Another Nail In The US Empire Coffin: Collapse Of Shale Gas Production Has Begun

Tyler Durden's picture

Via SRSroccoReport.com,

The U.S. Empire is in serious trouble as the collapse of its domestic shale gas production has begun.  This is just another nail in a series of nails that have been driven into the U.S. Empire coffin.

Unfortunately, most investors don’t pay attention to what is taking place in the U.S. Energy Industry.  Without energy, the U.S. economy would grind to a halt.  All the trillions of Dollars in financial assets mean nothing without oil, natural gas or coal.  Energy drives the economy and finance steers it.  As I stated several times before, the financial industry is driving us over the cliff.

The Great U.S. Shale Gas Boom Is Likely Over For Good

Very few Americans noticed that the top four shale gas fields combined production peaked back in July 2015.  Total shale gas production from the Barnett, Eagle Ford, Haynesville and Marcellus peaked at 27.9 billion cubic feet per day (Bcf/d) in July and fell to 26.7 Bcf/d by December 2015:

Top-U.S.-Shale-Gas-Fields-Production

As we can see from the chart, the Barnett and Haynesville peaked four years ago at the end of 2011.  Here are the production profiles for each shale gas field:

Barnett-Shale-Gas-Field

According to the U.S. Energy Information Agency (EIA), the Barnett shale gas production peaked on November 2011 and is down 32% from its high.  The Barnett produced a record 5 Bcf/d of shale gas in 2011 and is currently producing only 3.4 Bcf/d.  Furthermore, the drilling rig count in the Barnett is down a stunning 84% in over the past year.

Haynesville-Shale-Gas-Field

The Haynesville was the second to peak on Jan 2012 at 7.2 Bcf/d per day and is currently producing 3.6 Bcf/d.  This was a huge 50% decline from its peak.  Not only is the drilling rig count in the Haynesville down 57% in a year, it fell another five rigs this past week.  There are only 18 drilling rigs currently working in the Haynesville.

Eagle-Ford-Shale-Gas-Field

The EIA reports that shale gas production from the Eagle ford peaked in July 2015 at 5 Bcf/d and is now down 6% at 4.7 Bcf/d.   As we can see, total drilling rigs at the Eagle Ford declined the most at 117 since last year.  The reason the falling drilling rig count is so high is due to the fact that the Eagle Ford is the largest shale oil-producing field in the United States.

Marcellus-Shale-Gas-Field

Lastly, the Mighty Marcellus also peaked in July 2015 at a staggering 15.5 Bcf/d and is now down 3% producing 15.0 Bcf/d currently.  The Marcellus is producing more gas (15 Bcf/d) than the other top three shale gas fields combined (12.1 Bcf/d).

I have posted the Haynesville shale gas production chart below to discuss why U.S. Shale Gas production will likely collapse going forward:

Haynesville-Shale-Gas-Field

What is interesting about the Haynesville shale gas field, located in Louisiana and Texas, is the steep decline of production from its peak.  On the other hand, the Barnett (chart above in red) had a much different profile as its production peak was more rounded and slow.  Not so with the Haynesville.  The decline of shale gas production at the Haynesville was more rapid and sudden.  I believe the Eagle Ford and Marcellus shale gas production declines will resemble what took place in the Haynesville.

All you have to do is look at how the Eagle Ford and Marcellus ramped up production.  Their production profiles are more similar to the Haynesville than the Barnett.  Thus, the declines will likely behave in the same fashion.  Furthermore drilling and extracting shale gas from the Haynesville was a “Commercial Failure” as stated by energy analyst Art Berman in his Forbes article on Nov 22 2015:

The Haynesville Shale play needs $6.50 gas prices to break even. With natural gas prices just above $2/Mcf (thousand cubic feet), we question the shale gas business model that has 31 rigs drilling wells in that play that cost $8-10 million apiece to sell gas at a loss into a over-supplied market.

 

Haynesville-Shale-EUR-Map-Berman

 

At $6 gas prices, only 17% of Haynesville wells break even (Table 3) and approximately 115,000 acres are commercial (Figure 2) out the approximately 3.8 million acres that comprise the drilled area of the play.

