, which fell to just under $84 a barrel at one point this week, dropped to as low as $60 to $65, according to Rystad Energy, an international oil and gas consultancy based in Norway.

The falling price of oil creates varying degrees of financial difficulties for countries that rely heavily on its export. According to research by Deutsche Bank, the point at which their national budgets break even varies from about $125 a barrel for Iran to less than $75 for Kuwait.
Sources: Bloomberg (price of oil); Deutsche Bank

“Oil output will respond very slowly to a drop in oil prices,” Bjornar Tonhaugen, vice president for oil and gas markets at Rystad Energy, wrote in a report released this week. “Markets may even be oversupplied next year more than previously thought.”

Slowing American oil production is like slowing a freight train moving at high speed. The current production of 8.7 million barrels a day, the highest in nearly a quarter-century, is more than a million barrels a day higher than it was only a year ago. Most companies make their investment decisions well in advance and need months to slow exploration because of contracts with service companies. And if they do decide to cut back some drilling, they will pick the least prospective fields first as they continue developing the richest prospects.

The Energy Department this week reported that only 4 percent of shale production in North Dakota, Texas and other states needed an oil price above $80 a barrel for producers to break even on investments. One reason is that improved efficiencies in hydraulic fracturing and other modern production techniques have increased the output of each new well month after month in recent years.

For example, the Energy Department expects that new oil production from new wells in the North Dakota Bakken shale field will increase by seven barrels a day next month over this month, and in the Texas Eagle Ford field by eight barrels a day. Put together, over a couple of months that translates into tens of thousands of new barrels every day across the country, with no increase in investment.

Sadad Al Husseini, the former head of exploration and production at Saudi Aramco, predicted that the United States would add a million more barrels of oil in daily production over the next year.

“What is softening prices is weaker demand because of the global economy and the growing volume of North American production,” Mr. Al Husseini said in an interview. “So will prices bottom? It depends on what comes from the U.S.”

He added that when investors start seeing $75 to $80 oil, that will cut back some ambitions, and that could mean “a leveling off of new supplies by midyear 2015.”

The United States has banned most oil exports for four decades, but the expanded production has slashed imports from many OPEC countries, forcing them to drop their prices in Asia. The United States is also expanding its exports of refined products like gasoline and diesel, which are allowed, and that is cutting into production from other countries.

The Paris-based International Energy Agency, which accumulates and analyzes data for the industrialized nations, this week identified deep water offshore production, the Canadian oil sands and some of the American oil shale fields as the most susceptible to cuts in investment and production when oil prices fall. But only about 8 percent of these types of production require $80 a barrel oil to break even.

All told, the I.E.A. said only about 2.6 million barrels out of total world production of just over 90 million barrels requires a break-even price of $80, including some fields in China, Indonesia, Malaysia, Nigeria and Russia, which are high-cost fields in part because of how much the governments require producers to pay them in taxes and royalties.

Global and American benchmark oil prices bounced back a bit on Friday, ranging between roughly $83 and $86. The American benchmark, West Texas Intermediate, fell below $80 for the first time in two years briefly Thursday morning, and some oil experts say it could break the symbolic threshold again in coming days.

Lower oil prices mean lower prices at the pump for American consumers. The average national price for a gallon of regular gasoline on Friday was $3.14, 10 cents lower than it was a week ago and 22 cents lower than a year ago, according to the AAA motor club. That is the lowest price in more than three years.

Roughly a third of the nation’s gas stations are selling gasoline for less than $3 a gallon. The average American family saves about $120 a year for every dime drop in the gasoline price, experts say.

Many oil experts say that Saudi Arabia and several other OPEC countries that have shaved their prices in recent days are trying to drive down global production, and particularly American and Canadian production, to protect their market share. But with a growing population and struggling to tamp down potential domestic unrest, Saudi Arabia carries a rising social service budget that is financed almost entirely by oil money.

Over the long term, it may need to stretch its production as much as or more than the United States.

“For the government to balance budgets on an ongoing basis, higher oil prices are inevitably required,” Badr H. Jafar, president of Crescent Petroleum, a United Arab Emirates-based oil and gas company, said in an email exchange. “Otherwise, if oil prices continue to fall, maximizing production may be an imperative to securing required higher revenues, and that in turn might have a catastrophic effect with the creation of a major glut.”

