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Shale Is the Odd Man Out in Oil Reckoning

Shale Is the Odd Man Out in Oil Reckoning thumbnail

After delaying the inevitable, rapid decline rates are poised to catch up with shale crude producers, giving them a big role in balancing the global crude market

An oil well is seen in California’s Monterey Shale region.

The world oil market is starting to resemble the old slapstick gag about the French Foreign Legion. The sergeant needs a volunteer to take a step forward for a dangerous mission. Instead, all the assembled soldiers, except one, take a step back, volunteering him.

The sucker this time seems to be U.S. shale. While Russia and many members of the Organization of the Petroleum Exporting Countries may meet next month in Qatar to discuss the idea of an output freeze to support prices, this represents a hollow pledge. Yes, the invited countries represent some three-quarters of global output—certainly enough to move the needle on supply. But that needle is stuck in the red zone for all but one producer.

Iran, coming off of years of sanctions, is determined to ramp up its output to some 4 million barrels a day from about 2.9 million in January. In the face of that commitment, regional rival Saudi Arabia is reluctant to cede market share. And Russia, pumping near post-Soviet records and desperate for income, has taken a similar stance.

Photo: The Wall Street Journal

With OPEC and its possible partners unwilling to agree to anything beyond the status quo, balancing of supply and demand is being done by western producers with bills to pay and shareholders to please. Economics might seem to dictate that the first cuts would come from the highest-cost fields such as Canada’s oil sands, but that would be wrong. Instead it will occur where lack of investment will show up first: U.S. shale.

A report last week from the U.S. Energy Information Administration highlights why. A surprisingly high 48% of U.S. oil production from the contiguous states came from wells drilled since 2014. The vast majority is from unconventional formations such as shale. They went from providing 500,000 barrels a day in 2009 to a peak of 4.6 million last May, but output has been declining since then as spending was slashed. Based on geology alone, that decline should have been worse. Production from a shale well typically falls by half during the first year in operation and then by another quarter to one-third in the following year. The reason it hasn’t is a significant rise in productivity per well—a modest additional investment squeezed out extra barrels. That trend is reaching its limits, though.

So are U.S. producers really such patsies? Driven by the imperative of profitability, it is true that they will cede share. But a large number of uncompleted wells colloquially referred to as a “fracklog” stands ready to come on stream fairly quickly once prices rise by another $20 a barrel or so.

By keeping its financial powder dry, a leaner U.S. shale patch can storm back soon after prices become more attractive and enjoy the last laugh.


40 Comments on "Shale Is the Odd Man Out in Oil Reckoning"

  1. shortonoil on Thu, 31st Mar 2016 6:54 am 

    “By keeping its financial powder dry, a leaner U.S. shale patch can storm back soon after prices become more attractive and enjoy the last laugh.

    Once these loans default the operations no longer own their assets – the creditors do! They can not regain them until the loan balance is paid in full. Whether or not these creditors will be willing to have what assets remain further impaired by letting the operators raise additional funds to frack DUCs is going to be doubtful. We don’t think that the price can raise far enough, fast enough to ever make these DUCs worth completing:

    WSJ seems to be peddling a little bit of snake oil.

  2. james_boags on Thu, 31st Mar 2016 7:13 am 

    love the posts short keep them coming F#@K the trolls .

  3. makati1 on Thu, 31st Mar 2016 7:45 am 

    WSJ is peddling tankers of snake oil…

  4. PracticalMaina on Thu, 31st Mar 2016 9:10 am 

    Short, I would not be surprised if they, our elected leaders, fired up the ole printing press and paid the creditors some of the debt and try to get those a holes up and running again, under new management of course to give the illusion of justice. Coal has shown that the Feds and states will have to pay cleanup and cost associated with former mine employees. I wonder if the US will allow the mines of Peabody and others on their way out go idle, I hope so, but that would be a big deal for energy markets, and I feel like the feds will try to get someone to operate some of them, because local renewables don’t bribe nearly as well.

