Peak Oil is You
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Page added on May 18, 2016
Bring on the zombie killers to clear the way for the energy revival
Oil prices may be headed higher, but a bust like this one isn’t over until bankruptcies, mergers and acquisitions clean up the detritus left behind.
Almost two years after oil prices hit their most recent peak at $107 a barrel, most analysts believe the worst is over. Prices for West Texas Intermediate bottomed at $26 in February, and lately they’ve been hovering around $45. We could see $60 oil by year’s end.
The price collapse has devastated the global industry, with 350,000 people laid off, $1 trillion in capital spending cut, and trillions more lost to bankruptcies and collapsing stock, bond and real estate prices. Those losses have hobbled the oil and gas sector, turning it into a zombie with just enough revenue to stay afloat but too much debt to recover.
Luckily, a reckoning is beginning.
Big banks have cut $6.3 billion from oil company credit lines, shrinking them an average of 18 percent, according to data compiled by Bloomberg. With bond payments coming, 72 oil and gas companies have filed for bankruptcy since 2014, with 20 filing for Chapter 11 protection in March and April alone.
Mergers and acquisitions, though, have been the missing piece, and I’m not talking about the monopolistic Halliburton and Baker Hughes kind of deal. Healthy companies buying distressed companies to develop the best fields is how the industry normally culls the herd, and that hasn’t happened as expected.
M&A activity is down 40 percent from 2014, when deal activity and oil prices peaked, according to our colleagues at The Texas Lawbook. Deal-making was down 8 percent in the first quarter of 2016 compared with the same period last year, the group reported, citing data provided by research firm Mergermarket.
The problem has been the huge distance between what sellers want and how much buyers were willing to pay with prices swinging wildly. An independent exploration and production company’s main asset is the value of its proven reserves, which is subject to the spot price of oil and gas, except for the barrels already sold using valuable futures contracts.
“I think it’s hard for sellers to overcome the psychology of selling at a price that is below their expectation for the future,” said Brent Ross, a principal in the energy practice at A.T. Kearney, a management consulting firm.
Buyers during a bust want low prices so they can profit when prices rise, while sellers want something closer to the most recent peak. Oil executives have held out by living off futures contracts, cutting expenses and delaying debt payments.
After two years, almost all of the futures contracts have rolled off. That’s why many are excited that prices are up 70 percent since February.
“If we see a continued run-up, or strength around the current price level in the mid- to high $40s, you’ll see people trying to put deals together again,” Ross told me. “We have a lot of distressed companies in the marketplace , and once they feel they are not going to sell at a loss, they are going to rush to get deals done to avoid bankruptcy.”
The problem is finding enough buyers. International oil companies are selling off assets, and national oil companies are under pressure to save. That leaves only strong independents and private equity.
M&A attorney Jim Rice, co-managing partner of Sidley Austin’s Houston office, said his clients believe “2016 looks like it is going to be the acquisition opportunity of a lifetime.”
“There is a belief that the second half will see the pace of deal closings ramp up significantly,” he said. “In the vast majority of cases, the buyers are private equity, hedge funds and the like. This could mean that the seeds are being sown for some potentially exciting times over the next few years as the new owners exit or monetize these investments.”
These buyers will be the zombie killers, or the predators that eat the old and feeble, or pick your own metaphor.
Investors who bought when the market peaked in 2014 will suffer major losses. Employees at the worst-run companies will lose their jobs. That’s what happens during mergers and acquisitions, but it’s the best way to clean up the bad debt and establish realistic valuations to move forward.
Most importantly, though, the pain caused by the bust presents a teachable moment for the industry and its investors as they rebuild. They can no longer rely on OPEC to prop up prices. Instead, the world’s largest producers have become competitors trying to supply the cheapest barrel possible and fundamentally changing the oil markets.
Surviving companies will have to focus on pumping the cheapest possible barrel, using the lowest-cost technology and tapping only the best reservoirs. The days of indiscriminate borrowing and drilling are over.
Just as it took six months for oil companies to feel the price collapse, it will take at least as long for them to benefit from the recovery.
