Oil company executives and Wall Street shysters were made for each other. The shale oil boom is built upon lies, misleading projections, false data, and bad math. The CEOs of shale drillers have only one purpose – to get rich. The easiest way to get rich is to lie about the potential, pump your stock price up, pay yourself with stock options, and sell the overinflated stock before the truth is revealed.
To count as proved reserves to the SEC, companies must have “reasonable certainty” that the oil and gas will be extracted from existing wells and those scheduled to be drilled within five years. The forecasts are based on fuel prices, geology, engineering and the performance of nearby wells. Planned wells must be economically and technically viable.
The amount of reserves they put into official SEC documents is 80% less than the figures they tell stock investors. I wonder why? Do you think they would be more likely to lie to the SEC or to muppet investors? The energy independence morons never address the “economically & technically viable” aspects of extracting shale oil. If it costs you more to extract the oil than you get by selling it, you won’t extract it.
We are nearing the point where extracting shale oil is no longer profitable enough for drillers to drill. Due to the worldwide recession which is spreading across the globe, oil prices have plunged from $100 per barrel to $85 per barrel. If prices drop below $80 per barrel, the shale oil miracle will become a shale oil bust. But liars gotta lie. It’s the American way.
Let me get this straight:
We are so desperate for alternatives that we use food for fuel even though it takes more energy to produce than the new product produces. (Takes approx one unit of energy to produce one unit of ethanol – which only has 85% of the original energy).
Then we decide that coal is bad, so close down our plants (thus increasing costs) and allow our natural resources to be sold around the world at lower price than we can sell it here.
Now we are going to take pie-in-the-sky guesstimates and convince a couple (corrupted) CONgress critters to allow these companies to pump the oil beneath our feet and sell it elsewhere, all while spending trillions to “defend” Arab oil fields?
And somehow this is “good” for the country?
Buffett was sooooooooooo right. We are going to wake up sharecroppers paying tribute to WDC and China.
Nothing makes sense anymore. I’m beginning to doubt it ever has, and accept that it is just my own knowledge that has changed, not the underlying situation.
Sell it all to China folks. We don’t need no stinkin’ pipelines, or resources, or non-gubment/wall st jobs.
But, but, but I thought we were on the verge of energy independence.
Bob.
As Fracking Enters A Bear Market, A Question Emerges: Is The Shale Boom Built On A Sea Of Lies?
Submitted by Tyler Durden on 10/10/2014 12:12 -0400
One of, if not the biggest contributors to the improving US trade deficit and thus GDP (not to mention labor market in select states) over the past several years, has been the shale revolution taking place on US soil, which has led to unthinkable: the US is now the biggest producer of oil in the world, surpassing Saudi Arabia and Russia. Which is great today, but what about tomorrow?
It is here that problems emerge according to Bloomberg’s snapshot of the shale industry. In “We’re Sitting on 10 Billion Barrels of Oil! OK, Two”, the authors look at the two-tiers of reporting when it comes to deposits that America’s fracking corporations allegedly sit on, and find something unpleasant:
Lee Tillman, chief executive officer of Marathon Oil Corp., told investors last month that the company was potentially sitting on the equivalent of 4.3 billion barrels in its U.S. shale acreage. That number was 5.5 times higher than the proved reserves Marathon reported to federal regulators.
Such discrepancies are rife in the U.S. shale industry. Drillers use bigger forecasts to sell the hydraulic fracturing boom to investors and to persuade lawmakers to lift the 39-year-old ban on crude exports. Sixty-two of 73 U.S. shale drillers reported one estimate in mandatory filings with the Securities and Exchange Commission while citing higher potential figures to the public, according to data compiled by Bloomberg. Pioneer Natural Resources (PXD) Co.’s estimate was 13 times higher. Goodrich Petroleum Corp.’s was 19 times. For Rice Energy Inc., it was almost 27-fold.
