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Shale Fracking Is a “Ponzi Scheme” … “This Decade’s Version of The Dotcom Bubble” … “A Lot In Common With the Subprime Mortgage"
In 2011, the New York Times wrote:
“Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. “Reminds you of dot-coms.”
“The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work,” an analyst from IHS Drilling Data, an energy research company, wrote in an e-mail on Aug. 28, 2009.
***
“And now these corporate giants are having an Enron moment,” a retired geologist from a major oil and gas company wrote in a February e-mail about other companies invested in shale gas.
***
Deborah Rogers, a member of the advisory committee of the Federal Reserve Bank of Dallas, [and a] former stockbroker with Merrill Lynch ... showed that wells were petering out faster than expected.
“These wells are depleting so quickly that the operators are in an expensive game of ‘catch-up,’ ” Ms. Rogers wrote in an e-mail on Nov. 17, 2009, to a petroleum geologist in Houston, who wrote back that he agreed.
***
A review of more than 9,000 wells, using data from 2003 to 2009, shows that — based on widely used industry assumptions about the market price of gas and the cost of drilling and operating a well — less than 10 percent of the wells had recouped their estimated costs by the time they were seven years old.
***
“Looks like crap,” the Schlumberger official wrote about the well’s performance, according to the regulator, “but operator will flip it based on ‘potential’ and make some money on it.”
In 2012, the New York Times pointed out:
The gas rush has ... been a money loser so far for many of the gas exploration companies and their tens of thousands of investors.
***
Although the bankers made a lot of money from the deal making and a handful of energy companies made fortunes by exiting at the market’s peak, most of the industry has been bloodied — forced to sell assets, take huge write-offs and shift as many drill rigs as possible from gas exploration to oil, whose price has held up much better.
***
Now the gas companies are committed to spending far more to produce gas than they can earn selling it. Their stock prices and debt ratings have been hammered.
Rolling Stone reported the same year:
Fracking, it turns out, is about producing cheap energy the same way the mortgage crisis was about helping realize the dreams of middle-class homeowners. For Chesapeake, the primary profit in fracking comes not from selling the gas itself, but from buying and flipping the land that contains the gas. The company is now the largest leaseholder in the United States, owning the drilling rights to some 15 million acres – an area more than twice the size of Maryland. McClendon [the CEO of fracking giant Chesapeake] has financed this land grab with junk bonds and complex partnerships and future production deals, creating a highly leveraged, deeply indebted company that has more in common with Enron than ExxonMobil. As McClendon put it in a conference call with Wall Street analysts a few years ago, "I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet."
According to Arthur Berman, a respected energy consultant in Texas who has spent years studying the industry, Chesapeake and its lesser competitors resemble a Ponzi scheme, overhyping the promise of shale gas in an effort to recoup their huge investments in leases and drilling. When the wells don't pay off, the firms wind up scrambling to mask their financial troubles with convoluted off-book accounting methods. "This is an industry that is caught in the grip of magical thinking," Berman says. "In fact, when you look at the level of debt some of these companies are carrying, and the questionable value of their gas reserves, there is a lot in common with the subprime mortgage market just before it melted down."
***
In February, Chesapeake announced that, because of low gas prices, its revenues will fall $3.5 billion short of its expenses this year.
Jim Quinn noted last year:
Royal Dutch Shell is one of the biggest corporations in the world, with financial resources greater than 99% of all the organizations on earth. Their CEO [Peter Voser] probably knows a little bit more about oil exploration than the Wall Street systers and CNBC bimbos. His company has poured $24 billion into shale exploration in the U.S. It has been a huge failure. They have already written off $2.1 billion. They are trying to sell huge swaths of land in the Eagle Ford area. They are losing money in the shale oil and gas business. If Shell can’t make it profitable, who can?
Bloomberg noted in February:
Independent producers will spend $1.50 drilling this year for every dollar they get back.
Oil Price reported in March:
Shell’s new boss, Ben van Beurden, said bets on U.S. shale plays haven’t worked out for his company.
***
“Some of our exploration bets have simply not worked out,” Shell’s Chief Executive Officer Ben van Beurden said. It was bad management policy to commit close to $80 billion in capital on its North American portfolio and still lose money. Now, he said, it’s time to cut the loss and slash exploration and production investments by 20 percent for 2014.
***
Shell’s problems say more about the difficulties of shale exploration than they do about the company itself.
The Wall Street Journal pointed out this April:
These newly public companies are spending more than they make ....
Bloomberg wrote in May:
Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.
“The list of companies that are financially stressed is considerable,” said Benjamin Dell, managing partner of Kimmeridge Energy, a New York-based alternative asset manager focused on energy. “Not everyone is going to survive. We’ve seen it before.”
