AuthorTopic: Fracker Debt Bubble  (Read 112293 times)

Offline BuddyJ

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Re: 🛢️ A Fracking Ban Will Never Happen
« Reply #465 on: September 16, 2019, 08:08:42 AM »
economics can only kill it if folks stop using oil and natural gas.

No, economics kill it because it can't be extracted at a price enough consumers can afford to pay.  Price goes up, demand goes down, glut ensues, prices fall, rinse and repeat until you hit bottom.

RE

Okay, so we've seen two of those cycles since the Great Recession. The one that hit its height in WTI at $145/bbl in July of 2008 and nadir in February of 2009 at $34/bbl. So that would be the crashing demand, followed by glut and low prices.

Price then increased into the $100+ range from 2011-2014. Demand didn't decrease, it increased.



This appears to be more of a cycle, not hitting a bottom, but bouncing around, and for reasons far more substantial than whether or not some company or another decides to do hydraulic fracturing. If memory serves, that entire high price period just about created the US shale revolution, and that revolution grew oil and gas production even more once prices went DOWN. That production caused a drop in price, and demand just kept increasing through the 2014-2018 time period as well. So the relationship of volume and price didn't even do the cycle thing from 2011-2018 as expected.

Offline RE

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Re: 🛢️ A Fracking Ban Will Never Happen
« Reply #466 on: September 16, 2019, 08:41:46 AM »
economics can only kill it if folks stop using oil and natural gas.

No, economics kill it because it can't be extracted at a price enough consumers can afford to pay.  Price goes up, demand goes down, glut ensues, prices fall, rinse and repeat until you hit bottom.

RE

Okay, so we've seen two of those cycles since the Great Recession. The one that hit its height in WTI at $145/bbl in July of 2008 and nadir in February of 2009 at $34/bbl. So that would be the crashing demand, followed by glut and low prices.

Price then increased into the $100+ range from 2011-2014. Demand didn't decrease, it increased.



This appears to be more of a cycle, not hitting a bottom, but bouncing around, and for reasons far more substantial than whether or not some company or another decides to do hydraulic fracturing. If memory serves, that entire high price period just about created the US shale revolution, and that revolution grew oil and gas production even more once prices went DOWN. That production caused a drop in price, and demand just kept increasing through the 2014-2018 time period as well. So the relationship of volume and price didn't even do the cycle thing from 2011-2018 as expected.

Yes, demand does increase due to the fact that population continues to increase.  It's the RATE of increase that falls below expectations for growth, and that's what kills the investment because you need the constant growth to cover the interest on the investment.  That's why it is a Calculus problem.

The production increases, but the profitability from that production is falling.  Episodes like this perform the function of a Goalie doing a Stick Save.  But eventually, too many Pucks are going to be flying at the Goalie's head, and he can't stop them all from reaching the net.

RE
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Offline BuddyJ

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Re: 🛢️ A Fracking Ban Will Never Happen
« Reply #467 on: September 21, 2019, 05:27:04 PM »
Yes, demand does increase due to the fact that population continues to increase.  It's the RATE of increase that falls below expectations for growth, and that's what kills the investment because you need the constant growth to cover the interest on the investment.  That's why it is a Calculus problem.

What is the expectation for growth? According to CSIS, Rystad, WoodMac and Barclays, it is slowing to zero, and then going negative. I don't know what that means for who is covering what interest. Certainly if folks want less, less will be produced, and we have a different relationship for price as demand and production see-saw downwards. A good thing for the environment.

Quote from: RE
The production increases, but the profitability from that production is falling.  Episodes like this perform the function of a Goalie doing a Stick Save.  But eventually, too many Pucks are going to be flying at the Goalie's head, and he can't stop them all from reaching the net.

RE

So how does your idea work in the expected decreasing demand scenario that the think tanks are putting out there for discussion right now?

Offline RE

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🛢️ You’re Footing The Bill For Bankrupt Shale Drillers
« Reply #468 on: September 26, 2019, 11:24:39 AM »
Privatize the Profits, Socialize the Losses.

RE

https://oilprice.com/Energy/Energy-General/Youre-Footing-The-Bill-For-Bankrupt-Shale-Drillers.html

You’re Footing The Bill For Bankrupt Shale Drillers
By Nick Cunningham - Sep 25, 2019, 4:00 PM CDT


A wave of oil and gas wells abandoned by bankrupted drillers could cost the U.S. government hundreds of millions of dollars.