The market may have bottomed, but the healing is just beginning.
42 Comments on "Bring on the zombie killers to clear the way for the energy revival"
Davy on Wed, 18th May 2016 7:14 am
Looks like someone financial is not connecting the dots as usual. This is a destructive process that has gutted our supply potential and directly by extension gutted demand potential. This is a global system that must grow. Do the math.
makati1 on Wed, 18th May 2016 7:46 am
Healing? The plug is about to be pulled on the support machines in the I.C.U. No recovery possible.
shortonoil on Wed, 18th May 2016 8:16 am
Hope springs eternal – especially when one sees no other alternative!
“Surviving companies will have to focus on pumping the cheapest possible barrel, using the lowest-cost technology and tapping only the best reservoirs. The days of indiscriminate borrowing and drilling are over.
Just as it took six months for oil companies to feel the price collapse, it will take at least as long for them to benefit from the recovery.”
WTI has fallen from its high of $97.38 to its present $48.31; a loss to the industry’s revenue stream of $1.72 trillion per year. We don’t see this alleged recovery that is being referred to by the author? We see an industry that is rapidly bleeding to death, and is attempting to delay the inevitable by selling its assets (reserves). The industry can not make money at $48.31, and they know that. They know that because they were not making a 50.4% profit margin on their gross sales when oil was $97.38.
The simple matter of the fact is that the world can no longer afford oil. It can no longer pay a price that is high enough to cover the cost of producing it. It can barely afford to buy what has already been paid for; that is simply the cost to pump existing reserves out of the ground. As long as people refuse to believe that oil is an energy source, and not much else, hope will continue as their strategy. It will remain their strategy because they see no other alternative.
http://www.thehillsgroup.org/
PracticalMaina on Wed, 18th May 2016 8:17 am
Interesting that so many companies hedged at 50$ even though the sands will be down for longer than expected, turmoil in the middle east, Nigeria, and Venezuela.
PracticalMaina on Wed, 18th May 2016 8:18 am
Do they know the world economy is about to shit the bed?
Kenz300 on Wed, 18th May 2016 8:34 am
The oil companies and the auto companies need to get their collective heads out of the sand and realize that the world is changing with or without them.
Climate Change is real….. it will impact all of us…
It is time to move away from fossil fuels and embrace alternative energy sources like wind, solar, wave energy, geothermal and second generation biofuels made from algae, cellulose and waste. They need to change their business models and move from being OIL companies to ENERGY companies. The auto industry needs to move from just building compliance vehicles to embracing electric vehicles and start putting development and advertising behind them..
The world is moving to embrace alternative energy sources…….. the fossil fuel companies can transform themselves into “energy” companies or they can die a slow death.
As Climate Change impacts more people there will be a bigger backlash against fossil fuels.
marmico on Wed, 18th May 2016 8:39 am
The simple matter of the fact is that the world can no longer afford oil.
What a crock of shit. 2015/16 U.S. energy (including petroleum) expenditures as a percent of GDP are ~6%. Affordability was worse between 1980-1985 when expenditures were >10%.
makati1 on Wed, 18th May 2016 8:46 am
It is difficult to see reality when you have your eyes and mind closed, isn’t it, Marm?
dave thompson on Wed, 18th May 2016 8:51 am
“The simple matter of the fact is that the world can no longer afford oil.” What most fail to see is that growth in the economic sense of yesteryear, labor and capital being the gauge, no longer holds water. Growth as we know it today is corporate outsourcing of labor and stock buybacks that grow nothing but fiat currency and the race to the bottom.
Kenz300 on Wed, 18th May 2016 8:53 am
The transition to safer, cleaner and cheaper alternative energy sources continues…………
Germany Achieves Milestone – Renewables Supply Nearly 100 Percent Energy for a Day
http://www.renewableenergyworld.com/articles/2016/05/germany-achieves-milestone-renewables-supply-nearly-100-percent-energy-for-a-day.html
Portugal ran entirely on renewable energy for 4 consecutive days last week
http://electrek.co/2016/05/16/portugal-ran-entirely-on-renewable-energy-for-4-consecutive-days-last-week/
shortonoil on Wed, 18th May 2016 8:55 am
“What a crock of shit. 2015/16 U.S. energy (including petroleum) expenditures as a percent of GDP are ~6%.”
