Energy Analysts Deliver More Bad News for US Fracking Industry’s Business Model

Lambert here: Yet another bezzle.

By Justin Mikulka, a freelance writer, audio and video producer living in Trumansburg, NY. Originally published at DeSmogBlog.

This month, the energy consulting firm Wood MacKenzie gave an online presentation that basically debunked the whole business model of the shale industry.

In this webinar, which explored the declining production rates of oil wells in the Permian region, research director Ben Shattuck noted how it was impossible to accurately forecast how much oil a shale play held based on estimates from existing wells.

Over the years of us doing this, as analysts, we’ve learned that you really have to do it well by well,” Shattuck explained of analyzing well performance. “You cannot take anything for granted.”

For an industry that has raised hundreds of billions of dollars promising future performance based on the production of a few wells, this is not good news. And particularly for the Permian, the nation’s most productive shale play, located in Texas and New Mexico.

Up until now, the basic premise of the fracking business model has been for a company to lease some land, drill until finding a high-volume well, hype to the press this well and the many others it plans to drill on the rest of its acreage, and promise a bright future, all while borrowing huge sums of money to drill and frack the wells.

Throughout the seminar, Wood MacKenzie analysts emphasized that companies can’t reliably predict future oil production by “clustering” wells, that is, estimating volumes of many future wells based on the performance of a small number of nearby existing wells, and described the practice as potentially “misleading.”

Shattuck called out how the old business model of firms borrowing money from investors while hoping for future payouts on record-breaking wells no longer works. He summed up the situation:

We’re transitioning to a point in time, where the investment community was enamored of the next well and how big it might be. That has changed for a variety of reasons. One very important reason is the next well might not be bigger. It might be smaller.”

The fracking industry is now being asked to produce positive financial results — not just promises of new super wells, or cube development, or artificial intelligence. And yet the industry couldn’t deliver profits while drilling all the best acreage over the last decade. Now, shale companies need to do that with oil wells that may not produce as much.

Seven years ago, Rolling Stone referred to the fracking industry as a “scam” while profiling the “Shale King” Aubrey McClendon, the man generally credited with inventing the business model the shale industry has used the past decade. Today, McClendon’s old company Chesapeake Energy is in danger of going bankrupt.

Perhaps investors are finally catching on.

Are Child Wells the New Normal?

Last year I covered the issue of child wells, or secondary wells drilled close to an existing “parent” well, and the risk they posed to the fracking industry. Child wells often cannibalize or damage parent wells, leading to an overall drop in oil production.

At the time, I cited a warning about this situation from Wood MacKenzie, which said, “Closely spaced child well performance presents not only a risk to the viability of the ongoing drilling recovery but also to the industry’s long-term prospects.”

Over a year later, has the shale oil industry abandoned this approach or are child wells still an issue?

During this month’s webinar, Ben Shattuck answered that question, making a statement that should strike fear in the heart of shale investors and the owners of all this shale acreage:

We know we’re on the cusp of a child-well world.”

One of the biggest problems with fracked oil well production is child wells, and according to Shattuck, that looks like the new normal. When the bug in an unprofitable business becomes the main feature of the business model, its future is definitely at “risk.”

Fracking’s Fatal Catch-22

As long as shale firms could keep borrowing and losing money to drill new wells, producing more oil was simple. When profits weren’t a concern, the debt-heavy business model worked. But similar to the dot com boom and bust, the fracking industry is learning that if you want to stay in business, you need to make a profit.

Without a doubt, drilling and fracking shale can produce a lot of oil and gas in the right geological regions. It just usually costs more to get the oil and gas out of the rock than the fossil fuels are worth on the free market. Now, however, the much-lauded “shale revolution” is facing two big issues — the best rock has been drilled and few are eager to loan money to drill the remaining acreage.

