By F. Willia m Engdahl
September 29, 2019 "Information
Clearing House" -
Over the course of the past decade the United
States, following decades of relative stagnation in
oil production, has surprised many to become the
largest oil producer in the world, exceeding Russia
as well as Saudi Arabia. Latest daily production is
just above 12.1 million barrels a day. In November
2018 for the first time in decades the US became a
net oil exporter. The geopolitical implications to
this energy boom in a world where oil determines the
growth of entire economies, would appear to be
great. Almost all the increase owes to the
exploitation of what is called shale oil,
unconventional oil found in shale rock formations.
The US Department of Energy projects a rise to 8.8
million barrels daily from US shale oil alone, a new
record. Now though, we are seeing the first clear
signs that the “shale boom” could implode even
faster than it rose. The implications for American
foreign policy and global geopolitics and economics
are significant.
The ‘Fracking’ Revolution
The idea of extracting oil or natural gas embedded
in shale rocks has been known for years. However
shale oil, or tight oil as it is known, first became
economical with introduction of new horizontal
drilling techniques combined with oil prices of $100
a barrel or more. This was about two decades ago.
In
hydraulic fracturing or fracking, oil embedded in
shale rock thousands of feet down is injected with a
high pressure mix of water, lots of it, mixed with
chemicals and sand. The de facto sand blasting
creates fissures where oil can flow into the oil
pipeline. The actual drilling of a shale well is
only about 30-40% of the total cost. Up to 55-70%
are from completion which includes actual fracking.
The independent oil consultancy, Wood Mackenzie,
recently estimated that the USA held an impressive
60% of all world shale reserves that are
economically viable at oil prices of $60 per barrel
or
less.
Now it begins to get interesting. The current price
for the West Texas Intermediate marker grade of oil
is around $58 a barrel, where it has been for
months. The price has not shot up as many expected
despite the disruptions in Venezuela, in Iran and
around the Persian Gulf. This puts shale well
production, much of which today is in the Permian
basin in West Texas or Bakken in North Dakota, at a
delicate point.
When Saudi Arabia and the Arab OPEC producers
decided to flood the market in 2014 with cheap oil
in order to force the US shale producers into
bankruptcy, the results were disastrous for the OPEC
countries financially, but new technology advances
allowed the major part of US shale oil production to
survive at far lower prices. That, combined with a
Federal Reserve Zero Interest Rate Policy (ZIRP),
made borrowing to produce oil attractive for shale
companies. Now, with two years of gradual Fed rate
increase policies, shale companies are beginning to
show signs of major stress.
Are You Tired Of
The Lies And
Non-Stop Propaganda?
|
Economic Troubles
Little known is the fact that despite all
technological advances and economies of scale, the
USA shale oil industry as a whole has yet to turn a
net profit. At a juncture when world GDP growth
begins to look very bleak, whether in China or in
the EU or Emerging Markets like Brazil or Argentina
or Turkey, US shale companies face a critical
juncture.
The year 2018, according to projections of the
International Energy Agency was supposed to be the
year that the shale industry finally turned a
profit. The IEA wrote in early 2018 that “higher
prices and operational improvements are putting the
US shale sector on track to achieve positive free
cash flow in 2018 for the first time ever.” Since it
began, until the Saudi price crash, that is from
2000-2014, US shale companies as a whole according
to IEA estimates, already generated a cumulative
negative free cash flow of more than $200 billion.
With glowing predictions for a “new Saudi Arabia,
and banks willing to lend to after the 2008
financial crisis, money poured into shale. Companies
claimed once infrastructure was in place the profits
would soon flow. It didn’t. Despite over two years
of rising world oil prices, some 33 US publicly
traded shale companies had a combined negative cash
flow of $3.9 billion in the
first half of 2018.
But with possible war with Iran and the unrest in
Venezuela combined with projections of a growing US
economy, the US shale industry told their bankers
that 2019 would be the year finally of net profit.
The reality has been the opposite. Shale company
combined capital expenditures for the first Quarter
of 2019 alone have exceeded operating cash flow by a
whopping $5 billion. And now with oil prices
stuck seemingly at $58 and the prospects for
economic slowdown, not only abroad but more recently
in the USA itself, many bank lenders to the US shale
oil bonanza are having second thoughts.
Unconventional means more cost
Unconventional means by definition more costly to
produce. Shale, unlike conventional oil reservoirs,
deplete far faster than normal oil wells. In many
cases a shale well loses 70% of recoverable oil the
first year. The Permian Basin has been measured at
22% a year. To justify taking on debt via junk bonds
and other lending to continue producing, shale
companies went to the best, so-called “sweet spots”
and projected the optimistic numbers into the
future.
