Some very puzzling and contradictory data has been spilling out of my trusty Dell Precision 390 desktop of late. In November or December there was a report from the Oil industry rag Oilprice.com on a slowdown in fracksville. Then the WSJ put out a similar story within the last month. Ditto on a blog from the respected INDEPENDENT oil analyst Art Berman. But what does he know? as a Houston oil man said some time back. “Art hates fracking.” The report that really caught my eye was Tyler Durden’s Zerohedge site on 1/20/19 which carried a report from the Big honcho of Continental Resources, Harold Hamm who said that frack volumes could fall 50% this year. He did qualify it as a “Wild guess.” What was more revealing is that the Frack Ponzi which relies on issuing bonds and stock mostly to the hedge fund and private equity crowd was only able to peddle 3 issues in October and NONE SINCE! That is big news and there was signs that the debt already issued was beginning to smell like 3 day old fish on Wall Street.I mean who would want it? Most have the frackers have been free cash flow negative forever. That is they are losing money. Free cash flow is operating cash flow minus capital expenditures. Not all companies mind you, just most depending upon what quarter you take a look at. Art Berman said 1/3 of companies were FCF negative in the third quarter at a time when crude prices were pretty high for the year. Continental was one of the winners as well as a few bigger diversified companies like Conoco Phillips. Some years back Art put out a similar graph of all the companies and at that time I recall that less than 5 were solidly in the red at a time o
f low prices. Here is Tyler’s graph of debt issuance:Here is Berman recent graph of free cash flow for companies engaged in fracking activities in the Permian formation:
And then here is the just issued report from the EIA and Rystad Consultants on the coming boom in Fracksville:
Last week saw some of the most optimistic forecasts for the future of US shale oil production ever published. Rystad Energy announced that the US is on track to produce some 24 million b/d of oil, more than Russia and Saudi Arabia combined by 2025 – assuming that oil prices stay above $58 a barrel. The growth in US liquids production will be driven by major shale basins such as the Permian, Rystad’s report said.
The EIA also joined the optimism last week. In its Annual Energy Outlook 2019, the administration forecast that US crude oil production will keep setting annual records until 2027 and will remain higher than 14 million b/d through 2040, thanks to continuously growing shale production. “Near the end of the projection period (2050), the United States returns to being a net importer of petroleum and other liquids as a result of increasing domestic gasoline consumption and falling domestic crude oil production in those years,” according to the EIA.
This was courtesy of Tom Whipple over at Peak Oil Review. Those numbers are mind blowing forecasts.completely at variance to what I mentioned at the beginning of this post. The EIA and IEA have been wrong on forescasts for decades usually dialing back numbers with subsequent Energy Outlooks. For eample The Monterey Shale in California was for some years predicted by the EIA and USGS as the next big gold mine but in 2014 they had to revise the stimates of extractible oil downward by 96%!!! Art Berman is especially critical of the IEA in Paris. He once noted that the IEA staff is virtually devoid of geologists and consists of statisticians and economists and their idea of making a prediction is to extrapolate a line from some arbitrary starting point. The head of the IEA, Faith Birol, is a Turkish economist. I do not know if the EIA has scientific staff and is also cluttered up with economists,witch doctors,and viziers like the IEA but it wouldn’t surprise me. I am eagerly awaiting Art’s take on Rystad’s numbers.
It should be noted that these agencies and think tanks almost always crank out predictions based upon the estimated resource. But as some wag once noted, it’s not the size of the resource that counts but the size of the straw! I saw no mention in Rystad’s paper how many wells it would take to reach 24 million bbl/day, or how much sand and water or more importantly how much MONEY would be needed to hit these numbers. The inability of these companies to attract capital in the last 3 months might throw a wet blanket over these predictions. I assume if the oil price could get to 3 figures and stay there, fracking might become viable but every time in the past 40 years when oil hit a high point, there was a recession. So we have the new truism: high oil prices kill economies. Low oil prices kill companies. There are a few things we do know. Conventional oil wells make money in spades and always have before they eventually deplete. Saudi Arabia has about 1350 wells and as of 2015 the US had 1,666,715!!!
So let’s do the math. Both countries produce about 11 million barrels a day. Divide that by the number of wells and Saudi Arabia extracts an average of 8148 BBL/Day per well and the US 6.59! We know that Frack wells deplete drastically in a year or two and there are a lot of stripper wells in the US but there are stripper wells in Saudi Arabia too.
I have a hunch(just a wild guess) that if these frack companies continue to have difficulty attracting finance they will either go under as many have already or be sucked up by the big fish with deep pockets.(Do fish have pockets?) But the pockets of the big three oil companies may not be as deep as we assume. They have sunk a lot of dry holes looking for oil in the past 15 or 20 tears and piled on a lot of debt:
These aren’t up to date numbers but they show a disturbing trend up to 2017. Little oil companies can go bankrupt but so can big ones if they guess wrong. And to wrap this post up I will state that based upon my own personal research, I do not know if this fracking boom can last . There is no way to be sure.
There are other places in the world where formations similar to the Permian in W. Texas exist. Namely the Vaca Muerta in Argentina’s high desert and potentially the world’s largest, the Bazhenov in Siberia. Again, it’s not the size of the resource but the size of the straw and whether the extraction process is cash flow negative or positive. I haven’t previously mentioned this but besides matters of cash flow there is the matter of energy flow or EROEI(energy return on energy invested). Unless these companies can get a decent return in money or energy, what is the point? Germany in WW2 was making aircraft and tank fuel from coal using the Fischer-Tropsch process . It took 2 units of non oil energy to get one unit of fuel energy for Tiger Tanks and the ME109.They lost the war because they ran out of oil. I know virtually nothing about these frack formations but water and infrastructure is bound to be a problem in both areas and if global warming continues as is expected, Siberia will lose its permafrost and turn into one big mosquito infested mudhole int the summer. My final statement in this post is one I have repeated ad nauseam and that is that the world is past its peak in Cheap Oil and it is cheap oil that has driven growth in the world economy. Richard Miller who oversaw prospecting for BP wrote in the Guardian:”We are like a cage of lab rats that have eaten all the corn flakes and discovered that you can eat the cardboard packets too
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Peak Oil is the hidden driver that no one is talking about. Instead of being honest about the limits of growth we develop more and more complex technology and investment schemes. The politicians won’t admit peak oil because then it would hasten collapse and they would lose control. The CO2/climate change narrative seems to be the way they are going about reducing consumption, wrapped up in the guise of saving the environment. Being honest about how we’ve burned up all the cheap energy and are facing the downslope is totally taboo.