 

The Haynesville Shale play is a commercial failure. Encana exited the play in late August. Chesapeake and Exco, the two leading producers in the play, both announced significant write-downs in the 3rd quarter of 2015.

Basically, the overwhelming majority of the shale gas extracted at the Haynesville was done so at a complete loss.  So, why do they continue drilling and producing gas in the Haynesville?

The reason Art Berman states is this:

What we see in the Haynesville Shale play are companies that blindly seek production volumes rather than value, and that care nothing for the interests of their shareholders. The business model is broken. It is time for investors to finally start asking serious questions.

Chesapeake is one of the larger shale gas producers in the Haynesville as well as in the United States.  According to its recent financial reports, Chesapeake received $1.05 billion in operating cash in the first three-quarters of 2015, but spent $3.2 on capital expenditures to continue drilling.  Thus, its free cash flow was a negative $2.1 billion in the first nine months of 2015.  And this doesn’t include what it paid out in dividends.

The same phenomenon is taking place in other companies drilling for shale gas in the other fields in the U.S.  This insanity has Berman perplexed as he states this in another article from his site:

This has puzzled me because the shale gas plays are not commercial at less than about $6/mmBtu except in small parts of the Marcellus core areas where $4 prices break even. Natural gas prices have averaged less than $3/mmBtu for the first quarter of 2015 and are currently at their lowest levels in more than 2 years.

The reason these companies continue to produce shale gas at a loss is to keep generating revenue and cash flow to service their debt.  If they cut back significantly on drilling activity, their production would plummet.  This would cause cash flow to drop like a rock, including their stock price, and they would go bankrupt as they couldn’t continue servicing their debt.

Basically, the U.S. Shale Gas Industry is nothing more than a Ponzi Scheme.

The Collapse Of U.S. Shale Gas Production Even At Higher Prices

I believe the collapse of U.S. shale gas production will occur even at higher prices  Why?  Because the price of natural gas increased from $2.75 mmBtu in 2012 to $4.37 mmBtu in 2014, but the drilling rig count continued to fall:

U.S.-Gas-Drilling-Rigs-vs-Spot-Price

As the price of natural gas increased from 2012 to 2014, gas drilling rigs fell 40% from 556 to 333.  Furthermore, drilling rigs continued to decline and now are at a record low of 127.  Just as Art Berman stated, the average break-even for most shale gas plays are $6 mmBtu, while only a small percentage of the Marcellus is profitable at $4 mmBtu.

Looking at the chart again, we can see that the price of natural gas never got close to $6 mmtu.. the highest was $4.37 mmBtu.  Thus, the U.S. Shale Gas Industry has been a commercial failure.

Now that the major shale gas producers are saddled with debt and many of the sweet spots in these shale gas fields have already been drilled, I believe U.S. shale gas production will collapse going forward.  If we look at the Haynesville Shale Gas Field production profile, a 50% decline in 4 years represents a collapse in my book.

The Two Nails In The U.S. Empire Coffin

As I stated in several articles and interviews, ENERGY DRIVES THE ECONOMY, not finance.  So, energy is the key to economic activity.  Which means, energy output and the control of energy are the keys to economic prosperity.

While the collapse of U.S. shale gas production is one nail in the U.S. Empire Coffin, the other is Shale Oil.  U.S. shale oil production peaked before shale gas production:

Top-4-Shale-Oil-Fields-Production

This chart is a few months out of date, but according to the EIA’s Productivity Reports, domestic oil production from the top four shale oil fields peaked in April of 2015… three months before the major shale gas fields (July 2015).

Unfortunately for the United States, it was never going to become energy independent.  The notion of U.S. energy independence was built on hype, hope and cow excrement.  Instead, we are now going to witness the collapse of U.S. shale oil and gas production.