Drilling Deeper

David Hughes

October 27, 2014

Abstract

Drilling Deeper reviews the twelve shale plays that account for 82% of the tight oil production and 88% of the shale gas production in the U.S. Department of Energy’s Energy Information Administration (EIA) reference case forecasts through 2040. It utilizes all available production data for the plays analyzed, and assesses historical production, well- and field-decline rates, available drilling locations, and well-quality trends for each play, as well as counties within plays. Projections of future production rates are then made based on forecast drilling rates (and, by implication, capital expenditures). Tight oil (shale oil) and shale gas production is found to be unsustainable in the medium- and longer-term at the rates forecast by the EIA, which are extremely optimistic.

This report finds that tight oil production from major plays will peak before 2020. Barring major new discoveries on the scale of the Bakken or Eagle Ford, production will be far below the EIA’s forecast by 2040. Tight oil production from the two top plays, the Bakken and Eagle Ford, will underperform the EIA’s reference case oil recovery by 28% from 2013 to 2040, and more of this production will be front-loaded than the EIA estimates. By 2040, production rates from the Bakken and Eagle Ford will be less than a tenth of that projected by the EIA. Tight oil production forecast by the EIA from plays other than the Bakken and Eagle Ford is in most cases highly optimistic and unlikely to be realized at the medium- and long-term rates projected.

Shale gas production from the top seven plays will also likely peak before 2020. Barring major new discoveries on the scale of the Marcellus, production will be far below the EIA’s forecast by 2040. Shale gas production from the top seven plays will underperform the EIA’s reference case forecast by 39% from 2014 to 2040, and more of this production will be front-loaded than the EIA estimates. By 2040, production rates from these plays will be about one-third that of the EIA forecast. Production from shale gas plays other than the top seven will need to be four times that estimated by the EIA in order to meet its reference case forecast.

Over the short term, U.S. production of both shale gas and tight oil is projected to be robust-but a thorough review of production data from the major plays indicates that this will not be sustainable in the long term. These findings have clear implications for medium and long term supply, and hence current domestic and foreign policy discussions, which generally assume decades of U.S. oil and gas abundance.

[url=http://www.zerohedge.com/news/2014-09-19/shale-fracking-“ponzi-scheme”-…-“-decade’s-version-dotcom-bubble”-…-“-lot-common-sub]Shale Fracking Is a “Ponzi Scheme” … “This Decade’s Version of The Dotcom Bubble” … “A Lot In Common With the Subprime Mortgage"[/url]
George Washington's pictureSubmitted by George Washington on 09/19/2014 01:12 -0400

In 2011, the New York Times wrote:

“Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. “Reminds you of dot-coms.”

“The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work,” an analyst from IHS Drilling Data, an energy research company, wrote in an e-mail on Aug. 28, 2009.

***

“And now these corporate giants are having an Enron moment,” a retired geologist from a major oil and gas company wrote in a February e-mail about other companies invested in shale gas.

***

Deborah Rogers, a member of the advisory committee of the Federal Reserve Bank of Dallas, [and a] former stockbroker with Merrill Lynch ... showed that wells were petering out faster than expected.

“These wells are depleting so quickly that the operators are in an expensive game of ‘catch-up,’ ” Ms. Rogers wrote in an e-mail on Nov. 17, 2009, to a petroleum geologist in Houston, who wrote back that he agreed.

***

A review of more than 9,000 wells, using data from 2003 to 2009, shows that — based on widely used industry assumptions about the market price of gas and the cost of drilling and operating a well — less than 10 percent of the wells had recouped their estimated costs by the time they were seven years old.

***

“Looks like crap,” the Schlumberger official wrote about the well’s performance, according to the regulator, “but operator will flip it based on ‘potential’ and make some money on it.”
In 2012, the New York Times pointed out:

The gas rush has ... been a money loser so far for many of the gas exploration companies and their tens of thousands of investors.

***

Although the bankers made a lot of money from the deal making and a handful of energy companies made fortunes by exiting at the market’s peak, most of the industry has been bloodied — forced to sell assets, take huge write-offs and shift as many drill rigs as possible from gas exploration to oil, whose price has held up much better.

