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Page added on August 11, 2019

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Kurt Cobb: The wheels come off shale oil

Production

A flurry of coverage about the gloom and outright calamity in the shale oil business appeared last week. Low prices continue to dog the industry. But so does lack of investor interest in financing loss-making operations for yet another season. Plunging stock prices portend more bankruptcies if circumstances don’t change.

I received considerable pushback last January when I asked whether U.S. shale oil had entered a death spiral. The almost constant refrain of the cheerleaders for the shale oil industry has been that increasing production demonstrates there is something wrong with my analysis and that of others who have been skeptical of the industry’s claims.

We skeptics have certainly been wrong about how long the boom could go on. We could not fathom why investors kept funneling capital into businesses that were consistently consuming it with no hope of ever providing a long-term return.

I can remember when Alan Greenspan, the former U.S. Federal Reserve Bank chair, opined in December 1996 about “irrational exuberance” in the U.S. stock market. His speech turned out to be only an inflection point for the technology sector boom. The tech-heavy NASDAQ stock exchange rose 288 percent between the day Greenspan spoke and the index’s peak in March 2000.

In the subsequent bust the bankruptcy courts were littered with companies that had never made dime.

So far this summer season we have heard two unthinkable utterances come from shale oil industry executives. The first linked above was that the industry has destroyed 80 percent of the capital entrusted to it since 2008. This came from a CEO no longer in the industry.

The second, however, came from one of the largest players in the Permian Basin, the hotbed of shale oil activity. Pioneer Natural Resources CEO Scott Sheffield said that the industry is running out of so-called Tier-1 acreage. That’s oil-speak for “sweet spots.” Those are the circumscribed areas in shale deposits within which extraction costs are low enough to justify drilling.

Outside the sweet spots there is oil, but it is much more costly to extract. The industry at one time likened shale oil production to a manufacturing operation, claiming the one could drill practically anywhere in a shale deposit and get oil out profitably. No one is making such claims credibly any more.

Now, just two years ago the same Scott Sheffield mentioned above compared the Permian Basin to Saudi Arabia. To be fair to Mr. Sheffield, his job is to attract investors so he can drill more wells. So, I fault mostly the investors for not looking carefully at the economics of shale oil which have been free cash flow negative for the industry as a whole for almost a decade.

Some have called shale oil a Ponzi scheme. In a Ponzi scheme the books of the Ponzi operator are kept hidden from the investors so as to make sure they don’t catch on that money from new investors is being used to pay exorbitant returns to old ones. In the case of shale oil, the financials were published quarterly by the publicly traded companies for all to see. And, the wealth extracted by company managements could be calculated practically to the penny.

So, why didn’t investors understand what they were looking at? One possible explanation comes from an oil company executive who explained to me way back in 2009 that oil and gas companies often promote themselves as so-called “asset plays” to investors. They drill a lot of very marginal prospects to get reserves on their books and then tout the growth in their reserves. But much of those reserves will never be exploited at a profit. They are essentially a mirage.

Resource investing is tricky and most investors, even sophisticated ones, can be fooled by the hype. It’s very difficult to know whether something a company calls a reserve is actually a reserve—even more so since 2008 when the Securities and Exchange Commission allowed companies to use “proprietary methods” to determine reserves that are not subject to disclosure.

It’s true that the amount of oil in any one formation can be huge. But that is of no practical consequence if you can’t get the oil out at a profit and do that consistently.

To illustrate, there is enough gold dissolved in the world’s oceans to make all those who are reading this piece millionaires. But the gold remains far too costly to extract.

It seems now that investors are finally realizing that the promise of most of these “asset plays” is never going to be realized.  Even a cheerleading trade publication last week ran a piece entitled “Is the US Shale Boom Winding Down?”

We skeptics said shale oil would not work on the so-called “manufacturing model” asserted by industry. It turned out we skeptics were right. The industry actually focused on “sweet spots” that allowed lower-cost extraction.

We skeptics said that a large portion of the sweet spots would probably be exploited within a decade or so depending on the pace of drilling and the price oil. Now one of the industry’s most prominent CEOs is lamenting in public about the paucity of sweet spots remaining.

We skeptics said that investors would at some point realize that shale oil was a long-term money loser. A former industry CEO did the math and calculated the damage as minus 80 percent for investors in the industry as a whole since 2008. Lately, investors seem to be reacting to facts rather than the hype.

Will shale oil rise again from the dead as it did after the 2014-2016 price decline? That will happen only if two things occur: 1) The oil price rises significantly and 2) investors have a serious bout of amnesia.

Resource Insights



69 Comments on "Kurt Cobb: The wheels come off shale oil"

  1. Truth Buster on Tue, 13th Aug 2019 12:33 pm 

    You ever thought about taking up a hobby Davy?

  2. Truth Buster on Tue, 13th Aug 2019 2:45 pm 

    You ever thought about getting a life, Juan?

  3. More Davy Childish ID Theft on Tue, 13th Aug 2019 3:19 pm 

    Truth Buster on Tue, 13th Aug 2019 2:45 pm

  4. Peak Oil Ombudsman on Tue, 13th Aug 2019 3:24 pm 

    Davy,

    Once again, you’re letting your vagina do the talking instead of your little head.

    Must I warn you yet again where bad little boys go? Keep up the bad behavior and it’s off to the rubber room.

  5. Truth Buster on Tue, 13th Aug 2019 3:25 pm 

    come on Juan, everyone know you are the childlike mentally ill fool. When is the last time you contributed anything? You are a lunatic troll gaming the forum as if it were a anything goes Facebook.

    I say vote ban the fool, juanpee! Go back to your failed south America. Go hang out in Argentina or something. We don’t want asshole rich illegal South Americans in the US.

