Wall Street's Shale 'Fraud' Exposed

Tyler Durden's picture

Via Jim Quinn's Burning Platform blog,

U.S. energy independence, we're told, is at our fingertips thanks to the so-called “shale revolution”. Offsetting declines in conventional oil and gas production, shale gas and tight oil (shale oil) are being heralded as the means by which the U.S. will become energy independent – a net exporter of natural gas and once again the world’s largest oil producing nation.



But two new reports by Post Carbon Institute and Energy Policy Forum show that the hype simply doesn’t stand up to scrutiny.



  • High productivity shale gas plays are not ubiquitous: Just six plays account for 88% of total production.
  • Individual well decline rates range from 80-95% after 36 months in the top five U.S. plays.
  • Overall field declines require from 30-50% of production to be replaced annually with more drilling – roughly 7,200 new wells a year simply to maintain production.
  • Dry shale gas plays require $42 billion/year in capital investment to offset declines. This investment is not covered by sales: in 2012, U.S. shale gas generated just $33 billion, although some of the wells also produced liquids, which improved economics.


  • More than 80 percent of tight oil production is from two unique plays: the Bakken and the Eagle Ford.
  • Well decline rates are steep – between 81 and 90 percent in the first 24 months.
  • Overall field decline rates are such that 40 percent of production must be replaced annually to maintain production.
  • Together the Bakken and Eagle Ford plays may yield a little over 5 billion barrels – less than 10 months of U.S. consumption.


  • Wall Street promoted the shale gas drilling frenzy which resulted in prices lower than the cost of production and thereby profited [enormously] from mergers & acquisitions and other transactional fees.
  • Industry is demonstrating reticence to engage in further shale investment, abandoning pipeline projects, IPOs and joint venture projects.
  • Shale gas has become one of the largest profit centers in some investment banks, in direct parallel with the decline of natural gas prices.
  • Due to extreme levels of debt, stated proved undeveloped reserves (PUDs) may have been out of compliance with SEC rules at some shale companies because of the threat of collateral default for some operators.
  • With natural gas prices far higher outside the U.S., exports are being pursued in an effort to shore up ailing balance sheets invested in shale assets.



Source: ShaleBubble.org

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Cognitive Dissonance's picture

Wall Street runs on hype. How else then would you fan the flames of Greed and Fear?

The money meme writ large.

0b1knob's picture

The Shale Monster!   OHHHH Scary stuff kids!

Don't worry.   Godzilla King of Monsters will kick his Shale Monster's ass.

Looney's picture

“Shale Fraud” rhymes nicely with “Schadenfreude”. I ain’t no Limerick King, but… I did stay at a Holiday Inn once.  ;-)


Stackers's picture

No complaints here. I sell to oil field service companies.

ACP's picture

Meh, none of this really matters.

No matter how destructive any method method of extraction, engineers will be able to figure out how to extract more, especially with an election on deck.

Example: California - the green state, right...why does it have the worst air quality in the US?

And why did it just offer environmental waivers for a Tesla? Apparently, saving the water is not as important as saving the air, hmm?

All about getting re-elected, nothing else.

kaiserhoff's picture

Thanks Tylers.  I'll take the other side of that trade.


MiguelitoRaton's picture

Oh look some anti-oil "green" groups hate fracking, so they make propaganda pieces saying it is a financial fraud...yet they offer not energy alternative....I'm shocked /sarc

kaiserhoff's picture

ZH is always whining that there is no difference between the Repubs and the Dims, while dragging out every ridiculous Lib scam since Adam, just for the halibut.  Sounds fishy to me.

So Close's picture

As I sit here in West Texs drilling one of the above mentioned wells..   Let me ask this question.  Does the decline rate matter more or less or inversly in conjuction with the intial prodoction rate of a comparable vertical well?  We return 100% ROI on these wells in an average of 14 months... so does it matter what the prodction fall of is if it is on 100% profit?  Tyler... I appreciate much of what you put out on this site but you are out of your depth on this one. 

disabledvet's picture

Well it's not like the USA isn't consuming a lot less either.

Forget just shale oil...look at ethanol production.  Everyone agrees of course "when prices fall this is bad.". But hey...the sun doesn't just "also rise"...it rises and shines everyday!

Kinda annoying actually....

oudinot's picture

So Close: Good work.

If you can continue these type of numbers the declination wll be moot.

However, I think that your rate is an abberation of shale fracking rather than the norm.

You play, most likely, is the exception that proves the rule.

So Close's picture

Yeah... we are all out here pissing money away as fast as we can because we work for non-profits....  wake up.   

