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Drilling Our Way Into Oblivion: Shale Was About Land Gambling With Cheap Debt, Not Technological Miracles

Tyler Durden's picture




 

Submitted by Raul Ilargi Meijer of The Automatic Earth blog,

Oh, that sweet black gold won’t leave us alone, will it? West Texas Intermediate went through some speedbumps Friday, but ended over +5%, though still only at $57. Think them buyers know something we don’t? I don’t either. I see people covering lousy bets. And PPT (and that’s not the one we used to spray our crops with).

The damage done must be epic by now, throughout the financial system, but we’re not hearing much about that yet, are we? We will in time, not to worry. Everyone’s invested in oil, and big time too, and they’ve all just become party to a loss of about half of what both oil itself and oil stocks were worth just this summer.

There’s those who can ride it out and wait for sunnier days, but many funds don’t have that luxury. Who wants to be manager of Norway’s huge oil-based sovereign fund these days? With all these long-term obligations entered into when oil was selling for $110, no questions asked? The Vikings must be selling assets east, west, left and right. But they’re not going to tell us, not if they can help it.

Just like all the other money managers who pray every morning and night on their weak knees for this nightmare to pass. Your pension fund, your government, they’re all losing. BIG. They’ll try and hide those losses as long as they can. But trust me on this one: all major funds have oil in a prominent place in their portfolios. And there’s a Bloomberg index that says the average share values of 76 North American oil companies, i.e. not just the price of oil, have lost 49% of their value since June. There will be Blood with a capital B.

The discussions over the past few weeks have all been about OPEC, whether they would cut output or not. And I’m not really getting that. There are 3 major producers today, you might even label them swing producers: Saudi Arabia, Russia, and the US. But all the talk is always about OPEC cutting. What about Russia? Well, they can’t really, can they, with all the sanctions and the threat they are to the ruble. Russia must produce full tilt just to make up for those sanctions. The Saudis know that if they cut, other producers, OPEC or not, will fill in the gap they leave behind. At $55 a barrel, everyone’s desperate. Therefore, the Saudis are not cutting, because it would only cost them market share, and prices still wouldn’t rise.

So why does everyone in the western media keep talking about OPEC cutting output, and not the US, just as the same everyone is so proud of saying the US challenges the Saudis for biggest producer status?! Why doesn’t the US cut production? It’s almost as big as Saudi Arabia, after all. Why doesn’t Washington order the (shale) oil patch to tone it down, instead of having everyone talk about OPEC? I know, energy independence and all that, but it’s still a curious thing. Want to save the shale patch? Cut it down to size.

Anyway, this is what we have on offer: the oil industry faces a triple whammy. Oil prices are down 50%, oil company share valuations are also down 50%, and their production costs are rising, in quite a few cases exponentially so. That’s what they, and we, face while slip-sliding into the new year. Do I need to explain that that does not bode well? Let’s do a news round. Starting with Bloomberg on how the shale boys are stumbling over their hedges and other ‘insurance’ policies. All you really need to know is: “Producers are inherently bullish ..” And then you can take it from there.

Oil Crash Exposes New Risks for U.S. Shale Drillers

Tumbling oil prices have exposed a weakness in the insurance that some U.S. shale drillers bought to protect themselves against a crash. At least six companies, including Pioneer Natural Resources and Noble Energy, used a strategy known as a three-way collar that doesn’t guarantee a minimum price if crude falls below a certain level, according to company filings. While three-ways can be cheaper than other hedges, they can leave drillers exposed to steep declines.

 

“Producers are inherently bullish,” said Mike Corley, of Mercatus Energy Advisors. “It’s just the nature of the business. You’re not going to go drill holes in the ground if you think prices are going down.” [..] Shares of oil companies are also dropping, with a 49% decline in the 76-member Bloomberg Intelligence North America E&P Valuation Peers index from this year’s peak in June. The drilling had been driven by high oil prices and low-cost financing.

 

Companies spent $1.30 for every dollar earned selling oil and gas in the third quarter, according to data compiled by Bloomberg on 56 of the U.S.-listed companies in the E&P index. Financing costs are now rising as prices sink.

 

The average borrowing cost for energy companies in the U.S. high-yield debt market has almost doubled to 10.43% from an all-time low of 5.68% in June, Bank of America Merrill Lynch data show. [..]

 

Pioneer, one of the biggest U.S. shale oil producers, used three-ways to cover 85% of its projected 2015 output, the company’s December investor presentation shows. The strategy capped the upside price at $99.36 a barrel and guaranteed a minimum, or floor, of $87.98. By themselves, those positions would ensure almost $34 a barrel more than yesterday’s price.

 

However, Pioneer added a third element by selling a put option, sometimes called a subfloor, at $73.54. That gives the buyer the right to sell oil at that price by a specific date. Below that threshold, Pioneer is no longer entitled to the floor of $87.98, only the difference between the floor and the subfloor, or $14.44 on top of the market price. So at yesterday’s price of $54.11, Pioneer would realize $68.55 a barrel.

Where does this turn from insurance to casino, right? It’s a blurred line. Nobody worried about that as long as prices were NOT $55 a barrel. But now they have to. Pioneer gets $68.55 a barrel. Big deal. That’s still well over 30% less than in June.

In Europe, oil is a big issue too. They still have some of the stuff there after all. And that too has halved in value. North Sea oil is a large part of total UK tax revenues, but it’s also energy independence. And already there are people saying that the entire industry is dying.

North Sea Oil Industry ‘Close To Collapse’

The UK’s oil industry is in “crisis” as prices drop, a senior industry leader has told the BBC. Oil companies and service providers are cutting staff and investment to save money. Robin Allan, chairman of the independent explorers’ association Brindex, told the BBC that the industry was “close to collapse”. Almost no new projects in the North Sea are profitable with oil below $60 a barrel, he claims. “It’s almost impossible to make money at these oil prices”, Mr Allan, who is a director of Premier Oil in addition to chairing Brindex, told the BBC.

 

“It’s a huge crisis.” “This has happened before, and the industry adapts, but the adaptation is one of slashing people, slashing projects and reducing costs wherever possible, and that’s painful for our staff, painful for companies and painful for the country. “It’s close to collapse. In terms of new investments – there will be none, everyone is retreating, people are being laid off at most companies this week and in the coming weeks. Budgets for 2015 are being cut by everyone.”