The collapse of U.S. shale oil and gas production are two nails in the U.S. Empire coffin.  Why?  Because U.S. will have to rely on growing oil and gas imports in the future as the strength and faith of the Dollar weakens.  I see a time when oil exporting countries will no longer take Dollars or U.S. Treasuries for oil.  Which means… we are going to have to actually trade something of real value other than paper promises.

I believe U.S. oil production will decline 30-40% from its peak (9.6 million barrels per day July 2015) by 2020 and 60-75% by 2025.  The U.S. Empire is a suburban sprawl economy that needs a lot of oil to keep trains, trucks and cars moving.  A collapse in oil production will also mean a collapse of economic activity.

Thus, a collapse of economic activity means skyrocketing debt defaults, massive bankruptcies and plunging tax revenue.  This will be a disaster for the U.S. Empire.

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MSimon's picture

The amout of gas/oil available depends on price.

Beam Me Up Scotty's picture

The price depends only on how far they open the spigot out of the ground.  There could be a million years of oil and gas underground---do you think we would be told that?  Maybe there is, maybe there isn't.  We paid $4+ for a gallon of gas a few years ago, because why?  There certainly wasn't/isn't a shortage-----it was because they closed the spigot, just enough to get the price to skyrocket.  Shortage my ass.  We were told that about oil too.  And here we are, out of oil storage capacity.

Rubicon's picture

Thx for pointing out the peaks.

PAPA ROACH's picture

This is without a doubt a top 10 worst article ever. Shale is not nor will be "over" in our lifetime. Art Berman has been wrong for a decade on all of his analysis, well documented. The market will eventually price at a reasonable rate of return for producers, and they will produce. We should ratchet up to a long-term price band of $3.50 to $$6.00 for the forseeable future. The efficiency gains and lowered costs have brought break-even economics way lower than Berman's mis-guided prices.History will not be kind to him.

daveO's picture

Agreed. 

Thus, a collapse of economic activity means skyrocketing debt defaults, massive bankruptcies and plunging tax revenue.  This will be a disaster for the U.S. Empire.

Other producers, hooked on petro dollars, will collapse first. You get them hooked on debt, like Saudi Arabia, then jerk the rug out from under them! Next up, Iran. Think like a money changer and notice the overall picture, the death of debt-encumbered OPEC is occurring.

JRobby's picture

"Energy drives the economy and finance steers it" into a black hole of debt/derivatives. We need Mr. Sulu at the helm! George, are you available? You are clearly more qualified than Yellen and Handlers.

Boris Alatovkrap's picture

Thesis is flawed, "Finance is steer it" is how Thelma & Louis is over cliff. "Rule of Law must steer it" is correct thesis. Is only reason why USA is historically safe for preservation of wealth. Property ownership in USA is secure only if law is equal apply to everyone. Scofflaw POTUS, SOS, DOJ, and FRBS is real nail in casket.

…but what is Boris know?

Lore's picture

Right. "It can't happen here."  Interesting how some Zhers treat this as lightly as "global warming" rhetoric.  To me, this is serious.

Augustus's picture

Papa Roach is correct.  Just look at this quote from the article:

As the price of natural gas increased from 2012 to 2014, gas drilling rigs fell 40% from 556 to 333. 

Price has an increase, # rigs falls, but volumes continue with the big increases.  The fewer rigs replaced production declines and increased deliveries.  That happened because the tech improved to get much more hole drilled for the same rig time.  Also latterals were able to be extended, requiring less verticle hole and with the use of the same pad to drill multiple wells.  Berman fails to consider the cost reductions and productivity improvements.  Frac jobs that once took over a week are not done in a few days. 

Berman has been yelling Ponzi Scheme for years.  In his view, all extractive businesses must be Ponzi Schemes.  His claims had nothing to do with a prediction of lower NG prices, just lack of reserves.  While produceers may have been off on the price forecasts, it is obvious from the production numbers that they did a great job in reducing costs and delivering the reserves. 

A NG price in the $4 range mekes it pretty profitable for the producers.  Relatively affordable for consumer and energy equiv. to oil at < $30.

