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Has the Shale Bubble Already Burst?

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By Igor Alexeev. Cross-posted from Oil Price

Just like the famous Gold Rushes of the 19th century, US shale gas development is turning out to be a limited and regional market opportunity. Across the Atlantic, the high financial and human costs to fracking also mean that Europe should forget any fantasies about repeating the US shale boom.

Many US shale companies that have been beating the drums of shale “revolution” are now facing oil and gas well depletion. In February 2013 the US Energy Information Administration (EIA) warned that “diminishing returns to scale and the depletion of high productivity sweet spots are expected to eventually slow the rate of growth in tight oil production”. It was a cautious but intriguing statement.

Arthur Berman, a prominent shale skeptic who runs Labyrinth Consulting firm in Sugarland, Texas, is not surprised. “The shale gas phenomenon has been funded mostly by debt and equity offerings. At this point, further debt and share dilution are less feasible for many companies” – he wrote in The Oil Drum blog several months ago.

The average depletion rate of wells in the Bakken Formation (the largest tight oil play in the US) is reported to be 69 percent in the first year and 94 percent over the first five years (37 percent and 50 percent in the Barnett Formation). Due to the lack of reliable data on shale industry many experts (for example, Deborah Rogers from Energy Policy Forum) await possible future write-downs in shale assets. Naturally smaller investors will not hear about the write-downs in the news.

Rock-bottom gas prices on the American market make it extremely difficult to drill more wells and maintain current levels of production, unless technology radically changes.

“The cheap price bubble in the US will burst within two-to-four years,” believes David Hughes, a geoscientist and former team leader on unconventional gas for the Canadian Potential Gas Committee. “At a high enough price, the supply bubble will burst perhaps 10-to-15 years later, when drilling locations become sparse.”

It means that natural gas market is successfully absorbing shale output for now.

The sharp inflection points for shale gas wells result from a well-known drawback of horizontal drilling and hydraulic fracturing technologies. Production peaks for a year or two but then the initial flow peters out. Overall lifespan of shale wells in Texas is about 8 years. Drilling company must continuously invest in the new wells or refrack the old ones. In comparison conventional, vertically drilled wells demonstrate more stable output for 20-30 years.

Fracking business model in 2009-2012 was based on enormous cashflow from investors attracted by tall promises of natural gas bonanza. At the same time shale wells were considerably underperforming in dollar terms making the whole business a very risky venture. Lack of statistics was sugar coated by lucrative promises.

Will domestic gas prices be high enough to pay for the continuing exploration and development in the coming year? It is hardly probable. Natural gas futures for September and October 2013 slid to the lowest price in more than five months in New York after U.S. stockpiles increased more than forecast last week, Bloomberg reported.

There are also sensational industry reports that reveal how investment bankers promoted shale bubble in order to profit from a short-lived energy boom. Subprime mortgage crisis has shown that the Wall Street is very good at creating financial bubbles.

A lot of the small investors now being solicited by respected investment publications may lose their money, forecasts Professor Robert U. Ayres in Forbes. The shale gas boom was profitable in 2009 but now small players are late for dinner.

Europe Must Forget Fantasies About Repeating The US Shale Boom

Strong anti-fracking grassroots movement in Europe proves that people on the continent also understand the hidden dangers of shale gas development. Many countries in continental Europe have shelved unrealistic shale projects despite the fact that European energy prices are double those in the US. Germany set strong barriers against fracking. France’s president Hollande blocked shale initiatives. The Paris-based International Energy Agency has strong doubts about shale gas in Europe pointing to the lack of drilling equipment, higher population density and environmental concerns. The only apologist of fracking in the European Union is Great Britain. London is strongly influenced by US companies trying to sell drilling equipment on the island.

In May 2013 the EU Cimate Commissioner Connie Hedegaard stressed that geological and geographical factors of Europe shale did not make its large-scale exploitation as cost-effective as in North America. Finally, the Director of Strategy at the European Commission’s DG Environment Robin Meige has recently said that “in the most optimistic case, European shale gas can only compensate for declines in domestic conventional gas”. In other words, Europe must forget fantasies about repeating the US Shale Boom, writes online industry journal OilPrice.com.