 

His remarks echo comments made by the veteran oil man and government adviser Sir Ian Wood, who last week predicted a wave of job losses in the North Sea over the next 18 months. US-based oil giant ConocoPhillips is cutting 230 out of 1,650 jobs in the UK. This month it announced a 20% reduction in its worldwide capital expenditure budget, in response to falling oil prices.

 

Other big oil firms are expected to make similar cuts to their drilling and exploration budgets. Research from Goldman Sachs predicted that they would need to cut capital expenditure by 30% to restore their profitability at current prices. Service providers to the industry have also been hit. Texas-based oilfield services company Schlumberger cut back its UK-based fleet of geological survey ships in December, taking an $800m loss and cutting an unspecified number of jobs.

 

[..] .. as a lot of production ceases to make money below $80 barrel (it’s now in the region of $63), North Sea producers and those in their supply chain now face pressure to cut costs sharply. Those costs have been rising steeply in recent years. And measured per barrel of production, they’ve been rising at an alarming rate.

400,000 people work in the industry in the UK, plus at least twice as many in supporting fields, and most of those jobs are in Scotland. Not good.

And it’s not going to stop either, as the following Bloomberg piece makes crystal clear, and for obvious reasons. Once you’ve dug a well, you have to squeeze it for all you got. Makes perfect sense to me.

But… A 42-year record in US domestic production just as prices plummet by 50%, that has to be a game changer. And then you run into problems.

Exxon Mobil Shows Why US Oil Output Rises as Prices Plunge

Crude oil production from U.S. wells is poised to approach a 42-year record next year as drillers ignore the recent decline in price pointing them in the opposite direction. U.S. energy producers plan to pump more crude in 2015 as declining equipment costs and enhanced drilling techniques more than offset the collapse in oil markets, said Troy Eckard, whose Eckard Global owns stakes in more than 260 North Dakota shale wells.

 

Oil companies, while trimming 2015 budgets to cope with the lowest crude prices in five years, are also shifting their focus to their most-prolific, lowest-cost fields, which means extracting more oil with fewer drilling rigs, said Goldman Sachs. Global giant Exxon Mobil, the largest U.S. energy company, will increase oil production next year by the biggest margin since 2010. [..]

 

“Companies that are already producing oil will continue to operate those wells because the cost of drilling them is already sunk into the ground,” said Timothy Rudderow, who manages $1.5 billion as chief investment officer at Mount Lucas Management. “But I wouldn’t want to have to be making long-term production decisions with this kind of volatility.”[..] U.S. oil production is set to reach 9.42 million barrels a day in May, which would be the highest monthly average since November 1972, according to the Energy Department..

 

Existing wells remain profitable even as benchmark crude futures hover near the $55-a-barrel mark because operating costs going forward are usually $25 or less, Tom Petrie, chairman of Petrie Partners said. That’s why prices that have tumbled 47% from this year’s peak on June 20 haven’t prompted any American oil producers to shut down wells, said Petrie. The average cost to operate an existing well in most parts of the U.S. “is about $20 a barrel,” Petrie said. [..] Until you dip into that and start losing money on a cash basis day in, day out, you don’t think about shutting in” wells.

 

Once oil companies sink cash into drilling wells, lining them with steel pipes and concrete, blasting the surrounding rocks into rubble with hydraulic fracturing, and linking them to pipeline systems, they have no incentive to scale back production, said Andrew Cosgrove, an analyst at Bloomberg. Those investments, which represent “sunk costs,” are no longer a drain on cash flow, Cosgrove said. Instead, they generate capital companies use to repay debt, fund additional drilling, pay out dividends and buy back shares, he said.

Exxon Chairman and CEO Rex Tillerson pledged in March to raise output by an annual average of 2% to 3% during the 2015-2017 period.

Things run fine at existing wells. Prices get governments in Russia and other producers into trouble, but most can catch that fall up to a point. In the US shale patch, it’s a different story, because there it’s not like once you’ve drilled a well, you can move for years to come. Saudi’s famed Ghawar field has been gushing for 60 years. Shale wells deplete 80-90% in just two years.

It’s like comparing a business that can keep durable goods in stock for years, with one that has only perishables and needs to move them ASAP. A whole different business model, but operating in the same market, and competing for the same customers.

The shale patch can exist in its present form only if it has access to nigh limitless credit, and only if prices are in the $100 or up range. Wells in the patch deplete faster than you can say POOF, and drilling new wells costs $10 million or more a piece. Without access to credit, that’s simply not going to happen.

Don’t forget, shale companies came into the ‘new lower price era’ with big debt issues already in place – borrowing well over $100 billion more annually than they earned, for at least 3 years running, and then in Q3 2014 they spent ‘$1.30 for every dollar earned selling oil and gas’ according to Bloomberg’s E&P index.

Q3 is July, August and September. On July 1, WTI traded at $106. On September 30, it still did $91. And in those days, at those prices, the industry bled $1.30 for every dollar earned. What is that ratio today? $2 spent for every $1 earned? $2.50? More? That is not a different business model, that is not a business model at all.

Existing wells, those already drilled, will be allowed to be emptied, but then it’s over. Who’s going to continue to pump millions upon millions into something that’s a guaranteed loss? Nobody. And not only that, but lenders will start calling in their loans, and issue margin calls. “The average borrowing cost for energy companies in the U.S. high-yield debt market has almost doubled to 10.43% from an all-time low of 5.68% in June”, says BoAML.

That’s about all we need to know. Shale was never a viable industry, it was all about gambling on land prices from the start. And now that wager is over, even if the players don’t get it yet. So strictly speaking my title is a tad off: we’re not drilling our way into oblivion, the drilling is about to grind to a halt. But it will still end in oblivion.

 

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Sun, 12/21/2014 - 16:08 | 5578740 Soul Glow
Soul Glow's picture

Even if we had economic miracles it would just drain the oil reserves that much faster.

"I drink your milkshake!  I drink it up!" - There Will Be Blood

Sun, 12/21/2014 - 16:44 | 5578842 nope-1004
nope-1004's picture
Shale Was About Land Gambling With Cheap Debt, Not Technological Miracles

 

Exactly!  Was always about credit, just like housing.  The only economy that exists is easy credit, binge buying, and speculative bubbles.