There goes Marm with his ECON 101 magic again. Now if he could only figure out which way a Demand Curve, and which way a Supply Curve slopes, he’ll be a real guru.
shortonoil on Wed, 18th May 2016 9:08 am
“What most fail to see is that growth in the economic sense of yesteryear, labor and capital being the gauge, no longer holds water.”
When you have a monetary/financial system creating an additional 3 to 4% of imaginary money each year – there is a booming economy. It works real well — until you starve to death!
marmico on Wed, 18th May 2016 9:27 am
The quart shy of oil is arithmetically challenged. He maintains that a higher price is more affordable than a lower price.
6% is less than 10% you fuctard. 2015 ranked as the 4th lowest year of energy expenditure relative to GDP in the last 70 years.
dave thompson on Wed, 18th May 2016 9:41 am
“6% is less than 10%” yes it is, however, the difference is in the counting and of what. The liquid energy increases of the past 10 years are only keeping the oligarchs running in place. Conventional oil production has not increased, that is the oily goodness of our grandparents. Todays french fry oil and corn liquor only will temporarily show positive GDP, if you can call stock buy backs and job outsourcing to the lowest bidder growth.
GregT on Wed, 18th May 2016 10:02 am
“2015 ranked as the 4th lowest year of energy expenditure relative to GDP in the last 70 years.”
GDP is not a reliable indicator of economic well being. It takes a relatively small fraction of energy to fuel speculative bubbles in real estate and stock markets, when compared with real production. It also takes very little energy at all, to print digital money and to create trillions of dollars in un-repayable debt.
Apneaman on Wed, 18th May 2016 10:15 am
Kenz, are you saying every single, car, plane, train, piece of heavy equipment ran on “renewables” for that 1 day? Or just everything that runs on electricity? Electricity which is what 20% of total energy use? Also, if Germany is so fucking awesome then lets see the numbers on how much shitty dirty brown coal they burn every year. Why did they restart the nuke plants they shut down after fuke? This ain’t the first time the Germans have pulled the wool over the worlds eyes now is it? Cherry picking a one day statistic that is an anomaly compared to the rest of the data. Apparently the environmentalist propagandists have learned a trick or two from the denial propagandists albeit far too late.
UPDATE 1-Germany warns against rushed exit from coal power
http://www.reuters.com/article/rwe-coal-idUSL8N1531X2
I promise I’m going to quit drinking and popping those pain pills like candy – no really I mean it this time. Just not now. I’m under a lot of pressure and I just need to keep self medicating until I get through the rest of the year – I promise that once I get my ducks in a row, I’ll clean my act up for good, but I just need more time. Promise.
Apneaman on Wed, 18th May 2016 10:20 am
marmi, how are you progressing with your micro penis issues? You know switching to metric measurements will give you bigger numbers and that might make you feel better. Just trying to help.
marmico on Wed, 18th May 2016 10:23 am
The rise or fall of real estate or stock prices are mostly irrelevant for purposes of calculating GDP.
A $250,000 new home or apartment adds a significant amount to GDP. It’s an increase in the flow of goods and services. Trading an existing home originally worth $250,000 at a higher price adds an insignificant amount to GDP except for the frictional costs (brokers, attorneys, title insurers, etc.). It’s an increase in the stock of capital.
GDP measures increases and decreases in flows not stocks.
Apneaman on Wed, 18th May 2016 10:26 am
50 Shades Of Solar Power
“The real reason solar panels are so cheap is that Asia manufactures about 75% of all the solar panels on the whole planet and ships them worldwide, either that or else the pimps in Washington are doing a bang up job. Here’s some data.”
more
https://lokisrevengeblog.wordpress.com/2016/03/09/solar-wind-energy-for-adults-only/
GregT on Wed, 18th May 2016 10:31 am
How the housing market is pumping up our GDP numbers
The charts say it all
“The boost to GDP from the housing sector is coming both from the construction industry, and, in part, from the “finance and insurance” category, which includes things like management of residential mortgages.”