E&E News recently highlighted what this reality means for Texas’s Eagle Ford shale play, where production is now 20 percent lower than at its peak in early 2015. For an oil basin that’s only been producing oil via fracking for just over a decade, that is a pretty grim number. However, an analyst quoted by E&E News highlights the secret to making money while fracking for oil: Simply stop fracking.

“Generating free cash is easy: Stop spending on new wells,” said Raoul LeBlanc, vice president for North American unconventionals at IHS Markit. “The catch is that production will immediately move into steep decline in many cases.”

Ah, the catch. To generate cash while fracking requires companies to stop fracking and sell whatever oil they have left from rapidly declining wells. Because fracked wells decline quickly even when everything goes perfectly, if a producer isn’t constantly drilling new wells, then the oil production of a field drops off very quickly — the “steep decline” noted by LeBlanc.

That’s exactly what happened in the Eagle Ford shale, an early darling of the fracking industry, and most of the top acreage in the Bakken shale play in North Dakota and Montana has already been drilled, and will likely see similar declines.

LeBlanc emphasizes this point again in the Journal of Petroleum Technology, where he is recently quoted saying that the decline rates in the Permian region have “increased dramatically” for new fracked wells.

A year and a half ago, DeSmog launched a special series exploring the finances of the fracking industry, putting a spotlight on its financial failings. At the time, optimism about the future of fracking was still filling the pages of the financial press.

The initial article kicking off the series closed with a quote from David Hughes, a geoscientist and fellow specializing in shale gas and oil production at the Post Carbon Institute. For years, Hughes has been warning about the optimistic estimates for shale oil and gas.

Hughes told DeSmog that with the finances of fracking, “Ultimately, you hit the wall. It’s just a question of time.”

With the industry on the cusp of a “child-well world,” that wall appears to be approaching quickly — unless you still believe the industry promises that fracking’s big money is right around the corner.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. PlutoniumKun

    As the article says, the key scary thing for investors and the industry about fracking is that fracked wells don’t tail off over years like conventional ones – they stop producing quite abruptly. Once the sweet spots are sucked dry, the drop off in production will be calamitous with all sorts of potential impacts through both the oil/gas and the finance world. It will probably happen far too quickly for most investors to jump off the carousel in time. It will be a game changer when it happens (and probably, sadly, quite good news for the Gulf States).

    In past years, whenever I’ve expressed scepticism about the finances of fracking, the usual response is ‘but those guys wouldn’t be putting in billions unless they knew there was lots of oil and gas there’. What they don’t seem to grasp is that making money from oil and gas exploration is not the same as making money from oil production. Its not about selling on the fuel. Its about first of all extracting money from investors for the exploration (and getting your cut), then its about developing a prospect and selling it on for a big profit. They don’t really care if the well is profitable in the long term or not. I know of at least one oil company (not in fracking, mostly off-shore), which has made millions for its owners over the 40 years of its existence, despite the fact that it has never sold one barrel of oil, nor ever found a field which could be brought to full production. All their profits have come from their cut in selling on prospective fields, not one of which has ever come to production.

    1. Jerry B

      ===Its about first of all extracting money from investors for the exploration (and getting your cut)==

      ==All their profits have come from their cut in selling on prospective fields, not one of which has ever come to production===

      What that tells me is there are a lot of investors that have soo much idle money floating around the world and can literally throw huge sums of money at some venture and if the venture fails oh well.

      Many authors (Susan Strange, etc.) have used the term Casino Capitalism and this seems to fit that.

      It’s like taking millions of dollars and making an idle bet at the roulette wheel and if you lose oh well it was just pocket change or I’ll just make up the losses on some other scam. Meanwhile millions of people are homeless, without healthcare, hungry, etc. It’s is long past time to storm the castles! Pitchforks Up!!

  2. Noel Nospamington

    I predict a nightmare of numerous abandoned wells as the many unprofitable fracking companies go belly up, leaving the public with an expensive environmental mess to clean up.

    Just another example of western cronie capitalism where you privatise all profit, and socialise all losses including both monetary and environmental.

