Big Oil hits the brakes on shale spending

36 Comments on "Big Oil hits the brakes on shale spending"

shortonoil on Tue, 9th Dec 2014 8:15 am 



The shale industry must begin to understand that petroleum is not a magical, mythical substance with unlimited value. There is a maximum price that the economy can afford to pay for oil. The investors who have poured 100’s of billions of dollars into this fairy tale are about to discover that there are no unicorns, or flying reindeer. What they thought was the Fairy Godmother was just a pig wearing lipstick all dressed up as Santa Claus.

http://www.thehillsgroup.org/

eugene on Tue, 9th Dec 2014 8:24 am 



Nice, little superficial American biased article. Good for the masses.

Davy on Tue, 9th Dec 2014 8:40 am 



Short, how about that bail out coming! TPTB have bailed out everything else why not the shale folks?

Ron Patterson on Tue, 9th Dec 2014 9:33 am 



A comment on my blog by “Mike” that I thought worth repeating:

“One of the many reasons I have so little regard for the shale oil industry, as an oilman myself, is that it simply cannot tell the truth. From the beginning it misled the American public about its sustainability and hubbub about “energy independence.” Shale oil production was never anything but a very high cost, low return bubble in domestic oil production. It worked for awhile for one reason, and one reason only…high oil prices.”

Pveroi on Tue, 9th Dec 2014 9:50 am 



Some breaks in US exploration would have happened by now any ways. With low eroi and the best formations known, domestic exploration wasn’t going to keep going right? Slamming on the breaks for exploration in places like Africa and SA is what I think tells the real story of where big oil growth is in trouble.

Northwest Resident on Tue, 9th Dec 2014 9:51 am 



Ron, I read another comment on your blog — I can’t remember who that commenter was — but he is, like Mike, an individual who has been in the oil business a long time and obviously very experienced. His comment was something to the effect of “we in the oil business have seen downturns before, we’re a tough bunch, we’ll weather this downturn and rebound again at some point in the future.”

I didn’t want to dispute that commenter on your blog, but I will dispute him here. I think his optimism, though admirable and obviously what got him through tough times in the past, is misplaced this time. Barring some remarkable discovery of “easy to access” conventional oil in great quantities, there is nothing left but shale, tar sands and other high-cost production oil.

Mike’s comment that you posted almost says it all. What he should (or could) have added is that “shale oil production was ALL they had, and it is all that’s left for anybody.”

Which is why I like to say that we are currently in the downward trending midst of The Last Bust. There isn’t going to be another BOOM. The economy broke itself on this last shale “boom”, and doesn’t have the strength or wherewithal remaining to launch another shale boom.

The age of oil had to end on a bust, and it looks like this is it.

wildbourgman on Tue, 9th Dec 2014 10:02 am 



Northwest, just like some people said this boom was different and wouldn’t go bust, I won’t say there won’t be another boom.

Many of the people I know working in the oil industry are too either young to remember the last bust or the others that should know better bought the bull crap about this boom being different.

I’m thinking there will be a bunch of shocked people in North Dakota and to a lesser extent Texas.

Northwest Resident on Tue, 9th Dec 2014 10:11 am 



wildbourgman — I’m neither an oil industry or a financial expert, far from it in fact. But I am a keenly interested observer reading up on those two subjects every day, and have been for a while. I guess the world “boom” when applied to the oil industry is interpretive to a certain extent. But I ask you, where will the next “boom” come from? Some as yet undiscovered shale play? Some deep water source? Like Mike’s comment from Ron’s blog pointed out, the first “shale boom” relied on massive debt accumulation and hucksterism like the financial world has never seen before on such a massive scale. How can this broken economy, so deeply in debt (and exponentially increasing daily) ever find the funding and the trust to launch another “boom” based on high-cost, unconventional production? I’ve been asking that question, but not getting any answers.

Davy on Tue, 9th Dec 2014 10:11 am 



This time is different. The bumpy descent has started and prosperity is over. We just don’t know it yet.

keith on Tue, 9th Dec 2014 10:35 am 



Northwest Resident there can be another boom in shale, only this time with slave labour and militarized police enforcement to transfer human energy into shale oil.

