THE SHALE OIL PONZI SCHEME EXPLAINED

By the SRSrocco Report,

Few Americans realize that the U.S. economy is being propped up by the Shale Oil Industry.  However, the shale oil industry is nothing more than a Ponzi Scheme, so when it collapses, it will take down the U.S. economy with it.  Unfortunately, the reason few Americans understand how lousy the economics are in producing shale oil and gas is due to the misinformation and propaganda being put out by the industry and energy analysts.

I am quite surprised how bank analysts and brokerage firms can continue to fund the shale oil and gas or advise clients to purchase stock when the industry is behaving just like the Bernie Madoff Ponzi Scheme.  The only big difference is that the U.S. Shale Industry is a Ponzi at least four times greater than Madoff's $65 billion fiasco.

I decided to discuss in detail why the U.S. Shale Oil Industry is a Ponzi Scheme in my newest video.  I provide some interesting charts that explain how the huge decline rates and massive debt are going to bring down the industry, much quicker than the market realizes.

In the video, I show just how quickly two of the largest U.S. shale oil fields decline.  The chart below was developed by Enno Peters at the ShaleProfile.com websiteThe Permian, the largest shale basin in the United States, decline rate was a stunning 60% in just two years.  Thus, the companies producing oil in the Permian are forced to spend boatloads of Captial Expenditures (CAPEX) to grow or just maintain production:

Furthermore, I explain how many of these shale oil companies are using debt to fund operations.  However, lousy shale economics are not allowing these companies to pay back debt, so they must borrow new debt to pay back existing debt.  This is the very definition of a Ponzi Scheme.  The table below shows how EOG has structured its debt to be repaid over two decades:

Unfortunately, for the majority of investors holding EOG debt, they will not receive the return of their funds.  When the stock market suffers the next major leg lower, probably in the fall, it will pull down the oil price.  As the oil price drops back to $40 and on its way to $30, it will destroy the already weakened U.S. Shale Oil Industry, thus dragging down the economy along with it.

All Ponzi schemes collapse.  Just like the collapsing stock market destroyed the Bernie Madoff Ponzi Scheme, the falling oil price, lousy shale economics, and the massive decline rates will also kill the U.S. Ponzi Scheme.

Lastly, when the U.S. economy and financial markets were collapsing in 2008, the domestic oil industry was still in relatively good shape.  Today, it's quite the opposite.  The Federal Reserve's massive monetary stimulus was able to provide the shale energy that helped pull the United States out of the recession, but this time around, there is no PLAN B.

Today, the entire market is full of massive bubbles and Ponzi Schemes.

Check back for new articles and updates at the SRSrocco Report.

Comments

fx King of Ruperts Land Thu, 05/24/2018 - 12:31 Permalink

of course debt goes down and production is up - when should that happen if not now, with WTI above $70?

The crux is,  oil won't stay that high forever (at least heavy cyclical declines will happen) and even if it did, decline rates will kick in with a vengeance , like clockwork. That's how shale wells work!

 5 years from now, shale companies will stare into the abyss with heavily depleted reserves, still a mountain of debt and little if any ressources left for future production growth.

Over the entire cycle (from early 2000s till, say 2040/2050) the net effect will be at ton of money lost on shale projects, some filthy rich shale execs and a lot of precious oil and gas reserves wasted. Oil, of course by then will be way past $200/barrel-. So farsighted, to squander the bulk of shale oil at prices ranging from $25-$60.

In reply to by King of Ruperts Land

snblitz Buck Johnson Tue, 05/22/2018 - 16:57 Permalink

I would like to say that scams & hustles are the definition of government and banks, but I can really only provide evidence for the behavior since 1913.

So I will assert that the scams & hustles are not harbingers of the end, but that they have been going for 100+ years in the US. 

I had thought that the harbinger of the end would be when the 1% ran out of assets to steal.  But the government and banks cleverly figured out how to steal from the future too.

So when will the future run out of assets?  Hard to say.  There certainly is a lot of future.

In reply to by Buck Johnson

Mazzy Buck Johnson Tue, 05/22/2018 - 17:46 Permalink

" Isn't it the last hours of empire when most or all of her financial acumen is only scams and hustles "

Why build an addition to the house when someone's already lit a fire in the attic? 