NoDebt's picture

Damned right.  If it's not profitable, why would you be doing it?

I have no "idealogical" position on shale, fracking or anything related to the "drill for energy" industry.  If your company fucks up and comes up short on production to cover expenses, that's on you.  If you make a profit, good for you.

There's a weird undercurrent of "the government should do something about this" that permeates all the articles on this subject (including ZH, but not just on ZH).  

Bottom line, that's YOUR business.  Not mine.  Not the business of internet posters.  Drill your ass off.  Make money.  Fill my gas tank.  You'll get nothing but thanks froom me.  Just don't come to me for a bail-out if shit goes all pear-shaped for you.

If we can agree on that, I couldn't ask you for any more.

Matt's picture

The general thinking I get is that QE is the only reason that interest rates are low enough to allow people to borrow to keep drilling.

The Central Bank / Federal Government are the only reason that fracking is happening on this scale. Some of the most profitable wells might still exist at higher interest rates, but probably far fewer.

NoDebt's picture

Which is the problem of So Close's company.  Not my problem, not yours.  If you think it's going to back up on them and throw them into financial trouble, don't invest in their company.  Or short their stock, if you feel strongly about it.

I agree with your general point, but only insofar as I think it applies to a LOT more companies than just drillers.  The whole damned economy is riding on that principle.

GooseShtepping Moron's picture

You, sir, are correct. Gail had a graph up just the other day showing that all the oil majors have been cash-flow negative since 2012. There is no realistic way to amortize that debt, and without the low interests rates all the financial shenanigans in the world will not prevent frackers from going bankrupt. US oil production is being subsidized by savers and taxpayers via the rather recondite route of financial repression.

This is par for the course in American economics; we've been subsidizing airlines, agriculture, and entitlements this way for decades. But now that the vital petroleum industry is also a rentseeker, we've reached an inflection point where the physical economy has gone catabolic on itself. Airlines are a luxury and could be subsidized. You could even make the case that the cost was worth it, since commercial air travel added value and cachet to out economy in exchange for a pittance of financial repression that the average person hardly even noticed. However, petroleum is an integral part of the physical economy. You can't fund oil extraction on the airline model for very long, especially not when you use the stuff as wastefully as we do.

Seer's picture

You, sir, are NO moron (in the traditional sense of the word)!

If it's not sustainable (good luck finding ANYTHING that is) then it IS subsidized.  The trick is to find how something is subsidized.  As you correctly note, the low interest rates (market manipulation) is in fact THE mechanism for the subsidy for shale oil production (and so very, very much more).

At the very least one can say that the subsidy is a pull-forward from the future: based on the future outlook for our continuing the things that we've been doing I'd have to say that the subsidies have been HUGE (growth, in the Big Picture, is pretty much totally pulled forward).

skepsis101's picture

IF, and I don't believe its a very big if any more, extensive fracking correlates with underground water resource contamination as well as seismic activity and subsidence, your companies certainly include in their business model the eventual compensatory costs, RIGHT?   IF NOT, does that mean the US taxpayer eventually provides a further subsidy to YOUR PROFITS?  Just asking!

S.M.T.U.Q.I.'s picture

I doubt God would have left us here without enough fuel to live an d cook with.

So Close's picture

The folks on Easter Island were obvioulsy praying to the wrong God then.

daemon's picture

" The folks on Easter Island were obvioulsy praying to the wrong God then. "

Or maybe their hubris, that same hubris which made them destroy their island, prevented them to pray other gods than themselves.

wrs1's picture

I have tried to explain this before.  Note that they fail to mention the Wolfcamp in this article and it's going to be bigger than Eagle Ford the way it's going in Reeves and Culberson Counties right now.

phaedrus1952's picture

wrs1, please do not inject any facts into this thread ... didn't the above article say only TWO shale plays , the Bak and the EF? Omitting the Permian basin which is producing somewheres around more than these two COMBINED would just diminish the negative tone of the article, dontchano.

The way those boys are marching those big rigs into west Texas, you all are going to be ass-deep in oil for decades to come.



Seer's picture

The equation doesn't change.

As I've been saying for some time now, economies of scale in reverse.  Margins will only continue to get squeezed until it don't work any more.  There isn't enough readily available, CHEAP, energy to push global growth.  Without global growth there won't be the volume to support economies of scale.  There may be "huge" pockets of extractable energy, but that doesn't mean that there are buyers and that there is price support to maintain any margins: 2/3 of the world's population lives on $3/day or less- there is no sign that this will improve (not in the US, that's for sure).