A new report from the U.S. Government Accountability Office (GAO) studied oil and gas wells drilled on federal lands, and found that the public could get stuck with a significant tab from companies that go out of business.

Inactive wells that have not been properly plugged present environmental threats, from methane leaks to surface, air and groundwater contamination. Reclaiming a well that goes offline involves plugging it, removing structures and revegetating that landscape.

On federal lands, the Bureau of Land Management (BLM) collects a bond upfront that can be returned to a driller after reclamation. If the well is not properly reclaimed at the end of its life, BLM uses the bond to pay for the cleanup.

But the problem is that the bond payments are often too low to cover the cost of reclamation. BLM regulations have minimum bond rates at $10,000 per lease, $25,000 for all wells in a state and $150,000 for all wells nationwide.

When a company abandons a well because it cannot afford to clean it up, the well becomes “orphaned,” and tends to fall to BLM. But the agency does not have the funds to handle a wave of orphaned wells because the bonds that drillers pay are too low. “Bonds held by BLM have not provided sufficient financial assurance to prevent orphaned oil and gas wells,” the GAO report found. For instance, GAO identified 89 new orphaned wells between July 2017 and April 2019, which could cost as much as $46 million to clean up.

More eye-opening was the fact that the agency identified nearly 3,000 wells that are at risk of becoming orphaned. Costs for reclaiming old wells vary widely, so much so that the GAO offered two scenarios: low-cost wells can cost $20,000 a piece, while high-costs wells can reach $145,000. For those 3,000 at-risk wells, the cleanup tab for the federal government could range from $46 million to $333 million.

Roughly 84 percent of bonds are likely too low to reclaim the wells to which they are linked. “Bonds generally do not reflect reclamation costs because most bonds are set at their regulatory minimum values, and these minimums have not been adjusted since the 1950s and 1960s to account for inflation,” GAO said. It can also be decades between when a bond is paid and reclamation is actually completed. Notably, the average bond that BLM has on hand has declined over the years on a per-well basis, from $2,207 per well in 2008 to $2,122 per well in 2018.
Related: The Largest Trading Busts In The History Of Oil

This may seem like a rather arcane problem, but it is significant for two reasons. First, the number of shale wells have proliferated in recent years, drilled at ever-increasing depths, which makes reclamation pricier. Second, the shale industry is indebted and the financial foundation could begin to crumble, leaving a growing mountain of orphaned wells for the government as companies go out of business. Already more than 190 shale E&Ps have gone bankrupt since 2015.

“I talk to those guys, all the fracking companies, on a daily basis. I'm very engaged in what they are doing with their business, and I completely believe that the current model is unsustainable,” Scott Forbes, vice president of the Lower 48 for Wood Mackenzie, told E&E News.

It is because of this heightened financial stress that concerns over a wave of orphaned wells are rising. As E&E News notes, New Mexico requires a bond of $250,000 for companies with over 100 wells, which only translates into $2,500 per well at best, a paltry figure compared to reclamation costs.

Ultimately, if the full cost of reclamation was required upfront, there could be a lot less drilling.

The GAO report came at the request of Rep. Raul Grijalva (D-NM) and Rep. Alan Lowenthal (D-CA), both of which come from states with abandoned wells. “The oil and gas industry’s boom-and-bust cycles can lead operators to drill wells when prices for oil and gas are high but can contribute to bankruptcies when prices are low,” the GAO wrote in a letter to the congressmen that accompanied the report.

GAO recommended the U.S. Congress grant BLM the authority to obtain funds from drillers to reclaim orphaned wells while also requiring the agency to develop a mechanism to do so. It also said that BLM should hike bond rates to reflect actual costs of cleanup.

Rep. Lowenthal introduced a bill last week that increased the minimum bond payment for federal lands.

By Nick Cunningham of Oilprice.com
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Offline BuddyJ

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Re: Fracker Debt Bubble
« Reply #469 on: September 26, 2019, 05:27:42 PM »
So this article really isn't about shale drillers going bankrupt and their wells being taken over by someone else after bankruptcy or whatnot, it is about orphaned wells? Orphaned wells have programs dedicated to handling them, and they are certainly too small. But that is a regulatory thing, and should have been cleaned up decades ago. Governmental and regulatory incompetence is the category this problem fits into.