Fracking 101: “Predicting how much oil can be pumped out of shale has been controversial since the boom began about a decade ago. Companies combined horizontal drilling with fracking, or hydraulic fracturing. Fracking involves blasting water, sand and chemicals into deep underground layers of shale rock to free hydrocarbons. Innovators such as Oklahoma City-based Chesapeake Energy Corp. (CHK) said that drilling vast expanses of oil-soaked rock formations is more predictable than the traditional, straight-down method of exploration. Regulators agreed and requirements were loosened starting in 2010.”
Furthermore, as tech companies have non-GAAP to hide all the nasty “expense” stuff, energy companies rely on probable and possible.
Energy companies also lobbied the SEC to let them file more speculative estimates, known as probable reserves and possible reserves. Only three companies take that option, according to data compiled by Bloomberg. The rest report only proved reserves to the SEC and save their other estimates for public presentations, which the SEC doesn’t supervise.
Now the discrepancy between the two estimation methodologies is hardly new: every serious investors in the E&P space has known about the two-tier bookkeeping system for years. The problem, however, is well laid out by John Lee, one of University of Houston petroleum engineering professors for hire: “They’re running a great risk of litigation when they don’t end up producing anything like that. If I were an ambulance-chasing lawyer, I’d get into this.”
The reason why no ambulances were chased for the past 6 years, ever since the shale boom truly took off, is that this roughly corresponds to the time when the Fed unleashed its QE on the world, and boosted stock prices to record levels across the board, including those of shale plays. As a result, since fracking investors saw their stocks also rise to record highs, they had no reason for complain, even if the surge in market cap may have had little to do with the actual underlying fundamentals, among which level of reserves, and everything to do with a very different type of liquidity, that emerging from the Fed’s printer.
But now things are rapidly changing, the commodity space is getting, pun intended, fracked, E&P companies across the board are sliding, and as of today, the shale space just entered a bear market.
And since investors take to losses with far less enthusiasm and stoic patience than paper profits, artificial as they may have been, they will soon start looking for scapegoats. They will find these were right in front of their eyes. To wit:
Additionally, here is what the abovementioned ambulance chasers will be closely looking at in the coming weeks and months unless the shale stock plunge doesn’t reverse quickly.
Marathon’s Tillman, who was speaking at the Barclays Plc CEO Energy-Power Conference in New York on Sept. 3, said there are “risk and uncertainties that could cause actual results to differ materially from those expressed or implied by” his comments. Many company presentations remind investors that publicly announced estimates are more speculative than the numbers the drillers file with the SEC.
Figures the company executives cite during presentations “are used in the capital allocation process, and are a standard tool the investment community understands and relies on in assessing a company’s performance and value,” said Lisa Singhania, a Marathon spokeswoman. The Houston-based company’s shares have risen 1.6 percent in the last year.
The SEC requires drillers to provide an annual accounting of how much oil and gas their properties will produce, a measurement called proved reserves, and company executives must certify that the reports are accurate.
No such rules apply to appraisals that drillers pitch to the public, sometimes called resource potential. In public presentations, unregulated estimates included wells that would lose money, prospects that have never been drilled, acreage that won’t be tapped for decades and projects whose likelihood of success is less than 10 percent, according to data compiled by Bloomberg. The result is a case for U.S. energy self-sufficiency that’s based more on hope than fact.
The SEC is keeping mum, realizing very well that it is suddenly sitting on the next powder keg:
Judy Burns, a spokeswoman for the SEC, declined to comment on what drillers say during investor presentations.
And this is where companies have gotten into hot water:
Many of the companies use their own variation of resource potential, often with little explanation of what the number includes, how long it will take to drill or how much it will cost. The average estimate of resource potential was 6.6 times higher than the proved reserves reported to the SEC, the data compiled by Bloomberg News show.
This is the E&P equivalent of annualized, pro-forma, adjusted EBITDA, a metric that is fully made up on the spot to exclude anything and everything and make the subject look more attractive. In other words, lipstick on a pig.
It is also known as the “Bill Gross effect”: everything was great as long as he was making money. And then things all hell broke loose.