Plantagenet on Tue, 9th Dec 2014 11:07 am 



Shale isn’t the only part of the oil biz that needs high oil prices. So do tar sands in Canada, deep offshore drilling in the GOM, megaprojects in the black sea, and any kind of Arctic oil development.

Its all in the doghouse now.

Perk Earl on Tue, 9th Dec 2014 11:52 am 



The energy predicament is at a crisis point. The cost of producing oil from the remaining smaller fields and other marginal plays is higher than consumer affordability. It’s reached a point now in which there needs to be a forced effort beyond what makes sense energy-wise to keep the dark stuff flowing sufficiently to keep the BAU ship moving forward.

We are guzzling what’s already been tapped at prices that endanger future supply. Everyday the price of oil remains this low is another day in which symbolically dirt is being shoveled into the grave of the oil age.

GregT on Tue, 9th Dec 2014 11:55 am 



Plant,

Concise and to the point. Good post.

Plantagenet on Tue, 9th Dec 2014 11:58 am 



Ron— I checked out your blog—Its GREAT!

Allow me to compliment you on your prediction that peak oil will occur in 2016.

I also enjoyed the post on Ron’s interview at the “Burning Platform” by “RE” that said

“It is quite obvious that cheap energy is HISTORY”

Meanwhile, oil prices are plunging and cheap energy is the story du jour.

Northwest Resident on Tue, 9th Dec 2014 12:00 pm 



Perk — Great imagery with that last paragraph you just posted. I can almost hear the funeral march music playing woefully in the background, somber members of TPTB and political elite standing in a drenching rain on a dark, cold and dreary day watching the last few shovelfuls of dirt being tossed onto the grave of The Age of Oil. And what will the epitaph on the tombstone say? “R.I.P. The Age of Oil March 29, 1819 – 2015. A gift so great used so foolishly.”

Northwest Resident on Tue, 9th Dec 2014 12:04 pm 



Plant — Define “cheap energy”. In your opinion, is $65 per barrel of oil “cheap”. Is “cheap” a relative term when it comes to oil — as in, relative to historically “cheap” or “expensive” oil prices, or is “cheap oil” a value that stands on its own?

GregT on Tue, 9th Dec 2014 12:16 pm 



Plant,

“Meanwhile, oil prices are plunging and cheap energy is the story du jour.”

And right back to your usual cluelessness. At least you had a little spark of rationale, there may be hope for you yet. Keep trying.

Davy on Tue, 9th Dec 2014 12:25 pm 



Kieth, one of my points exactly. As the bumpy descent gathers speed eventually we will be in a crisis situation with vital infrastructure that needs FF and food needs local production. To compensate for this situation whole segments of the population will have to return back to the land. Human and animal power must return in this situation. I don’t see slave labor widespread but I do see a significant portion of the population as peasants.

The negative energy value of oil and other FF at least initially will be subsidized by peasant labor and animal power. This is much like the pyramids were constructed. Martial law and a command control economy is another possible reality at some point. Social fabric will likely tear and break with a population not conditioned for sacrifice, shortages, and insecurity. This will create situations of social unrest.

I imagine areas will be triaged off the grid and security apparatus. Why spend resources policing inner city slums that have no economic value. Places in the Ozarks where my farm is may not have the economies of scale for power companies to keep the lights on. All the above might sound extreme but descent from complexity in a short time with over population is an extreme situation.

The corns who see optimism with either continued growth or a gentle managed descent are pushing the envelope of reality. I hope the realistic corns are right about a gentle descent and a time frame several years in the future. Although I also have concern for AGW which needs immediate degrowth and reduced carbon. AGW mitigation is only going to happen through a significant and sustained descent to a much lower level of economic activity and population. I am talking 19 century in a generation or less.

shortonoil on Tue, 9th Dec 2014 12:45 pm 



Davy said:

Short, how about that bail out coming! TPTB have bailed out everything else why not the shale folks?

They could, and probably will try to bail out the shale industry. The attempt will be like pushing on a string; physics will ultimately trump economics. No matter how much money is shoved into shale it will not put one more BTU into a barrel of what otherwise could be described as high test camel pee. Shale was a net energy zero product when it was developed, and still is today. Unless someone can figure out a way to overcome that problem, shale is a race horse that died at the starting gate.

