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The Global Oil & Gas Industry Is Cannibalizing Itself To Stay Alive

The Global Oil & Gas Industry Is Cannibalizing Itself To Stay Alive thumbnail

While the Mainstream media continues to put out hype that technology will bring on abundant energy supplies for the foreseeable future, the global oil and gas industry is actually cannibalizing itself just to stay alive.   Increased finance costs, falling capital expenditures and the downgrade of oil reserves are the factors, like flesh-eating bacteria, that are decimating the once great oil and gas industry.

This is all due to the falling EROI – Energy Returned On Investment in oil and gas industry.  Unfortunately, most of the public and energy analysts still don’t understand how the Falling EROI is gutting the entire system.  They don’t see it because the world has become so complex, they are unable to connect-the-dots.  However, if we look past all the over-specialized data and analysis, we can see how bad things are getting in the global oil and gas industry.

Let me start by republishing this chart from my article, Future World Economic Growth In Big Trouble As Oil Discoveries Fall To Historic Lows:

The global oil industry only found 2.4 billion barrels of conventional oil in 2016, less than 10% of what it consumed (25.1 billion barrels).  Conventional oil is the highly profitable, high EROI oil that should not be confused with low quality “unconventional” oil sources such as OIL SANDS or SHALE OIL.  There is a good reason why we have just recently tapped in to oil sands and shale oil…. it wasn’t profitable for the past 100 years to extract it.  Basically, it’s all we have left…. the bottom of the barrel, so to speak.

Now, to put the above chart into perspective, here are the annual global conventional oil discoveries since 1947:

You will notice the amount of new oil discoveries (2.4 billion barrels) for 2016 is just a mere smudge when we compare it to the precious years.  Furthermore, the world has been consuming about an average of 70 million barrels per day of conventional oil production since 2000 (the total liquid production is higher, but includes oil sands, deep water, shale oil, natural gas liquids, biofuels and etc).  Conventional oil production has averaged about 25 billion barrels per year.

As we can see in the chart above… we haven’t been replacing what we have been consuming for quite a long time.  Except for the large orange bar in 2000 of approximately 35 billion barrels, all the years after were lower than 25 billion barrels.  Thus, the global oil industry has been surviving on its past discoveries.

That being said, if we include ALL liquid oil reserves, the situation is even more alarming.

Global Oil Liquid Reserves Fall In 2015 & 2016

According to the newest data put out by the U.S. EIA, Energy Information Agency, total global oil liquid reserves fell for the past two years.  The majority of negative oil reserve revisions came from the Canadian oil sands sector:

Of the 68 public traded energy companies used in this graph, total liquid oil reserves fell from 116 billion barrels in 2014 to 100 billion barrels in 2016.  That’s a 14% decline in liquid oil reserves in just two years.  So, not only are conventional oil discoveries falling the lowest since 1947, companies are now forced to downgrade their total liquid oil reserves due to lower oil prices.

This can be seen more clearly in the EIA chart below:

The “net proved reserves change” is shown as the black line in the chart.  It takes the difference between the additions-revisions, (BLUE) and the production (BROWN).  These 68 public companies have been producing between 8-9 billion barrels of oil per year.

Because of the downward revisions in 2015 and 2016, net oil reserves have fallen approximately 16 billion barrels, or nearly two years worth of these 68 companies total liquid oil production.  If these oil companies don’t suffer anymore reserve downgrades, they have approximately 12 years worth of oil reserves remaining.

But… what happens if the oil price continues to decline as the global economy starts to really contract from the massive amount of debt over-hanging the system?  Thus, the oil industry could likely cut more reserves, which means… the 12 years worth of reserves will fall below 10, or even lower.  My intuition tells me that global liquid oil reserves will fall even lower due to the next two charts in the following section.

The Coming Energy Debt Wall & Surging Finance Cost In The Energy Industry

Over the next several years, the amount of debt that comes due in the U.S. oil industry literally skyrockets higher.  In my article, THE GREAT U.S. ENERGY DEBT WALL: It’s Going To Get Very Ugly…., I posted the following chart:

The amount of debt (as outstanding bonds) that comes due in the U.S. energy industry jumps from $27 billion in 2016 to $110 billion in 2018.  Furthermore, this continues higher to $260 billion in 2022.  The reason the amount of debt has increased so much in the U.S. oil and gas industry is due to the HIGH COST of producing Shale oil and gas.  While many companies are bragging that they can produce oil in the new Permian Region for $30-$40 a barrel, they forget to include the massive amount of debt they now have on their balance sheets.

This is quite hilarious because a lot of this debt was added when the price of oil was over $100 from 2011 to mid 2014.  So, these companies actually believe they can be sustainable at $30 or $40 a barrel?  This is pure nonsense.  Again… most energy analysts are just looking at how a company could producing a barrel of oil that year, without regard of all other external costs and debts.

Moreover, to give the ILLUSION that shale oil and gas production is a commercially viable enterprise, these energy companies have to pay its bond (debt) holders dearly.  How much?  I will show you all that in a minute, however, this is called their DEBT FINANCING.  Some of us may be familiar with this concept when we have maxed out our credit cards and are paying a minimum interest payment just to keep the bankers happy.  And happy they are as they are making a monthly income on money that we created out of thin air… LOL.