Maybe only a few of the plebeians know the fire is going so they grab what they can and head for the exits.

By the time most people even smell smoke the bankers are long gone, forgetting to call the fire department along the way.  Ah, those commoners can handle it they suppose.

In reply to by Buck Johnson

EddieLomax Tue, 05/22/2018 - 13:05 Permalink

Cannot disagree, its a ponzi and these investors will get burned.

But the oil must flow, it is not a luxury.

Oil going to $30?  I doubt it because we are doing the exact opposite of over investing in future production as we did back in 2008, $30 means a glut is on the way - Or is demand going to slump that hard?

The next set of investors are going to go in with their eyes open demanding full payment and a profit, then we'll truly see what the price of shale oil is.

Juggernaut x2 EddieLomax Tue, 05/22/2018 - 14:24 Permalink

Feb 2016- oil dips to $26- TX banks with $ loaned out to shale companies get nervous and call the Dallas Fed- D Fed calls a meeting where banks show the D Fed how many shitty shale loans are on their books and -POOF! - oil shoots to $40 within a few weeks of that D Fed/bank meeting and has never looked back(yes- the Fed bought up oil futures to get it from $26 to $40 almost overnight). 

In reply to by EddieLomax

shortonoil EddieLomax Tue, 05/22/2018 - 15:10 Permalink

Hi Steve, and this is about what we have been saying for the last 6 years. Jean Leharrere has been saying it for the last 10. To add insult to injury to keep production even for Shale (because of their horrible decline rate) over the next 5 years will require the drilling of an additional 1.5 million new wells. Which will have a $7.3 trillion price tag attached. That also assumes that they can find places to drill 1.5 million new wells. The sweat spots have long been exhausted. Now it is down to just harder than a brick source rock.

 

Good article as usual, thanks.

BW

In reply to by EddieLomax

SRSrocco shortonoil Tue, 05/22/2018 - 17:28 Permalink

shortonoil,

Agreed.  The only way Shale Oil made sense was by defrauding faceless investors.  In the past, the real oil men would deal FACE TO FACE with investors when they produced conventional oil and gas.  Today, companies producing shale had to go public because it takes the BAMBOOZLING of faceless investors to produce uneconomic oil and gas.

However, at some point, very soon, thermodynamics of oil depletion will take the printing press away from the Fed & Central Banks.  So, the notion that the Fed can bailout the Shale Oil Industry is just as ludicrous as an empty gas tank can provide energy to move the car.

SRSrocco

 

In reply to by shortonoil

MrNoItAll SRSrocco Wed, 05/23/2018 - 02:33 Permalink

The wheels of energy production MUST keep turning, otherwise the engine of the global economy dies and takes down civilization with it. The Shale Revolution was a great JOBS program. It kept the oil production industry and all the industries that service oil production in business for a few years longer. It kept people working. It kept the illusion of "all is well" alive. They had to bamboozle investors -- and print trillion$ in new money -- and keep rates artificially suppressed, etc. What it "took" to keep civilization creeping forward another ten years, from 2008 until today, looks insane at first glance, but when we realize that everything done since 2008 had one and only one goal -- to keep civilization from crashing and burning -- then it all starts to make sense. Short term measures though. It seems like the gig is just about up.

In reply to by SRSrocco

indygo55 shortonoil Wed, 05/23/2018 - 03:30 Permalink

I was at the NRA show in Dallas and talking to a guy who was a land owner for years and he was involved with oil speculation. He said these wells lose 50 percent in under 12 months. They must keep drilling new wells to keep the product flowing. There are ads on the radio for investment products paying 10 11 12 percent for paper on these projects to satisfy the demand for yield on retirement plans. There are people selling and people buying this paper which generates cash to fund these operations. They probably wont pay the first or second coupon because the wells stop hitting the mark so fast before the first coupon is due. No one is talking about that because it isnt in their interests to do so. Good luck with that. 