When a country exports all its jerbs, the only thing left is financial innovation to give the appearance of bottom line growth.

Sun, 12/21/2014 - 17:02 | 5578907 Publicus
Publicus's picture

The era of abundance is upon us. Timed to coincide with the post-Jobs economy.

Sun, 12/21/2014 - 17:25 | 5578971 daveO
daveO's picture

When writers say 40% of the economy is finance, they never include the shale boom. That'd put it over 50%, I'd say. So, they could call it FIRES; finance, insurance, real estate and shale. 

Sun, 12/21/2014 - 18:50 | 5579196 Gusher
Gusher's picture

It's not exactly right. it is exactly wrong!  Without fracking oil might be at $125 a barrel right now!  Look what fracking did to nat gas - cut the price by over half!!!  Thanks to fracking we now have oil trying to find it's true market price, instead of a price being driven to the roof every time a pipeline is sabotaged in Libya or Iraq or Nigeria.   Seems to me there is a lot of Monday morning quarterbacking going on here.  Some of the harshest critics of the oil price drop seem to be the same people that told us the era of cheap oil is over, not too long ago,

Sun, 12/21/2014 - 19:49 | 5579382 Newsboy
Newsboy's picture

The unseen price of oil is all that investment which will be defaulted on, bigger than Lehman, but now covered for the big CDS writing banks since the CROmnibus Trojan horse went through.

http://www.globalresearch.ca/russian-roulette-taxpayers-could-be-on-the-...

Sun, 12/21/2014 - 21:33 | 5579736 Sam Spade
Sam Spade's picture

As a consumer filling my gas tank, I couldn't care less about this "unseen price of oil".  I am enjoying the cheap gasoline.  For those who took imprudent positions on credit default swaps and such, let them suffer the consequences.

Mon, 12/22/2014 - 01:34 | 5580211 noben
noben's picture

I thought it was about the same old game: Great for some*, crappy for most.

* Surveyors, lawyers, accountants, drillers, drilling services & suppliers, transporters, storage guys, Wall St and Libertarian Brokers and Financial Advisers/Planners, and local economies (fees, taxes, RE, hotels, restaurants, bars, entertainers, strippers, hookers, cops, courts, Urgent Care places, car dealers, stores, ex-wives, delinquent child support payments...). And let's not forget our favorite politicos: "Drill-Baby-Drill Palin", and "Dark Lord Cheney".

A veritable ecosystem of interests and beneficiaries. Who all hate the Saudis. Having Motive, too bad they lack Means and Opportunity to get back at them.

Mon, 12/22/2014 - 01:58 | 5580244 Augustus
Augustus's picture

Drill-Baby-Drill has been vey successful in reducing te costs of energy supply.  Palin and Cheny hav been proved correct.

Enjoy the bnefits as long as you can before Obama finds a regulatory way to kill the one prosperous sector of the economy.

Mon, 12/22/2014 - 01:52 | 5580237 Augustus
Augustus's picture

The basis of the article title and the arguments presented is pure nonsense.

The fast recovery of reserves is what makes the shale hroizontal drilling and fracking economical in the first place.  It has long been known that the resource was there, in the shale.  The cost of the well compared to the recovery rate made development un-economical.  Yes, it was technology which brought on the increase in recovery rate, allowing rapid recovery of drilling cost investment.  Many wells were paid for in the first nine to twelve months.  The magic of the deal is that there were almost NO dry holes.

Consider how this rapid increase in US production looks on the chart.  The operator drills one well and gets paid out in 12 months.  With cash in hand they drill two more with same result.  Now, with that production backing a loan, the next deal is to drill three more.  Earlier wells continue to generate nice cash flow.  Compound that up for five or six years multiplied by 1,000 operators and you get a rapid increase in production.  Financing costs are not really relevant considering the payback time.

Now, to the problem.  Yes, some operators became over leveraged by tying up acreage.  A $million acreage investment might take $10 million drilling investment to develop to generate value.  CHK is the prime example of irresponsible use of that strategy.  The comapny had $billions in acreage costs that would take tens of billions to drill.  It crashed the NG price and many NG producers when prices continued to decline.  Most NG producers could not believe that NG price could go from $10 to $2.

In any case, the increased production does result from much improved technology.  That technology is not proprietary and is used by many successful operators.  Those operators were so successful that they expanded rapidly to rapidly increase energy supplies.

The idea that operators will suffer from increased market rates on the financing that has already been arranged and funding is nonsense.  They may have to scale back drilling new wells but it has nothing to do with operating wells already drilled.  There are thousands of wells already drilled awaiting completion and pipeline connection.  Product will continue to increase during first half of 2015 from that alone.

Reports of reduced rig count can be a bit misleading.  the reduction is due to declining numbers working on traditional vertical wells.  Rigs drilling horizontal wells (new technology wells) have not declined.

Sun, 12/21/2014 - 16:11 | 5578742 Goldilocks
Goldilocks's picture

Let me play you a sad Song on the World's smallest Violin
http://www.youtube.com/watch?v=XdofmoYcJNE (0:39)

Sun, 12/21/2014 - 22:36 | 5579891 Carpenter1
Carpenter1's picture

Never knew there were so many oil industry employees on ZH. Guess they figured they were safe and could watch and laugh as the world burned.

Now they found out they're the first to be sacrificed. Guess the whole economic collapse thing isn't quite as appealing when your industry is chosen to take a fall first.

Mon, 12/22/2014 - 02:04 | 5580249 Augustus
Augustus's picture

It is not necessary to be an oil industry employee to enjoy lowr energy costs.  I'm very glad to see US citizens being employed and earning a good income rather than sending money to Venezuela's communists or Saudi fanatics.

Sun, 12/21/2014 - 23:13 | 5579982 Volkodav
Volkodav's picture

Are You Ready Kids?

Russia Army: SpongeBob Squarepants Song

https://www.youtube.com/watch?v=vhuzb3WMntc

 

Sun, 12/21/2014 - 16:27 | 5578792 gswifty
Sun, 12/21/2014 - 23:03 | 5579961 Volkodav
Volkodav's picture

"I Love Oil" (petroleum)

Marina Kravets

https://www.youtube.com/watch?v=EucLgHzuZaw

admit a little more went into production..

