
Frackers Face Harsh Reality as Wall Street Backs Away - glassworm
https://www.wsj.com/articles/frackers-face-harsh-reality-as-wall-street-backs-away-11551009601
======
panarky
I'd love to see an unbiased analysis of the long-term economics of an
individual shale well.

There's some data that indicates volumes drop off pretty dramatically over
time at the individual well level. If this is true, then it requires perpetual
investment of new capital in new wells just to maintain constant production
volumes.

The public data isn't great because old wells are mixed in with new wells and
so it's hard to see how production changes with the age of the well.

Here's an example from Bakken
[https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats...](https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats.pdf)

You can see that in 2016 the total number of producing wells didn't change
much, which probably means new wells weren't being drilled, so the data is
mostly from older wells. Daily production per well drops quickly from month to
month.

Then in 2017 and 2018 the growth rate in total wells more than doubles, and
the production per well also increases, probably because new wells produce
much more than existing wells.

If this is true, then it looks like the shale boom is sustained by heavy
investment of fresh capital. When interest rates rise or credit dries up, the
shale boom could quickly turn to bust.

~~~
D_Alex
I would love to show you an unbiased analysis of long-term economics of
individual shale wells, I have a few. But, confidentiality.

I can say that:

First of all the picture is quite complex, and of course not all wells are the
same. Second - talking "in general" \- the break-even oil price for shale oil
wells has declined quite dramatically, from around $80-100 in 2014 to $40-50
today, with current wells costing less and producing more than wells of 4
years ago. However, third: The improved economics are _not_ primarily a result
of technological advances. Rather, the lower well cost is largely due to lower
rig rates and cheaper and more efficient labour. The lower rig rates are not
sustainable in the long term, they are low only because it is better to have
the rig working and earning at least a little money (not enough to justify
buying a new one in the future) than rusting away in a yard. Labour
productivity gain is partly explained by the fact that the only the most
experienced and efficient crews are now working, and higher well productivity
is partly due to only drilling the very best prospects. The quality of crews
and prospects is a barrier to raising production further.

In summary, I believe the shale boom is an economic oddity. Whether it
continues for any length of time depends on the oil prices. At the current
prices, it is not sustainable.

Corollary: If the oil price is effectively set by the _true_ cost of shale
oil, we should expect that the price of oil will rise to $80-100/bbl in the
medium term.

~~~
ianai
How many years do the laborers have left? Is it less than the medium term of
raising prices to 80-100/bbl?

I’m trying to figure out whether the current situation is likely to grow
prices relatively linearly or more suddenly - if technological improvements
aren’t possible.

~~~
D_Alex
>How many years do the laborers have left? Is it less than the medium term of
raising prices to 80-100/bbl?

I don't think the ageing workforce is a huge problem, if that is what you are
asking. The labour pool can smoothly absorb new entrants to replace the
retirees.

The problem is that if a rapid expansion of workforce is needed - eg in
response to increased demand for rigs if oil prices jump into the $80-100/bbl
range - the quality of the labour pool will suffer, the productivity will
decline and costs will increase.

Are the prices likely to grow suddenly? In some scenarios (eg effective OPEC
action, ME conflicts) - certainly. More interesting is what ought to happen in
a "business as usual" scenarios. I see it as a race between the decline in
production from major "conventional" fields, the growth in energy demand esp
from India, China and the "little tigers", and the transition to renewable
energy and the "electric economy". My pick is that the speed of the transition
to renewable energy will not be sufficient to compensate for the other two
factors, and that we will see an increase in the oil prices to $80-100/bbl by
2020, which will enable new production to be brought on stream profitably.

------
athollywood
Speaking as an employee at one of the largest independent E&P’s, we haven’t
relied on debt and equity financing in the last few years because we have had
enough free cash flow. The only thing slowing us down really is things like
pipeline takeaway and labor shortage.

~~~
imglorp
This might be an unpopular idea among the fossil money and investment people,
but as a victim and witness to pipeline activity by an unscrupulous
corporation, I would suggest that there are a mountain of unstated risks and
hidden costs. This example [1] pipeline has state and local criminal and civil
legal issues, spills, runoff, poisoned wells, sinkholes, inestimable property
value loss, loss of use, an explosion, and all other kinds of malfeasance.
This line passes literally within feet of homes and schools, and I don't think
we've begun to see the true danger: the stated blast zone is 1000 feet and the
"self" evacuation zone is 3 miles [2]. Someone is going to get hurt.

Perhaps the biggest hidden cost has no price tag, which is the damage to
democracy in the form of bad precedent that occurs when a big corporation
steamrolls local governments, gets itself declared as a public utility, and
begins to eminent domain and wreck everything in sight, literally bulldozing
through suburbs. These are homes and businesses a dozen feet from the line:
[3,4,5,6]. This is not CNG, it's other more explosive fractions. It's a
travesty of injustice.