***
In a measure of the shale industry’s financial burden, debt hit $163.6 billion in the first quarter, according to company records compiled by Bloomberg on 61 exploration and production companies that target oil and natural gas trapped in deep underground layers of rock.
***
Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells. At the same time, investors have been pushing companies to cut back. Spending tumbled at 26 of the 61 firms examined. For companies that can’t afford to keep drilling, less oil coming out means less money coming in, accelerating the financial tailspin.
***
“Interest expenses are rising,” said Virendra Chauhan, an oil analyst with Energy Aspects in London. “The risk for shale producers is that because of the production decline rates, you constantly have elevated capital expenditures.”
And Tim Morgan - former global head of research at Tullett Prebon - explained last month at the Telegraph:
We now have more than enough data to know what has really happened in America.
***
If a huge number of wells come on stream in a short time, you get a lot of initial production. This is exactly what has happened in the US.
The key word here, though, is "initial". The big snag with shale wells is that output falls away very quickly indeed after production begins. Compared with “normal” oil and gas wells, where output typically decreases by 7pc-10pc annually, rates of decline for shale wells are dramatically worse. It is by no means unusual for production from each well to fall by 60pc or more in the first 12 months of operations alone.
Faced with such rates of decline, the only way to keep production rates up (and to keep investors on side) is to drill yet more wells. This puts operators on a "drilling treadmill", which should worry local residents just as much as investors. Net cash flow from US shale has been negative year after year, and some of the industry’s biggest names have already walked away.
The seemingly inevitable outcome for the US shale industry is that, once investors wise up, and once the drilling sweet spots have been used, production will slump, probably peaking in 2017-18 and falling precipitously after that. The US is already littered with wells that have been abandoned, often without the site being cleaned up.
Meanwhile, recoverable reserves estimates for the Monterey shale – supposedly the biggest shale liquids play in the US – have been revised downwards by 96pc. [Background; and see this.] In Poland, drilling 30-40 wells has so far produced virtually no worthwhile production.
In the future, shale will be recognised as this decade's version of the dotcom bubble. In the shorter term, it's a counsel of despair as an energy supply squeeze draws ever nearer.
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I'm in northeast PA where fracking royalties have pulled a lot of people out of poverty. If this is a ponzi scheme, then I hope it lasts long enough for me to get my house fixed up with alternative energy and edible landscaping so I can asurvive when it goes bust.
Good that you are putting food on the table. The royalties are crumbs. We all wish we had a little also, because that's all we've got. And we are so happy to have a little food for our families.
When will America Return? I don't think it... Well We the People will return. That's what I believe.
Cheap money fuels the industry and cheap money isn't going anywhere. There plenty of land in the west to be fracked.
Game on.
To be clear. Unlike the dot com crash, all of todays ponzis are really one giant ponzi. The FED owns it. The status quo will have to crash for the ponzi to end.
The status quo has many more resources and options than pets.com, for example, many more sock puppets.
"... an industry that is caught in the grip of magical thinking ..."
which operates inside of a globalized civilization in the grip of magical thinking, because today's Ponzis ARE one giant Ponzi! The whole world is controlled by ENFORCED FRAUDS, systems of legalized lies, backed by legalized violence, which have been developing to get bigger and BIGGER for thousands of years! The initially astonishing social facts are the ways that governments are the biggest form of organized crime, controlled by the best organized gangs of criminals. THE PONZI is private banks being legally allowed to create the public "money" supply out of nothing, as debts, while everyone else is forced to accept that fiat fraud, and work within that social pyramid system.
The original Ponzi required people to voluntarily agree, to be tricked by the fraudulence in that Ponzi. The globalized giant Ponzi is backed up by all the governments of NATO, their police, military, and mercenaries. That giant Ponzi allows for no way out of that ENFORCED FRAUD. Instead, the magical thinking based on operating a political economy in which the "money" to "pay" for everything gets made out of nothing, as debts, drives the entire civilization to behave in ways based upon irrationally insane "magical thinking."
I was forced to agree with another recent comment made by gjp on this article:
http://www.zerohedge.com/news/2014-09-19/precious-metals-liquidated-make...
"... the ponzi has won. Markets are marching to one tune only now, doing the bidding of the establishment. Ever since they went all in there has been no other bet. The only way to win is to play along. Of course it ensures unproductive waste and decline and ultimate collapse, but then everybody loses, including the stackers. Sadly the rational thing to do, short of prepping and dropping off the grid is to join the dark side. ..."