More:
Several companies, including Sanchez Energy Corp. (SN), don’t provide a total estimate. Instead, they publish variables such as the number of well locations and the estimated output from each one. Analysts often use these figures to independently compute the total. Even though Sanchez Energy provides the variables for analysts to calculate its resource potential, the Houston-based company doesn’t publish a total estimate. Executives debated whether to include one and decided against it, said Gleeson Van Riet, senior vice president for capital markets and investor relations.
In practical terms, the discrepancies are quite glaring:
The investor presentation by Canonsburg, Pennsylvania-based Rice Energy shows 2.7 billion barrels. Rice, which went public in January, reported 100 million barrels to the SEC in March, records show.
At Pioneer Natural Resources, the number they cite to potential investors has increased by 2 billion barrels a year in each of the last five years — even as the proved reserves it files with the SEC have declined.
The rising number is “a game changer for this company,” said Sheffield, the CEO. “It’s a game changer for this country.”
Curiously, just like in the great Herbalife soa opera, the politicians are involved for one simple reason: they can collect lots of money to give their stamp of approval even if they really have no understanding or idea what they are vouching for.
Pioneer’s numbers aren’t misleading; they’re conservative, Sheffield said. He said he’s shared them with Senators Mary Landrieu of Louisiana and Lisa Murkowski of Alaska, the Democratic chair and Republican ranking member, respectively, of the Senate energy committee.
“Obviously it’s helped us in regard to making headway on convincing people to lift the export ban,” Sheffield said. “We want to convince them that we have this great resource. We don’t want it trapped here in the U.S. That’s for the public, the administration and Congress. So if we’ve got this great resource, why don’t you allow us to export it?”
The message is getting through. While Landrieu said she favors more study, Murkowski said she supports ending the ban.
The one message that is not getting through, however, is that no matter if Obama endorses one reserve estimation metric or another, if and when the P&L crash comes, nobody will be able to stop the onslaught of lawsuits that will immediately hone in on the weakest link, which in this case is clearly the ambiguous and two-tiered public data.
Some are already getting a sense of which way the wind is blowing:
In August, Lee led a workshop in Houston on the best practices of reserves estimation. The audience in the ballroom of the Hotel Derek included engineers for shale drillers such as Marathon, Continental and Rice. Pamela Allen, a senior reserves coordinator for Marathon, raised her hand and told Lee that she was worried that using outsized forecasts in public presentations would run afoul of the SEC and “come back to haunt us.”
Singhania, the Marathon spokeswoman, said she was unable to comment on Allen’s remarks without seeing a transcript.
“If a lot of people get burned — and I think a lot of people can and will be burned — by these numbers in the investor presentations, there may be a push by investors to get the SEC to do something about it,” Lee said during the workshop.
Actually, considering the gross incompetence of the SEC, the corrupt, co-opted regulator (for hire) may do something… in just about a decade. In the meantime, the most vibrant US industry may go from boom to bust in a heartbeat, as soon as its is mired in litigation once shareholders realize that the stock gains of the past half-decade will not continue in perpetuity. One look at the shale index chart above and the alarm bells should be going off.
Thank goodness we have ethanol. : ))
EF
WE ARE ON TRACK TO BE THE BIGGEST OIL PRODUCER N THE WORLD SAYS THE OIL COMPANIES BUT ADMIN SAYS WHOLE ON THERE A COTTON PICKING MIN.I AM TRYING TO FIGURE OUT WHO IS RIGHT.MAY THEY MEET SOMEWHERE IN THE MIDDLE?
I wonder how long oil will stay under $90 per barrel when Saudi Arabia needs $93 to breakeven?
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I live on the edge of the great fracking miracle. To the north in Greely CO it starts and runs strong all along the Front Range to Canada. It has brought short term economic boom to a decent swath of middle and upper middle class Americans in these turbulent times. What is noticeable for me is the large amount of smaller operations participating. Both in producing/drilling and mineral rights holders. It seems akin to any of the past “rushes” in western history. Probably will last about as long too. Chunka,Chunka, Chunka we will get all the last little bits.
