What Happens When U.S. Shale Oil Peaks & Declines



Posted by Ed 4 mths ago
The global economy would be in serious trouble if it weren’t for the rapid growth of U.S. shale oil production.

Since the 2008 financial crisis, U.S. shale oil production has increased by more than 6 million barrels per day. Without these additional barrels of oil, the massive money printing and asset purchases by the central banks would not have been as successful in propping up the economy and markets.

We must remember this simple fact; energy drives the markets, not finance. Finance steers the market.

So, for the economy to expand, there must be oil production growth. However, it would be unwise for the market-economy to rely upon the U.S. shale industry as the leading driver of global oil production growth for the foreseeable future.


Well, there are several reasons, but let’s first look at how much the increase in U.S. shale oil production has accounted for the rise in global oil supply since 2008. Of the 9.6 million barrels per day (mbd) of global oil production growth 2008-2017, the United States supplied two-thirds or 6.3 mbd of the total:


Interestingly, global oil production minus the United States and Canada didn’t increase in 2009, 2010 or 2011.

There was a small bump up in 2012 and finally by 2105-2017 did global oil production minus the U.S. and Canada increase by 1.7 mbd. Now, let me repeat that. If we add up ALL THE OTHER COUNTRIES in the world producing oil, the net increase from 2008 to 2017 was only 1.7 mbd.

Thus, of the total 9.6 mbd of global oil production growth 2008-2017, the U.S. (6.3 mbd) and Canada (1.6 mbd) accounted for 82% of the total.

The figures in the chart above came from the 2018 BP Statistical Review. BP will be providing data for last year when their 2019 Statistical Review is published on June 11th. So, I only have data up until 2017.

Regardless, I was quite surprised to see overall global oil production flat, minus the U.S. and Canada for the past nine years.

However, the situation in the global oil industry looked much different in the previous decade. From 1997-2007, global oil production minus the U.S. and Canada increased 11.4 mbd, or nearly seven times more than the following decade (2008-2017):


So, from 1997-2007, the overwhelming majority of global oil production growth came from all other countries, not including the United States and Canada, but, quite the opposite took place from 2008-2017 when the U.S. and Canada were the predominant leaders in global oil production.

To truly understand the difference in global oil production growth minus the U.S. and Canada over these two periods, this next chart wraps it up nicely:


Here we can see that excluding the United States and Canada, global oil production increased a hefty 18.7% from 1997-2007, but could only add a mere 2.3% more supply from 2008-2017. And that also takes into account the $100+ a barrel oil the global oil industry enjoyed from 2011-2014. So, why so little oil production growth from the rest of the world?

Well, I believe the FALLING EROI and the THERMODYNAMICS of oil depletion are finally wreaking havoc on the global oil industry.

Why The World Shouldn’t Rely Upon The U.S. Shale Oil Industry For Future Sustainable Growth:



Ed 4 mths ago
The Shale Boom Is About To Go Bust

The shale industry faces an uncertain future as drillers try to outrun the treadmill of precipitous well declines.

For years, companies have deployed an array of drilling techniques to extract more oil and gas out of their wells, steadily intensifying each stage of the operation.

Longer laterals, more water, more frac sand, closer spacing of wells – pushing each of these to their limits, for the most part, led to more production. Higher output allowed the industry to outpace the infamous decline rates from shale wells.

In fact, since 2012, average lateral lengths have increased 44 percent to over 7,000 feet and the volume of water used in drilling has surged more than 250 percent, according to a new report for the Post Carbon Institute.

Taken together, longer laterals and more prodigious use of water and sand means that a well drilled in 2018 can reach 2.6 times as much reservoir rock as a well drilled in 2012, the report says.

That sounds impressive, but the industry may simply be frontloading production. The suite of drilling techniques “have lowered costs and allowed the resource to be extracted with fewer wells, but have not significantly increased the ultimate recoverable resource,” J. David Hughes, an earth scientist, and author of the Post Carbon report, warned.

Technological improvements “don’t change the fundamental characteristics of shale production, they only speed up the boom-to-bust life cycle,” he said.

For a while, there was enough acreage to allow for a blistering growth rate, but the boom days eventually have to come to an end. There are already some signs of strain in the shale patch, where intensification of drilling techniques has begun to see diminishing returns.

Putting wells too close together can lead to less reservoir pressure, reducing overall production. The industry is only now reckoning with this so-called “parent-child” well interference problem.

Ultimately, precipitous decline rates mean that huge volumes of capital are needed just to keep output from declining. In 2018, the industry spent $70 billion on drilling 9,975 wells, according to Hughes, with $54 billion going specifically to oil. “Of the $54 billion spent on tight oil plays in 2018, 70% served to offset field declines and 30% to increase production,” Hughes wrote.


Ed 4 mths ago
Don't look to the Saudi's for help...


Ed 4 mths ago
SEA OF RED: Majority Of U.S. Shale Companies Took A Beating Q1 2019

The overwhelming majority of U.S. shale companies were hit hard due to lower oil prices in the first quarter of the year. Just about every shale company that I keep track of suffered negative free cash flows in Q1 2019.

This was quite a surprise as Rystad Energy claimed that the breakeven price for U.S. tight oil (shale oil) was the second lowest in the world at $46 a barrel, right behind Saudi Arabia at $42.

According to the U.S. Energy Information Agency (EIA), the average West Texas Oil price in Q1 2019 was $54.82, down from $60 in the last quarter of 2018. However, even with receiving nearly $55 a barrel, the majority of U.S. shale companies posted negative free cash flows. I was quite surprised when I researched the data.

As we can see in the chart below, sixteen of the leading U.S. shale companies posted a total of $3.2 billion of negative free cash flow:


While it’s true that I did not include every shale company in the list above, it’s a pretty extensive group. Furthermore, I did not include the free cash flow from the big three U.S. oil companies, ExxonMobil, Chevron, and ConocoPhillips as they still produce a lot of conventional and offshore oil.

However, one shale company that I did not include in the list above was APC – Anadarko Petroleum. Anadarko posted a negative $260 million in free cash flow in Q1 2019.

Regardless, we can clearly see that even at $55 a barrel, the majority of U.S. shale companies were still spending more money than they received from operations in the first quarter of the year.

Again, the total free cash flow of the group was a negative $3.2 billion.


Ed 4 mths ago
According to the data taken from GuruFocus.com, these sixteen shale companies paid nearly $900 million of interest expense in just the first quarter of the year:


Thus, for the entire year, these shale companies will pay roughly $3.6 billion only to service the debt. How much is $3.6 billion of interest expense in one year? Well, that would purchase 65 million barrels of oil at $55 a barrel.

But, of course, these companies only pay a portion of each oil barrel to pay for the interest expense. If we assume $5 for each barrel for their interest expense, that will take 2 million barrels per day of oil production. That’s correct.

These shale companies need to produce 2 million barrels of oil per day for an entire year at $5 a barrel just to pay their interest expense.

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