The real world IS controlled by entrenched systems of Huge Lies backed by Lots of Violence, which vicious spirals have been getting bigger and BIGGER for thousands of years, at an exponentially accelerating rate ... The American development of Neolithic Civilization based on systems of organized lies operating robberies became the greatest of all such systems, so far, which has been able to dominate the rest of the world.
The basic problem has been the social pyramid system. The phrase "Ponzi Scheme" as one such famous example of a pyramid scheme, however, the entire world is now one vast social pyramid system, based on ENFORCED FRAUDS, wherein people became successful by adapting to think more and more magically, or to develop the magical mathematics of make "money" out of nothing as debts, which form of "money" could also disappear back to nothing.
It is impossible to exaggerate the degree to which the established globalized electronic frauds, backed by the force of the threat of atomic bombs, is criminally insane. However, everyone who is born into that system has a choice to make, and those who choose to operate inside of that system and take the maximum short-term advantage of those runaway ENFORCED FRAUDS, become the most socially successful, WITHIN those systems.
There are combined money/murder systems, which have become utterly INSANE STATE RELIGIONS, based on the magical thinking which operates through the ENFORCED FRAUDS of making "money" out of nothing. The deeper levels were that human beings, when they are perceived and defined as separated from their environment, operate as robbers. Civilization was always systems of organized lies operating robberies. The history of human civilizations was based on warfare, through which the surviving War Kings, who were the best at backing up deceits with destruction, created the sovereign states, whose powers were developed through the history of warfare. The sovereign powers of states was captured by the biggest gangsters, the banksters, the Fraud Kings. Thereby, the systems of backing up deceits with destruction segued into backing up frauds with force, as information became more important than power.
There are at least two levels to perceive these problem upon. The first is that governments are the biggest forms of organized crime, controlled by the best organized gangs of criminals, and the second is that all human systems operate as entropic pumps of energy, in which good analysis of reality will always reveal there are systems of organized lies, operating robberies. The only things which actually exist are different systems of organized lies operating robberies in dynamic equilibria with each other.
What has happened has been that the most dominant systems, the runaway fascist plutocracy juggernaut, and its fascist police state, which enforces the frauds of making the public "money" supply out of nothing, enable and encourage as much magical thinking as possible. The reality of the political economy was always organized lies operating robberies, and that must necessarily be the case, as soon as any human energy system is defined and perceived as an entropic pump of energy, which are the only scientific ways to see them.
The most success of those systems where the ones which maximized their deceits and frauds, in order to become the biggest of the systems of organized lies operating robberies. In fact, our entire civilization IS based on the maximum possible deceits and frauds, because what was most socially successful was to benefit from ENFORCED FRAUDS.
"The only way to win is to play along. Of course it ensures unproductive waste and decline and ultimate collapse, but then everybody loses ..."
"The status quo will have to crash for the ponzi to end."
There is a growing Grand Canyon Paradox due to progress is human being understanding general energy systems, while that is NOT applied to understanding human energy systems, because in order to do so almost all of the dominate forms of magical thinking would have to be surmounted. Almost all of the ways that the biggest bullies' bullshit social stories dominate civilization would have to be corrected, by going through a series of intellectual scientific revolutions, from the philosophy of science to politics.
The globalized great Ponzi scheme, of the atomic energy enforcing electronic frauds, is still being dealt with by most people through deliberate ignorance, while those few who do understand continue mostly to decide it is personally most successful for them to continue to play along. Meanwhile, the enforced frauds of making the public "money" supply out of nothing as debts drives collective magical thinking to unprecedented levels, which "it ensures unproductive waste and decline and ultimate collapse."
THE BASIC PROBLEM IS THE SOCIAL SUCCESS FLOWING FROM BEING ABLE TO BACK UP LIES WITH VIOLENCE, HAVING BECOME A GLOBALIZED CIVILIZATION BASED ON INTEGRATED SYSTEMS OF LEGALIZED LIES, BACKED BY LEGALIZED VIOLENCE.
That "Ponzi" HAS WON! However, the price of winning has been to drive the entire civilization to become criminally insane. Meanwhile, there is no effective opposition, but only controlled opposition that stays within the same frame of reference as the established system does. To change paradigms requires understanding the ways that the biggest bullies' bullshit dominated the philosophy of science, the same as it did all other social enterprises. Therefore, we understand the concept of entropy backwards, because an arbitrary minus sign was inserted into the entropy equations of thermodynamics and information theory, in order that measurements of power and information would result in positive numbers, instead of negative numbers, which the mathematical physics itself revealed was the true situation.