Offline RE

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🛢️ Oil Giant Slashes Jobs Amid Shale Slowdown
« Reply #470 on: October 11, 2019, 03:40:18 PM »
https://oilprice.com/Energy/Energy-General/Oil-Giant-Slashes-Jobs-Amid-Shale-Slowdown.html

Oil Giant Slashes Jobs Amid Shale Slowdown
By Nick Cunningham - Oct 10, 2019, 4:00 PM CDT


Halliburton announced that it would lay off 650 workers across four U.S. states due to the slowdown in shale drilling.

The oilfield services giant blamed “local market conditions” for slashing payrolls. “Making this decision was not easy, nor taken lightly, but unfortunately it was necessary as we work to align our operations to reduced customer activity,” Halliburton said in a statement. The job cuts were concentrated in Colorado, New Mexico, North Dakota and Wyoming.

The cuts are not the first for Halliburton. Over the summer, the oilfield services company announced job cuts equivalent to 8 percent of its North American workforce. At the time, Halliburton CEO Jeff Miller said that the company would be “removing several layers of management” and that it would be “emphasizing a return on capital approach.” Notably, the company stacked idled equipment, as the market for oilfield services crashed amid a surplus of rigs and services.

In July, when Halliburton last cut jobs and sidelined equipment, investors cheered. “Kudos for being proactive on stacking equipment in this market versus fighting for share,” Angie Sedita of Goldman Sachs said to Halliburton CEO Jeff Miller on an earnings call. Halliburton’s share price soared by 9 percent on the news.

This time around, the stock bounce did not materialize. Sinking oil prices, a deeper decline in drilling activity and increasing skepticism from investors has put Halliburton – and other service companies – in a bind. Halliburton’s share price has fallen by more than half in the last 12 months.
Related: OPEC Chief Hints At Deeper Cuts In December

Pessimism is very apparent from both oil producers and the oilfield service companies. In the most recent quarterly survey from the Federal Reserve Bank of Dallas, anonymous comments from industry executives revealed a deep sense of anxiety. “U.S. oil production is about to fall significantly. The rig count has declined dramatically from one year ago (down 170 rigs), and our customers are not completing wells in order to save cash flow. This all equals a big shift down,” one executive said.

“Oversupply of hydraulic fracturing capacity and reduced activity by customers have put extreme pressure on pricing. Most hydraulic fracturing providers feel that the current pricing is unsustainable over the medium to long term,” another unnamed executive from an oilfield services company said.

The problem for the industry is that WTI is lower than it was a few months ago, and the prospect of a rebound is also questionable. The global economy continues to weaken, and successive cuts to demand forecasts are coming on a monthly basis. OPEC just lowered its demand numbers for the third month in a row, although only by a modest 40,000 bpd.

As Reuters notes, industrial demand has declined as the economy has weakened. Consumption of natural gas and diesel is off because of a recession sweeping over the manufacturing sector. U.S. oil production is not growing at the blistering rate that many analysts had expected, but it has flattened out at a time when demand has contracted.

The most important factor affecting this trajectory in the short run will be the outcome of the latest round of trade talks from the U.S. and China. At the time of this writing, there were mixed signals coming from both sides.
Related: Is This The Next $170 Billion Energy Industry In The US?

There is a bit of momentum for a modest trade deal that could stave off further tariffs. Trump said that he was set to meet with China’s vice premier on Friday, which raised speculation that there could be some sort of a breakthrough. At the same time, Chinese press said that there was no progress on negotiations. The Trump administration is also considering a more aggressive crackdown on Chinese companies and capital flows between the U.S. and China.

An accommodating and de-escalation could provide a jolt to oil prices, but because a grand bargain is extremely unlikely, it’s not clear that simply pushing off a planned hike in tariffs will be enough to rescue the deceleration in the global economy. For now, WTI is trading between $53 and $54 per barrel for November delivery.

Worse, oil futures for November 2020 are at just $50 per barrel, which is an indication that the market thinks things will only get worse next year. That is bad news for oil producers, and the oilfield service companies like Halliburton that support them.

By Nick Cunningham of Oilprice.com
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