  6. Daisy Dyke on Tue, 13th Aug 2019 3:28 pm 

    Peak Oil Ombudsman is a misogynist. Go suck a prick faggot.

  7. Truth Buster on Tue, 13th Aug 2019 3:29 pm 

    Daisy, didn’t you know Juan’s boy is Boney Joe. Are you new?

  8. Professor J. Averill Snoopington, IV on Tue, 13th Aug 2019 5:59 pm 

    “I say vote ban the fool, juanpee! Go back to your failed south America. Go hang out in Argentina or something. We don’t want asshole rich illegal South Americans in the US.”

    Davy, dear, you can say and you can tantrum all you want and it won’t make one bit of difference. Instead, start with your own bad behavior. If you want to change something, start with yourself first. You’re not in control, dear. Wasn’t that the reason why you threatened to start your own blog. As with everything else pouring out of your vagina, it was all talk.

    Remember this folks:

    “Excluding my ID Theft and Sock Puppetry, I am spending less time on this lame unmoderated forum to concentrate on my own blog. I do want to thank all those who have attacked me with giving me material for growth. I have saved the best of my comments for my new blog. I have years worth of material. I have enjoyed moderating the worst of you and neutering your selfish useless agendas. I will still be here it is just I will be spending more time putting out a blog. I don’t expect much of a following with my blog. This is more a personal effort to assemble what I have learned over the last 10 years of formulating my REAL Green Deep Adaptation. Many of my ideas and lifestyles are not mine. I do not claim anything either. For the stalkers here I hope you find my blog and visit the comment forum. It will be only lightly moderated to prevent juanpee identity theft and excessive cloggo spamming. LOL. There will be a prize for juanpee and annoymouse if you can stalk my blog. Double LOL. Anyway fuck my enemies and many thanks to those who contributed to my metamorphous.”

    “I guess I could have joined the moderated section at PO dot com, but I knew I’d get my ass permanently banned. I’ll try not to let the door smack me up the backside on the way out.”

    “Goodbye to ALL of you dumbasses.”

    Promises, promises.

  9. PROFESSOR (CHIEF) TIMOTHY ADEDEJI AWONIYI J. P. on Tue, 13th Aug 2019 6:03 pm 

    Mr. Davy:

    You must not allow the exit door to smack you upside your ass on the way out.

  10. Troll Buster on Tue, 13th Aug 2019 6:41 pm 

    JuanP is an obsessive compulsive liar and this post makes a great point thanks cloggie and davy:
    https://browserspy.dk/webserver.php
    and fill in peakoil.com, you get that the server is hosted by Cloudflare:
    https://en.wikipedia.org/wiki/Cloudflare
    Cloudflare is one of the last bastions of free speech, under lefties also known as “hate speech”.
    It is very sad that the admin of this site doesn’t seem to want to take the trouble to log in to his server dashboard and active a few presets, enforcing posters to post under a unique username/password combination. That doesn’t eliminate trolls like juanpee to post garbage under fake identities, but at least it stops identity theft and that would make a hell of a difference.
    If possible, you could also enforce that one IP-address can only post under a single identity.
    Please admin, invest an hour of your time to get this right. The international situation is getting more “interesting” (like in famous the Chinese proverb) by the day.

    Davy on Sun, 11th Aug 2019 4:39 am
    AH, as one who has seen his identity taken and fruit cake socks used to ad hom for over a year now I second that request. Juanpee has ruined this place that is clear. He started the shit. He doesn’t care though. He is an egotistical mentally ill fuck. I can deal with people attacking me and I will attack back. I look forward to heated debate and normal discussions. What juanpee is doing is trashing the forum with the worst of behavior a forum can see and that is id theft. Even the socks are bad but nothing like id theft. If I partake it is because poison is be used on me so I give poison back. This is how war is done. I will be here to the bitter end, fuck wack, juanpee. Go ahead and take the site down. Pretty clear most everyone but you

  11. More Davy Childish ID Theft on Tue, 13th Aug 2019 6:49 pm 

    Troll Buster on Tue, 13th Aug 2019 6:41 pm

  12. Troll Buster on Tue, 13th Aug 2019 6:53 pm 

    Stop it juan, everyone knows you are the forum troll. Be an adult and go somewhere else with your bad behavior.

  13. The Truth Shall Set You Free on Tue, 13th Aug 2019 6:53 pm 

    Davy wants the site to conform to his wishes so that he can direct his poison individually. This has nothing to do with “bastions of free speech”. If that were the case, he would not demand censorship.

    Hypocrite.

  14. Professor J. Averill Snoopington, IV on Tue, 13th Aug 2019 6:54 pm 

    Davy, dear, you can say and you can tantrum all you want and it won’t make one bit of difference. Instead, start with your own bad behavior. If you want to change something, start with yourself first. You’re not in control, dear. Wasn’t that the reason why you threatened to start your own blog. As with everything else pouring out of your vagina, it was all talk.

  15. JuanP sock fraud on Tue, 13th Aug 2019 6:58 pm 

    Professor J. Averill Snoopington,

    The Truth Shall Set You Free

  16. Troll Buster on Tue, 13th Aug 2019 6:59 pm 

    will the juanpee noise ever end??

  17. Troll Buster on Tue, 13th Aug 2019 7:22 pm 

    will the Delusional Davy noise ever end??

  18. Kenz300 on Mon, 19th Aug 2019 3:03 pm 

    Fossil fuels are a bad investment.

    Financial institutions and insurance companies are starting to factor in the risks from the Climate Crisis.

  19. Rick on Tue, 20th Aug 2019 11:51 am 

    Davy should find a hobby, that will keep him busy.

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