    The only way to stop this is to make shareholders personally responsible for such losses including environmental clean up, even after a company goes belly up. Only then will shareholders demand long term viability and more sustainable environmental practices, instead of only short term profits.

    1. PlutoniumKun

      A much simpler way is to simply insist that any license to drill can only be granted if it is tied to a certified insurance bond for correct capping and abandonment. It would be interesting to see just how many insurance companies would be willing to take on that risk.

      1. XXYY

        This should be the norm for all resource extraction permits: mining, logging, drilling, whatever. A “restoration bond” has to be in place to finance the restoration of the site after the valuable resources have been carted away.

        This would be cheap in some cases, and very expensive in others (e.g., uranium mining). It would be a way of factoring the externalities (as economists like to call them) into the overall cost of the project, as well as decreasing the odds that fly by night operators will trash the planet.

        1. The Historian

          Just a very small quibble:
          The days of the big pits for uranium mining are over. Most uranium, and I think all uranium in the US, is now mined by in-situ leaching. You wouldn’t know you were near an uranium mine any more except for the small pumps in the field.

          This link has a good picture of what a uranium mine now looks like:

          1. Eclair

            “You wouldn’t know you were near an uranium mine any more ….”

            Alas, the residents of Red Shirt, South Dakota, a tiny Lakota community on the fringes of the Pine Ridge Reservation, know about uranium mining. Past uranium mining activity has resulted in the leaching of radioactive materials into their ground water and wells. Even the nearby Cheyenne River has been contaminated. They can’t drink the water. Or use it for irrigation or fishing. The entire region is an official National Sacrifice Area. Just a bunch of poor Indians.

            The Defenders of the Black Hills are now fighting efforts to mine uranium using in-situ leach mining. In this process, holes are dug, water and solvents injected to dissolve the uranium, then the waste water is brought to the surface and temporarily stored in mud waste ponds. Sounds like ‘fracking?’ Concerns are for the spread of contaminants in ground water and aquifers. Where you can’t see it.

            1. The Historian

              Granted, no type of mining is without its problems.

              But you could live in an area like mine where well water has to be tested routinely for the high levels of uranium that occurs naturally in our water. No uranium mines around here.

              1. drumlin woodchuckles

                You have uranium in your water, so let everybody have uranium in their water. Is that it?

                1. The Historian

                  I’m going to be polite and ignore the tone of your comment. I was merely pointing out that uranium mining is not the only reason for high uranium levels in ground water. There is a lot of uranium in the earth’s crust and it is dissolvable in water. All well water should be checked for uranium levels but it is rarely done.

        2. JTMcPhee

          “Restoration bonds” would just become another “wetlands mitigation meets emissions trading” scam.

          I’d favor forcing the investors and executives that want to erect these horrors to personally (along with their family members) do the on-site labor of closing and cleanup, while breathing the air and drinking the water that locals do. Still, of course, possible to game even that by capturing the regulatory process of setting cleanup standards and requirements, a la the federal and state Superfund programs.

          Malum prohibitum vs. malum in se…

          “ Latin referring to an act that is “wrong in itself,” in its very nature being illegal because it violates the natural, moral or public principles of a civilized society. In criminal law it is one of the collection of crimes which are traditional and not just created by statute, which are “malum prohibitum.” Example: murder, rape, burglary and robbery are malum in se, while violations of the Securities and Exchange Act or most “white collar crimes” are malum prohibitum.”

    2. George Stubbs

      The public won’t be asked to fund the cleanup because there will be no cleanup. The responsible parties aren’t interested, and our government is no longer interested either. It’s another one of those issues in which communities without power will insist on government action, and they will be ignored.

  3. Wukchumni

    “We know we’re on the cusp of a child-well world.”

    Do it for the children!

    I hope the whole fracking thing goes down in flames financially before they desecrate the Sierra Nevada, finger crossed and all that.