Some Eastern European states are pushing forward the shale agenda for purely political reasons disregarding interests of their own population. For instance, the government of Poland has painted itself into a corner by making loud and unsubstantiated statements about shale gas “revolution”. Despite around 40 wells being drilled in the country since 2010 by oil majors, no company has announced that it can extract gas for commercial purposes. However heavy pro-fracking lobbying resulted in dramatic corruption scandal. Seven officials were arrested last month in connection with licenses to explore and exploit shale gas deposits.

At the same time Polish farmers have initiated massive protests against shale gas development. It seems they understand the situation far better than many professional energy analysts in London.

“If they go ahead with drilling thousands of meters underground, our water will be affected and there will be no more life in our fields,” villager Stefan Jablonski told IPS during a protest in Warsaw last week. “Not to mention that we might end up with no gas and no water too.”

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24 comments

  1. psychohistorian

    It is said that all we have to share with each other is the example of how we live our lives. If you extend that concept to countries, I think you can say the the US is providing a horrible example to the world and it is being noticed…..how many millions of dollars of natural gas are being burned off stupidly as part of this shale scheme?….and everyone else is going solar but the banana republic US.

    But being the bully we are with too many nukes and control of most of global finance I have yet to see a path forward that doesn’t include conscious genocide/population control by the global plutocrats.

    I suppose all this could work for me if I just had F Beard’s faith in the Rapture, but I don’t and never will…been there, done that and learned from it…..hell, I have more faith in aliens coming and saving us than the Rapture.

    1. profoundlogic

      Well said historian. We are indeed behaving like spoiled children. Scripture makes for some interesting reading, but it doesn’t change reality. That blind faith many are clinging to is part of the same delusion that has perpetuated the growing stench in Washington and the U.S. in general.

  2. Tony Westerberg

    OMG – This piece is not worthy of publishing on this site NC is a favorite site of mine, too which I have contributed, because it offers credible contrary prose and insights on most topical macro economic subjects.

    Mr. Alexeev’s piece is full of literary misdirection and disinformation.

    What are: “Across the Atlantic, the high financial and human costs to fracking…”?

    The operative word is “Eventually”…“diminishing returns to scale and the depletion of high productivity sweet spots are expected to eventually slow the rate of growth in tight oil production”.

    OMG…..most are public companies…,”many experts…”
    Due to the lack of reliable data on shale industry many experts (for example, Deborah Rogers from Energy Policy Forum) await possible future write-downs in shale assets. Naturally smaller investors will not hear about the write-downs in the news.

    Since when is NC in the propaganda business? Wow….really beneath the good work you have been doing.

    1. kimyo

      Deborah Rogers supports her argument with clarity and plenty of footnotes. you, otoh, appear to be incoherent. propaganda? please.

      http://shalebubble.org/wall-street/

      “In Q3 2012, as predicted, further deterioration occurred for Chesapeake. The company took an additional and considerably larger impairment charge of $2.02B on it shale assets.”

      “Encana said it had recorded a US$1.7 billion non-cash after-tax impairment charge resulting primarily from the decline in 12-month average trailing natural gas prices.”

      “British Petroleum (BP) said Tuesday it is taking an impairment charge of US$2.11 billion, primarily relating to its U.S. shale gas assets.”

      “BHP Billiton (BHP) blamed a glut of gas supply in the US for a US$2.84B impairment charge against the value of its Fayetteville gas assets, which it acquired for US$4.75B 18 months ago.”

      “BG Group, the U.K.’s third-largest oil and gas producer, wrote down $1.3 billion on its U.S. shale fields…”

    2. from Mexico

      Due to the lack of reliable data on shale industry…

      I agree. This was a really stupid assertion, because there is no “lack of reliable data.” Quite the contrary, there is ample data.

      If we look at the actual production history of the oldest and biggest shale play in existence, the Barnett Shale, which began in serious in 2002, we now have a long enough performance history to see what these wells are actually capable of producing over their lifetimes. The claim that there is a “lack of reliable data” is just ignorant nonsense. And the reality of what these wells have produced? Well, it’s not a pretty sight.

      Whereas cumulative lifetime production of Barnett shale gas wells was touted at 5 BCF in the prospectus, these wells, in reality, are going to be lucky to produce 20% of that. At today’s gas prices, investors will only recover a fraction of the original drilling, completion and leasehold cost.