By the way, Andy Hall (the god of oil) Citi’s 100 million$ per year oil trader just got fired. We commented on the fate of his multi billion dollar long positions about the time that we put up the first version of this graph:

http://www.thehillsgroup.org/depletion2_022.htm

Now you would think that someone with a few hundred billion$ in oil positions would take a little time to check out PO News once in a while. We would have been happy to have saved him a few billion.

http://www.thehillsgroup.org/

dashster on Tue, 9th Dec 2014 12:47 pm 



” It worked for awhile for one reason, and one reason only…high oil prices.””

Well, are we really going to have low oil prices from now on??????

rockman on Tue, 9th Dec 2014 12:57 pm 



Ron – “One of the many reasons I have so little regard for the shale oil industry, as an oilman myself, is that it simply cannot tell the truth.’ I’ll expand on Mike’s point. It will not sound nice but as he says some will and some won’t be honest. Back in the 80’s there was a similar tech focused boom chasing NG reservoirs. We used to create geologic maps that inferred the possible presence of NG reservoirs. But starting in the 70’s offshore and the mid 80’s onshore we developed a seismic technique that, in the right areas and under the right circumstance, actually directly showed the presence of a NG reservoir on the seismic data itself. For short I’ll just call them “amplitude anomalies”. I used AA’s to drill for shallow NG reservoirs in the mid 80’s in a trend where the historic commercial success rate using just geology was at best about 10% to 20%. I hit 23 out of 25 wildcats.

Prospects in every trend are not all are equal. Doesn’t matter if the trend is Deep Water GOM, shallow NG reservoirs where I drilled in the 80’s, the EFS trend, the Bakken, etc. So using my shallow NG AA technology as an example:

I would rate them as A’s (prospects I would recommend my company to drill at 100% of its cost).

Or B’s (prospects with significant risk) which we would sell to investors on a promoted basis. A typical promote: my company would recover the lease and the seismic cost and the investors would pay for 100% of the drilling cost. A dry hole: we would plug and go ion to the next prospect. A good well: the investors would pay for 75% of the completion cost and my company would pay 25%. And then we would produce the well with the investor getting 75% off the net income and my company getting 25%. Everyone makes some money. The promote might sound steep but remember the investor isn’t paying for the salaries at my company, the upfront investment in the land and seismic or any of the office overhead. If bought $500k of seismic and didn’t find a prospect to drill (or I did but couldn’t get the lease) then my company would eat the loss. Along with my outrageous salary. LOL.

And then there are the C prospects: the ones that are high risk with little chance of recovering the investments. Operators like me would eat the loss associated with those C’s and go look for A’ and B’s. OTOH a “promoter” would find some unsophisticated investors who really couldn’t tell the difference between an A, B or C. And then sell them the idea and pocket the upfront money when they drilled a dry hole.

And these unsophisticated investors can include oil companies. In the late 70’s I worked for a NG pipeline company that decided to get into exploration game. They joined four different joint ventures with established exploration companies. I managed two of those JV’s. Times were booming and no one wanted to be left out so the “promoters” had a field day. I call one of the companies “AH”…for ass hole. LOL. AH drilled 18 wildcats in a row that my company participated in. And drilled 18 dry holes in a row. Between this FU’d venture and a number of other bad choices (along with the price crash of the mid 80’s) my company eventually sunk and was acquired by another pipeline company. And AH? The senior management retired $millionaires. Not bad for not finding a single $ worth of oil/NG, eh?

And that long story explains why every time a “civilian” asked me about investing directly in a drilling program I would verbally slap them upside the head. LOL. I still recall a story I read about a couple that saw an ad in the back of the Wall Street Journal offing direct participation in a drilling project. You need to understand this was in the middle of the “Arab Embargo” hype when oil boomed to over $100/bbl (inflation adjusted) in the late 70’s. They mailed a check off to a PO box somewhere. And then couldn’t understand why they were never able to reach that “oil company” to ask why they weren’t getting any “mail box money.

So have some folks got suckered into crappy shale plays that would still be crappy at $100/bbl? Hell yeah. And a lot more that invested in shale wells that are even crappier at $65/bbl. And some were unsophisticated “civilians” and some were knowledgeable folks involved at some level in the oil patch that allowed themselves to be drawn into the hype. And there were folks that invested with good operators who made a nice profit. And there were lots of folks who bought stock in pubcos drilling the shales that made a nice profit…if they sold at the right time, of course. Remember it’s easy to make money in the stock market: buy low…sell high.

