Podcast: Play in new window | Download
Subscribe: RSS
Oil pumpjacks starting to suck oil instead of money. (You and I know, of course, that grasshopper pumps are not used in fracking, but have become a universal symbol for the oil bidness in the Mainstream Media, so there you go. And here you are.).
In the same sense that brave individuals are said to “fight” stage four cancer, the American oil industry has spent a harrowing year fighting reality. Since oil prices tanked last summer, the industry has drawn down its strategic reserves of whitewash, pig lipstick, shinola and embalming fluid to keep things looking good even as they were decomposing. They did a pretty good job, but then they’ve had a lot of practice.Their theory, apparently; when you’re kicking the can down the road, a myth is as good as a mile. Consider a brief compendium of the lies, damned lies and statistics the oil guys have sold the country in the past few years.
Myth Sold: The Oil “Revolution.” Hydraulic fracturing was a technological breakthrough that was going to make America number one in world oil production again, restore American energy independence and guarantee American hegemony for (pretty much) ever.
Fact: Fracking is an extremely expensive and environmentally destructive way to wring the last few drops of oil out of source rock. While it temporarily increased US oil production, it never equalled our peak production of 1970, and while it temporarily decreased our oil imports (which are now on their way back up), it never threatened our status as the world’s largest importer of oil.
Myth Sold: Technology Will Save Us. When oil prices cratered, the frackers reassured their investors, lenders and us that they could handle it. They had improved the fracking technology so much they could continue to make a profit producing $50-a-barrel oil.
Fact: The much-hyped changes were just so much tinkering, and profits remained illusory. Virtually every company involved in the fracking patch had negative cash flows from the beginning. Operating profits from the wells were wiped out by the costs of replacing the wells every three or four years, because of their hideous depletion rates. Conventional wells produce for 20 years, five time longer than fracked well.
Myth Sold: Efficiency Will Save Us. Like the old line about balancing the federal budget by eliminating waste and fraud, this sounds reasonable but never happens. The frackers concentrated on the “sweet spots,” the small areas of their holdings with the best returns, and they started placing four drilling rigs, instead of one, on each pad.
Fact: Thus their production actually increased for a few months after the price crash. But, well productivity is flatlining now and with the rig count down by about half, new wells are not being brought on line and production has started to fall sharply.
Myth Sold: Hedging Will Save Us. For the first year or so of depressed prices, frackers benefited from hedges — contracts to sell their product at last year’s prevailing prices. The theory was, prices would be back up before the hedges ran out.
Fact: The hedges have run out. The people who used to take the other side of the hedges are not answering frackers’ phone calls. Maybe because their phones have been disconnected.
Myth Sold: Junk Bonds Will Save Us. And so they did, for a while. Infusions of cash — from, among others, vultures hoping to acquire cheap oil company assets and ride the resurgence to a new, new oil revolution — in the form of junk bonds, leveraged loans, sub-prime loans, covenant-lite loans, etc., kept the bubble inflated.
Fact: What resurgence? Banks and other lenders, reluctant to recognize the mounting losses, continued to pretend that the oil companies whose assets’ worth had been cut in half were still solvent. Nothing wrong here! Why do you ask?
New Fact: Right now, the banks are conducting a mandatory review of the worth of the assets pledged against their fracking loans, that is, the value of the oil the companies still have to extract. This spring, the banks assessed the oil at last year’s prices, and with fingers tightly crossed rolled over the loans.
It was a stretch then; can they do it again, eke out a few more months of myths? On the one hand, maybe so, denial is not just a river in Egypt. On the other hand, good as they have been, the sellers of the myths appear to be sold out.
I am looking for year over year production (e.g. October 2015 v October 2014) in the Bakken to be down by the time October figures come out in December. We’ll see.
This is an indication of the disastrous financial aspects of the fracking frenzy. Noticeably missing is the damaging impact on ground water and other aspects of the living conditions in those regions where fracking is being carried out. Of course, these victims do not have as much say as moneyed investors, but they have more to lose, their well being.
One aspect that wasn’t mentioned in your excellent article, Mr. Lewis, is the fact that fracking has turned what was once “solid ground” to “Swiss cheese” and has thereby caused earthquakes – even in regions where they’ve rarely had a rumble and in other areas far removed from the operation. The usual allowance for investment in oil trumping all concerns has led us to our current state – on the road to extinction – and it’s getting worse by the day now. Nobody thought about all the gases that would rise up through those undrground cracked and broken rocks – like methane and hydrogen sulfide – that have deadly effects on life and infrastructure (among others). Well, now it’s too late to do anything about it and we’ll continue to suffer the consequences.
even human techno-cornucopianism cannot mitigate the mathematics of infinite growth not being possible on a finite planet!
Ref: Death Watch in the Oil Patch
Tom,
The Tar Sands fiasco in Alberta has also run its course. It is now down to the point of taking nearly a barrel of oil to get a barrel, and the barrel they get is a tar sludge that won’t go down a pipeline without dilution with another expensive hydro carbon. Tar Sands were never profitable, like fracking was never profitable. So, operations are folfing up leaving an environmental nightmare in its wake that the Canadian citizens are going to have to pay for. So, the hyping of the expensive XL Pipeline goes on despite the fact that there will be nothing to pump down it soon.
The financial “industry” talked savers like this woman into sinking everything she had into shale:
http://www.msn.com/en-us/money/markets/new-wave-of-oil-bets-wipes-out-billions-in-investor-savings/ar-BBms4OX?li=AA4Zjn
The broker must not have heard of the concept of appropriate investments – putting a widow supporting two young kids into an oil and gas partnership… come on…
But, but… isn’t THAT the AmeriCON way?!?!? Oh well, it doesn’t really matter since a couple decades hence Mars will be more habitable than this rock! Of course, getting there is a whole-nother ball of wax, tain’t gonna’ happen.