R has best dancers

 

Sun, 12/21/2014 - 16:28 | 5578803 Jumbotron
Jumbotron's picture

It's ALWAYS been about real estate.

Humans are just like locusts.  They will go wherever there are things needed for life.  In the old days....it was arable land for agriculture.  Now it's land where the Magic Black Elixer is to be found since that fuels ALL of our modern day science based life.

As George Carlin said........" These rich cocksuckers don't give a fuck about you.  They have all the best land......they have all the politicians bought and paid for in their back pocket."

 

It is and always will be about land.....ie......real estate.

Sun, 12/21/2014 - 16:32 | 5578810 ILikeBoats
ILikeBoats's picture

1. The breakeven is a lot less than $100 for some of the shale areas.

2. A drop in oil benefits Main Street, but not Wall Street. So this is why we are being subject to all the bloviating articles - when Main Street and "the people" were the ones whose ox was being gored, no one cared. But a Wall Street parasite might lose money on his casino gambling - OH NOEEZ!

Sun, 12/21/2014 - 17:17 | 5578952 jcaz
jcaz's picture

Really?

Because Wall Street financed the "oil benefits".

Go back and read the article again,  mouth out the word "credit" really slowly this time;

You're exactly the problem- you think being able to buy more shit at Walmart is a good thing.

Baaaaaaa........

Sun, 12/21/2014 - 23:52 | 5580051 ILikeBoats
ILikeBoats's picture

Is English your native language?  I ask because I used "benefits" as a verb, not a noun, something you didn't seem able to pick up on .

Sun, 12/21/2014 - 16:34 | 5578819 NoWayJose
NoWayJose's picture

There is no gigantic 'pool' of shale oil -- the geology is that there is a little bit of oil -- but in a LOT of places.  So yes, a well only produces for a few years, and yes you have to drill a lot of wells.  But the technology exists, the geologic surveys have been done,  the wildcat crews know how to drill, and even if you knock out a bunch of these little oil companies with $50 oil -- there is NOTHING that will prevent them from drilling again once oil rises to $85 again.  Cheap credit will remain available as long as the Fed has to hold down rates (forever?), and there is already SO MUCH excess liquidity flooding the world that cheap interest rates will be available far into the future (at least until the dollar collapse).  Where is that liquidity going to go -- to wildcatters drilling $85 oil (when it gets there again) -- or into a Swiss bank at NEGATIVE interest rates?

Sun, 12/21/2014 - 17:28 | 5578978 jcaz
jcaz's picture

Ya, heard that same mantra in 2008 when my house priced out at $2M less than it did in 2007-  "Once it goes back up, we'll all be fine, because everyone knows that the price always goes back up"-  uh huh.

Oil ain't going up with a stronger Dollar, period.  Your crews will be boxed out-  this is the nature of oil- boom/bust.   Come back in 20 yrs, try it again on the next cycle- this one is over.

Liquidity will take care of itself-  always does with a stronger Dollar, faster than everyone thinks.  Check out that flattening yield curve- whoops, guess it already did....

Sun, 12/21/2014 - 16:35 | 5578822 AusteninTX
AusteninTX's picture

I've read zerohedge for years and only recently created an account to comment becasue of all the nonsense i've read recently about oil. for whatever reason you people are cheering for a failure in the oil field BLOWS MY FREAKING MIND! I'm going to do some simple math for you idiots that have no clue about oil that will dissapoint you. our west texas wells have conservatively 200,000 barrels of oil. it cost 2.5 million dollars to drill a well. 200,000 x 57 = $11,400,000. thats still a great return. hate to break it to you people that love giving your money to the middle east and are cheering for domestic oil failure. prices havent been this low since 2009. quick question... did we produce oil before 2009 or did this all just happen the last 5 years? enjoy the price at the pump, but take a minute and honestly think about what you are cheering for. screw y'all i'm still making great money!

Sun, 12/21/2014 - 16:54 | 5578879 Jumbotron
Jumbotron's picture

I can't speak for all or even a few.

But here is why  I cheer for it.

First of all.....it's based on Ponzi Scheme Financial Mechanics.  If you root for the blow up of the  Great Ponzi....then Shale Oil will follow.

Second.....the Land Leasers lie constantly  to the poor saps looking to make a quick buck on rents.....or poor farmer who have been driven down by Big Corporate Ag.    Shale is based on LIES....LIES.....LIES !!

Third.....it tears the land up and leaves an enviromental mess.  I'm not a tree hugger....nor do I believe in Global Warming.  But the trucks and the pollution and the fumes and the fracking fluid in the dinking  supply.....etc.....etc.

Fourth......it involves fuckers like T. Boone Pickens who wants to buy up land where there is a SHIT TON of water.  Why.....because water is needed to frack.  SHIT TONS of it.   T. Boone doesn't give a shit about energy.....he cares about  THE LAND.  Once the energy is  all gone.....HE STILL HAS LAND RIGHTS......to  which he can rent to farmers, ranchers and real estate investors.   LAND is  WEALTH.   LAND is POWER !

 

Shall I go on?

Sun, 12/21/2014 - 17:12 | 5578938 bid the soldier...
bid the soldiers shoot's picture

 

Gerald O'Hara

“Do you mean to tell me, Katie Scarlett O’Hara, that Tara, that land, doesn’t mean anything to you? Why, land is the only thing in the world worth workin’ for, worth fightin’ for, worth dyin’ for, because it’s the only thing that lasts.”

I thought you looked familiar

Sun, 12/21/2014 - 17:14 | 5578946 Jumbotron
Jumbotron's picture

LOL !!

And even if I didn't look familiar.......' Frankly my dear.....I don't give a damn."    ; )

Sun, 12/21/2014 - 17:21 | 5578959 bid the soldier...
bid the soldiers shoot's picture

yup.

Frankly my dear.....I don't give a damn."

That's what I like about you.

Sun, 12/21/2014 - 19:19 | 5579259 Jumbotron
Jumbotron's picture

<chuckle>......here's a secret.    I do care.  That's why I come here and joke and rant a little.

It won't last much longer.  It's just one of those stages of grief.  Been going on now for a while.  It's ending.

When you don't see me anymore here......then you'll know I truly don't give a damn any more.