      Shale gas is a ponzi scheme, the creation of fast talking Wall Street salesmen and con artists.

      1. charles sereno

        from Mexico says:
        August 28, 2013 at 5:31 am
        Due to the lack of reliable data on shale industry… [Tony Westerberg]

        I agree. This was a really stupid assertion, because there is no “lack of reliable data.” Quite the contrary, there is ample data.

        Let me complete Westerberg’s statement:
        “Due to the lack of reliable data on shale industry many experts (for example, Deborah Rogers from Energy Policy Forum) await possible future write-downs in shale assets. Naturally smaller investors will not hear about the write-downs in the news.

        Since when is NC in the propaganda business? Wow….really beneath the good work you have been doing.”

        Presumably, you also agree with Westerberg that Deborah Rogers is stupid. kimyo offers a documented defense of Rogers. You, from your armchair, know that it’s all a Ponzi scheme. Wittingly or not, you’re giving credence to a jerk like Westenberg with his faint praise of NC. I may agree with your conclusions but I prefer to consult experts like Rogers or Art Berman.

        1. Tony Westerberg

          Kimyo – Sereno

          You don’t know me well enough to insult me…”…a jerk..”, now, if you knew me a little better, well…thats different:)

          I stand by my assertion, the piece is VERY weak by NC standards, and I am hopeful that we are not going to experience a degradation of content on the site, as I said..one of my favorites.

          If you want to understand the North Dakota Shale play, go to the state, and talk to the citizens, and the folks who are overseeing the industry. Better yet…do a little homework.
          See slides – 10, 12 and 13 for context on, creation of value (average well produces $24 mil. net profit over its lifetime), projected longevity, job creation……..

          https://www.dmr.nd.gov/oilgas/presentations/Cookfest07_2013.pdf

          pro·pa·gan·da noun \ˌprä-pə-ˈgan-də, ˌprō-\

          : the spreading of ideas, information, or rumor for the purpose of helping or injuring an institution, a cause, or a person

          : ideas, facts, or allegations spread deliberately to further one’s cause or to damage an opposing cause; also : a public action having such an effect

          Sereno,fascinating, you do a nice job of defining yourself for all here.

          “a jerk..”, and I don’t recall using the word “stupid” as relates to Ms. Rogers. I was questioning his “..many experts..” assertion.

          sir, you do a fine job of defining yourself for anyone paying attention here.

        2. Tony Westerberg

          Sereno -

          FYI, looking a 2nd time at your note, I believe you are confused, the reference to “…lack of reliable data…” came from Mr. Alexeev’s article. not from me.

          Perhaps you skimmed the article and then responded to my post.

          “Due to the lack of reliable data on shale industry many experts (for example, Deborah Rogers from Energy Policy Forum) await possible future write-downs in shale assets. Naturally smaller investors will not hear about the write-downs in the news.”

          At least you were correct, in your agreement with me,…the Author got it wrong, there is plenty of data, the Producers in the shale plays, and many of the Service Providers are Public Companies, they report (quarterly), IN DETAIL, their experiences in the oilfield.

          1. charles sereno

            Tony Westerberg:
            I am not familiar with you at all. I descended to name-calling you “a jerk” because I was incensed by your obvious hit piece (see your definition of propaganda). I was not “confused.” I merely recounted the final 2 paragraphs of your original comment. You repeat the author’s statement with a “bah, humbug, beneath the dignity of NC” dismissal that’s not worth arguing about. If anything, I owe from Mexico an apology and I hope he sees this. I was bothered because he seemed to give credence to your stance when, in truth, his position is diametrically opposed to yours. (BTW, f M, I admit that much can be accomplished from an armchair.) The question of “reliable data” can be a smokescreen. There’s enough there to get beyond the hype; not nearly enough to apprise non-profitable (unintended, of course) dire consequences. Finally, in my defense, I do not see how I have agreed with you as you claim.

          2. charles sereno

            I could have sworn I saw my reply registered before it disappeared into the ether. Another try.
            Tony Westerberg:
            I do not know you. I name-called you a “jerk” because I was irritated by your hit piece (see your definition of propaganda). I was not “confused.” I recounted the final 2 paragraphs of your original comment. You repeated the author’s statement with an implied, not-worth-arguing-about dismissal. Also, it was beneath the dignity of NC for publishing it.
            If anything, I owe an apology to from Mexico (I hope he sees this). I was bothered because he seemed to give credence to your stance when, in fact, I believe his position is diametrically opposed to yours. The question of “reliable data” is often just a smokescreen. There’s enough there to get beyond the hype, but not nearly enough to apprise the scope of unexpected consequences.
            Finally, I cannot see how I have agreed with you, as you claim.