  5. rockman on Thu, 31st Mar 2016 9:28 am 

    Practical – The US govt bailing out the oil patch like they did the bankers a few years ago??? Not in my lifetime
    …then then again I am old. LOL. And besides those cased and uncompleted holes aren’t going to disappear: they are assets that will be sold if there’s any perceived value in the near future. If not they will be plugged and abandoned. But even then it’s no big deal to re-enter a plugged well and frac it.

    So the oil patch doesn’t need any govt money if a well is worth completing today or in the future: if it has commercial potential we have more then enough capex to handle it. The Rockman alone is sitting on $250 million CASH IN HAND looking for opportunities to take advantage of.

    But if the feds want to have a big impact they can supply the capex to complete those DUC’s where the oil patch sees no commercial value. Now you’re talking! LOL.

  6. joe on Thu, 31st Mar 2016 9:29 am 

    Exactly in line with bumpy plateau peak oil economic expectations.
    As easy oil is used first, the closer we get to easy oil production limits and the tighter supply gets, the price will begin to look like a roller coaster. Supply will flat and elongated tending to reduce over the long term as we physically cant supply the demand we will destroy the planet trying to keep the lights on.

  7. PracticalMaina on Thu, 31st Mar 2016 9:49 am 

    Rockman, you definetly have a point but I think that many small and some large operators are going to be in a serious pinch in the near future. If for example Chesapeake closed tomorrow, combined with a decrease in economic activity and carbon pricing, there would be no one big enough to pay for those wells and continue to operate, especially if there is liability tied to the well due to a bad cement job ect. Since we are no where near energy independent, that could cause a too big to fail situation, because I do not think anyone outside of North America is going to be pumping all out for us if they can get us by the balls again.

    Carbon pricing should be in the near future, we shall see.

  8. PracticalMaina on Thu, 31st Mar 2016 9:53 am 

    I mean exxon-mobil owes me money for the lies, I want every penny I spent on fuel to them back. Imagine the carnage in the markets… muahahahaha

  9. PracticalMaina on Thu, 31st Mar 2016 10:19 am 

    Blows my mind there are still individuals burning kerosene lanterns. Talk about a savings, cheap LED and small solar and battery cannot be much more expensive than a kerosene lamp to begin with. 6 bucks a night for light? How would you ever get out of poverty? I mean you can get the cheaper outdoor garden lights, battery, panel, charge controller, automatic photo sensor and a small led for a buck sometimes… I am gonna go to Walmart take these devices which are made in the third world, and sell em back.

  10. PracticalMaina on Thu, 31st Mar 2016 10:35 am 

    The nations two largest coal mines announced they are each laying off 15% of their employees.
    “The layoffs are also notable as they come at what are generally reckoned to be the largest and most cost effective mines in the country. North Antelope Rochelle and Black Thunder generally mine around 100 million tons of coal annually.” The CEOs don’t deserve a cent in bonuses, it is interesting Peabody did not lay off anyone at mines in Australia yet, where I believe the operating cash flow is even worst. Shows what a first world government that puts the worker first can do, make an international company start with layoffs elsewhere.

    Also this is what I was getting at Rockman, less likely in the oil and gas sector, but still possible.

  11. twocats on Thu, 31st Mar 2016 10:57 am 

    During the housing crises (2009-2014, much less so today) HUD was in every part of the country spending millions of dollars a month to keep houses from falling apart. Paying the banks to pay service providers to pay property managers to do everything from cut grass, to check for vacancy, to full rehabs.

    Part of this network sprang out of nowhere (the service providers were mainly just contractors good at managing subs). But it was very easy to give HUD a mandate to “save the american household”.

    It sounds like Rock is saying there is no parallel organization to HUD in the oil patch, and why would there be?

    But if oil is seen as a vital national interest it might be as easily bailed out as say the auto industry was.

