Some years ago, oil explorers/producers and their service industries, which had begun to believe the “peak oil” theory of M. King Hubbert, thought they had died and gone to heaven when the realities of shale oil production began to take shape. The previously untapped resources of oil/gas trapped within massive fields of shale rock had emerged as a guarantor of endless profits.
Throughout history conventional wells had been dug straight down through earth, water, rock, etc. to tap into reservoirs of liquid “black gold” created over millennia by fossilized organic material. Retrieving it was the industrial equivalent of sucking soda through a straw. But in the shale “revolution” well pipes were drilled vertically, then elbowed into “L” configurations that penetrated horizontal strata of shale rock where oil/gas was trapped, and the gooey stuff was extracted using explosives, sand, chemically-treated water solvents and powerful pumps.
This was hydraulic fracturing or fracking. By 2014 its explosive development had propelled the US into position as the world’s leading producer of oil and gas liquids.
Not all oil production is equal, however. For various reasons the new and exciting method was much more expensive than the old: greater land area must be bought or leased for each well; much deeper and more complicated drilling is usually required; huge quantities of water must be bought and its contaminated remains “safely” transported, stored or disposed of; the production of fracked wells diminishes quickly, so continually-increasing drill sites must be financed to insure continuing operation and ongoing profit, etc., etc.
In an era when crude oil prices were high and stable, oil company explorers/producers were flying high. Everybody and his brother got in on the act. If you were a wildcatter with a few bucks to your name, you could borrow millions and know that your ten or twenty drill sites would leave you sitting pretty.
If you think that sounds a little like 1929 you’re not far off. In mid-2014, Brent Crude sold for $115/barrel. On Jan. 15, 2015 it sold for $28.94/barrel.
“Morgan Stanley analysts believe oil could hit $20 this year — and at this rate, it might happen sooner than crude producers would like.” (theguardian.com, Jan. 12, 2015)
This bubble burst not in one week but over a period of months. It has dramatically hurt oil explorers/producers – big and small – and many are dying. Their investors, public and private, have suffered substantial financial loss. (California’s two biggest public pension funds, for instance, lost more than $5 billion – 27% -on energy-related investments for the year ended June 30, 2015, during which time other investments showed profit.)
Investor confidence in oil conglomerates took a further hit when it became known that Exxon, though publicly denying the existence of climate change, had for almost 40 years hidden from its existing and potential investors the relevant information that for all those decades it was privately preparing for the environmental consequences of global warming. (Meaning, of course, that It knew government regulation or environmental necessity might eventually require it to keep its product in the ground, shielded from possibility of profit, resulting in a plunge of its share price.)
So where are we now? What is a probable future for oil explorers/producers, their service industries and fracking in particular?
“Saudi Arabia, which doesn’t rely on fracking, can extract crude oil for $5-$6 per barrel. In contrast, Morgan Stanley analysts recently suggested that the break-even price for U.S. shale oil producers was $76-$77 a barrel.
“As demand for crude oil has softened on weak worldwide economic activity and the growing market share for alternative energies, it is unclear how long producers in the U.S. can weather the storm at current prices. The downturn has been so quick and dramatic that the full effects of the price drop have yet to be felt. Early estimates indicate as many as $150 billion of oil and gas exploration projects may be put on hold in 2015 alone. Industry giant ConocoPhillips has already announced it plans to cut investment spending by 20% this year, and similar announcements are expected to come from other exploration and production (“E&P”) companies in the coming weeks and months. But planned cuts to investment spending at this juncture cannot stop the many E&P projects coming online in the first half of 2015 that will further increase supply. Many of these wells, anticipated by investors to be profitable as few as six months ago, may be coming online in an environment where they literally cannot succeed.
“Add to this the unprecedented levels of largely high-yield debt that were placed on energy companies during this recent stretch of prosperity and the result is an industry that could increasingly turn to professionals for restructuring advice in the near future. [Translation: Guidance through a bankruptcy procedure]”
(business-finance-restructuring.weil.com, Jan. 7, 2016)
“At a time when the oil price is languishing at its lowest level in six years, producers need to find half a trillion dollars to repay debt. Some might not make it. The number of oil and gas company bonds with yields of 10 percent or more, a sign of distress, tripled in the past year, leaving 168 firms in North America, Europe and Asia holding this debt, data compiled by Bloomberg show. The ratio of net debt to earnings is the highest in two decades.” (bloomberg.com, Aug. 26, 2015)
(The Federal Reserve’s recent interest-rate increase not only exacerbates the problem of raising money to repay debt, but by strengthening the dollar makes US oil more expensive for other nations to buy.)
“If oil stays at about $40 a barrel, the shakeout could be profound, according to Kimberley Wood, a partner for oil mergers and acquisitions at Norton Rose Fulbright LLP in London.” (ibid.)
In 2015, a review of energy company web sites revealed many contributors’ confident assurances that crude oil prices would bottom out at $84, $73, $65, $52, etc., etc. In our own forum, climate change deniers and oil/gas company boosters have told us for months that a price bounce-back will occur (“This is temporary.”; “You can bank on it!”). But invitations to “bank on it” by announcing purchase of an oil company stock at a specific price – so that one can evaluate the buyer’s understanding of the forces at work – have had no takers.
When the mutual fund group holding my IRA told me it had no fund that guaranteed not to invest in predominantly fossil-fuel-related companies, I switched to a fund company devoted to such a practice.
That is a future I want to be part of. I hope some here will join me.
William Smithers
Santa Barbara