    1. Ignacio

      I wonder if could it be the case that some government considers strategically important to keep production from free-falling, no matter if the economics are not sound, and shifting the cost to the Treasury. MMT to the rescue of shale plays and financiers.

      If the article is correct, calling for a plateau as soon as in 2021, the shale boom will prove more transient than expected.

      1. JTMcPhee

        Clearly, Obama and Trump were/are all-in on the “strategic importance” of frack-extraction.

        I can’t keep up with all the interlocks and back-scratches. But Banksters are getting rich, the intermediators in exploration and production are getting rich, the petroleum Bigs are getting rich and using the notional global competition and Market to damage one “nation’s” comparative advantage to their own ends. And as with all the behaviors leading to the conclusion that humanity is a failed, and maybe more honestly a plague species, all the incentives and flows of power are in the direction of what I believe it was a Reagan appointee offered as the moral underpinning of globalization and ruination: “God gave us dominion over the planet, and Jesus is coming back real soon and if we have not used up the whole place in accordance with His Holy Word as i read it, He is going to be really pissed…”

        As with all the stuff we NCers read here, everything seems to drive the truly awake soul in the direction of despair and that sense of vast futility, and that mindset of “Eat, drink and be merry, for tomorrow we shall die…” And screw future generations – past generations said that to us, so why should we, or some small elite among us, who now are in a position to have all our pleasure centers fully engaged and satiated to the max, behave “Responsibly?” “Responsible people maximize shareholder value (and executive looting)!”

        Rats, roaches, obscure creatures from the deeps of the ocean, that enormous mass of living cells that we are learning inhabit the whole crust of the planet and maybe far deeper toward the hot center, they’ll make it right, eh? After the last human has mouldered? Here’s hope for you (though not for “us” and our death-wish ways): There Is A Colossal Cornucopia Of Exotic Life Hiding Within Earth’s Crust

        1. Belly Sumtree

          Life is one big entropy generator.

          Give it time. Once we’re mouldered away, another “plague” species will come along to pick up the task of dispersing everything. Nature abhors a vacuum, but it also abhors thermodynamic imbalances. So some creature will come along to “mine” material, breaking it down into smaller and smaller parts, dispersing it across the globe, until there is no energy profit to be gained from moving it from one place to the other.

          We are just part of the great cosmic leveling. Ascribing some kind of morality, or immorality, to that, is a little bizarre. The universe is just a machine, and we the machines within the machine.

          1. Pym of Nantucket

            I think considering how small earth is compared to the universe progressing asymptotically to 3K, It is unwise to simply declare these miniscule ripples as evidence of second law limiting behavior. There is a LOT of time and space to work with here. I agree that humans are simply the most complex entropy generation system to arise from DRA, but the earth has a lot of wiggle room before we need to contemplate heat death.

  4. Gregory Etchason

    5 million EV takes inevitably back to nuclear energy. Without nukes you can anticipate losing your residential AC for several hours/day. PG&E is the future.

      1. Grumpy Engineer

        The Forbes article is crap. Any analysis of electricity costs coming from renewable power that does not include the costs of the energy storage systems required at high penetration levels will underestimate the costs. Badly. The solar panels and wind turbines are the easy part. The energy storage systems will easily cost 10X as much (and take 10X as much time). Because of this, we’ve seen renewable energy deployment efforts stall out in Germany, Spain, China, Denmark, and elsewhere, as they bumped into grid stability issues that require storage to mitigate. And the storage costs too much.

        1. bob

          Using “batteries” also produces a 10%* net loss to charge the batteries right off the bat. You need 110% of the electricity to get to same 100% you were getting before the battery. Rather than batteries helping, they actually end up using more electricity. That’s also before counting the electricity to make the battery.

          * that’s best case, theoretical, scenario.

          Batteries are net users of electricity. The do not make it.

        2. The Historian

          Perhaps you should read this?

          The Forbes article talks about balancing the grid so that variable energy sources can be incorporated reliably. To whit:

          Actually, battery storage, though often cost-effective today, is rarely needed to “firm” the output of variable renewables (photovoltaics and windpower), because there are eight ample cheaper methods.