In reply to by shortonoil

SRSrocco CorporateCongress Tue, 05/22/2018 - 14:08 Permalink

CorporateCongress,

The problem with rising oil prices is that it impacts costs.  Which is why the Shale Oil Industry didn't make any money at $100+ oil either.  As oil prices increase, it thunders through the shale industry as rising costs.  However, the rising price of oil from the low of $30 was beneficial in the short-term as drilling equipment rental prices were slashed just to keep the lights on.

But, now that more drilling is taking place, drilling equipment costs are increasing once again.  Also, the massive 30-50 stage fracks in the Permian are sucking down 15-20 million pounds of sand, trucked all the way from Michigan, and 500,000 barrels of water per well.  The EROI of shale oil today must be closer to 2/1.

So, even though the oil price is rising currently, costs will continue to increase as well.  

Unfortunately, the Shale Oil Industry is Doomed if oil prices rise or fall.  However, rising prices allows the ILLUSION to continue a bit longer than falling oil prices.

 

SRSrocco 

In reply to by CorporateCongress

Setarcos SRSrocco Tue, 05/22/2018 - 14:19 Permalink

Do you like Gail's "Our Finite World" work?  I think that her EROI in terms of energy input (rather than finance per se) is very telling.  As far as I understand it, pre-WW2 it took one barrel of oil/equivalent to extract 100 barrels, whereas now even only 1:10 can be considered "quite good", but obviously the closer we get to 1:1 the nearer we are to total collapse "of life as we know it"/our industrial form of civilisation.  And oil is far from the only resource in decline.

In reply to by SRSrocco

shortonoil SRSrocco Tue, 05/22/2018 - 15:28 Permalink

"The EROI of shale oil today must be closer to 2/1."

 

Damn glad that is settled. Did you explain to Art that they may come in at 15:1 and be 5:1 in 6 months. In five years you have, at best, a rich gas well. They are still producing a few dollars, but at $2.63 MM not many. That is when you go to some stupid banker, tell them about the great oil well that you have, show then five year old books, and borrow some more money. It wasn't technology that made shale, that was all invented 50 years ago, it was dumber than a rock investors. The industry's ace in the hole is that they still aren't getting any brighter.

BW

In reply to by SRSrocco

jin187 SRSrocco Tue, 05/22/2018 - 15:35 Permalink

Apparently, all the people that up voted you can't spot someone shilling for their website with garbage data.

All oil production is funded by debt, especially when you're talking about small/medium companies.  Only the big boys have enough cash to absorb losses, and keep going in times of low demand.  It's cyclical, just like gold mining.  Companies start up using debt, they try to produce their way out of debt, demand eventually drops, some of them fail, some succeed, and it's on to the next cycle.  The energy industry as a whole is a convoluted mess.  Singling out shale as some kind of boogeyman is ridiculous.

In reply to by SRSrocco

Setarcos Juggernaut x2 Tue, 05/22/2018 - 16:51 Permalink

Except that, according to reliable sources I have read (I think Jim Willie counts as one of them) the Saudis now have about a 90% water cut on their original major fields, i.e. they have to pump in so much water to maintain oil flow pressure, that the actual extraction rate of oil is only about 10% of what it was when natural pressure forced oil to the surface.  Apparently they are slant-drilling into Yemen too and the war on Yemen is probably about capturing largely untapped Yemeni oil reserves.

On a slightly separate note, the Golan Heights seizure by Israhell is to do with oil reserves, though apparently not easy to extract. 

Well the whole ME has been more or less "ablaze" for over a century because of oil and, notably, Lord Rothschild extracting the Balfour Declaration from Britain in 1917, which kick-started the Zionist occupation of Palestine and thus a Western/European base for military operations. (Btw don't scape-goat the Arabs/Moslems who got caught up in this disaster - try reading T E Lawrence's "Seven Pillars of Wisdom" to see how they got shafted a century ago.)

Whether or not the Zionist entity now has a "life of its own", it can still be regarded as "USS Israel', the unsinkable aircraft carrier for the Empire of Chaos centred in Washington DC, courtesy of the Rothschild & Co owned "Federal" Reserve Bank.