1\.
[https://stateimpact.npr.org/pennsylvania/2018/12/24/spills-s...](https://stateimpact.npr.org/pennsylvania/2018/12/24/spills-
shutdowns-and-legal-challenges-a-tumultuous-year-for-mariner-east-2/)

2\. [http://marinereast2.com/index.html](http://marinereast2.com/index.html)

3\.
[https://www.google.com/maps/@40.0571635,-75.6675604,3a,75y,1...](https://www.google.com/maps/@40.0571635,-75.6675604,3a,75y,170.37h,80.4t/data=!3m6!1e1!3m4!1sLKgDUrAPYcuT4bkoW-2UhQ!2e0!7i13312!8i6656)

4\.
[https://www.google.com/maps/@39.9789588,-75.5377762,3a,75y,2...](https://www.google.com/maps/@39.9789588,-75.5377762,3a,75y,25.45h,84.69t/data=!3m6!1e1!3m4!1sCbQch26KU8DBOTRQmvVB2g!2e0!7i13312!8i6656)

5\.
[https://www.google.com/maps/@40.0390132,-75.6366127,3a,75y,1...](https://www.google.com/maps/@40.0390132,-75.6366127,3a,75y,123.72h,77.42t/data=!3m6!1e1!3m4!1sF8chYn-5tTd9EQeTqw3uvQ!2e0!7i13312!8i6656)

6\.
[https://www.google.com/maps/@39.9874756,-75.5431866,3a,75y,3...](https://www.google.com/maps/@39.9874756,-75.5431866,3a,75y,314.74h,85.67t/data=!3m6!1e1!3m4!1sfs-
KdQjsyz9hKXiNDBTuDA!2e0!7i13312!8i6656)

~~~
athollywood
Not disagreeing with any of what you said, however I encourage you to consider
the alternatives of pipelines. Rail and trucking typically have a
significantly higher spill rate.

[https://www.iaee.org/en/publications/newsletterdl.aspx?id=46...](https://www.iaee.org/en/publications/newsletterdl.aspx?id=460)

~~~
imglorp
That's a great discussion to be had, as well as the costs of burning stuff in
general versus alternatives.

What I wanted to emphasize was, (1) we never had that tradeoff discussion at
any level of government or community; it was forced on us, (2) there was
substantial undisclosed activity that investors are probably not aware of, and
(3) the overall shitty behavior by the company will have many long term
negative effects on how we do public works.

------
adventured
Wall Street financing is no longer necessary for the fracking boom, the majors
have heavily consolidated the fracking industry over the last five or six
years. That consolidation continues apace.

The largest land owners in the Permian are now: Occidental, Exxon and Chevron.
Ten years ago it was a very diverse ownership group of independent operators
and speculators. The majors will keep buying until there are few small players
left. Exxon doesn't need to go begging to Wall Street to give it a few hundred
million dollars to finance more frack wells.

For example, the richest oil wildcatter in the US might soon be this man:

[https://www.bloomberg.com/news/articles/2018-11-27/wildcatte...](https://www.bloomberg.com/news/articles/2018-11-27/wildcatter-
turns-big-dog-into-fortune-as-oil-giants-weigh-bids)

Royal Dutch Shell, Exxon and Chevron would love to acquire his 329,000 acres
in the Midland Basin in the Permian. Estimate on the price tag: ~$10-$15
billion.

In mid 2017, Exxon bought 250,000 acres in the Permian from the Bass family
for $5.6b to $6.6b.

[https://news.exxonmobil.com/press-release/exxonmobil-
acquire...](https://news.exxonmobil.com/press-release/exxonmobil-acquire-
companies-doubling-permian-basin-resource-6-billion-barrels)

Over the last four quarters, Exxon + Chevron have produced $40 billion in
operating income. And that's with modest oil prices.

The fourth largest land owner in the Permian, is Apache, with 1.6 million
acres (with ConocoPhillips in fifth). Apache's market cap is a mere $12b. It's
obvious what's going to happen there. Exxon's market cap is $332b - they're
just going to keep on acquiring the fracking industry (they used their well-
valued shares - high for the energy industry - for the Bass deal). Companies
the size of Exxon and Chevron can trivially afford to explore and prime wells
in price downturns, then unleash them in upturns.

~~~
rhizome
This is exactly what I was wondering. "Couldn't this just mean that they're
self-sufficient now?"

------
burger_moon
Interesting I have friends and family who work at sand mines that supply the
sand for fracking. The companies they work for are still expanding and they
have more overtime available than they can take. I'm not sure on the long term
future of fracking but in the short 5-10 year span it doesn't appear to be
going away based on how much infrastructure these companies are adding right
now and how much land they're buying.

