One narrative is that US oil companies, displaying the usual plucky ingenuity, are finding ways to extract more and more oil from shale at lower and lower costs.
A different narrative says that they’ve been overstating the results and buring cash to maintain that illusion.
A prominent oil field servicing company, Shlumberger, with serious skin the game and every reason to spin things positively, also has to report to its own shareholders about future prospects.
They laid a couple of decent sized eggs in their most recent quarterly statement:
The first red highlight I’ve put in calls out the fact that more than half (54%) of total Capex is currently eaten up simply to cover the ferocious decline rates of the prior drilled wells. It should be noted that since the shale operators are currently cash flow negative as a group, that this represents a number far higher than 54% of cash flows.
Then they go on to observe that by 2021 total capex required to offset declines will rise to 75%!
If the price of oil remains where it is, there’s no doubt that this will represent more than 100% of cash flows from operations. Obviously any business concern that is spending more than 100% of its cash flows to generate more cash flows is a bankrupt concern. None of this even includes the idea of paying back debt and equity already secured. That’s extra.
The second red box highlights the fact that the precious sweet spots, termed “tier 1” agreage, are already seeing significant parent-child well interference. In other words, it’s all drilled up.
When the companies then are forced to move to tier 2 acreage, the spots are decidedly less sweet, and there are lower returns (i.e. less oil to be gathered) per well drilled.
Someday, when thoughtful future humans look back on all this, they’ll wonder why there was such a haste to rip all this tasty oil and gas out of the ground that it was done with economic losses and at such a furious pace that much of the associated gas had to be “flared” (burned uselessly into the atmosphere) because there was no infrastructure to gather it.
So it was burned.
The “unavoidable treadmill effect” is gathering speed in the shale space, and the only way out of it would be for the Federal reserve to begin buying up this bad debt and equtiy and letting it die on its books. They might do this, of course, as a “necessary” step to prevent reality from intruding unpleasantly on their dreams of infinite growth. We shall see.
All of this reminds me, sadly, of this:
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