Meanwhile the EROI of all these wars for control of dwindling oil reserves is encapsulated in US and EU debt levels overall … never mind just the small portion involved in fracking.  She's all gonna blow and quite soon.  The Saudis haven't been pumping conventionally for a long while and, originally, no actual pumping was needed for "gushers".

Oh and Russia no longer has "gushers", though their pumping costs are still low on better fields, even in the Arctic.  They can manage on $40 per barrel - rather less with ruble substitution/locally produced equipment, for example, though $60 is comfortable and easily allows a budget surplus, so sanctions are becoming irrelevant haha 😁

In reply to by Juggernaut x2

snblitz El Hosel Tue, 05/22/2018 - 17:19 Permalink

Imagine what would happen if the US added 4 additional nuclear reactors to each existing nuclear plant in the US:

  • 100% of US electrical energy would come from nuclear
  • No more burning oil or natural gas or coal for electricity
  • No more wars in the Middle East
  • 4x US nuclear industry related deaths (taking it from 5 to 20)
  • No CO2 emissions (for those who care)

What would the price of oil be?

For those of you wondering what to do with the spent fuel do a search on 'breeder reactors'.  The US actually had a couple decades ago.

And the US did build Thorium cycle reactors in the past.

And the US did and does build small format nuclear reactors.  There are two sitting in field in Utah.  Not to mention the ones in the US carriers and submarines.

How about comparing the deaths related to the nuclear industry in the US, or in the world, against the death and destruction related to the endless oil wars?

That would be 5 to 20 vs millions.

Would you rather have spent $6 trillion in endless oil wars, or $1 trillion for the reactors mentioned above?

In reply to by El Hosel

Setarcos snblitz Tue, 05/22/2018 - 17:46 Permalink

Nuclear power produces only electricity, which is only any use if other stuff can be made using it by driving machines.  Oil, coal and gas (to a lesser extent) have far more uses than just boiling water - which is all that nuclear energy does in power stations.

From oil, coal and gas we get all of the plastics used in manufacture, numerous other by-products and fertilizers without which modern, large-scale agriculture is impossible.  Also they are readily portable and energy dense (not so much gas), so can be taken anywhere needed, whereas electricity requires permanent complex power grids, with energy losses over distance.

Though atomic power can obviously complement conventional power stations (solar and wind never significantly will) there is no practical substitute for oil especially and Thorium (if really viable) makes no difference to this.  Meanwhile uranium is not exactly in abundance for existing nuclear power, so nothing is that simple.  Sorry.

In reply to by snblitz

JLarryL snblitz Tue, 05/22/2018 - 23:27 Permalink

The nuclear plants on Florida's east coast are poor candidates for expansion. As it is they sit in sensitive estuaries and require substantial cooling infrastructure. Not gonna happen.

Meanwhile: Thorium: the wonder fuel that wasn't.

I think the energy of the future will have to show commercial viability before it gets widespread use. Show real viability and a full and sustainable clean-up cycle. Thorium and breeder reactors fail in this regard.

As for price: Natural gas and wind are much cheaper on a levelized, unsubsidized basis than any nuclear technology. Utility scale solar (not rooftop!) is also much better where viable, and it is very viable in a lot of America. (PDF, page 3)

It's not by accident that natural gas crushed nuclear -- as it hammered coal.

I can imagine the government subsidies the new nuclear industry would need, too.

In reply to by snblitz

HominyTwin Tue, 05/22/2018 - 14:09 Permalink

Probably, in an alternate universe, where the FED didn't flood the economy with cheap money, maybe then, some small, flinty companies could have made a small profit off of shale. But in this economy, it's too easy for companies to borrow money, and too easy for any group of shysters to form a company and borrow money. So a bunch of money floods into any business where there's a even a chance of profit. But they just bid up the cost of fuel, trucks, labor, rigs, an everything else; making a profit becomes impossible in boom times. Then in the bust, the money dries up like water in the desert.

 

Technology has enabled some cost cutting, but no cost cutting is really done because the cheap money is a disincentive to cut costs during the boom. Look at the E&P guy, the "company man", on a rig site? Why is this guy who makes well in excess of six figures there, on every rig site? Technology should have enabled them to monitor the process remotely, and maybe dispatch a guy in case of problems. There are bunch of other "guys" on every rig site who don't need to be there 95% of the time, yet there they are.