TMLutas's picture

What all this shale oil does is give us time. A number of relevant advances are coming out of the lab and starting to get deployed in the energy field. The later the oil runs out, the less painful transition will be and the more likely that something's going to get cheaper than oil on a durable basis, ending the age of oil before the oil runs out. 

I remember when the figure used for 2/3 of the world was a dollar a day. The dollar's lost value but not quite that much. Saying they live on $3 a day is admitting that there's been significant progress in reducing global poverty. A long way to go yet to beat it, but $3 a day is real improvement. 

fallout11's picture

Scraping the hash pipe for one last desperate hit, like the addicts that we are. Not seeing tomorrow, too busy just trying to get through today.

daemon's picture

" Does the decline rate matter more or less or inversly in conjuction with the intial prodoction rate of a comparable vertical well?  We return 100% ROI on these wells in an average of 14 months... so does it matter what the prodction fall of is if it is on 100% profit?  "

The main point of the article is not the profitability, it is the so-called energy independence.

This is the first line of the article:  " U.S. energy independence, we're told, is at our fingertips thanks to the so-called “shale revolution”. "

Ben Ghazi's picture

So .......................................



Buy XOM, CVX, SLB, HAL, BHI, MRO .................... Right?

Matt's picture

The solution is drastic reduction in energy consumption. Only viable solution. 

Some energy may be gained in very specific locations with well designed renewables, but for the most part the solutions are going to be through efficiency and reduced consumption.

Seer's picture

I'd have to state that there is no "solution," as the very word means final/permanent.

Jevons Paradox speaks to the fallicy of effeciency.

For sure, "reduced consumption" is in our future (that and or reduced population size).

Matt's picture

Jevon's Paradox only occurs if there is more supply to be added. If the energy supply is a constraint, only 100% can be used, it is just a matter of how efficiently.

aVileRat's picture

Without question the second dumbest thing in the last 6-months I have seen posted on ZH.

Taking out the red pen:

1.) Drilling treadmill; 30 to 50% dry gas production does not take into account the shallowing of the type curves, or injection sweeps and only is talking to the nominal number. After the 18 month, even ultra-tight plays will shallow out, bi-lateral or refracing improves OGIP by around another 18%. Realistic replacement rates, even for the most ass-rotten plays (TMS, Granite Wash) come at well below a 1.1x replacement rate at 4/acre downspacing. 7,000 is a number out of their ass and means nothing esp. with context where that number has zero weight in a NAV report.

2.) Shale oil; see 1, go on USGS and feel free to find a 40% field blowdown rate. Go ahead I'll wait; this argument has been around as long as Sleeping Giant. 40% is the first 10 month decline, but fails to encapture the full recovery and secondary zone recovery factors. Simple numbers, for simple statistics traders.

3.) Top 2 plays, out of 9 discovered "tight oil" plays with proven booked production. Yup, great selective statistics. For those who actually read & follow along, go fetch the total recoverable oil, at the 10% type curve estimate at 80/bbl oil.

4.) Shale gas. 42B is a fugazzi and without knowing what type of configuration, design and development scheme that number does not break down into the 7,000 per well at any logical capex for a full drill, completion & tie back in line with current industry trends and goes to show you how out of depth the fact-checker (and audience) is. Compare and contrast a 6/pad; 32-stage Eagle Ford gas window well in 2014 with a 2012 2/pad, 10-stage configuration. Amuse us.

5.) Steep declines. An old trick bears use. Take calendar days, Shock with the inital hockey stick, show a 45 month cutoff of dry gas only. Add in the condensate cuts and apply reinjection after month 30.

6.) Shale oil: sucks when you manipulate the Y-axis to prevent laymen from seeing what the type curve looks like, and you take broad 10-year data to calculate your mean production decline. Making it too small for laymen to properly read is another nice touch.

7.) The final zinger: Compare the Field level recovery and per well economics with the recent spate of dry-hole and offshore costs to those of the Barnett. Go make a chart of it, added bonus if you can square the recent gazprom recovery rates to those of the DJ or Utica.

Now square the recent spate of Zero Hedge's lack of financial articles, increasing energy illiteracy, reposts vs. original posts with when they started to cater to the wingnuts. Correlation is not causation, but it's really starting to rhyme; and I am strongly thinking this site is now run by someone who has not worked at a long/short event driven fund.

Spitzer's picture

It's subprime in the oil business.