~~~
ipsum2
Prediction: this piece is just fearmongering, in 1-2 years we will see
fracking increase, not decrease.

~~~
adventured
It's something akin to talking about the problems independent burger stands
are having while McDonald's is taking over.

US oil output is projected to rise to 16-18 million barrels per day over the
next decade approximately, from 12.x million expected in 2019. At 16m barrels
per day, the US will be producing 50% more oil than Saudi Arabia. To do that
WTI oil merely needs to remain above roughly $50. At $70+ sustained oil, US
production will add a million barrels per day per year.

On the flip side, sustained $30-$35 oil would be a catastrophe for OPEC and
Russia. They'll cut and or restrain production expansion as necessary to keep
oil over a minimum price. Saudi needs $65-$70+ oil to avoid epic budget
shortfalls going forward. Russia needs it for spending to placate domestic
popularity re Putin. They don't like giving up demand growth to the US,
however for now they're not really net suffering a loss of output so much as
ceding global growth to US shale. They'll keep doing that for quite a while
yet, while hoping US output plateaus in the coming years.

~~~
Fjolsvith
So the higher the oil price, the greater the US market share growth. What a
nightmare for OPEC and Russia.

------
Bluestrike2
[https://outline.com/euZR5L](https://outline.com/euZR5L)

------
00N8
Also, a lot of people want to ban fracking

Personally, I'm not for an outright ban, but 100% public disclosure of the
fracking chemicals used should be required at the very least

------
SiempreViernes
I guess its not surprising the word "climate" doesn't show up in this text,
but I still find it depressing.

~~~
toomuchtodo
Solar and wind aren't deployed rapidly across the world because of climate
change; it's because they're stupid cheap compared to other generation
technologies.

While I'd love for more people to embrace the urgency of climate change, using
economic self-interest is just as good.

~~~
polotics
Really? Please look up some references. Eg.
[https://jancovici.com/en/](https://jancovici.com/en/)

~~~
toomuchtodo
Germany and other nations that poured subsidies into renewables early on (and
are to be commended for their economic sacrifice for doing so) are outliers.
The rest of the world caught up as soon as renewables were cheaper than fossil
fuels. Capital markets don't have feelings.

Humanity lucked out that solar and wind costs were driven down as rapidly as
they were through manufacturing scale. We'd be screwed otherwise ("ie business
as usual carbon output estimates").

Somewhat related but unrelated: it's not bad if fracking goes south. It'll
drive the price of natural gas up, which will make existing nuclear and
existing/new renewables more cost competitive. It'll also drive adoption of
energy storage faster. We _want_ natural gas prices to rise, since we're not
going to internalize the CO2 emission cost through regulation. This allows for
market forces to kick in that are beneficial to climate change mitigation.

Disclaimer: I have brokered one tax equity partnership arrangement for a solar
plant rated @ >1MW (Indianapolis suburbs), and have done my research.

~~~
Gibbon1
> Humanity lucked out

Humanity didn't luck out. The Chinese communists invested heavily in solar
while the US was wasting money on fracking.

~~~
Spooky23
That’s just a clueless statement. How are people going to heat their homes?

Solar is amazing, but isn’t the be all end all.

~~~
toomuchtodo
Heat pumps and weatherizing. Likely some homes in very cold climates will
still need natural gas service (propane tanks, more likely) for emergency heat
when the polar vortex hits, but a tight envelope and an efficient heat pump do
most of the heavy lifting.

~~~
scottlocklin
You live in the Bay Area, don't you?

No, heat pumps (which take energy; duh) and "weatherizing" are not going to
heat houses in Canada or Maine.

~~~
toomuchtodo
One of my properties is in northern Illinois, no problems running off a heat
pump almost year round. Natural gas bill is about $150/year for monthly
service connections and rare use.

I’ve never lived in California.

~~~
roenxi
Your comment omits an important but interesting detail here - how common is
"rare use" and what is it being used for?

~~~
Spooky23
Air source heat pumps become less effective as the temperature drops. At 17F,
you lose about 25% of BTU capacity as compared to 48F.

Hot water is another huge use — it’s really expensive to use electricity for
that purpose.

~~~
toomuchtodo
Heat pump water heaters exist.

"Heat pump water heaters use electricity to move heat from one place to
another instead of generating heat directly. Therefore, they can be two to
three times more energy efficient than conventional electric resistance water
heaters. To move the heat, heat pumps work like a refrigerator in reverse."

[https://www.energy.gov/energysaver/water-heating/heat-
pump-w...](https://www.energy.gov/energysaver/water-heating/heat-pump-water-
heaters)

~~~
Gibbon1
> Heat pump water heaters exist.

Yeah I just put one of those in, mostly because I didn't want to run a gas
line. And feel a lot more competent running a 30amp circuit than cutting and
sealing a hole in the roof.

Works fine.

Also friend in Florida says she has a heat pump with an air handler. It
produces heat in the winter and cooling in the summer.

Not the end of the world.