“Does this mean housing is becoming a larger and larger share of our economy? Indeed, it does.”
http://www.macleans.ca/economy/business/how-the-housing-market-is-pumping-up-our-gdp-numbers/
GregT on Wed, 18th May 2016 10:53 am
What Role Does Housing and Real Estate Play in the Gross Domestic Product?
“Let’s have a quick economics lesson for those of us in need of a refresher.”
“The Gross Domestic Product, or GDP, is a representation of the size of a nation’s economy.”
“The GDP is measured by either evaluating what the population earned or spent. ”
“In an effort to broaden the understanding of the vital role the housing market plays in the GDP, the National Association of Home Builders has placed several links supplied by the U.S. Bureau of Economic Analysis on their site. These are very useful tools for comparing how the real estate market affects economic growth.”
http://afrmortgage.com/blog/what-role-does-housing-play-in-the-gdp/#.VzyOn2O1Rug
String900 on Wed, 18th May 2016 12:12 pm
Solar is bigger than Housing in the US.
Also, in Germany solar and wind moving to base load.
http://www.bloomberg.com/news/articles/2016-05-16/germany-just-got-almost-all-of-its-power-from-renewable-energy
String900 on Wed, 18th May 2016 12:13 pm
China needs every solar panel it builds. It’s that polluted.
Hawkcreek on Wed, 18th May 2016 12:58 pm
The early 80’s also included a pretty severe recession. It must be coincidence that oil prices were high then, also.
It seems to say that we really can’t afford high priced oil, and have things remain the same.
shortonoil on Wed, 18th May 2016 1:15 pm
“What this means is simple: as a result of the budget imbalance driven by low oil prices, “largely a Saudi doing”, the kingdom is forced to give workers an implicit pay cut.”
http://www.zerohedge.com/news/2016-05-18/saudi-arabia-admits-full-blown-liquidity-crisis-will-pay-government-contractors-ious
Although we shouldn’t put too much credence in the intellect of someone who would make a statement like the one above, as we mentioned yesterday the Saudis have a cash flow problem. The $750 billion in US Treasuries that they supposedly held is actually $117 billion. Now they are talking about paying their contractors with IOUs; sounds like the economic situation of California.
“6% is less than 10%” yes it is, however, the difference is in the counting and of what. The liquid energy increases of the past 10 years are only keeping the oligarchs running in place. Conventional oil production has not increased,”
Between 1960 and 2005 world C+C production increased at an average yearly rate of 5.46%. Between 2005 and 2014 it increased by 0.43%. Over the last decade oil production increases have essentially stopped. They have not even been sufficient to compensate for the increased energy that has been required to produce petroleum. If petroleum can no longer supply enough energy to power its own production growth, it can certainly not supply enough to power economic growth. All that remains to increase the balance sheet is the printing presses of the Central Banks.
Data from EtpVB – Production. An analytical software package for the EIA and World Bank data sets.
http://www.thehillsgroup.org/
twocats on Wed, 18th May 2016 1:30 pm
“The cheapest barrels, lowest cost tech, best reservoirs” (article)
This sounds like a recipe for sucking out the remaining value on sunk costs and sheared sheep investors money. These do not sound like ongoing concerns.
sunweb on Wed, 18th May 2016 5:58 pm
Kenz300 “The transition to safer, cleaner and cheaper alternative energy sources continues…………”
A paper recently published in Energy Policy by Ferrucio Ferroni and Robert J. Hopkirk and titled Energy Return on Energy Invested (ERoEI) for photovoltaic solar systems in regions of moderate insolation. They used a similar methodology than we did (Charles Hall and myself) used in our study for 4 GW in Spain. That is, they considered not only the usual energy inputs for modules and its components and/or some immediate accesories to them, but also some societal sine qua non energy input expenses for solar systems and concludes that in these regions (countries like Germany and Switzerland), the EROI is 0.85:1.
