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.” As the
shale industry goes from 30 to 60 to 70 stage frack wells, this takes one hell
of a lot more pipe, water, sand, fracking chemicals and of course, 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…
MORE
STUFF costs MORE MONEY.
Of
course, the shale industry doesn’t mind using MORE MONEY, especially if some
other poor slob pays the bill.
Shale Oil
Industry: Deep The Denial
According
to a recently released article by 40-year oil industry veteran, Mike
Shellman, “Deep The Denial,” 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. We found it to be between
$285-$300B (billion), both public and private. 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.
… By year end 2019 I firmly believe the US LTO industry will then be
paying over $20B annually in interest on long term 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 its
own “breakeven” prices the US shale oil industry will ultimately have to
produce 9G BO of oil, as much as it has already produced in 10 years…just to
pay its total long term debt back.
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.
For
example, Pioneer brought on 130 new wells in the first half of 2018 and spent
$1.7 billion on CAPEX (capital expenditures) versus 125 wells and $1.36 billion
in 2H 2017. 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. So, how
can Pioneer add five more wells (130 vs. 125) in 1H 2018 to see its oil
production increase a third of what it was in the previous period?
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.
I believe
the U.S. Shale Oil Industry will suffer catastrophic failure from the impact of
deflationary oil prices along with peaking production.
While U.S. Shale Oil production has increased exponentially over the past
decade, it will likely come down even faster.
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