Sun, 12/21/2014 - 17:15 | 5578945 AusteninTX
AusteninTX's picture

you obviously have no clue what you are talking about. every point you made is wrong.

1. what ponzi scheme mechanics are you talking about? honestly please tell me. I partner with investors drill wells and spilt the profits with the investors. whats wrong with that?

2. this comment is just stupid, you obviously have no clue what you are talking about. there are laws in place to prevent this from hapening, and if and when it does happen the leases are void. competition for land also makes sure the land owners get good deals. there are TONS of west Texas farmers that me and other producers have given generational welath too that disagree with you.

3. you'll believe what you want, really no sense arguing geology and other facts with you.

4. it takes more water to water a golf course then frac a well. the water that is used isnt potable either way. this comment proves your ignorance about the industry. you dont buy the land, just the mineral rights. did T. boone screw your wife or sometihg??? i'm a capitalist and applaud his success. 

Sun, 12/21/2014 - 17:39 | 5578996 daveO
daveO's picture

FED rates were nearly 'normal' prior to 2009. Oil is, or was, being carried along for the 'inflationary ride' thanks to the Petro Dollar and QE. Until rates are allowed to normalize, an oil worker = an indirect employee of the Federal Reserve. Enjoy the ride. I did, when house prices were being pumped to the moon.  

Mon, 12/22/2014 - 02:30 | 5580278 Augustus
Augustus's picture

If you believe that Fed rates control oil prices, you hould investigate those rates when oil prices were $140 bbl several years ago.  Then what were Fed rates when here was $10 oil that caused the vibrant economy under Clinton.

Inteest rates have little bearing on drilling costs when wells payoutin 12 months.

Sun, 12/21/2014 - 18:24 | 5579124 zaphod
zaphod's picture

Thank you AusteninTX, been posting here for five years and yes the quality has degraded quite a bit over the past year or so. A lot of great posters have level and the remainder seems to just be praying for madmax days.

Sun, 12/21/2014 - 18:43 | 5579181 AusteninTX
AusteninTX's picture

you're welcome 

Mon, 12/22/2014 - 00:51 | 5580157 phaedrus1952
phaedrus1952's picture

Ditto all that, Austen, zaph.  

Place has just become infested with shitheads, people running this joint not much better.

Sun, 12/21/2014 - 18:44 | 5579182 AusteninTX
AusteninTX's picture

you're welcome 

Sun, 12/21/2014 - 19:09 | 5579236 35 Whelen
35 Whelen's picture

Please oh please stop making so much sense ... I prefer watching idiots with pitchforks ranting about fantasies that exist in their heads only.

Truthfully though, you'd think they'd get tired of constantly hating something, fearing soming, and basing it all on the thinnest of realities.

Sun, 12/21/2014 - 18:09 | 5579086 Gordon Freeman
Gordon Freeman's picture

Yeah--how much is a SHIT TON?

Moron...

Sun, 12/21/2014 - 19:21 | 5579266 Jumbotron
Jumbotron's picture

Your posts weigh that much in shit.  How's that for a reference you can understand ?

Mon, 12/22/2014 - 02:26 | 5580270 Augustus
Augustus's picture

I weighed his post using a scale that will register 1/100th gm.  It did not register anything.

Take that shit-ton in your left hand and cram it deeply into your left ear.  I will double your brain weight.

Sun, 12/21/2014 - 20:10 | 5579453 ejmoosa
ejmoosa's picture

Oil is a product.  Gasoline at $4 a gallon is still a great bargain considering what it does for you.

And today, a gallon of gas will move you and your family 30 miles or so down the road.  Thirty miles....

Let's see you try to talk them into riding mass transit, ride a bike, or walk thirty miles.

If you really need to get somewhere, you are gonna buy it and use it because it provides utility.

I dare you to fly over this nation and look down and spot the so called environmental mess.  You are not fooling anyone.  This planet has resources that are meant to be used.

And they have been talking about the decline of the oil industry since the 1920's.  Could any group of prognosticators have been more wrong?

 

 

Sun, 12/21/2014 - 16:56 | 5578888 debtor of last ...
debtor of last resort's picture

Poisoning your water to prop up your gdp. Giving billions of dollars a new home, and fuck up your environment. Way to go dude.

Sun, 12/21/2014 - 17:29 | 5578985 AusteninTX
AusteninTX's picture

you'd think a million wells would be a large enough sample size to prove this wrong, but o well.

Sun, 12/21/2014 - 22:40 | 5579899 MEFOBILLS
MEFOBILLS's picture

Hello there fellow Austinite.  Yes, there seems to be a lot of babbling and nonsense.  I also recently got an account to counter the babbling.  It is at a fever pitch. 

 

First off...all of humanity uses energy to multiply their labor.  Energy comes in portable form with oil.  That means production and outputs of all goods and services have a knock on effect with cheap oil.  Everything gets cheaper as energy is intrinsic to all production.  

In fact, the labor inputs to goods and services production keeps going down.  With robots it might even go to zero.  The equation for all economics goes something like this:

Earth+ Labor= tool.  Tool + Labor = Machine.  Machine + Labor + Earth (oil and minerals) = all economic outputs.  Money is simply a transaction medium that allows us to trade out outputs.  And there are many gifts in economics, which include land,  and the commons that were built up by our ancestors.  

Unearned increment of association is that which is gifted to you by your ancestors and the people/inventors that came before you.  Thank you Nicola Tesla for allowing us to have horsepower via polyphase motors, which in turn get their electricity from fossil fuels.

 

The current oil price is entirely a function of the Saudi's pumping like crazy.  And WHY?  Because NeoCon's have their panties all twisted as Putin blocked them in Syria.  Then he outmaneuvered them in Crimea, and now the South Stream pipeline is going to Turkey.

 

NeoCon Wolfowitz doctrine is to prevent Eurasia from forming, and that means turning Russia into a satellite of the West and extracting all of her EARTH.  Russia is even more dangerous to western Capital Banking elites now that she found Oil in the Artic and is creating BRIC system with separate (non BIS) settlement procedures. 

 

So what - our dual citizen owners think.  Screw the shale producers in the U.S.  Geopolitics and money power control are where the big boys are playing.  A few American companies can go bankrupt, but Eurasia must not be allowed to form.  