And the short form of my story: the oil patch is no place to play if you really aren’t very good at it. But, then again, neither is investing in a start-up restaurant either.

Northwest Resident on Tue, 9th Dec 2014 1:33 pm 



Davy said:

Short, how about that bail out coming! TPTB have bailed out everything else why not the shale folks?

I remember back in 2008/2009 time period. The liberals were pushing hard for a jobs program. The argument was that we needed a jobs program to kick start the economy, to get cash into people’s pockets, to get things moving again.

Well, I believe that now, in retrospect, we can honestly say that the “shale revolution” WAS a jobs program. The taxpayers “paid” for it with massive government debt issued. The result was significant job creation and GDP increase. They didn’t call it a jobs program, but in fact it was a jobs program.

And it might also be viewed as an oil industry “bail out”. As in, without that last burst of trillion$ in debt to juice the economy enough to enable shale oil extraction, the oil industry wouldn’t have had anything to work on other than assorted scraps and crumbs. The shale revolution WAS the bailout, figuratively speaking. And now we are reverting back to reality, which includes the massive unpayable debt that bought the bailout.

The oil industry, and everybody else, is truly screwed at this point. We just haven’t become fully aware of that fact, yet.

Perk Earl on Tue, 9th Dec 2014 4:51 pm 



A QE jobs program (like FDR’s Works Progress Admin.) and oil industry bailout. That’s it NWR, and now we watch as the oil industry tries to remain viable at the consumer affordability oil price.

Not looking good so far.

Plantagenet on Tue, 9th Dec 2014 5:17 pm 



@GretT

You don’t think that a plunge of 40% in oil prices is significant? Really?

Say…..since you look at things that way, why don’t you sell me your house at 40% off? After all, you don’t think a 40% knockdown is important, right?

Hahahahahahah!

Mike999 on Tue, 9th Dec 2014 5:26 pm 



These guys should now be looking to move into WIND POWER and Solar. These prices are still dropping and advancements are still being made.

The solid state battery is around the corner too, meaning a big conversion in Auto Transportation. NOW is a good excuse to get in on the Green Money.

GregT on Tue, 9th Dec 2014 7:16 pm 



Plant,

If I inflated the price of my house by 600% and then sold it to you at 40% off, would you call that a significant plunge in the price of my house? Ya, you probably would.

Boy do I ever have a deal for you…..

Davy on Tue, 9th Dec 2014 7:29 pm 



Planter, Greg gotcha there son!

GregT on Tue, 9th Dec 2014 7:31 pm 



Why do I envision a twelve year old?

Longtimber on Tue, 9th Dec 2014 9:50 pm 



Part II of Mikes comment on PeakOilBarrel.com

“Apparently these shale guys, and the people that fund them, are not going to give up the ghost very easily and will continue to try and bullshit America right up to the very end.” HOOK LINE & SINKER :

Speculawyer on Wed, 10th Dec 2014 2:24 am 



Was “Big Oil” ever spending much on shale fracking? I thought it was mostly the smaller operations. I thought Big Oil was in foreign countries, the Gulf of Mexico, and some Canadian tar sands.

OFT on Wed, 10th Dec 2014 5:15 am 



If I read the ConocoPhillips press release correctly, they state that their 2015 spend on ‘Development Drilling (primarily the Eagle Ford and Bakken) will be $5billion out of a total capital budget of $13.5 billion.
But as mentioned by others, they are – proportionally – more heavily invested in the shale plays than other big oil companies.

shortonoil on Wed, 10th Dec 2014 8:41 am 



Another article on the coming implosion in shale:

http://www.zerohedge.com/news/2014-12-09/time-same-housing-bubble-fed-ignoring-shale-bubble-plain-sight

Northwest Resident on Wed, 10th Dec 2014 10:35 am 



shortonoil — I read that article by David Stockman on his “Contra Corner” website yesterday. That is one very hard hitting and direct-to-the-point article. I highly recommend it to anybody who wants to get a better understanding of just how screwed we are.