***

Now the gas companies are committed to spending far more to produce gas than they can earn selling it. Their stock prices and debt ratings have been hammered.
Rolling Stone reported the same year:

Fracking, it turns out, is about producing cheap energy the same way the mortgage crisis was about helping realize the dreams of middle-class homeowners. For Chesapeake, the primary profit in fracking comes not from selling the gas itself, but from buying and flipping the land that contains the gas. The company is now the largest leaseholder in the United States, owning the drilling rights to some 15 million acres – an area more than twice the size of Maryland. McClendon [the CEO of fracking giant Chesapeake] has financed this land grab with junk bonds and complex partnerships and future production deals, creating a highly leveraged, deeply indebted company that has more in common with Enron than ExxonMobil. As McClendon put it in a conference call with Wall Street analysts a few years ago, "I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet."

According to Arthur Berman, a respected energy consultant in Texas who has spent years studying the industry, Chesapeake and its lesser competitors resemble a Ponzi scheme, overhyping the promise of shale gas in an effort to recoup their huge investments in leases and drilling. When the wells don't pay off, the firms wind up scrambling to mask their financial troubles with convoluted off-book accounting methods. "This is an industry that is caught in the grip of magical thinking," Berman says. "In fact, when you look at the level of debt some of these companies are carrying, and the questionable value of their gas reserves, there is a lot in common with the subprime mortgage market just before it melted down."

***

In February, Chesapeake announced that, because of low gas prices, its revenues will fall $3.5 billion short of its expenses this year.
Jim Quinn noted last year:

Royal Dutch Shell is one of the biggest corporations in the world, with financial resources greater than 99% of all the organizations on earth. Their CEO [Peter Voser] probably knows a little bit more about oil exploration than the Wall Street systers and CNBC bimbos. His company has poured $24 billion into shale exploration in the U.S. It has been a huge failure. They have already written off $2.1 billion. They are trying to sell huge swaths of land in the Eagle Ford area. They are losing money in the shale oil and gas business. If Shell can’t make it profitable, who can?
Bloomberg noted in February:

Independent producers will spend $1.50 drilling this year for every dollar they get back.
Oil Price reported in March:

Shell’s new boss, Ben van Beurden, said bets on U.S. shale plays haven’t worked out for his company.

***

“Some of our exploration bets have simply not worked out,” Shell’s Chief Executive Officer Ben van Beurden said. It was bad management policy to commit close to $80 billion in capital on its North American portfolio and still lose money. Now, he said, it’s time to cut the loss and slash exploration and production investments by 20 percent for 2014.

***

Shell’s problems say more about the difficulties of shale exploration than they do about the company itself.
The Wall Street Journal pointed out this April:

These newly public companies are spending more than they make ....
Bloomberg wrote in May:

Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.

“The list of companies that are financially stressed is considerable,” said Benjamin Dell, managing partner of Kimmeridge Energy, a New York-based alternative asset manager focused on energy. “Not everyone is going to survive. We’ve seen it before.”

***

In a measure of the shale industry’s financial burden, debt hit $163.6 billion in the first quarter, according to company records compiled by Bloomberg on 61 exploration and production companies that target oil and natural gas trapped in deep underground layers of rock.

***

Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells. At the same time, investors have been pushing companies to cut back. Spending tumbled at 26 of the 61 firms examined. For companies that can’t afford to keep drilling, less oil coming out means less money coming in, accelerating the financial tailspin.

***

“Interest expenses are rising,” said Virendra Chauhan, an oil analyst with Energy Aspects in London. “The risk for shale producers is that because of the production decline rates, you constantly have elevated capital expenditures.”
And Tim Morgan - former global head of research at Tullett Prebon - explained last month at the Telegraph:

We now have more than enough data to know what has really happened in America.

***

If a huge number of wells come on stream in a short time, you get a lot of initial production. This is exactly what has happened in the US.

The key word here, though, is "initial". The big snag with shale wells is that output falls away very quickly indeed after production begins. Compared with “normal” oil and gas wells, where output typically decreases by 7pc-10pc annually, rates of decline for shale wells are dramatically worse. It is by no means unusual for production from each well to fall by 60pc or more in the first 12 months of operations alone.

Faced with such rates of decline, the only way to keep production rates up (and to keep investors on side) is to drill yet more wells. This puts operators on a "drilling treadmill", which should worry local residents just as much as investors. Net cash flow from US shale has been negative year after year, and some of the industry’s biggest names have already walked away.