Scientific studies show it takes years to payback the energy used in solar electric devices. EROI (Energy Returned on Energy Invested) says it takes energy – mining, drilling, refining, transporting, installing, maintenance, and replacement parts – to make the devices necessary to capture solar energy.
Spain’s Photovoltaic Revolution: The Energy Return on Investment by Prieto, Pedro A., Hall, Charles 2013.
http://www.springer.com/energy/renewable+and+green+energy/book/978-1-4419-9436-3
and http://energyskeptic.com/2013/tilting-at-windmills-spains-solar-pv/
and B o o k R e v i e w : E n e r g y i n A u s t r a l i a – P e a k O i l , S o l a r P o w e r , a n d A s i a’ s E c o n o m i c G r o w t h by G r a h a m P a l m e r http://www.springer.com/energy/renewable+and+green+energy/book/978-3-319-02939-9
Spain’s Photovoltaic Revolution presents the first complete energy analysis of a large-scale, real-world deployment of photovoltaic (PV) collection systems representing 3.5 GW of installed, grid-connected solar plants in Spain. Prieto and Hall conclude that the EROI of solar photovoltaic is only 2.45, very low despite Spain’s ideal sunny climate. Germany’s EROI is probably 20 to 33% less (1.6 to 2), due to less sunlight and efficient rooftop installations.
“Solar advocates can learn from this analysis . . . “ Not looking at the reality of EROI “is not good science and leads to wasted money and energy that could have been better spent preparing more wisely for declining fossil fuels in the future.”
sunweb on Wed, 18th May 2016 5:59 pm
Kenz300 “The transition to safer, cleaner and cheaper alternative energy sources continues…………”
The whole picture needs to be included not just the installed devices. I am not a supporter of fossil fuels or nuclear. I am concerned about continuing business as usual and its devastation of the earth and humanities future.
Solar and wind energy collecting devices and their auxiliary equipment have an industrial history. They are an extension of the fossil fuel supply system and the global industrial infrastructure. It is important to understand the industrial infrastructure and the environmental results for the components of the solar energy collecting devices so we don’t designate them with false labels such as green, renewable or sustainable.
This is a challenge to ‘business as usual’. If we teach people that these solar devices are the future of energy without teaching the whole system, we mislead, misinform and create false hopes and beliefs. They are not made with magic wands.
These videos are primarily concerning solar energy collecting devices. These videos and charts are provided by the various industries themselves. I have posted both charts and videos for the solar cells, modules, aluminum from ore, aluminum from recycling, aluminum extrusion, inverters, batteries and copper.
Please note each piece of machinery you see in each of the videos has its own industrial interconnection and history.
http://sunweber.blogspot.com/2015/04/solar-devices-industrial-infrastructure.html
This is about wind:
http://sunweber.blogspot.com/2014/11/prove-this-wrong.html
Is this more elitist technology for the few. It seems to me all this promotion of solar and wind energy collecting devices are either envisioned as worldwide or it is simply more imperial colonizing of countries with resources and no power. Then think of the resources and energy required to meet global need for the global population.
makati1 on Wed, 18th May 2016 6:36 pm
One thing is for certain. The dying oily industry and world economy is generating lot of bullshit from the deniers. Too bad it is not able to fertilize all of those dead farms that have to rely on chemicals to grow frankenfoods. We could all eat like obese Americans.
Apneaman on Wed, 18th May 2016 6:58 pm
In God We Trust
“In God We Trust” because belief in God ushered in organized civilization and cancerous growth in the ecosystem which continues to supply us with bountiful rewards. There is no more suitable place for this phrase than on a Federal Reserve Note or Dopa-Dollar.
“In God We Trust” to provide ample rewards for our dopamine-controlled brains to pursue. “In God We Trust” that the opioids will be potent and long-lasting and that we shall have even more heavenly reward after our deaths.”
more
http://megacancer.com/2016/05/18/in-god-we-trust/
shortonoil on Wed, 18th May 2016 7:57 pm
“Solar advocates can learn from this analysis . . . “ Not looking at the reality of EROI “is not good science and leads to wasted money and energy that could have been better spent preparing more wisely for declining fossil fuels in the future.”