  12. PracticalMaina on Thu, 31st Mar 2016 10:57 am 

    I will summarize the findings for you, 4.3 billion dollars lost annually in medical cost and lost productivity. So about 15 bucks for every man woman and child every year in this country, can be directly linked to this one side effect from pollution.
    This on top of a similar article yesterday linking the same sized pollution particulates to increased risk to an unborn of a whole variety of mental health issues. What is the real medical cost of fossil fuels?

  13. GregT on Thu, 31st Mar 2016 11:16 am 

    Wealth Inequality in America

    A 6 minute long sobering info-graphic

  14. Outcast_Searcher on Thu, 31st Mar 2016 11:16 am 

    Short makes me laugh. He accuses the WSJ of peddling snake oil while he is in the business of peddling his website/oil report, based on doomer fantasy.

    As if stronger oil firms couldn’t possibly buy and utilize the assets of the weaker firms, IF they go bankrupt.

    As if magically, with a global economy that continues to grow, people can’t afford oil products at a half or less of what they cost from 2010 to 2014.

    As if low energy costs don’t help the entire global economy outside the fossil fuel producers.

    As if cars like the Tesla Model 3 and the Chevy Bolt (and more solar and wind to help power them) weren’t coming, to help offer a growing alternative energy source which will be helpful to the global economy in the long run.

    Yes, it’s all doom all the time IF you refuse to look at any aspect of reality that might challenge doomer beliefs.

  15. Plantagenet on Thu, 31st Mar 2016 11:29 am 


    If Chesapeake closed tomorrow, its acreage isn’t going to sit there forever and not be drilled as you assume.

    If Chesapeake goes bankrupt some other companies will buy up their assets for pennies on the dollars, and then when oil prices go back up the new company will resume drilling.

    This isn’t peak oil—-this is an oil glut. They are different things.


  16. PracticalMaina on Thu, 31st Mar 2016 11:31 am 

    Outcast searcher, he may be selling something but I would not write it off as doomer fantasy, Lower prices mean increased pollution and less ability for the world to accept there is a limit on their resources. It may be a temporary spending break for someone fiscally smart, but the majority will actually get themselves in trouble, getting larger more expensive cars trucks suvs or homes and heating systems.

    Electric cars are old as fuck, cheap oil means we continue to kill ourselves.

  17. PracticalMaina on Thu, 31st Mar 2016 11:41 am 

    Its acreage, you make them sound like a real estate investment group. Chesapeake owns drilling rights for a limited time, its a lease, not like they OWN the state of Pennsylvania, well at least not in that way. If the market is in a bad way their leases may expire before drilling by another company can take its place, or it may not have significant value at that time ….stranded asset, we will see what happens in a couple months with Peabody, it will be interesting to see if they can sell some of their mines to recover some of their 6.2 billion in debt, they are burning 17.5 mill a day and the one deal they had lined up hit a hitch because of funding. When soulless big banks are taking a “stand” against you, you may be in trouble.

  18. PracticalMaina on Thu, 31st Mar 2016 11:48 am 

    I hope they didn’t bury the former CEO of Chesapeake with any gold teeth, he owes that for debts accrued.

    Freaking Chesapeake fires 250 miners and acts like it is going to keep them solvent, that is what maybe 100g a day in savings on wages ect. only 17.4 million more to fix and then you can start working on the debt! They will probably just redirect the 100gs to the top, because they have such exceptional talent up there.

  19. PracticalMaina on Thu, 31st Mar 2016 11:48 am 

    *peabody fired 250 miners

  20. HARM on Thu, 31st Mar 2016 11:54 am 


    Thank you for pointing that out. Most here don’t want to face the truth that we have not yet reached a peak (and may not for some time), but I’d rather put down the Kool-Aid and face reality.

  21. PracticalMaina on Thu, 31st Mar 2016 12:06 pm

    We have also reached a peak in oil and gas consumption within the industry, record pollution, record consumption within Saudi. WOO! I have no dog in the when is peak fight, I just know that cheerleading continued record production and kicking the can is killing us and our offspring.