            1. Tony Westerberg

              I’ll admit, both my “OMG”, and “Propaganda” comments were perhaps…..excessive. I have grown very frustrated with the kinds of generalizations offered in “Hit pieces” like Mr. Alexeev’s, VERY frustrated. Thus my outburst.

              The single link wasn’t meant to be definitive, but demonstrate that the basic suggestions of Mr. Alexeev’s piece are flawed, thus the entire piece, and its general unworthiness.

              I have been making investments in and around the Shale Oil industry for 3 years. It is not my background, but it has been a productive effort, while most other categories have produced bupkis during the same period. So, I am not an armchair observer, and I am not an old hand in the oil industry either. We (my Partners and I) are entreprenuers, taking risk, with our own (small and very precious) Capital in and around an industry (one of the few) that is creating jobs, delivering profits, and growing. The very first thing we did was assess the probability of continuity (with intense focus on the time frames required to amortize our risk capital at projected rates of return). It has been extremely well studied and discussed, if one cares to be informed. For example, it is very true that decline curves are steep, but as described in the linked presentation, the average well produces for 45 years. In addition, the # of wells that can be drilled with todays technology (veritcal downspacing and array fracking) are immense, and provide the probability of a long lived industry, provided one thing….the price of oil remains at levels which allow a justifiable ROI on the effort.

              Certainly positive continuity in the industry requires continual drilling. The thing is, contrary to Mr. Alexeev’s piece, the drilling can and will continue for 25 yrs. in ND, if the price justifies it.

              The rationale for continued drilling comes down to that one variable….the price of oil. If oil remains above $70/brl. drilling will continue. As technology improves the pricing ceiling may come down further. That is our bet. We can recover and profit before oil drops below $70/brl. for an extended period of time.

              It is up to us, as it is every investor, to accept the consequences of our poor, or good judgement in making investment decisions. We do not need poorly organized commentators manufacturing or distorting facts about an industry we are taking risks in, without counter pointing. Provide the facts and enjoy credibility. Offer generalizations, with a crystal clear agenda, which is contrary to someone elses real world experience, and suffer ridicule.

              Shale development, as every investment categories is in need of transparency and debate. Lets just make sure it is an intelligent, and well balanced debate. Mr. Alexeev’s piece, in my opinion, is not worthy of publication on NC.

    3. BigG

      I agree that this is a poor article. Shale oil and shale gas are different markets but this story bobs and weaves through them both. Most specific statements in the article talk about shale gas and the bad market that exists for gas but then the more general sweeping statements refer to shale in general or shale oil and gas.

      It seems that the author makes some valid points about shale gas and is trying to hang them on shale oil without providing any evidence.

      1. Asher Miller

        It’s true that shale gas and tight oil are not the same and there are big differences in terms of the market. The steep drop in natural gas prices led many in industry to move towards liquids instead.

        But there is a lot of similarity when it comes to the geology and technology. Both require massive amounts of water, have steep decline rates, and both gas and oil plays are not “manufacturing operations” as industry has tried to portray, in that there are distinct sweet spots.

    4. Asher Miller

      Contrary to statement of “a lack of reliable data,” the analysis by David Hughes is based on actual production from over 65,000 shale gas and tight oil wells. This data comes from DIDesktop, widely used by industry and the EIA.

      1. charles sereno

        In their recent June 10, 2013 report “Shale oil and shale gas resources are globally abundant,” the EIA states –

        “Because they have proven to be quickly producible in large volumes at a relatively low cost, shale / tight oil and shale gas resources have revolutionized U.S. oil and natural gas production, providing 29 percent of total U.S. crude oil production and 40 percent of total U.S. natural gas production in 2012.”

        There is nary a mention in their upbeat report about decline rates. Oh well.

    5. dSquib

      Dude who doesn’t seem to comment on NC has concerns about the “standards” of NC. Dude works for company with apparent interests in gas boom. See page 43.