The money in oil shale was made via financial engineering, for example, buying and selling of land leases. The well are expensive to drill and well head pressures drop off at alarming rates. It’s a scam!!
ottomatik where do you live Eaton, Ault? I grew up in Greeley. All my family is from Arkansas but Dad moved us to Greeley when I was in 3rd grade. I did not get back to the land of my ancestors until I was an Adult.
The entire Culture of Northern Colorado (Weld County) has changed. I personally know the developer who’s buying up all the farms and selling the water rights to Denver and surrounding Burbs. It will soon turn back to grassland. The Front range does not have enough water to support the growing population.
Oh my memories, Colorado was a Great place to grow up in the 70’s. John Denver and Rocky Mountian High. I was there walking through Aspen with my high school buddies tearing the slopes up. We were on top of the world, with time, and endless possibilities. Oh the indiscretions of youth, what ride.
We started out with the topic of shale and end up with Sensetti’s À la recherche du temps perdu or, In search of lost beavers.
Sensetti- I have retreated to the mountains SW of Denver. I am sure the fracking miracle is anything but. For now though, there is a lot of cash chasing it. That and Weed. Greely is booming my brother lives there and fracking is paying good for many.
El Coyote/ Sensetti- ” In search of lost beavers. ” If the lost ones cannot be found, there is a plethora of new ones. Colorado appears to be rich in Energy, Weed, and 20 to 30 something Beavers, chasing Energy and Weed.
The US shale industry presents itself to investors as something it is not: it hugely overestimates its reserves, it carries incredible amounts of debt, there is cash flow but it doesn’t even begin to cover expenses, and its wells, which cost $8-20 million a piece to drill, even on average deplete faster than you can say ‘Christmas next year’.
Meanwhile, politics and media sing the Hossanah of energy independence, which in turn makes oil and gas prices slump to such a degree that shale becomes even less viable than it -obviously to us – already is. But as long as you’re legally allowed to overstate your reserves 27-fold, you can squeeze this balloon for another year or so, right.
It all makes me think that if people don’t see through this nonsense, they get what they deserve and perhaps need in life. But as always, it’s the little people who will end up paying up. And I don’t like that one bit. And if this is what America has become, a giant Ponzi, someone should raise their voice before it gets completely out of hand. If this kind of spiel is legal, there’s something deeply wrong with the law.
Raúl Ilargi Meijer
TE
“Nothing makes sense anymore. I’m beginning to doubt it ever has, and accept that it is just my own knowledge that has changed, not the underlying situation.”
You don’t understand “capitalism.” The way it works is not what is the most profitable money-wise, the way it works is what allows the greatest CONTROL over the masses.
That is why only the WORST possible outcomes are promoted.
Admin- I totally agree with your analysis and points, I just know a lot of “folks” who are making good money right now. There are wells all over and I talk with them, most saying they run from 3-7 years, mostly Natgas. Who is getting fleeced to pay the royalties and drilling operators and pipe fitters I dont know, but my peeps are bringing it in. Thanks for the articles it is nice to be exposed to info on differing scales.
If The Oil Plunge Continues, “Now May Be A Time To Panic” For US Shale Companies
Submitted by Tyler Durden on 10/14/2014 18:11 -0400
Over the past 5 years, the shale industry, fabricated or real reserves notwithstanding, has been a significant boon to the US economy for four main reasons: it has been the target of billions in fixed investment and CapEx spending, it has resulted in tens of thousands of high-paying jobs, its output has been a major tailwind for the US trade deficit, and has generally been a significant contributor to GDP (not to mention various Buffett-controlled or otherwise railway corporations). And perhaps, most importantly, it has become a huge buffer to the price of global oil, as the cost curve of US shale is horizontal, with a massive 10,000 kbls/day available within pennies of $85/bl.