You are just getting bullish at the top


Captain Willard's picture

Thanks for this post. It's very difficult even for laymen who have followed the water floods and CO2 plays of the past (not to mention traditional down-spacing dry gas plays) to understand the new shale plays. The economics and techniques are a lot different and decline curves don't tell the whole story.

But when the laymen see Shell and others taking big write-offs of recent shale investments, they start wondering about shale plays in general and just how much hype is applied to these situations.

There is clearly a lot of variability in the quality of shale plays and you cannot help wondering how much hype is applied to some of the marginal shale plays.

You are obviously an expert and I would be damned grateful if you would share your thoughts on what's real in shale and where you are skeptical or perceive too much hype (Marcellus/Utica?)



phaedrus1952's picture

Great post, Captain. There certainly is a lot of variability, rapid change and tons of noise surrounding the shale revolution. The fact that the major oil companies are being left in the dust should in no way cast doubt on the viability of this industry. To the contrary, in a few years, we will see a new major - EOG - assuming the mantle of being the largest onshore producer of oil in the USA.

The supply, the economics, the follow on business opportunities from this stunning and long lasting source of hydrocarbons are real and still in its early stages ... Regardless of the ruffling of so many people's ideological preferences.

Seer's picture


It's NOT sustainable.  PERIOD.

There's insufficient quantities of this "stunning and long lasting source of hydrocarbons" to perpetuate global growth.  And, especially, as long as our economic system is global this limitation stands.  The downward growth trend is clear (and inevitable).

RafterManFMJ's picture

Your problem is in your maths. Reduce the 5.4 Billion number of humans denominator to 500 million or so and run your numbers again.

BobPaulson's picture

Just more evidence that the price will have upward pressure, while the unwinding /tanking economy will give downward price pressure. Lots of people predicting oil at $200 or 2$ any day now. It makes me think it will grind along fairly steady since the increasing cost of production is what is causing the dropping economy. Since our governments always plan the future on what happened last time, they cannot think their way out of this one by diversifying the economy or pushing for an alternate way of doing things. 

Among other things, this is the pitfall of having a world run by old people who are cynical, thinking more of their own deaths than the deaths they cause, and can't imagine a world that changes they way it runs.

Seer's picture

Up-arrow for your first paragraph.  I refer to the pressure here as "economies of scale in reverse" (one day most people will get it; it's taken years for people to finally realize that growth is dead).  As energy is what drives everything else it's, energy's, price (affordability) impacts is much more direct.  EROEI, it's basically law (physics).

As to the second paragraph, well, no fucking idea what you're suggesting here.  Kill off a bunch of old people?  Or, that we can get around our issues by "hope and change?"  I don't care what "wonderful" minds proliferated, if we were a total collective of "happy, optimists," as long as our underlying philosophy is that of perpetual growth on a finite planet we WILL, eventualy, be forced to endure the impact with the WALL (natural forces/physics).

BobPaulson's picture

Saying we need more young middle class leaders, not old rich ones.

Kirk2NCC1701's picture

Que the "Drill!" Shills.

"Drill, baby, drill!" Sarah Palin

Seer's picture

Funny how this logic is seen clearly for so many other things, but when it comes to energy (and or Sarah Palin [another fucking politician]) people unplug from logic.

Strength through exhaustion.  Come on you down-arrowers, defend your positions!

junction's picture

The independent shale oil drilling companies will go bust, the aquifers poisoned by fracking injection wells will stay contaminated for centuries and the EPA will pick up the cost to remediate some of the damage done.  With several hundred more Superfund sites due to fracking and illegal disposal of drilling waste fluids, that will leave taxpayers holding the bill for a few trillion dollars worth of hazardous waste removal and remediation.  Unless the Ogallala Aquifer gets contaminated.

knukles's picture

Sure glad I live in drought land where there's no water

ACP's picture

There's plenty of water near CA, just off the coast.

Of course, drinking it as-is may result in severe kidney damage and death, but no matter.

saveUSsavers's picture

Carlsbad CA 92008- DESAL PLANT under const

phaedrus1952's picture

Hey, Knuks, you may find it of interest that as per a July 2014 NY Times article, Chevron is providing one half of Bakersfield's water district's water supply from their filtered produced water.

Seer's picture

How noble of them: I'm sure that the shareholders are asking them to do LOTS more of this humanitarian aid (I'm sure that it's being written off).  And when Chevron goes bust and leaves (which it WILL), then what?

JLee2027's picture

It costs 5 million to drill a well in North Dakota Bakken and you make your money back in less than a year, anything after is a profit. There are no dry holes. So, the decline in production is not important. It's not a scam.