I don't agree with this strategy, but it is policy of Washington Consensus.  Washington is merely executing its strategy.

 

 

Sun, 12/21/2014 - 23:43 | 5580035 GotNuttin'todo
GotNuttin&#039;todo's picture

You hit every well Austenin? Wow good for you!

The reason oil sucks is because the global economy sucks. Oil will go back up when excess supply dries up and not until, so don't hold your breath.

BTW Austenin, where did you learn spelling and grammar? Or maybe you aren't as clever as you let on.

Sun, 12/21/2014 - 16:39 | 5578836 chairman of the...
chairman of the bored's picture

Some old wells,100 yrs old or more,are still producing....3-4 barrels a day..

Sun, 12/21/2014 - 16:58 | 5578892 Jumbotron
Jumbotron's picture

LOL !

YEAH.....that'll help in America where we use 18-20 MILLION barrels every....single day,.

Sun, 12/21/2014 - 17:05 | 5578919 bid the soldier...
bid the soldiers shoot's picture

Hey, how do we get to oil independence if we will be producing 10 million bpd, but using 18 -20 million bpd?

Huh?

Sun, 12/21/2014 - 17:17 | 5578948 Jumbotron
Jumbotron's picture

< ding >

A little light just went on.

Sun, 12/21/2014 - 22:18 | 5579850 Volkodav
Volkodav's picture

Is that like consuming more than you produce?

I heard there are countries do that and get away with it so far.

Mon, 12/22/2014 - 00:27 | 5580110 Jumbotron
Jumbotron's picture

The one that does it best has the best Central Bank and the biggest military.

 

Take a W.A.G. as to who that might be.

 

Sun, 12/21/2014 - 16:42 | 5578847 Wahooo
Wahooo's picture

Tyler how many ways can you say the same thing?

Sun, 12/21/2014 - 16:51 | 5578878 negative rates
negative rates's picture

Well all 360 degrees claim to be a circle.

Mon, 12/22/2014 - 00:55 | 5580166 phaedrus1952
phaedrus1952's picture

As in circle jerks? This place sure has enuf of em lately.

Sun, 12/21/2014 - 16:46 | 5578865 AusteninTX
AusteninTX's picture

of all the article i've read recently about oil on this site, this one takes the cake as the dumbest.

Sun, 12/21/2014 - 17:18 | 5578950 disabledvet
disabledvet's picture

Yep.

Sun, 12/21/2014 - 19:03 | 5579216 35 Whelen
35 Whelen's picture

I agree.  Writers should keep from making dogmatic preditions; it only sets them up for looking the fool.  In a year or two we will know the outcome ... the shale boom may be stopped in its tracks, may be slowed a bit, or may be as "boomy" as ever.

What isn't helpful is when individuals come to the table with a very obvious bias, then concoct a long winded half baked diatribe designed to simply echo their preconceived bias.  These guano pumpers are always good at cherry picking "facts" and ignoring lots of others.

Whenever I read these screechy pieces my eyes glaze over.  After all, think of all the "stock market crash is coming" hysteria we've read since 2010 ... I'm still waiting.  Sure, it's going to come ... it always does ... but nobody can predict how deep and when it will be and what will trigger it.  There'll be some lucky prophet out there ... but everyone will ignore the 99% of the time he's been wrong haha.

Mon, 12/22/2014 - 02:41 | 5580288 Augustus
Augustus's picture

The ZH zealots have been been short SPY since it bounced back to about 900.  They hedged that position with long gold at $1,800.  If anyone else has actually profited during their time of pain those gains are the result of some market conspiracy to ruin them.

Sun, 12/21/2014 - 17:01 | 5578902 Dre4dwolf
Dre4dwolf's picture

What people don't get is, when a corporations is no longer profitable, it continues to operate until it cant any longer, the owners of the company (not the shareholders) but the people benefiting directly from the day to day operations (managers, ceos, administrators) etc. . . . will continue to work the company into bankruptcy so long as it can keep writing them checks.

This is the entire point of corporations its to create a business and bleed it dry with administrative compensation, then fire everyone and run shell company on fumes till there is nothing left.

IF oil prices reverse, investing in shale mining operations as a shareholder, could prove a good move.

IF oil prices continue to nose-dive , you would of probably made the worst investment you could of.

50/50 odds, no one knows what tomorrow brings.

But one thing for sure is, the corporations will keep chugging along until they cant.

 

Sun, 12/21/2014 - 17:01 | 5578904 bid the soldier...
bid the soldiers shoot's picture

do the math

drilling new wells costs $10 million or more a piece. 

In April 2009 there were 991 wells in the Bakken.  In October 2014 there were 8620 wells.  What was the cost of wells in the Bakken since 2009?  Do the math.

The stated average daily production per well was 130 bpd.  (we'll call it 200 bpd). $10 million per well producing 200 bpd.   How many days to break even@ $100 per barrel?  @$50 per barrel?  Do the math.

What was the best way to play the shale oil boom in 2009?  What's the best way to play it today?

Sun, 12/21/2014 - 17:34 | 5578995 oudinot
oudinot's picture

Yopu neglect the depletion of the Shale wells which is significant.

130 BPD mean nothing without a depletion value.

70% in first year is common.

Sun, 12/21/2014 - 17:09 | 5578933 oudinot
oudinot's picture

Good article but one element is wholly missing; to say all production costs are soaring isn't wholly correct; with $55 oil the energy costs in producing oil  are dropped by 30%.

For example, Encana, a Canadian pipeline company:  because most of the crude in their pipeline is from clotty tar like oil sand oil they need to lubricate the pipeline with heavy oil solvents so the crud can pass-this one cost is their highest pipeline cost.  So their biggest input cost is down roughly 50%.

Like anything economic  nothing is straight line simple......

 

Sun, 12/21/2014 - 18:09 | 5579084 BobRocket
BobRocket's picture

Good point oudinot,

 

as we rely on oil for everything, the cost of everything should fall which means the production costs of everything else (including the stuff needed to produce oil) will also fall.

 

Falling prices for everything produces its own problems, who will invest at todays prices when the realised future price will be less ?

 

Everything appears to be seriously fucked up and getting more fucked uppier each passing day.