          I believe the author’s thesis is for the electricity from renewables to be fed into the grid when it is available, not to store it.

          Do you think nuclear power plants run continuously and are never taken off the grid? Do you think we use huge storage batteries when they are down?

          1. bob

            Both your quote, and the pdf ‘talk about’ that. That’s all they do. The forbes author really is a treat. “There are 8 ample, cheaper methods” What are those eight methods? why only 8? No further details.

            “I believe the author’s thesis is for the electricity from renewables to be fed into the grid when it is available, not to store it.”

            It seems you noticed it too. No details, just numbers spelled out as words and asserted as evidence.

            1. The Historian

              Well, unfortunately the link that explains his 8 methods is behind a paywall.

              But I think we are talking apples and oranges here.

              The author of the Forbes article is talking about how a grid works. When a power plant is taken off the grid, energy is moved in from some other area to take up the slack as long as that power plant is offline. He expects that should be done with renewable energy also.

              If you are depending on only one form of renewable energy, then of course you would need batteries when that form of energy is not available. But batteries are an added cost and not as efficient as moving energy via the grid. A better method would be to have many types of renewable energies available so that you can switch between them as necessary. It is what he means when he is talking about needing to firm the output of variable renewables.

              So for example, in my area, the winds kick up when the sun goes down so it makes sense to switch from solar to wind power at dusk.

              1. The Historian

                I forgot to add that his main thesis is that when you compare the costs of energy going into the grid, then nuclear power doesn’t look so good.

                1. Grumpy Engineer

                  I’m don’t buy Amory Lovins’ thesis. Bob’s criticism is correct. The other 8 methods aren’t listed. The required sizes and associated costs aren’t listed. It is impossible to judge the viability of the scheme he envisions when the relevant information is missing.

                  A real plan would list nameplate GW for all types of generation assets and GW and GWh for all energy storage assets. In other words, full details.

                  The only “plan” I’ve seen for supplying US energy needs with 100% renewable power that actually contained full details came from Mark Jacobson of Stanford University: To his credit, he did the time-domain analysis necessary to determine the amount of load-sharing and energy storage necessary to keep the lights on through even extended periods of unfavorable weather.

                  Unfortunately, his “solution” required two things: (1) expanding US hydro capacity by a factor of 10, and (2) deploying a stupendous 541 TWh of energy storage. Neither is feasible. The first would cause massive flooding and ruin river ecosystems if ever run at full power, and the second would cost over $100 trillion at today’s energy storage costs of $200/kWh. His plan was so wildly unrealistic (and yet popular with Democrats) that a team of scientists and engineers issued a formal rebuttal: Jacobson’s plan has been debunked.

                  The South Koreans deployed their nuclear fleet for approximately $3000/kW. At this cost, we could completely de-carbonize the US electrical system for less than $2.5 trillion. It would be quite the bargain in comparison.

                  1. The Historian

                    The South Koreans do have one of the lowest costs for nuclear energy production – a LCOE of about $2021/kWe compared to the US of $4100/kWe and the world average of $4702/kWe – but the way they do that is by having much looser regulations and by severely underestimating the decommissioning, waste management, and accident compensation costs. Is that what you want for nuclear energy in the US?

                    I think it’s kind of dangerous to just throw numbers around unless you understand what they actually mean.

                    1. Grumpy Engineer

                      I understand the numbers just fine. But let’s take your point and exaggerate it. Let’s assume $10000/kWe for nuclear to account for all externalities. It would cost us $8.3 trillion to decarbonize the grid, which is still a total bargain compared to the $100+ trillion of the Jacobson plan. And we don’t have to destroy all of our river ecosystems to make it happen.

