As an old oil
hand, I was seriously disturbed five years ago when it was almost impossible to
develop a payback time for shale oil production. Since then it has continued to go missing as
massive amounts of cash was spent on the industry. This suggests that we now know. It is never at the present pricing regime.
This could not
be worse news. It means that our
vulnerability to supply disruption is rocketing while elasticity is
dropping. US shale oil has merely
postponed our day of reckoning by a few years while the decline in conventional
oil production actually accelerates.
Right now we are
swapping dollars in the oil industry at best and the ship is clearly leaking.
The only good
coming out of all this is that massive amounts of money are coming home to be
spent drilling more wells. Obviously
this allows repatriation of US currency and there is enough out there to keep
this up for quite a while.
Peak Oil: It's
Baaaack
By Nick Hodge | Wednesday, March 12th, 2014
Over the past few months, I've been sharing my
concerns about shale oil.
I've articulated the reasons for my thesis,
including fast decline rates, the amount of new rigs and wells needed, and a
cost of production that's been higher than the price of sale for some time now.
I've also shared recent evidence that this theory is
proving correct, from horrid earnings reports — citing the reasons I just
mentioned — for oil majors across the board to the fact that mainstream
media outlets are starting to put the dots together, running stories like:
"Big Oil Companies Struggle to Justify Soaring
Project Costs" —Wall Street Journal
"Dream of U.S. Oil Independence Slams Against
Shale Costs" — Bloomberg
"Why America's Shale Boom Could End Sooner Than
You Think" —Forbes
"What Happens When The Shale Boom
Ends?" — Christian Science Monitor
After my last article on the subject, I got an email from a
sophisticated investor-friend of mine worth hundreds of millions of dollars —
some even say a billion. His subject line was: "Awesome Article on
Shale." Here's what he had to say:
Nick, I think you're right on with your views toward
shale oil. Good job. Now tell me what that means looking forward for oil and
gas prices and what it means for the conventional light crude producers?
All the best...
So I typed up my thoughts for him, and I'd like to
share them with you today:
Predictions are tough, especially with a
still-struggling economy. If I had to say, prices at least need to rise to the
marginal cost of production at $115ish. Trouble with that is anything over $110
for a sustained time causes recession, which of course would send prices lower
making projects unviable once more.
It's classic peak oil. It never went away, we've
just been able to paper over it with free money for the past half decade.
Seems like the majors realize the gig is up. They're
selling unconventional assets in a big way, wanting to mitigate risk and capex
by getting back to conventional. Still,
conventional peaked in 2005 and that strategy seems like a last-ditch effort.
When the peak hits, I see it as the reset button the
world badly needs to purge itself of all the debt, paper, and invented
financial instruments. Depends on the response of course, but I see the masses
waking up and getting antsy.
Anyway, the core strategy has never changed. Land,
ag/food, water, resources/metals, self-reliance/protection. You can try to play
the spike in oil prices when it comes, but timing is always tough.
A colleague of mine named Steve St. Angelo has
written an exclusive report on this for my readers. It's attached.
Shale Shoes Keep
Dropping
As if on cue, news keeps coming out that supports
this very view.
Last week, Maria van der Hoeven, CEO of the
International Oil Agency, sat down for an interview with the Christian
Science Monitor. Here's her response when asked if the promise of
unconventional oil and gas is overhyped:
The light tight oil revolution in the United States
is changing the geographical map of oil trade. But we also mentioned [in an IEA
analysis] that this growth would not last — that it would plateau, and
then flatten and go down. That means that from 2025 onward, it's again Saudi
Arabia and the Gulf states that will come back.
In the analysis she cites, the IEA found
that independent shale producers will spend $1.50 drilling this year for every
dollar they get back. And it will take 2,500 new wells a year just to sustain
output of 1 million barrels a day in North Dakota's Bakken shale. Iraq could do
the same with 60.
In total, U.S. drillers are expected to spend more
than $2.8 trillion by 2035 even though peak shale production will occur a
decade before that. It's a treadmill to nowhere.
Take Sanchez Energy, which will spend $600 million
this year drilling in the Eagle Ford — twice the amount of revenue it
earned in 2013.
I don't know about you, but where I come from, we
don't invest in companies that are spending twice what they're bringing in. But
that's happening across the board when it comes to shale oil and gas.
What's more, the Institute for Sustainable
Development and International Relations is out this week with a woefully
underreported study on the impact of shale oil and gas on the U.S. economy.
The report was blunt, stating there is "no
evidence that shale gas is driving an overall manufacturing renaissance in the
US." It found the cumulative long-term effect of shale on U.S. gross
domestic product (GDP) will be less than 1%.
And that's not 1% per year. The report found shale
oil will add just 0.84% to U.S. GDP between 2012 and 2035. For comparison,
cosmetics add twice that to the GDP each and every year.
It also found that the economic implications of
shale on economies outside the U.S. would be even worse.
It's my view that free money and low interest rate
policies from the Fed have led to the illusion of cheap energy. Slowly but
surely, more and more people are realizing how the trick has been pulled off.
And the economic turmoil created when the market
realizes shale drillers are putting out $1.50 for every $1.00 they get
back — coupled with fast-spreading unrest in the rest of the world —
will make precious metals the place to be once more.
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