Any ability of human beings to perceive their world, and discuss those perceptions, NECESSARILY results in systems of organized lies operating robberies. There are good reasons why good analysis always reveals those facts. There are good reasons why governments are the biggest form of organized crime, controlled by the best organized gangs of criminals. There are good reasons why the controlled opposition groups to the established system continue to promote the same sets of false fundamental dichotomies, and "solutions" based on the related impossible ideals, which always backfire badly, and make the opposite happen in the real world. As soon as human beings perceive themselves as finite, and separate from their environment, and other beings, then they must necessarily perceive themselves as operating through systems of organized lies and robbery, and the only genuine resolutions of their chronic political problems are to change the dynamic equilibria between those different systems of lies operating robberies.
Although on Zero Hedge one typically finds much better analysis than in the mass media, and the mainstream schools, one almost never finds any better "solutions," since all those "solutions" continue to operate within the same old false fundamental dichotomies, and therefore, after relatively good analysis, the proposed "solutions" tend to collapse back to being based on the same old impossible ideals, which actually always cause the opposite to happen in the real world. It is not possible to exaggerate the degree to which we are living in a Bizarro Mirror World, where everything is perceived proportionately backwards and distorted, and that applies to the proposed "solutions" to our problems even more than it does to the standard analyses of those problems.
Paradoxically, the economic systems is directed by the debt controls, which are backed by the death controls, both of which developed to operate on the basis of the maximum possible frauds and deceits, so that every economic decision was being made inside of that context of social success based on enforced frauds. However, a deeper analysis does NOT lead to promoting solutions which would "stop" that from happening. Rather, a deeper analysis leads to understand how and why that necessarily was what happened, because it had to work that way.
Paradoxically, the only genuinely better resolutions to these chronic political problems are better dynamic equilibria between the different systems of organized lies operating robberies. The only genuine solutions to these problems require better organized crime, in the form of better debt controls backed by better death controls. The only genuinely better resolutions demand intellectual scientific revolutions, from the philosophy of science to politics, so that we do not continue to promote the impossible ideals that it is possible to stop human systems from being entropic pumps of energy flows, which naturally end up following their paths of least resistance, being controlled by the most labile components, which are now the paths of least morality controlled by the banksters.
There is no doubt that things like shale fracking, and the manipulation of the price of gold and silver, are both significant manifestations of the ways that some people have the legal privilege of making the public "money" supply out of nothing, which powers enable them to rig the markets for everything. However, there are no ways to actually better resolve those problems which do not face the basic facts that money is measurement backed by murder, which exists in the necessary context that all human realities are systems of organized lies operating robberies.
The only ways that we could develop better human, industrial and natural ecologies are IF we were to understand human energy systems in ways which were consistent with natural energy systems. However, there is no way to do that which can avoid coming to the conclusions that governments are necessarily the biggest form of organized crime, controlled by the best organized gangs of criminals, because the better perception of human energy systems necessarily results in the operations of human systems of the entropic pumping of energy converging with being best described by the principles and methods of organized crime.
Fraudulent Ponzi schemes, which were illegal, blend into the biggest systems of legalized lies, backed by legalized violence, of the greater globalized Ponzi schemes of the banksters' government enforced frauds, of making "money" out of nothing, facilitating every kind of magical thinking surrounding the magical mathematics. On Zero Hedge, one will routinely find excellent analysis of those problems, however one will almost never find any better sets of "solutions" for those problems, because those proposed solutions tend to never stay consistent with their analysis, but rather, tend to collapse back down to the bullshit based on impossible ideals, when they switch gears from analysis of the problems, to the synthesis of solutions.
Of course, the obvious problem that arises IF one does not collapse back to bullshit impossible ideals in order to base "solutions" upon is that then one is forced to face the basic backed that the combined money/murder systems require that to change the debt controls means changing the death controls. Any better monetary system, which was not based on magical thinking, or the magical mathematics in which "money" can be created out of nothing and disappear back to nothing, would require a better murder system to back that up.
To begin to do that would require understanding human energy systems better, which returns us to the requirements for a series of intellectual scientific revolutions in the ways that we perceive the world, which would then apply to the money systems and the murder systems that back those monetary systems up. While better analysis of the history of the banksters' dominance of their globalized greater Ponzi scheme, influencing everything from the price of oil to the price of gold, reveals how the banksters were able to apply the methods of organized crime to control the political processes, in order to establish the current systems of enforced frauds, any better sets of solutions would necessarily have to be consistent with that analysis, that only better debt controls, backed by better death controls, could perhaps enable a better political economy to operate, in ways which respected the need for overall integrated evolutionary ecologies of the human, industrial and natural worlds ...