  22. shortonoil on Thu, 31st Mar 2016 12:10 pm 

    “Short makes me laugh. He accuses the WSJ of peddling snake oil while he is in the business of peddling his website/oil report, based on doomer fantasy.”

    When you get something worth selling let us know? That will be when you can build a model more complex than a Lego Set. In the meantime the Etp Model will keep finding new readership around the world. The only thing that you have to sell at this point is good old fashion Bullshit!

    “Short, I would not be surprised if they, our elected leaders, fired up the ole printing press and paid the creditors some of the debt and try to get those a holes up and running again, under new management of course to give the illusion of justice.”

    I don’t think there can be any question of that – of course they will. You can’t run modern civilization without oil, and the oil industry is going broke at supersonic speeds. Its extraction, processing and distribution networks have lost about $5 trillion in annual revenue flows in the last 22 months. Every country in the world that is dependent on oil revenue is now in serious trouble. The problem is that this is not a short term dilemma; by our calculations it will require the formation of an additional $39 trillion in debt over the next decade to keep the world’s economy supplied with petroleum. The world will go bankrupt attempting to keep the oil flowing, and it will because there will be no other option.

    The world is now investing its entire economic future into a process that shortly must, and will ultimately fail!

  23. PracticalMaina on Thu, 31st Mar 2016 12:16 pm 

    Is the definition of drinking the kool-aid not listening to the government, media and industry when they say everything will be fine. Hard reality you are imagining HARM.

  24. PracticalMaina on Thu, 31st Mar 2016 12:25 pm 

    Short you CAN run modern society on much much less. It would not take much of a carbon tax to price out fossil fuels vs ev, especially as the prices of gas are slowly recovering. EV and solar link together well, cover commercial buildings with PV so that the employees can charge their vehicles during peak production to help stabilize things. Stop funding any new road work or highway widening and instead redirect it to light rail and public transportation. Slow the speed limit right down. More people telecommute. People can survive limited mobility and fasting in the winter, they cannot survive no available clean water.

  25. Plantagenet on Thu, 31st Mar 2016 12:47 pm 

    @it really does’t matter if Chesapeake goes bankrupt and other people buy up their assets and leases from the bankruptcy court, or if the leases just expire and other companies pick up that land during the next land auction.

    When the price of oil goes back up—which it will do when this oil glut ends—–then fracking activity in the US will re-accelerate.


  26. Plantagenet on Thu, 31st Mar 2016 12:49 pm 


    Thanks—as George Orwell pointed out way back in the 20th century, the most revolutionary thing anyone can do is just tell the truth.


  27. antaris on Thu, 31st Mar 2016 12:59 pm 

    Prac ” you CAN run modern society on much much less” but nobody will be willing to do it until they are forced too. When people don’t have a choice, then they will do something different.

  28. rockman on Thu, 31st Mar 2016 2:07 pm 

    Practical – Way past that: hundreds of companies already crippled and on their death beds. LOL. But understand that no way with positive cash flow will be abandoned. Remember the average US well makes less than 20 bopd. And those strippers are not that inexpensive to keep producing. Huge numbers of companies will disappear forever…many already have. But we are in the season of the STRIPPER OPERATOR. They basically make their profit by doing most of the heavy lifting themselves. Such a typical one-man operation might produce $150k/yr from a dozen wells. He obviously can’t pay an engineer #125k/yr. It always boils down to sweat equity. Which is why a larger Little Oil can’t buy those properties let along a Big Oil.

    But again the wells will keep producing as long as they have a positive cash flow. But the big “IF” that goes along with that is if there are a sufficient number of stripper operators left. This could be a new dynamic that we’ve never seen before. A stripper operator truly has to be a jack of all trades that has essentially worked his whole life in the field. Here’s they catch: a huge number of them are old farts like the Rockman. IOW many of them could be ready to “head to the house” permanently. That’s oil patch code for retiring. There’s no way to guess how many might fall into that category. Tripper operators as a group are essentially invisible to even the oil patch insiders.