                  2. steven

                    Replies from: The United States can keep the grid stable at low cost with 100% clean, renewable energy in all sectors despite inaccurate claims
                    “(1) expanding US hydro capacity by a factor of 10”

                    Clack et al. (1) then claim incorrectly that the 1,300 GW drawn in figure 4B of Jacobson et al. (2) is wrong because it exceeds 87.48 GW, not recognizing that 1,300 GW is instantaneous and 87.48 GW, a maximum possible annual average … The value of 1,300 GW is correct, because turbines were assumed added to existing reservoirs to increase their peak instantaneous discharge rate…

                    “(2) deploying a stupendous 541 TWh of energy storage.”

                    Clack et al. (1) state misleadingly that Jacobson et al.’s (2) storage capacity is twice United States electricity capacity, failing to acknowledge that Jacobson et al.’s (2) report treats all energy, which is five times electricity, not just electricity, and in Jacobson et al. (2), storage is only two-fifth of all energy.

        1. Jokerstein

          Ah, the wonderful “Heaters”. They are situated outside EBR-1, just south of ID-20, west of Idaho Falls, and east of Arco.

          The whole of the area around there is a fascinating place to visit for a nuclear nerd like me, plus you have the wonderful Craters of the Moon NM there too.

          Other interesting places to visit are Atomic City, which has a population of around 25, and is a weird time capsule from the ’60s, plus Big Southern Butte, which is a, er, big butte.

          You can also find a gate leading off ID-20 to the north, into INL (Idaho National Laboratory), which used to be the access road to the army’s SL-1 reactor, which underwent a steam explosion due to a core excursion in 1961, and is (as far as is admitted) the only nuclear accident that led to immediate deaths in the US.

          For a really interesting review of nuclear history read the three books by James Mahaffey. He was a nuclear plant operator for a while, and describes the little pastime of “reactor racing”, which was seeing who could get a reactor up to nominal operating capacity in the shortest time.

  5. Louis Fyne

    blame the Fed/zero interest rates.

    At every Dem. presidential primary debate, there should be multiple monetary policy questions and someone(s) should be blasted the Fed every time.

    The Fed isn’t “independent.”—its nominal independence is itself a form of political bias.

  6. The Rev Kev

    I guess that this means that Trump and his crew will make another run at Venezuela – before the fracking industry goes down the gurgler. All of Venezuela’s oil fields are like a big box of chocolates in America’s backyard. But if they try to take it, like life, you never know what you are going to get.

      1. James

        They are engaging in long term siege warfare targeting Venezuela’s economy. They can’t invade every country.

  7. Samuel Conner

    Am I right in guessing that this will significantly impact forecasts of aggregate US domestic oil production? Do we remain the global “swing” producer?

  8. ambrit

    As PlutoniumKun says above, the collapse of the shale field production will be great news for the Gulf Coast’s petroleum industry. Not only is the Gulf a proven reserve, but with the inevitable higher prices for crude oil, many more of the offshore wells will become profitable.
    The American shale collapse will also be good news for other world producers of petroleum. OPEC will regain some of it’s lost political influence.
    On the down side; all forms of shipping and transportation will have a spike in per unit costs. A canny politician could use this factor to push an onshoring of lost industrial and manufacturing capacity. Put Americans back to work in America. That will be a winning strategy.

    1. JTMcPhee

      “…many more of the offshore wells will become profitable.” For some definition of “profitable.” “Externalities? A fig for your externalities!”

      1. ambrit

        Yes, well, I generally assume that the definition of “profitable” in use in the board rooms of the giant conglomerates ‘rules the day.’ Until some method of ‘regulating’ the actions of the board rooms of industry are brought into play, I’m afraid we are stuck with some version of the status quo.
        Just as the German usual suspects moved nations into ‘Realpolitik’ after the War, so too have the modern Austrian usual suspects moved the world into ‘Realeconomik.’ Both have led our best of all possible worlds into a Neoliberal Paradise.