Of course, at the present time, we are rushing faster and faster in the opposite direction, which enable debt insanities to prepare for conditions in which there will be death insanities. Furthermore, as the Zero Hedge Web site reveals, while the mainstream morons' analysis of those problems is pathetically ridiculous, most of the "solutions" proposed by those who are published on Zero Hedge are also pathetically ridiculous.
After reading Zero Hedge for several years, and posting my kinds of comments here for the last couple years, I have yet to read anyone who consistent follows through from the correct analysis of the social facts that the banksters are the biggest gangsters to then propose genuine solutions which remain consistent with that discovery. As long as the "solutions" continue to be proposed within the same old-fashioned frames of reference of false fundamental dichotomies and related impossible ideals, then those "solutions" are NOT consistent with better understanding of human systems as manifestation of general energy systems.
Sometimes I want to strangle the guy who invented "cut and paste".
Cut and paste, like these basic links about the Fed in particular, and fractional reserve banking in general:
http://www.youtube.com/watch?v=CM2vMHx46ww 1:02 minutes
http://www.youtube.com/watch?v=q6vi528gseA 23 seconds
https://www.youtube.com/watch?v=4RF3Lr4XI4w 2:26 minutes
Only sometimes?
I am not saying the article is totally off base, there is some truth in there but a lot of those wells can be re-fracked and get some new production. Production may drop off by half after a year, and by half again the year after that, but they can re-frack and get most of it back for a while the next year. So can they get energy, yes. At these prices long term? Doubtful.
Can they re-frack their debt too ?
I work in the industry Bakken,ND. It is a nuthouse out here... Tremendous effort to pull the oil out- water, saltwater, fracsand, infrastructre, ,heavy machinerytrucks, manpower. Seems like a clusterfuck but I'm making cash hand over fist. Turning it into silver and gold as fast as possible.
Dust grease and gears, bitchez.
Off for another 14 hour day!
When do I start?
I started in the oil and gas industry up in Williston, ND-be sure to buy some warm clothes, winter is coming!
P.S. Keep stackin :)
Big difference is the Dot-Com bubble left empty office space. Fracking leaves a scarred and polluted landscape that was mostly pure before the wells were built. Disgrace!
True B7. Take a look on Bing maps (satellite view) at the northern one-third (60 miles x 300m.) of Pennsylvania. What was once a nearly unbroken, deep and thick forest from New Jersey to Ohio, is now pock-marked with many hundreds of disgraceful fracking operations where large 25-50 acre areas are clear-cut along with crude access roads. This might as well be a war zone with bomb craters throughout. Enviromental concerns were the least of Dick Cheney's/Halliburton's heinous fracking invention. Pennsylvania was the pushover state selected to be the guinea pig. Fracking is a colossal failure, period.
If a tree falls in the forest and no one is there to hear it, does it make a sound?
If a tree is cut down in the forest, and no one is there to see it, who gives a fuck if it is cut down to extract a needed commodity?
We have tons of trees. More oil please. All of my vehicles need a regular diet of delicious dinosaurs.
Sustainability means planning our future in a way that we do not set ourselves up to crash and burn at some future date. Long-term planning has not been something politicians excel at or are even good at. Our system is geared at getting politicians reelected and fulfilling the most pressing needs of today.
Things like profit, greed, and quenching our unrelinquishing desire for growth are placed in front of longer term issues and needs. Mapping out a logical and sustainable long-term plan requires delving into some rather hefty philosophical questions like what brings real happiness. More on this important topic in the article below.
http://brucewilds.blogspot.com/2014/04/planning-sustainable-future-for-m...
Sustainability = a system/element producing enough energy to both maintain and reproduce itself with in its lifetime.
This. Dumb
You're being sarcastic. Right?
The whole game is only possible because of ZIRP. It makes no sense on an EROI basis and the depletion rates are astonishing, requiring ever more investment to maintain production levels. The Major oil Companies ALL pulled out long ago. Now, I wonder why that would be? When rates rise, the frackers all go bankrupt, leaving the environmental problems to the taxpayer. As usual....
For some, yes. The key to making money and being able to sustain your business is to drill to cash flow. That is what the company where I work has started doing. We have paid off about $5B in debt so far this year and are only adding new rigs to the more productive areas (NM, Eagle Ford in TX) and then only if we can pay cash to do so. A heavily leveraged company will ultimately find itself in an unsustainable position.
We hedged most of our oil this year at $95/bbl. We will easily profitable with oil at $70/bbl. If it drops below that for an extended time, we will have to make some changes.
By the way, the majors have not pulled out. Not even close.
An example of zirp malinvestment.
Bingo! ZIRP is the reason. Unintended consequences.
And the banksters win again.
<= this is my shocked face