    And to be blunt what good would come from the govt infusing money into the wounded oil patch? If we had much to do that would produce oil/NG profitably we can always get the money for such projects. If I had a $10 million project that made economic sense I would have no trouble acquiring that capex. If it really is a good investment the money will be there. All the govt might be able to do is help fund projects that don’t make very much economic sense. But hey: if the govt is passing out the $bucks I’ll surely put my hand out. The Rockman long ago learned how to make a tidy little income by using someone else’s money to drill crappy wells. LOL.

    Hell, y’all just watched hundreds of thousands make $BILLIONS doing just that in the shale plays. LOL.

  29. twocats on Thu, 31st Mar 2016 4:07 pm 

    Another interesting wrinkle to the whole post-bankruptcy salvaging of assets is the fact that hedge funds might be buying up stressed debt/bonds of companies. This according to 360Oil and gas:

    “Oil & Gas 360 says that banks are also marketing their troubled debt to hedge funds, marking down distressed debt to cents on the dollars. Hedge funds could buy up discounted debt in hopes of repayment.”

    Now you might say, “so what the oil will still get produced”, but then it become again a question of cost. These hedge funds are financial terrorits of the highest order:

    So if companies that acquire these assets are not able to “strip” the liabilities from them because vulture funds are continuously circling it waiting for a pay out, then the oil might only be economical at yuuuge costs. Big oil vs Hedge Funds? Or then the US gov’t would have to step in and give money to private companies to hand over to other private companies, perhaps even foreign companies, to release the liabilities. Yes this sort of stuff was done under AIG et al, but again, if it’s not a financial cost then there are potential political costs. it isn’t a zero risk maneuver by the system.

  30. twocats on Thu, 31st Mar 2016 4:08 pm 

    *the key phrase of “cents to the dollar” doesn’t mean the debt is reduced, just the cost to buy the debt. The hedge funds can hold those liabilities in perpetuity and demand full or near full payment. this strategy is used and has been extremely effective!!

  31. Anonymous on Thu, 31st Mar 2016 4:17 pm 

    The uSgov has been handing out $bucks to the oil industry for over a century. The uS has always been one of the best places in the world to be in the oil business. Ask Exxon or BP, they’d agree. Generous uS gov’t support for oil(or the ~ of whatever shale and fracking ‘produce’) drilling means NO one in uS empure has ever had to bear the full costs of the ‘oil patches’ activities.

    If things are different this time around, its only because the real rulers of empire are fixated on trying to bankrupt Russia and Iran without having to resort to an actual war the uS knows it cannot win. If the gov’t hasn’t sent enough of its toilet paper dollars to the frak-boys, its only because the uS military and Wall St have a lock on most of it already.

    Mother-Frak’n american ‘little’ oil have been written off as collateral damage. Nothing personal though…..

  32. Plantagenet on Thu, 31st Mar 2016 4:43 pm 


    When Cheasapeake or other oil companies go bankrupt the debt is discharged by a bankruptcy court, i.e. it disappears. The court may sell off remaining assets and pay what they can to the lien holders. But there is not obligation to repay the entire debt.

    Its clear you don’t understand this…please consider how the US bankruptcy and tax systems work together to resolve bankruptcy issues.

    No one will have to “buy the debt” as you assume. After all the assets of the bankrupt company are sold, the Hedge Funds and banks that hold the remaining debt will write off those loans and take huge losses. Lucky for them the US tax system is set up so that losses are tax deductible and can used to offset profits that they make in other parts of their investment portfolio.


  33. practicalMaina on Thu, 31st Mar 2016 5:47 pm 

    Plant first off Chesapeake is a gas company not really an oil co. Secondly lost tax revenue is not gonna make that much of an impact for the investors. Chesapeake has one of the worst environmental records of the fracking biz and therefore the tax payers may be stuck with the bill for clean ups.
    Rockman exxon-mobile will be claiming two big to fail as soon as a serious attempt to bring them to justice on their deceit is made.