Setarcos Tue, 05/22/2018 - 14:11 Permalink

Shale oil is "just" the extreme example of all resource depletion on our finite planet.  No matter what commodity is considered - and I will deliberately mention the "easy gold" rushes of a century or more ago - they all get harder to find and extract, thus the EROI applying to oil really applies across the board, if unevenly of course.

In a nutshell:  our present industrial/financial form of civilisation is bound to fail, sooner rather than later, with NO real signs in the "West" that anything is being done about it, whereas at least Vladimir Putin is acutely aware - according to numbers of his talks - though when the "West" goes down, it is hard to see how anywhere will not suffer very serious social problems.

Anyway take this as indicative of things overall: pre-WW2 Us oil production had a return on investment (fundamentally energy input, rather than money-as-such) of about 100:1, but nearly everywhere now (not just the US) it's nearer 10:1.  Canadian oil sands are about 5:1 I think, with only cheap natural gas(energy) making it "viable".  US shale is about the same, or less, but SRSrocco can correct any errors I've made from memory.

snblitz Setarcos Tue, 05/22/2018 - 17:24 Permalink

resource depletion on our finite planet

Thorium is lying on the open ground everywhere.

Why stay on the planet?  Have you noticed how much energy is "out there?"

There are lots of solutions. 

The social order is failing due to the choices people make, not the resources available.

Most economists and people agree that scarcity (and scary) drive up prices.

So you can see why artificial scarcity and artificial scary are used both to extract wealth and to control people.

In reply to by Setarcos

Setarcos snblitz Tue, 05/22/2018 - 18:05 Permalink

Have you got any idea about how much energy it takes to get off this planet - about one ton of propellant for each pound of payload (efficiency might have improved a bit) so, say, 150 tons of fuel per person + whatever the weight of the vehicle and gear.  Then where do you go?  And, if some other viable planet could be reached, how do you transport thousands or millions of settlers?  Not enough total available energy on this planet to even consider this fantasy for a second … and don't posit "atomic powered rockets", they will never exist on an large scale, whatever the Russians have recently done with a small already launched missile.

I've been hearing about Thorium going nowhere for decades.  IF there is anything to it, then it's too late.

I don't mean to be insulting, but I don't think that you know enough to realize how little you know, e.g. your unspecified statement, "There are lots of solutions."  Like what and for which of a myriad problems?  And resources REALLY do deplete you know.  This IS a finite planet and we ain't going nowhere.

In reply to by snblitz

BangDingOw Tue, 05/22/2018 - 14:31 Permalink

The theme of this article is correct, but it is rather simplistic.

 

The last I looked , which was not long ago, solid producers could break even at about $60. Those solid producers are now hedging future prod and are going to make a profit for the next 2 years no matter what happens to the oil price. Of course, there are bad producers that are goin to lose money at $70. Secondly, EOG last I looked , was primarily a natgas company.

As far as Ponzi, the WS banksters basically set the oil price. They set the price to the point where producers will be heavily indebted to those same WS crooks. The banksters also promote the companies with growing production, so companies take on more debt to grow production. As such, they will not allow the oil price to go TOO low, because then too many producers will go BK and a few will default on those loans (but primarily the shareholders get wiped and the banksters are first in line to collect theirs). It is all a nasty game and it is all about the banksters.

resistedliving BangDingOw Tue, 05/22/2018 - 15:45 Permalink

agree Ding about WS.  only differ about banksters setting the price.  I.e. SAUDI ARAMCO has a lil IPO they're trying to make work.

Bad analogy but think Retail.  Small co., nice product, WS pitches how they "grow" the company and waddyaget?  Overbuilt, over leveraged then bankruptcy.  The diff is China demand.  and it's there.  every day.  and growing, EV's or otherwise.

Remember this one?  

The Story of the Mexican Fisherman https://bemorewithless.com/the-story-of-the-mexican-fisherman/

SRS is right.  The trillion dollar question is when does Free Money end.  then talk to me.

 

In reply to by BangDingOw