  9. Susan the Other

    Didn’t Chesapeake Energy declare bankruptcy a good ten years ago? And then restructured itself into a shale fracking company with the extreme help of the Obama administration? When Obama “pivoted” away from KSA he went straight to US drillers. Allowing any hype necessary to get the needed investments. Obama was clearly panicked. I wonder if it is possible that that is when he learned that Aramco’s reserves were only a fraction of the Saudi hype? Bin Sawbones was subsequently allowed to provide the estimate of the worth of KSA’s oil reserves at 2 Trillion. The IPO went forward at that estimate and just today there is an article in ZH about Aramco’s actual value being much less. It looks to me like we just up and left KSA. Why on earth would we do that unless they were running dry? And why would they have fought that obscene war with Yemen unless they (the Saudis) were getting desperate? Secure people generally don’t do things that stupid. And the next logical question might be, How long will Russian reserves hold up as they supply both China and the EU? The simple answer is it is all just a question of time. We need to envision a lifestyle that is far more compatible with the planet. Fracking was just a distraction. A farce. It would be better to own warm sox than oil shares. And electricity is not going to help us out if we do not aggressively restrict our use. I’d just like to know why we can’t all come together and admit this one elemental fact.

  10. ObjectiveFunction

    Drainage! Draaaainage, Eli, you boy! Drained dry. I’m so sorry.

    Here, if you have a milkshake, and I have a milkshake, and I have a straw. There it is, that’s a straw, you see? You watching? And my straw reaches acroooooooss the room, and starts to drink your milkshake.

    I… drink… your… milkshake! slurp I drink it up! Every day I drink the Blood of Lamb from Bandy’s tract.

  11. John k

    The last man standing might be profitable.
    Not so long ago gas was much higher… I think the peak during a pre fracking cold winter was $15… now under $3. Plus we’re exporting the stuff bc us price is so far below Eu price. But us price is clearly unstable Bc it’s too low for frackers to break even, much less make money.
    It’s the large fracking production that’s driven price down to sub $3. Maybe foolish investors and banks will soon stop burning $, after which price will rise towards $10… as this happens utilities will really jump on solar bc gas will be increasingly non competitive.
    Ca should refuse all utility requests to build more gas-fired generating plants… existing ones will be shut over the next decade as solar plus storage price continues falling and gas price rises.

  12. ptb

    Additional Reading – stats on US oil production by well productivity:

    From graphs 2 and 3, you can see that half or more of the national oil production comes from about 50,000 high producing wells (out of roughly 1mm total). These are of course on the treadmill of decline and need continuous investment to be renewed.

    Note the changing oil price, esp. collapse in mid 2014. (aside: when was Nixon impeachment?)

    Anyway after 2014 the national production responded to the price collapse within about a year. This is what is somewhat different about fracking — the short time horizon and the outsize contribution of the “top” wells — constant depletion and investment — results in a fairly fast response to the price environment.

    Factor in pipeline capacity shortages come and go, affecting the share of $$ taken by the midstream. In any case, they’re losing money when the WTI price is in the $50-$60 range. What does that mean? Great question.

  13. kiers

    So, the shale/fracking industry has ~$200bn in debt, god only knows how much market cap is at risk on Shale and fracking alone, and it’s COMPLETELY UN PREDICTABLE. And people buy shares in this snake oil on the market? SEC sleeping? what a crock.

      1. kiers

        I suspect that shale plays like OXY, with marketwatch assigning a “beta” of (get this!) 0.99 to this stock, are fundamental misallocations of capital. In a political sense, it’s a red state SOE type play that doesn’t pass snuff. I saw the entire Wood MacKenzie webinar linked in Lambert’s article, and even THEY themselves are amazed at the range of valuations in the shale sector. No two wells can be compared truly. The webinar references when Ben Shattuck asked a wall street analyst for their comps on some company, and Wood MacKenzie’s analysis using on the ground depletion knowledge, was 40% lower, versus a higher paid wall street “comps” analysis!

        This entire sector is SNAKE OIL, imho, not to mention the environmental degradation not on the balance sheets. But it is politically privileged, so we must zip it.

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