The seemingly inevitable outcome for the US shale industry is that, once investors wise up, and once the drilling sweet spots have been used, production will slump, probably peaking in 2017-18 and falling precipitously after that. The US is already littered with wells that have been abandoned, often without the site being cleaned up.

Meanwhile, recoverable reserves estimates for the Monterey shale – supposedly the biggest shale liquids play in the US – have been revised downwards by 96pc. [Background; and see this.] In Poland, drilling 30-40 wells has so far produced virtually no worthwhile production.

In the future, shale will be recognised as this decade's version of the dotcom bubble. In the shorter term, it's a counsel of despair as an energy supply squeeze draws ever nearer.

gnosticheresy_2 » Mon Oct 13, 2014 5:29 pm wrote:Read the original article that's referenced in the intro to that piece that WB posted, added to the list of "things that are going to trigger the next financial "crisis"" (excuse the nested quotes)

EDIT: there's not much analysis in the above I admit but when I'm looking for specific reasons to say to people why things aren't really going to go back to what they were, it is easier for people to get there heads round fracking/ shale is a con than a slightly more abstract conversation about climate change.

82_28 » 20 Oct 2014 13:49 wrote:I have it on good record that Casper WY is "all halliburton these days". How do I know? I actually can't divulge. It's not top secret or nothing, just I can't tell anyone this -- for some reason. But there is mucho halliburton investment all around the daks and wyos.

stillrobertpaulsen » Fri Oct 31, 2014 12:27 am wrote:

gnosticheresy_2 » Mon Oct 13, 2014 5:29 pm wrote:Read the original article that's referenced in the intro to that piece that WB posted, added to the list of "things that are going to trigger the next financial "crisis"" (excuse the nested quotes)

EDIT: there's not much analysis in the above I admit but when I'm looking for specific reasons to say to people why things aren't really going to go back to what they were, it is easier for people to get there heads round fracking/ shale is a con than a slightly more abstract conversation about climate change.

Do you have the link for that, by chance? I'd love to read it.

In June, Rick Berman of the PR firm Berman & Company gave a speech to a room full of oil industry executives. Presumably believing his talk was private, he spoke of waging "endless war" against fracking's opponents and exploiting fear and anger to win supporters. Unfortunately for him, he was being recorded.

An anonymous executive in the room who was offended by Berman's implication that "you have to play dirty to win"—the speech endorsed tactics like digging up dirt on celebrities and high-profile oil opponents to discredit them—recorded the speech and provided the tape to the New York Times, which published a report alongside a full transcript yesterday.

Berman gave the speech alongside Berman & Co. VP Jack Hubbard to solicit donations for a multi-million-dollar campaign called Big Green Radicals, which runs what the Times calls "intentionally controversial" pro-fracking ads in contested markets like Colorado and Pennsylvania. The audience reportedly included representatives of companies like Devon Energy, Halliburton, and Anadarko Petroleum.

Some excerpts from the speech:

Fear and anger have to be a part of this campaign. If you want to win, that's what we're going to do. We're not going to get people to like the oil and gas industry over the next few months. There is no sympathy for the oil and gas industry. So we're not going to tap into the sympathetic.

People ask me one question all the time: "How do I know that I won't be found out as a supporter of what you're doing?" We run all this stuff through nonprofit organizations that are insulated from having to disclose donors. There is total anonymity. People don't know who supports us.

I've had clients say to me, "Well you know, I don't really want to attack. That's not who we are." I say, "Well, you know, you can either win ugly or lose pretty."

And from Hubbard:

You have people like Yoko Ono...this is a billboard we put up in Pennsylvania about, "Why would we take energy advice from the woman who broke up the Beatles?"

There was also an extended gay joke about a weedwacker.

Berman, as Bloomberg notes, has previously approved his avowed hardball tactics to unions, animal rights activists, and Mothers Against Drunk Driving. When Bloomberg reporter Mark Drajem asked a Berman & Co. spokeswoman about Berman's speech, she told him, "We are not confident in the objectivity of your reporting. If you have the recording, then you can use that."

gnosticheresy_2 » Fri Oct 31, 2014 7:24 am wrote:http://www.bloomberg.com/news/2014-10-09/ceos-tout-reserves-of-oil-gas-revealed-to-be-less-to-sec.html