    6. Simon

      Sorry….. but “OMG” and “WOW” are not really convincing me! If you have an alternative and coherent argument please state it.

      Thanks

      Si

  3. Aussie F

    Venal politicians in the UK will be rushing with bucketloads of cash to bail out their gashole sponsors.
    The bubbles burst! Who cares? Time for another cheque from HM Treasury. It’s all a question of National Security.

  4. Paul Tioxon

    Due to the great tales of wealth, all kinds of great paying jobs, and endless opportunities to use the ports and refineries in Philadelphia, the Pennsylvania gas industry and fracking have received in depth, on going coverage in business, news and political coverage with regular writers who have PA fracking as their respective beat. There is much anecdotal evidence of this wandering storyline over the years turning from I just hit the lottery stories to bitter anger over the what really happens to you and your land once you sign up for a gas well drilling. I have known people with some acreage upstate who just wanted peace and quiet for themselves on pretty cheap land, left behind by industrial development and the service economy booms of the last 75 years. So what if you couldn’t get a decent sandwich out there in the sticks! But despite some people going from riches to enviromental activists in a few months, even the riches turn out to be a rip off. People need to be warned that the same thieves from Wall St who finance and then foreclose, steal from the gas lease property owners just as badly. So much so, that local state park officials are offering their services to locals, for a cut of the action of course, on how to negotiate and making the gas drillers cry foul and conflict of interest. Boo Hoo!

    ——————————————————

    Report: Frackers cheating Pa. landowners and gov’t out of billions.

    Thousands are receiving far less money than they were promised by energy companies to drill their properties. Some are being paid virtually nothing.

    “Don Feusner ran dairy cattle on his 370-acre slice of northern Pennsylvania until he could no longer turn a profit by farming. Then, at age 60, he sold all but a few Angus and aimed for a comfortable retirement on money from drilling his land for natural gas instead. It seemed promising. Two wells drilled on his lease hit as sweet a spot as the Marcellus shale could offer – tens of millions of cubic feet of natural gas gushed forth. Last December, he received a check for $8,506 for a month’s share of the gas. Then one day in April, Feusner ripped open his royalty envelope to find that while his wells were still producing the same amount of gas, the gusher of cash had slowed. His eyes cascaded down the page to his monthly balance at the bottom: $1,690. Chesapeake Energy, the company that drilled his wells, was withholding almost 90 percent of Feusner’s share of the income to cover unspecified “gathering” expenses and it wasn’t explaining why. “They said you’re going to be a millionaire in a couple of years, but none of that has happened,” Feusner said. “I guess we’re expected to just take whatever they want to give us.”
    Read more at http://www.philly.com/philly/business/Frackers_.html#935ifoRFaP2GShjr.99

  5. Michael Fiorillo

    Meanwhile, as the shale ponzi teeters, Phildelphia had to borrow $50 million dollars and demand pay freezes and increased health n surname contribution from its teachers in order to open the schools, which are rapidly being privatized.

    Extraction really is the word: extracting wealth -public and private – from the many to serve the few.

  6. peace

    The main point of this post seems indisputable: Shale oil production peaks quickly. A known fact in the industry but not publicized for obvious political reasons – short-term profits do not outweigh the long-term costs in terms of environmental degradation and water resources expended and permanently polluted in some cases.

    Daily Kos provided industry produced graphs that explicitly illustrate steep declines in production from 300 barrels per day to virtually 0 within the first 6 years (Exhibit 6 – Bakken Type Curve) Drill Baby Drill! The Fracking Bubble is Bursting!

    Stop the ad hominem attacks.

  7. peace

    Also, it is fundamental to distinguish

    “estimated reserves” (and “resources”) that are estimates or are not economically feasible or geologically possible to extract (i.e., “not recoverable”)

    from

    “proven reserves” that are “recoverable”

    Peak shale findings force the industry to reduce the number of barrels that industry groups estimate to be recoverable. This reduction fundamentally weakens arguments about how great a bonanza of oil and gas will actually be produced and for how long.

  8. JustAnObserver

    John Dizard of the Financial Times has been on to this for a long time now (~18 months ?). In one column he even showed that, at least from a financial perspective, the fracking “boom” had a strong resemblance to the sub-prime credit bubble … and that it was going to end as badly.

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