 

 

Sun, 12/21/2014 - 18:13 | 5579093 Last of the Mid...
Last of the Middle Class's picture

we're about to fine out which oil companies were paying the derivatives game and were overexended. The only way to survive a price plunge like what we have is to cut the fat and stop drilling FAST. We'll soon find out.

Sun, 12/21/2014 - 18:57 | 5579209 scatha
scatha's picture

I understand righteous indignation of the those down to earth, hard working shell oil workers or lower management of small companies, when they face the reality of coming collapse of their jobs, their careers and livelihoods that already hit hard rest of America long time ago, but they missed that watching Kim Kardashian butt instead.

All of these “righteous” men of oil, however, are silent about simple fact that they piggyback on shoulders of global corporations which feed like pigs on LIRP or ZIRP induced rampant speculations and governments subsidies all over the world. The truth they refuse to face is that they work in taxpayer supported business.

You’ve been duped like corn farmers, in methanol Ponzi scheme, by smooth talking wall street types on payroll with global oligarchs, who long time ago wrapped up your lives and ours, into financial instruments of misery and sold it back to us for price of eternal enslavement.

So welcome to reality. Advice for near future: If it hurts in your brain, it’s because you never used it before. You about to join the club of ZH conscientious objectors, former believers in honesty and hard work as only way to succeed in America and elsewhere.

If interested in global context of the oil story go to comment I made few days ago. 

 

 

http://www.zerohedge.com/news/2014-12-19/just-what-china-buying#comment-...

Sun, 12/21/2014 - 19:45 | 5579365 Amerikan Patriot
Amerikan Patriot's picture
Putin’s Bubble Bursts

If you’re the type who finds macho posturing impressive, Vladimir Putin is your kind of guy. Sure enough, many American conservatives seem to have an embarrassing crush on the swaggering strongman. “That is what you call a leader,” enthused Rudy Giuliani, the former New York mayor, after Mr. Putin invaded Ukraine without debate or deliberation.

But Mr. Putin never had the resources to back his swagger. Russia has an economy roughly the same size as Brazil’s. And, as we’re now seeing, it’s highly vulnerable to financial crisis — a vulnerability that has a lot to do with the nature of the Putin regime.

For those who haven’t been keeping track: The ruble has been sliding gradually since August, when Mr. Putin openly committed Russian troops to the conflict in Ukraine. A few weeks ago, however, the slide turned into a plunge. Extreme measures, including a huge rise in interest rates and pressure on private companies to stop holding dollars, have done no more than stabilize the ruble far below its previous level. And all indications are that the Russian economy is heading for a nasty recession.

The proximate cause of Russia’s difficulties is, of course, the global plunge in oil prices, which, in turn, reflects factors — growing production from shale, weakening demand from China and other economies — that have nothing to do with Mr. Putin. And this was bound to inflict serious damage on an economy that, as I said, doesn’t have much besides oil that the rest of the world wants; the sanctions imposed on Russia over the Ukraine conflict have added to the damage.

But Russia’s difficulties are disproportionate to the size of the shock: While oil has indeed plunged, the ruble has plunged even more, and the damage to the Russian economy reaches far beyond the oil sector. Why?

Actually, it’s not a puzzle — and this is, in fact, a movie currency-crisis aficionados like yours truly have seen many times before: Argentina 2002, Indonesia 1998, Mexico 1995, Chile 1982, the list goes on. The kind of crisis Russia now faces is what you get when bad things happen to an economy made vulnerable by large-scale borrowing from abroad — specifically, large-scale borrowing by the private sector, with the debts denominated in foreign currency, not the currency of the debtor country.

In that situation, an adverse shock like a fall in exports can start a vicious downward spiral. When the nation’s currency falls, the balance sheets of local businesses — which have assets in rubles (or pesos or rupiah) but debts in dollars or euros — implode. This, in turn, inflicts severe damage on the domestic economy, undermining confidence and depressing the currency even more. And Russia fits the standard playbook.

Except for one thing. Usually, the way a country ends up with a lot of foreign debt is by running trade deficits, using borrowed funds to pay for imports. But Russia hasn’t run trade deficits. On the contrary, it has consistently run large trade surpluses, thanks to high oil prices. So why did it borrow so much money, and where did the money go?

Well, you can answer the second question by walking around Mayfair in London, or (to a lesser extent) Manhattan’s Upper East Side, especially in the evening, and observing the long rows of luxury residences with no lights on — residences owned, as the line goes, by Chinese princelings, Middle Eastern sheikhs, and Russian oligarchs. Basically, Russia’s elite has been accumulating assets outside the country — luxury real estate is only the most visible example — and the flip side of that accumulation has been rising debt at home.

Where does the elite get that kind of money? The answer, of course, is that Putin’s Russia is an extreme version of crony capitalism, indeed, a kleptocracy in which loyalists get to skim off vast sums for their personal use. It all looked sustainable as long as oil prices stayed high. But now the bubble has burst, and the very corruption that sustained the Putin regime has left Russia in dire straits.

How does it end? The standard response of a country in Russia’s situation is an International Monetary Fund program that includes emergency loans and forbearance from creditors in return for reform. Obviously that’s not going to happen here, and Russia will try to muddle through on its own, among other things with rules to prevent capital from fleeing the country — a classic case of locking the barn door after the oligarch is gone.

It’s quite a comedown for Mr. Putin. And his swaggering strongman act helped set the stage for the disaster. A more open, accountable regime — one that wouldn’t have impressed Mr. Giuliani so much — would have been less corrupt, would probably have run up less debt, and would have been better placed to ride out falling oil prices. Macho posturing, it turns out, makes for bad economies.

Mon, 12/22/2014 - 02:41 | 5580287 MEFOBILLS
MEFOBILLS's picture

American Patriot.

You should watch these videos and maybe your mainstream media opinions might change:

http://michael-hudson.com/2014/12/russian-pivot/

http://michael-hudson.com/2014/12/pipeline-politics/

 

Putin is not a swaggering idiot.  He is responding to many attacks.  The NATO eastern movement to his doorstep despite the Gorbachev and Yeltsin agreements.  Then the Harvard Boys Jewish advice to turn Russia into an extraction economy.  Hypothecate all your debt free lands in order to acquire Dollars/Euros to buy foreign goods, to then go into debt forever.  Then the population collapse as people stopped having babies, especially as Russia's economy became unbalanced and non diversified.