  34. twocats on Thu, 31st Mar 2016 5:58 pm 

    Plant you really aren’t that bright are you?

    You say, “No one will have to ‘buy the debt'”. What I’m saying is Hedge Funds are WILLINGLY buying debt (potentially) in order to collect on those bonds, even in the wake of bankruptcy for whoever claims the leases or assets. Municipalities too might hold fees over those leases for “lack of productivity” such that if anyone wanted to pump there they’d have to pay the back-fees first. This is already true for utility companies and transferring housing, why not for well-sites?

    Yes, I am aware (generally) of US bankruptcy law and its general ability to absolve debt. But I also know that increasingly courts have been siding with bond holders in cases against national entities and companies, including BofA vis-a-vis Countrywide. And these hedge funds are very very… very powerful, paul singer, etc. They are the system. And if they say the bonds are good, well, the bonds might still be good.

    You are looking at the most milk-toast version of bankruptcy. If the vulture funds can sue and win against Puerto Rico, Argentina, essentially implode Greece, well, I think they can handle Cheasepeake, or whoever tries to swoop in. If nothing else, litigation could tie up those lands for years.

    So it’s clear that YOU don’t understand the potentials here.

  35. twocats on Thu, 31st Mar 2016 6:21 pm 

    take a gander:

    “The outcome [of bankruptcy procedures regarding leases] is even less clear in states like North Dakota and Pennsylvania that do not have a recent history of hydrocarbon development and the corresponding legal disputes that would provide court decisions.”

    I imagine the funds would want to say that their mineral rights, the “leases”, extend to the physical ground and then they could even pay any fees imposed by states (for lost tax revenue due to not being able to re-issue rights), waiting, waiting, waiting, for what? for oil prices to go back UP! It’s the ultimate storage strategy!! Store it in place under bankruptcy. And then when prices go up, sell if for a killing.

  36. Rick Bronson on Thu, 31st Mar 2016 8:07 pm 

    Many partially completed oil-wells are slowly being completed and that brings some extra production in addition to the Offshore oil.

    But the decline in existing oilfields are slowly bringing down the overall production. Soon we may see prices going up if Iraq & Iran do not ramp up the production.

    But OPEC has started to achieve what they wanted. Its pushing the Shale & Sands oil out of business.

  37. makati1 on Thu, 31st Mar 2016 8:52 pm 

    The dreamers will always refuse to see reality. Realty is that the world economy is contracting and the Us is leading the decline.

    There are so many financial black swans circling above the Us that it is amazing that any light gets thru. I read more and more articles giving us a few months or a year before those black swans start dropping dead from the sky. I’m amazed that they have survived for this long.

    I hope you are all prepared for a lifestyle that has not existed for hundreds of years in the West. A world without cheap, plentiful energy or most of the other things you take for granted.

    Peak oil is not important. If you have no income to buy it, it could be a penny a barrel. Capitalism is dying along with that cheap, plentiful energy that supported it. I hope all of you stock holders have paper stocks in your hands. Then you will have something to start your cooking fires with and to wipe…

  38. Kenz300 on Fri, 1st Apr 2016 10:03 am 

    High cost shale producers going broke………

    When will the deep pocket, and high cost tar sands producers in Canada feel the pain……….

    How long can the cash reserves hold out…..

    Tar sands has to be the highest cost producer……

  39. Kenz300 on Fri, 1st Apr 2016 6:56 pm 

    The Koch brothers are big investors in Canadian tar sands…… I guess if your worth 94 billion dollars you can ride out any price declines…………

  40. Kenz300 on Fri, 1st Apr 2016 7:00 pm 

    Busted! Fracking Chemical Found in Wyoming Water Supply | CleanTechnica

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