Goldman’s explanation:
We believe that the vast reserves that have been opened for development through shale oil in the US have flattened the cost curve meaningfully, at around a US$85/bl Brent oil price. We estimate shale reserves from the top three fields in the US onshore (the Permian, Bakken and Eagle Ford) at around 91bn boe, which to put it in context, is equivalent to roughly one third of Saudi Arabia’s current stated reserves (ZH: this number may be vastly overstated). Most of this resource has become available in the past five years, with few barriers to exploiting the reserves. Production in the US as a result is growing strongly, by more than 1mbpd currently, and we expect this pace of growth to continue over the coming three years as capital continues to be drawn in to these developments. The consequence is that costs of production and E&P capex/bl should stabilise as the marginal cost of production remains stable. We believe that shale oil has become effectively the marginal source of supply, providing the bulk of non- OPEC production growth. This is also the key driver of our oil price view: we continue to expect Brent oil to stay at c.US$100/bl for the coming few years.
For once, Goldman is spot on (even if their Brent price target may be a bit off): with shale oil profitable only above its virtually horizontal cost curve, it means that a whopping 11,000 kbls/day are available as long as Brent is above $85, a clear “red line” for all OPEC producers.
The red line is conveniently shown on the chart below:
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However, should the price drop below $85, and very bad things start to happen, not the least of which is what we warned about in May that “Shale Boom Goes Bust As Costs Soar.” That was when Brent was $110. It is now at $85 and sliding lower.
As a further reminder, we noted two days ago that shale is now in a bear market:
But that is nothing compared to the no bid market the (very, very levered) shale companies will find themselves in if and when, for whatever reason, Brent drops below $85 to a price where only Qatar is profitable on the global Brent cost curve.
So while we understand if Saudi Arabia is employing a dumping strategy to punish the Kremlin as per the “deal” with Obama’s White House, very soon there will be a very vocal, very insolvent and very domestic shale community demanding answers from the Obama administration, as once again the “costs” meant to punish Russia end up crippling the only truly viable industry under the current presidency.
As a reminder, the last time Obama threatened Russia with “costs”, he sent Europe into a triple-dip recession.
It would truly be the crowning achievement of Obama’s career if, amazingly, he manages to bankrupt the US shale “miracle” next.
I agree with Durdans positive analysis of the Goldman Time Point, 3-5 years then…meh, that was nice. Most of the money will be made by boots on the ground getting it out, most of the “investor” class will likely be treated to one of Admin’s Muppet Pic’s.
We should probably save these last bits for a Global Melt Down and the resulting emergency that follows.
All the following jobs have gone into and out of a boom since 1998, and these are only the ones I’m intimate with, there are probably more.
Recruiters, record numbers needed in 1998, shortage everywhere, by 2001 there were individuals with shingles out all over trying to mind Monster for the same million candidates and shrinking jobs. Now they are high-end/specialty and a very niche business, or temp, or long gone. Many went into mortgage banking.
IT/Technology. 1998, setting their own salaries, hours and perks. Common salaries went into the six figures if you had specifically wanted experience in programming and network buildout. Plus Y2K. By 2001, going into government “security” (police state) or you were out. The majority of computer experts that were over 40 at 2000, ended up out of jobs or working for $11 an hour for Geek Squad.
Manufacturing. While the country boomed with real estate and the security state, manufacturing quietly closed shop and left. Totally covered up by the end-sale companies hiding domestic vs foreign component switch. Silent theft that continues as the industry continues to contract in size while the gross GDP continues to increase. Same exact thing happened in tech too.
Realtors, mortgage brokers, appraisers, home builders, home flippers, home decorators. We all still remember this one. Riding high in 2006, out of business in ’08.
To think the shale miracle will be anything different is to ignore history, math and geology.
But to talk to many an “informed” fellow, you would think that bombing ISIS and shale oil with a couple windmills and ebola vaccine and wow, all will be 1990 again.
Brent is dropping because the middle class, the world over, is taking it in the ass from the elite, the poor, and the PTB.
Bad things this way come. Invest in illusions at your own risk.