A couple of my favorite excerpts:

“The chart below shows the employment rate for the civilian population 16-54 years old. It has crashed during the last two decades of egregious money printing. Specifically, the 16-54 age population has grown by 37 million since 2000, but the number of non-farm employees in that same working age bracket has grown by just 4 million. Yes, the Fed’s hyper-stimulated economy has generated jobs for just 10% of the prime age workers who have been added to the labor force.”

“…the enterprise viability of virtually every shale junk issuer has always been dependent upon an endless rise in the junk bond issuance cycle.

Stated differently, oil and gas shale E&P operators are drastic capital consumption machines. Due to the lightening fast decline rates of shale wells, firms must access more and more capital just to run in place. If they don’t flush money down the well bore, they die along with all the “sunk” capital that was previously put in place.”

Shale was never anything EXCEPT a Ponzi scheme, a “jobs program”, a one-shot “oil industry bailout”, a short term “buy a little more time” strategy. It never stood a chance in hell of lasting much longer than it already has. The purchase price of the shale oil boom has been many trillion$ in unpayable debt and the corruption of a once fairly solid financial system. “They” knew before they set us on this path that this was the end game — an end game that is still playing out.

rockman on Wed, 10th Dec 2014 12:20 pm 



NR – OK bubba…I’ve put up with your abuse of the English language too long. LOL. The shale plays HAVE NOT been a Ponzi scheme. I have not heard of a single case of any operator taking funds from one investor and delivering them to an earlier investor claiming they were revenue generated from a project he had invested in. And did the same with the second investor with monies he got from a third investor. Etc.

It is much better describe as a “419” scam…also known as the “Spanish Prisoner Scam”. Such scams are the most common types of confidence trick. The scam typically involves promising the victim a significant share of a large sum of money, which the fraudster requires a small up-front payment to obtain. If a victim makes the payment, the fraudster simply disappears. There are many variations on this type of scam, including advance-fee fraud, Fifo’s Fraud, Spanish Prisoner Scam, the black money scam, and the Detroit-Buffalo scam. The number “419” refers to the article of the Nigerian Criminal Code dealing with fraud. The scam has been used with fax and traditional mail, and is now used with the Internet.

So I show you my inventory of shale prospects and you buy $X of my stock based on my pitch that the stock being worth $2X in the future…maybe even more. Of course you see the stock value increasing because you bought early into the play. Now the next investors comes along and sees the growth in your equity and decides he wants a piece so he buys the stock. Or maybe he prefers to make his return by loaning me some capex. I’m good either way.

But eventually that ultimate big pay day may not arrive as promised. Maybe my wells don’t yield the volume of oil I had predicted. Or maybe my wells turned out semi OK but a steep drop in the price of oil erodes those gains quickly. And if either (or both) events occur to a significant degree my operation folds up and…wait for it…wait for it…the company disappears in bankruptcy or is acquired by another oil company for a fraction of its initial stock value. LOL.

Northwest Resident on Wed, 10th Dec 2014 12:38 pm 



rockman — I appreciate the smack down. My philosophy is, no matter how bad it hurts, knowing the straight up truth is better than clinging to more comfortable fibs or half-truths.

I confess that I’m not all that original. When I called it a Ponzi Scheme, I was merely parroting the same words and terminology I’m reading everywhere else on the web regarding shale. I think your 419 scam is probably a much better descriptor now that you mention it, but probably the reason they’re all going with Ponzi scheme instead of 419 scam is because they get more bang for their buck out of the phrase “Ponzi Scheme”. Walk into a crowded theatre and yell “419 Scam” and see how many heads you turn… see what I mean? But yell “Ponzi Scheme”, and you’ve got a stampede on your hands…

I know that I don’t know anything except for what I read. No direct experience. No scholarly expertise such as Ron Patterson frequently exhibits. All I’ve got is the vast volumes of what experts, pundits, industry insiders and notable journalists write on these subjects. And my non-expert, non-hands-on POV is that the whole shale revolution was never sustainable, and yet knowing that, the financial hucksters and hypesters lured vast amounts of investment into the whole scam anyway. Some call it a Ponzi Scheme. Others call it a 419 Scam, and I guess I’ll have to go along with that descriptive phrase now that you mention it. But no matter what we call it, it still is exactly what it is, and that is, unsustainable.

Kenz300 on Wed, 10th Dec 2014 12:50 pm 



Boom……..bust…………boom………bust………