 

Then the attack of the oligarchs, again all Jews who got credit overseas from their in-group buddies.  They then acquired Russian industry cheap and media power to try to undo the Russian state once again.  As if Bolshevism wasn't enough for these people.

 

In Georgia, Putin quietly retreated.  Georgia was an attempt to wrest the Black Sea away from Russia, and hence Navy power projection.  Lately it has been Ukraine and designs on oil around the Caspian.  

Crimea was another attempt at preventing Navy projection required of a great power.

 

Putin's bubble is not bursting.  Russia has many resources, and pretty soon they will be pipelining oil to China.  The Chinese are going to build the steel on CREDIT, to be paid out of future production.

The Russian economy is now unfettered and can become BALANCED and not resource dependent.  

 

 

Sun, 12/21/2014 - 19:48 | 5579374 Amerikan Patriot
Amerikan Patriot's picture

Are y'all buying silver at $16?

Will you buy it at $12 too?

Sun, 12/21/2014 - 21:02 | 5579648 Jack Burton
Jack Burton's picture

"The shale patch can exist in its present form only if it has access to nigh limitless credit, and only if prices are in the $100 or up range. Wells in the patch deplete faster than you can say POOF, and drilling new wells costs $10 million or more a piece. Without access to credit, that’s simply not going to happen."

Certainly not. I have seen so many Shale Bulls, post on ZH and make claims of profitable at $50, with new recovery systems able to rejuvinate wells with ease to full production after that initial quick fall, all kinds of bullish talk from the Fracking Miracle crowd. I have argued that this is no miracle and never was. It is and was expensive oil made recoverable by limitless dollars at record low interest rates, and oil above $100, which we all thought would last for many years.

Outside these conditions, now gone, Shale is a myth. The happy Shale talk was about getting investors into the shale play, into junk bonds, into broker's shale products. We know that investors from Retail to Pension Funds poured money into Shale Bonds, to get that Junk return. Let's face it, that play is now burning to  the ground!

All the producers pumping cheap existing fields at full capacity to make up in volume and to keep market share. Plus a world economy falling fast, killing demand. Frackers should mothball the whole bloody business, and wait for the day the boom returns in higher oil prices. Sounds right doesn't it? It is what I would do with my wells and equipment, rather than spend $1.30 for every $1.00 I earn. Why pump at a loss. But wait!  We are leveraged up to our freaking eye balls, interest due, principle needing payback. What to do? Can't pump at a profit, only at a loss, and our creditors and bond holders screaming for their money back. What to do. Face it, Frackers are fucked.

For Christmas in North Dakota, all the newly rich are in for a giant lump of coal in their stockings and a pink slip. Ladies! Back to Making coffee at Starbucks for $8.50, no more driving a water truck to wells for $75,000.  Workers with averages of $90,000. Back to some shit retail outlet for tires or furniture and appliances for $30,000 tops!

When a boom busts, a lot of people are pushed right back down the socio-economic ladder.

Mon, 12/22/2014 - 08:45 | 5580520 Magooo
Magooo's picture

The never ending financial crisis is a symptom of the end of cheaply extractable oil.  QE ZIRP and other stimulus are medicine fighting the end of growth caused by oil prices that started to surge in 2001.

 

High oil prices kill growth (and even $50 oil is too high) --- low oil prices mean we stop looking for more.   The world runs on 20 buck oil…. That is never coming back.

 
 

Conventional Oil Peaked in 2005 – that is why oil went to $147 in 2008

THE DECLINE OF THE WORLD’S MAJOR OIL FIELDS http://www.csmonitor.com/Environment/Energy-Voices/2013/0412/The-decline-of-the-world-s-major-oil-fields

THE TRUTH BEHIND SAUDI ARABIA’S SPARE CAPACITY  http://www.forbes.com/sites/greatspeculations/2011/03/04/the-truth-behind-saudi-arabias-spare-capacity/

 

 

Shale is a Scam/Ponzi Scheme – but the 3M+ barrels a day from this has offset conventional declines – Drill Baby Drill!  If we did not start fracking big time post Lehman – we would be dead or living in a collapse world right now:

SHALE IS A MASSIVE FRAUD http://www.bloomberg.com/news/2014-10-09/ceos-tout-reserves-of-oil-gas-revealed-to-be-less-to-sec.html  

INDEPENDENT US OIL PRODUCERS SPEND $1.50 DRILLING FOR EVERY $1.00 THEY GET BACK http://www.bloomberg.com/news/2014-02-27/dream-of-u-s-oil-independence-slams-against-shale-costs.html

 

THE OIL PRODUCTION GLUT STORY IS BULLSHIT – Global Supply (conventional + deep sea + tar sands + shale) is approaching peak:

12-1st half 89.68128717
12-2nd half 89.83083083
13-1st half 89.61196729
13-2nd half 90.69364283
14-1st half 91.10622417

 

 

THE COUP DE GRACE:  And finally – by far the best analysis I have read (and I have read a lot) comes from a company that provide energy analysis to investment banks ---  if this is not correct then these guys would be laughed off the stage and out of business ---  the first part discusses what QE is about (offsetting high oil prices) – the last part discusses the DISEASE ---  feel free to dispute the conclusions --- I am unable to.

 

THE PERFECT STORM (see p. 59 onwards):  The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel. http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

 

 

Renewable Energy is Like god --- ‘it will save us’ – but like god --- it is false

Google Blows 850B on Renewable Energy – Top Stanford Scientists in charge State:  “Renewable Energy Simply Won’t Work”

http://techcrunch.com/2011/11/23/google-gives-up-on-green-tech-investment-initiative-rec/

Solar – After Hundreds of Billions of Dollars of Subsidies and R&D and this is what we get? (see the graph) http://reneweconomy.com.au/wp-content/uploads/2014/04/bernstein-energy-supply.jpg

The German Solar Disaster: 21 Billion Euros Burned http://www.thegwpf.com/german-solar-disaster-21-billion-euros-burned/

Spain’s disastrous attempt to replace fossil fuels with Solar Photovoltaics http://energyskeptic.com/2013/tilting-at-windmills-spains-solar-pv/

 

 

WE ARE TOTALLY FUCKED. 

 

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