According to the EIA, these 68 public energy companies are now spending 75% of their operating cash flow to service their debt compared to 25% just a few years ago:

We must remember, debt financing does not mean PAYING DOWN DEBT, it just means the companies are now spending 75% of their operating cash flow (as of Q3 2016) just to pay the interest on the debt.  I would imagine as the oil price increased in the fourth quarter of 2016 and first quarter of 2017, this 75% debt servicing ratio has declined a bit.  However, people who believe the Fed will raise interest rates, do not realize that this would totally destroy the economic and financial system that NEEDS SUPER-LOW INTEREST RATES just to service the massive amount of debt they have on the balance sheets.

As an example of rising debt service, here is a table showing Continental Resources Interest expense:

Continental Resources is one of the larger energy players in the Bakken oil shale field in North Dakota.  Before tapping into that supposed “high-quality” Bakken shale oil, Continental Resources was only paying $13 million a year to finance its debt, which was only $165 million.  However, we can plainly see that producing this shale oil came at a big cost.  As of December 2016, Continental Resources paid $321 million that year to finance its debt…. which ballooned to $6.5 billion.  In relative terms, that is one hell of a huge credit card interest payment.

The folks that are receiving a nice 4.8% interest payment (again… just a simple average) for providing Continental Resources with funds to produce this oil at a very small profit or loss… would like to receive their initial investment back at some point.  However….. THERE LIES THE RUB.

With that ENERGY DEBT WALL to reach $260 billion by 2022, I highly doubt many of these energy companies will be able to repay that majority of that debt.  Thus, interest rates CANNOT RISE, and will likely continue to fall or the entire financial system would collapse.

Lastly…. the global oil and gas industry is now cannibalizing itself just to stay alive.  It has added a massive amount of debt to produce very low-quality Shale Oil-Gas and Oil Sands just to keep the world economies from collapsing.  The falling oil price, due to a consumer unable to afford higher energy costs, is gutting the liquid oil reserves of many of the publicly trading energy companies.

At some point… the massive amount of debt will take down this system, and with it, the global oil industry.  This will have an extremely negative impact on the values of most STOCKS, BONDS & REAL ESTATE.  If you have well balanced portfolio in these three asset classes, then you are in serious financial trouble in the future.

SRSrocco Report

18 Comments on "The Global Oil & Gas Industry Is Cannibalizing Itself To Stay Alive"

  1. Apneaman on Fri, 16th Jun 2017 9:38 pm 

    Blowing up too.

    Gas Stations in Eastern Germany Start Running Dry After Refinery Fire

    No biggie, them Germans like marching anyway.

    I bet it was Muslim migrants what did it. Soro’s paid em to do it as part of the white genocide conspiracy evil plan thingy.

  2. rockman on Fri, 16th Jun 2017 10:48 pm 

    “The Global Oil & Gas Industry Is Cannibalizing Itself To Stay Alive”. As it has from time to time for the last 100+ years. Which is why the ” petroleum industry” will persist much longer then many anticipate. But it will still be around even if 90% of the current companies no longer exist and the world is producing much less oil/NG.

  3. Dredd on Fri, 16th Jun 2017 11:19 pm 

    “The Global Oil & Gas Industry Is Cannibalizing Itself To Stay Alive”

    Cannibals gotta cannibalize (Exxon Illegally Funded ALEC Under Tillerson’s Tenure, CMD Tells Committee).

  4. Cloggie on Sat, 17th Jun 2017 5:59 am 

    The “cannibalized oil industry” will revive from the moment oil prices will go up again.

    Which would be good news for the renewable energy industry as well.

  5. observerbrb on Sat, 17th Jun 2017 6:17 am 

    It seems that Mr. Hill is right again.

  6. Davy on Sat, 17th Jun 2017 6:33 am 

    The world is cannibalizing itself. There is no need to focus only on oil. Just take a look at global finance or most economic sectors. This is what parasites do. They feed on their host in a type of cannibalization.

    This concept also points to a new trend to modernism that will be required becuase of this and that is salvage strategies. Cannibalization is a salvage strategy and a good one. We need to be able to salvage good parts from what has broken down. We need to also do this with behaviors. We need to salvage the best of the modern and mix it with the best of the old.

    Cannibalization is a indicator of a trend towards decline. Decay and dysfunction are clearly part of modernism now. To ignore this as techno optimist do is denial.

  7. deadlykillerbeaz on Sat, 17th Jun 2017 6:36 am 

    When Titusville went dry, the cannibalization began. Head over to Ohio and drill there.

    Texas has 178,927 wells producing 14.88 barrels per day average. Hardly seems worth it, but it is done. You end up with 2,663,000 barrels of petroleum every day!

    2016 974,612 2,663 178,927 -3.00% 14.88

    A hundred million barrels per day, take that times 365, you have a big number, oil for years to come.

    36,500,000,000 barrels of oil in one year.