Explaining second quarter 2019 profits, the CEO of
one of the most successful companies, Scott
Sheffield of Pioneer Natural Resources warned in
early August that most of the oil from so-called
“sweet spots,” or “tier 1 acreage,” has already been
extracted. “Tier 1 acreage is being exhausted at a
very quick rate,” Sheffield
stated.
To
counter faster depletion rates of shale wells,
companies have resorted to technical changes in
terms of sand, closeness of drilling and other
means. As the drilling is forced to go to less ideal
areas, one oil industry source likened it to walking
up the down escalator, drilling more just to stay
even. That costs more per barrel.
Now an alarming new industry report suggests that
the shale oil producers, at least in the rich
Permian Basin, have been faking their numbers or
under-reporting the shale wells completed to make
the numbers look better. A detailed report by energy
analysts at Kayrros indicates that oil companies in
the Permian Basin greatly under-reported the number
of shale oil wells completed in 2018. Kayrros
estimates that more than 1,100 wells were completed
in the Permian Basin but not reported as required by
law. That would mean a significant 21% greater
number of completed wells to produce the same volume
as had been reported. That means the average well is
far more expensive per barrel and far less
efficient. Kayrros advisory chairman and CEO of
Schlumberger, Andrew Gould remarked, “With far more
wells contributing to Permian and US oil production
than accounted for, current shale oil production is
substantially more water- and sand-intensive than is
commonly believed.” Kayrros estimates that in 2018
in the Permian Basin alone that actual demand for
special grade sand was under-estimated by 9.2
billion pounds and water under-estimated by 12.5
billion gallons. That’s a lot of sand and a lot of
water. At some point the companies will be importing
sand from the deserts of Arabia at that
rate. The environmental costs of shale oil
fracking in terms of water, contamination,
earthquakes are enormous and need a separate
treatment.
To
worsen the energy outlook, the spectacular oil
production growth rates in the US appear to be
stagnating, a worrisome sign given the fact that
shale wells deplete annually at anywhere between
20-40% per year or more compared with around 4% for
conventional wells. Earlier estimates suggested that
the largest US shale region, Permian Basin, would
reach its economic peak around 2025 or after.
A
recent study of shale production by J. D. Hughes, an
oil geologist who has followed the industry closely,
suggests that with productivity per well peaking or
even in some regions like North Dakota actually
declining, oil companies are being forced to pour
more money in, drill more just to replace lost
output. 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. He added, “production
will fall as costs rise. Assuming shale production
can grow forever based on ever-improving technology
is a mistake—geology will ultimately dictate the
costs and quantity of resources that can be
recovered.”
Add to this all the huge debts of the shale oil
companies are a growing problem. According to the
Wall Street Journal some $9 billion worth of debt is
set to mature over the second half of 2019 and banks
are becoming reluctant to continue financing in a
weaker economy. Then a staggering $137 billion in
debt matures between 2020 and 2022, debt that was
taken on to survive the 2014-15 oil market meltdown.
Many producers will likely go down, though giants
like ExxonMobil will
survive.
If
major oil shale regions are already beginning to
shows signs of limits at present prices, and if
decline rates are about to significantly accelerate
over the coming 2-3 years, it will have major
implications for US foreign policy as well as the
economy. A major factor in the recent actions of
Washington in the Middle East and even Venezuela has
clearly been driven by a sense that America no
longer depends on foreign oil and can take greater
geopolitical risks. Oil and the remarkable shale
boom were largely behind this impression.
The Trump Administration began in 2017 as one of the
most oil-friendly in recent history. Rex Tillerson,
CEO of ExxonMobil, was named Secretary of State.
Texas oil-friendly Governor Rick Perry headed Energy
Department. Others were named who favored expansion
of shale oil as a national priority. If this
domestic shale oil support suddenly begins to
vanish, it will send major new shock waves around
the globe at a time when shock waves are coming from
every direction. It’s not the end of the Oil Age,
but it could soon be the end of the USA shale oil
boom, one fueled on mountains of debt, horrendous
environmental destruction and wishful thinking. In
turn that could trigger a global oil price shock
that will turn the economy dramatically down.
F. William Engdahl
is strategic risk consultant and lecturer,
he holds a degree in politics from Princeton
University and is a best-selling author on oil and
geopolitics, exclusively for the online magazine “New
Eastern Outlook.”
Do you agree or disagree? Post
your comment here
==See Also==
Note To ICH Community
We ask that you assist us in
dissemination of the article published by
ICH to your social media accounts and post
links to the article from other websites.
Thank you for your support.
Peace and joy