 

Bill Shockley's picture

Well friend, if you want the revolution to start just keep gas at $5 and natural or propane at $4.

 

Do you have any idea how a $10/hr wage works with that.

 

What is it about the word depression you don't grasp?

 

Americans are being fucked between food, medical and energy prices. Do you understand what a dry hole feels like?

 

 

Why do you think Trump and Sanders are where they are.

Murder is the next step when the kids are hungry. Is that the day you wish for?

The oil companies have been robbing us for my lifetime and I am an old man.

 

Like many you don't grasp it.

 

Nationalization is the only way to save the Union.

 

   Bill

Augustus's picture

Bill Shockley,

Your post is so full of dumb ass that you must have high ratio of donkey genes.

NG at less than $4 is a great bargain.  Maybe you are confused about liquid Gasoline prices?  Mine are well below $2 a gallon at the pump, including the taxes.

Propane prices have collapsed at the wholesale level.

Of course there has been a revolution.  US producers have been able to lower production costs.  It has lowered energy prices substantially and consumers have benefitted.

silverer's picture

What will happen is the cost to recover will steadily rise. I would rather use 18" of closed cell foam in double studded 2x10" walls and heat my house with a candle. Because it will be cheaper to insulate than to buy the energy to heat.

john milton's picture

maybe the demand have peaked... i see more and more e-cars, green energy, renewables, biodiesels etc

Redneck Hippy's picture

Gas has peaked because the number of rigs is off.  Most of the gas in North Dakota is still flared off because it is too cheap to make it worth transporting it.  

When we start exporting it in bulk, the price will go up and the supply will go up.

sharonsj's picture

I live in PA and drilling is all around me; but the gas companies have stopped opening up new wells because the price of gas fell so low.  Meanwhile, a geologist friend says there's anough gas in the Marcellus to last several decades, and there's oil under that.  I can't see producton coming to a complete halt but, yes, my royalties are also dropping because production fell.

svayambhu108's picture

there is a lot of denial in the shale business

silverer's picture

Funny how the gov is all over the pollution part (they should be), but rely on the same operation to provide revenue. This just gets ever more difficult as we go forward.

Normalcy Bias's picture

Exactly. When the market price is below production cost, and even capture cost from wells drilled primarily for oil, there will be less gas produced.

Even in 2014 when the market price for gas was $2 higher than it is now, it was more cost effective for most wells in the Permian to just flare it off.

commie's picture

I imagine in 10 years from now ZH will still be babbling about the demise of USA. Hell, we managed before shale so what's the big deal. TD gets his rocks from hyperventilating from his fever dreams of US destruction. 

silverer's picture

But the eco groups are on steroids, backed by the guy at the top. No carbon allowed. Start gathering silicone-based materials for fuel.

peddling-fiction's picture

@commie

All that is needed is for the petrodollar to disappear, and believe me, things will get very difficult in the States.

Now having said that, the US still has the best innovators in the world, and all that is needed is to bring back manufacturing and scale back globalization a bit.

commie's picture

So. Who will take the place of the US?  Russia?  china? You see the problem. 

peddling-fiction's picture

It will be a multi-polar world. Already is to a degree. The only problem I see is if only one country cuts the cake.

Regardless, I know that the US has the best innovation and only needs to bring back manufacturing and protect its economy a bit and it will still be a large power.

Are you an anti-commie?

Using the term commie as your username is really out of touch.

Maybe only North Korea is communist these days.

sun tzu's picture

Who was there to take the place of the Roman or British empires when they declined and collapsed? You see the solution?

JRobby's picture

Where will you be 10 years from now commie?

In a facility undergoing a continuous cycle of chloroforming followed by electro shock the moment you regain consciousness? (funded 100% by O care!)

JRobby's picture

Assume then this is something you have been through before and I hit a nerve?

Your post was dead on concerning the topic, in your mind.

Max Steel's picture

How much better is your life now compared to few decades back

silverer's picture

Finally! Now the prices can start to ... oops! Too late.

Insurrexion's picture

 

 

Bullshit Rocco.