    There are an estimated 1.25 trillion barrels recoverable.

    1,250,000,000,000/36,500,000,000=34.2465753425 years of oil remaining.

    Don’t really have to worry about it today.

    Just the way it is, can’t be stopped and won’t be changed.

    Ohio has about sixty thousand operating oil wells too.

  8. MASTERMIND on Sat, 17th Jun 2017 7:06 am 

    You have to love Rockman. He is here every single post. I mean every damn one.

    Refute this evidence Rockman

  9. John on Sat, 17th Jun 2017 7:12 am 

    Interest rates “CANNOT RISE”….um…they just did…and will again and again…would be interested to know what the author thinks about the impact of each 1/4 point move as it relates to current debt due…will the industry even survive to see the debt wall?

  10. twocats on Sat, 17th Jun 2017 7:12 am 

    A lot of this debt is owed to Central Banks. CB balance sheets have gone from $3.5T to $17.5 trillion just to the beginning of 2016 (1.5 years ago). The major CBs are at about $15T right now. It is hard to imagine what it would take for one of these CBs to “call in” the debt. And if they don’t, what else could stop the game?

    Pension funds and other investors who are not obligated to commit financial slow-bleed suicide might have to sell due to redemptions, but they are also getting new inflows from 401ks and bloated mega-corp (e.g. apple, google) and CEO profits. They are forced to chase yield or risk losing investors.

    Any country not at this trough is SOL. Africa, non-oil rich ME, peripheral Europe, Russia and satellites, Central and South America, and an ever growing sub-population within the core that don’t have channel access to this inflation. Soooo…. most of the world.

    Recent unprecedented talks between SA and Russia may be part of a growing frustration with this current arrangement and a desire for a certain block of countries to remove CB power.

  11. MASTERMIND on Sat, 17th Jun 2017 7:28 am 

    US Shale oil the biggest joke ever

  12. shortonoil on Sat, 17th Jun 2017 7:31 am 

    The world’s petroleum industry is now consuming $1.7 trillion per year from its asset base by extracting oil that it is not replacing. Our energy based calculations give a total of $2.7 trillion per year for all assets that it is now consuming. At present prices that is 5.4% of its total asset base. At that rate the world’s petroleum industry in 18.5 years will have a NPV (net present value) of zero.

    If the price continues downward, which it must, that time line will contract. The limiting factor is the rate at which the industry can convert its assets into cash flow to service its debt. As that conversion goes forward the value of its remaining assets will decline. The industry is now in a downward spiral from which it can not escape. Only a huge increase in the price of crude could save it. A huge increase in the price of crude would only bring more crude to an already oversupplied market. At 38% of total world economic activity, the end of the petroleum industry will certainly bring about the end of the modern economy. Once this situation becomes full appreciated the geopolitical impact will most likely be devastating!

  13. joe on Sat, 17th Jun 2017 9:51 am 

    Thankfully humans like to eat and drive, ergo there is demand. We can always invent new currencies to replace the crap money we now have, but new currencies structures must reflect global realities,
    China must have a higher value for its money, the dollar should be weaker, the Euro should be abolished in favour of two currencies, one for slow Europe, one for fast and let the poor countries compete fairly and revalue their debt accordingly, the Yen should be weaker and many Asian countries and Australia should get together to form up a large trading bloc outside of both US and China influence. Europe should buy oil priced in Roubles and help to build up Russia economically lest Russia totally collapses and the country with thousands of nukes ends up a failed state.

  14. rockman on Sat, 17th Jun 2017 11:03 am 

    Master – “Refute this evidence Rockman”. Refute what? That global GDP (especially that of certain countries) has been in trouble for a long time? Hell, maybe you’re a youngster: GDP in “trouble” in the 80’s? F*ck, we had a severe global RECESSION! LOL. And many attributing at least part of the cause to higher energy prices. Does that sound familiar at all to what we’ve seen the last 10?

    If you want to debate the Rockman that’s great. But you might want to pick a subject we disagree on. LOL. But just some friendly advice: say specifically what’s on your mind: no one here is going debate something contained in dozens of link like you just posted.

    Say what you feel and post some DOCUMENTATION that you think supports your position. Then we could have the start of an adult conversation. LOL.

  15. onlooker on Sat, 17th Jun 2017 11:03 am 

    Your model is right on track in accuracy and timing Short.Keep us informed

  16. MASTERMIND on Sat, 17th Jun 2017 11:20 am 

    Our industrialized and industrializing economies will never recover due to NNR Scarcity

  17. Harquebus on Sat, 17th Jun 2017 6:15 pm 

    We have had recessions before but, the world wasn’t full then. It is now. No more room to grow ourselves out of it when the next one arrives.

  18. makati1 on Sat, 17th Jun 2017 7:57 pm 

    Harq, the U$ is in a recession. We never left the last one. What comes next is a depression. Probably one that will make the 1929 Great Depression look like a Sunday picnic. The government has lied and used every trick in their playbook to hide the facts, but the signs are everywhere. I could list the latest, but you would ignore them. All of the West is headed down the crapper. Be patient.

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