While the U.S. Shale Industry produces a record amount of oil, it continues to be plagued by massive oil decline rates and debt. Moreover, even as the companies brag about lowering the break-even cost to produce shale oil, the industry still spends more than it makes. When we add up all the negative factors weighing down the shale oil industry, it should be no surprise that a catastrophic failure lies dead ahead.
Of course, most Americans have no idea that the U.S. Shale Oil Industry is nothing more than a Ponzi Scheme because of the mainstream media’s inability to report FACT from FICTION. However, they don’t deserve all of the blame as the shale energy industry has done an excellent job hiding the financial distress from the public and investors by the use of highly technical jargon and BS.
For example, Pioneer published this in the recent Q2 2018 Press Release:
Pioneer placed 38 Version 3.0 wells on production during the second quarter of 2018. The Company also placed 29 wells on production during the second quarter of 2018 that utilized higher intensity completions compared to Version 3.0 wells. These are referred to as Version 3.0+ completions. Results from the 65 Version 3.0+ wells completed in 2017 and the first half of 2018 are outperforming production from nearby offset wells with less intense completions. Based on the success of the higher intensity completions to date, the Company is adding approximately 60 Version 3.0+ completions in the second half of 2018.
Now, the information Pioneer published above wasn’t all that technical, but it was full of BS. Anytime the industry uses terms like “Version 3.0+ completions” to describe shale wells, this normally means the use of “more technology” equals “more money.” .
However, the majority of investors and the public are clueless in regards to the staggering costs it takes to produce shale oil because they are enamored by the “wonders of technology.” For some odd reason, they tend to overlook the simple premise that…
Of course, the shale industry doesn’t mind using MORE MONEY, especially if some other poor slob pays the bill.
According to a recently released article by 40-year oil industry veteran, Mike Shellman, he provided some sobering statistics on the shale industry:
I recently put somebody very smart on the necessary research (SEC K’s, press releases regarding private equity to private producers, etc.) to determine what total upstream shale oil debt actually is. . Kallanish Energy Consultants recently wrote that there is $240B of long term E&P debt in the US maturing by 2023 and I think we should assume that at least 90 plus percent of that is associated with shale oil. That is maturing debt, not total debt.
Using its own self-touted “breakeven” oil price, the shale oil industry must then produce over 1.5 Million BOPD just to pay interest on that debt each year. Those are barrels of oil that cannot be used to deleverage debt, grow reserves, not even replace reserves that are declining at rates of 28% to 15% per year… that is just what it will take to service debt.
Using Mike’s figures, I made the following chart below:
(For charts and graphs link to website below)
The public and investors need to understand that “oil breakeven costs” do not include capital expenditures. And according to Pioneer’s Q2 2018 Press Release, the company plans on spending $3.4 billion on capital expenditures in 2018. The majority of the capital expenditures are spent on drilling and completing horizontal shale wells.
I have seen estimates that it cost approximately $9 million for Pioneer to drill a horizontal shale well in the Permian. Thus, the 130 wells cost nearly $1.2 billion.
However, the interesting thing to take note is that Pioneer brought on 125 wells in 2H 2017 to add 30,000+ barrels of new oil production compared to 130 wells in 1H 2018 that only added 10,000+ barrels.
Regardless, the U.S. shale oil industry continues to spend more money than they make from operations. While energy companies may have enjoyed lower costs when the industry was gutted by super-low oil prices in 2015 and 2016, it seems as if inflation has made its way back into the shale patch. Rising energy prices translate to higher costs for the shale energy industry. Rinse and repeat.
Unfortunately, when the stock markets finally crack, so will energy and commodity prices. Falling oil prices will cause severe damage to the Shale Industry as it struggles to stay afloat by selling assets, issuing stock and increasing debt to continue producing unprofitable oil.
While U.S. Shale Oil production has increased exponentially over the past decade, it will likely come down even faster.
* * *