Because they are economists we must accept their decision as to what the EROI is. The problem is that don’t state as to where they calculated the EROI number. EROI is a time and place dependent variable. For instance the ERoEI (energy returned on energy invested at the well head) for the average world producer is presently 8.9:1. For the average consumer it is 1.56:1. Our calculations show that at the present return rate for solar it would take approximately 30 years to break even on an energy bases. In 5 years that will be reduced to 6 to 8 years. The reason for the discrepancy in time frames is basically because the EROI of solar is going up, while the EROI of petroleum is going down.
http://www.thehillsgroup.org/
Sissyfuss on Wed, 18th May 2016 9:39 pm
Stop it, Short! You’re scaring the children.
makati1 on Wed, 18th May 2016 9:44 pm
Sissy, and we DO have some children on here, don’t we? LOL
Rick Bronson on Wed, 18th May 2016 10:15 pm
Germany and Portugal are amazing in hitting records with renewable energy.
Meanwhile China has installed 7 GW of solar power in 2016-Q1 which is another record.
If China joins Germany in setting power generation records, it will change the World.
Craig Ruchman on Wed, 18th May 2016 10:16 pm
“the EROI of solar is going up, while the EROI of petroleum is going down.” I like those numbers 🙂
GregT on Wed, 18th May 2016 11:12 pm
There is no such thing as renewable energy Rick. All electric energy production is entirely reliant on burning fossil fuels. Take oil out of the equation, and electricity goes bye bye.
makati1 on Wed, 18th May 2016 11:29 pm
GregT, it gets frustrating trying to educate the dumbed down Americans, doesn’t it? Not to mention rebutting the delirious flag wavers and psychopaths. Thinking has become a lost art for most.
GregT on Thu, 19th May 2016 12:18 am
“the EROI of solar is going up, while the EROI of petroleum is going down.” I like those numbers”
Assuming that you aren’t relying on modern industrialism for food, clothing, shelter, and security, it would be foolish to disagree with you Craig.
shortonoil on Thu, 19th May 2016 8:13 am
“There is no such thing as renewable energy Rick. All electric energy production is entirely reliant on burning fossil fuels. Take oil out of the equation, and electricity goes bye bye.”
That is certainly true for the economic structure that is now being employed. The integrated global production system will not be sustainable for much longer. The energy to power it and, maintain it is declining. The deliverable energy supply has already declined to the point where growth for that system can now no longer be sustained. At some point in the foreseeable future maintenance of that system will also no longer be possible. It will then shut down.
The world has two possible alternatives? It can continue to support the status quo, which is most likely to result in some mindless bloody war, that will squander the last of our available energy resources; or begin searching for another avenue. The future fate for any resemblance to this civilization depends upon it.
http://www.thehillsgroup.org/
Kenz300 on Thu, 19th May 2016 9:23 am
Paris Goes Car-Free First Sunday of Every Month
http://ecowatch.com/2016/05/17/paris-goes-car-free/
String900 on Thu, 19th May 2016 12:03 pm
Saudi Arabia seems to believe the prediction that solar will be 100% of energy production in 12 years.
They’re pumping now, because there will be no demand and very low prices in 2028.
And we will NEVER have another oil production boom if Saudi increases output.
Waiting for the OIl BUBBLE to re-appear, that’s not going to happen.
kanon on Thu, 19th May 2016 2:59 pm
While we are enumerating the pitfalls of renewable energy, I thought it might be interesting to note the Odeillo solar furnace https://en.wikipedia.org/wiki/Odeillo_solar_furnace
Temperatures above 3,500 °C (6,330 °F) can be obtained in a few seconds.
This is sufficient heat for silicon in solar panels. We should not forget the fossil fuel interests are fighting renewables with every tooth and claw they have. It is also likely that Chinese politicians require solar panel makers to use polluting technology to protect existing interests. Something like that would never happen in the USSA. I think we just don’t have an accurate picture of the environmental costs or other pitfalls of renewable energy.