Tell us how the "empire" was suffering before fracking technology and new Shale Oil production?

Fuck head.

sun tzu's picture

The empire was running on coal powered energy. Now that coal has been pretty much outlawed, where will cheap energy come from?

wildbad's picture

starting? please..stick a fork in it.

I need more asshats's picture

"out the approximately 3.8 million acres that comprise the drilled area of the play."

I really like how the author utilizes the word 'play'. Very cool sounding. I wonder if he says 'handle' when he speaks of pricing.

Cool. (instead of clapping I'm snapping my fingers like those cool poetry guys do when they approve of something).

nakki's picture

The FED is in the first few innings of paper printing. Every country on the planet is bankrupt so there is no other empire waiting in the wings. Just a lot of consolidation. Just the way they want it. Its not like that oil and gas are going to just disappear.

Chuckster's picture

I'll bet most of this was financed by foreigners.  I used to be in the biz.  "sell the sizzle...not the steak"  As usual foreigners with more money than God were roped in and hog tied.  Now if they complain they are just showing their ignorance to their friends and family.

sun tzu's picture

It was financed by banks and pension funds

45North1's picture

When the export ban is re-instated, we will be there. In the meantime, trying to keep places like Cushing from overflowing and WTI tanking will be the priority.

As has been said, the cure for cheap oil.....  is cheap oil.

besnook's picture

the shale oil collapse is good. the wells are still there but the capital costs are getting a haircut that will actually lower the extraction costs in the long run as the big players pick up the assets for pennies on the dollar.

Lore's picture

...And the industry defaults hundreds of billions in bad debt derivatives, and we slog through shortages and spikes while drillers who still exist fail to ramp production from mature formations, and capital floats away in an orchestrated banking crisis, and the biggest currency regime loses reserve status. It'll be fun.

Moody's Just Put Over Half A Trillion Dollars In Energy Debt On Downgrade Review (ZH, 22-Jan)

Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke (Bloomberg, 9-Dec)

Oh, and the psychopaths won't give up their plans for moar war...

besnook's picture

they took the internet first in the crash of 2000, they took real estate in the crash of 2008 and world bankstering in the meantime. this time they get all the resources. who cares what happens to you. they must be a raptor of some kind, can't be human.

JustUsChickensHere's picture

Of course they are human. Homo sapiens are the most vicious predator on the planet!

peddling-fiction's picture

The demon possessed humans are particularly nasty. Particulary the elite, but also the tv-dinner brainwashed.

juggalo1's picture

Let me ask you this: what is better for the US? Billions in environmental cost and economic effort on cracking rocks and drilling deep holes or billions in spending money on $35 Saudi oil? Your charts are meaningless because they are only looking at production. Where's the graph showing oil prices vs. US shale investment flows? The US is a high-cost producer. Our energy is most sensitive to marginal prices. Why are we better off producing our energy at high prices than importing it at low prices? Are you a Communist?

sun tzu's picture

If we weren't producing, there would be no low prices. Take the 4mbpd production from fracking and the excess oil disappears overnight and prices go back to $100.  Enjoy the cheap foreign oil while it lasts. The only thing that can keep it cheap is a global depression.

commie's picture

Let's get this straight. If push comes to shove, the US will take it from SA. The fuckers can't do a damn thing about it. PAX AMERICANIA

Normalcy Bias's picture

The U.S. should've done that 25 years ago and the world would've been far better off for it.

JRobby's picture

You should know by now that the way it works is:

The World Bank / IMF loan the 3rd World Countries the $$$$. The puppet GOV set up by the USSA skims their piece, the energy and mining companies move in and skim off their piece and set up extraction operations, then sell off the product at market prices and give the 3rd World Country just enough to service the debt because we can never leave the banksters out of their piece, or else!

Normalcy Bias's picture

I understand that game, but it doesnt apply to SA. They haven't needed a loan from anyone until perhaps recently.

JRobby's picture

They are old and used up now, their "cycle" was a few decades ago. WB/IMF have marauded onward to destroy new frontiers.