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Frackers Face Harsh Reality as Wall Street Backs Away (wsj.com)
103 points by glassworm 58 days ago | hide | past | web | favorite | 77 comments

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...

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.

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.

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.

>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.

Couple of points:

- yes decline curves are fairly steep, requiring constant investment to maintain production (often referred to as the drilling wedge) see pg.20-21 [1]

- However, almost all of a new well's cost is the drilling and completion costs on the front end vs the lease operating expense to produce oil/gas once the well is online

-IRRs are pretty high on individual wells (see. pg. 15 [2])

- since decline curves are so steep the pricing environment when the well comes online is tremendously important to well economics

[1] https://d1io3yog0oux5.cloudfront.net/_be06fc1138095794ea39e9...


It would be good to overlay that with the price of oil. That is clearly a driving factor in how much they can pump out of the wells and whether they’ll drill new ones.

TFA claims that:

> The once-powerful partnership between fracking companies and Wall Street is fraying as the industry struggles to attract investors after nearly a decade of losing money.

Is that inaccurate?

I'm guessing that fracking was profitable until oil prices crashed. So is the financial debate about if, when and how much oil prices will increase?

Oil prices aren't particularly low by historical standards.


So I'd guess that the "decade of losing money" is due to poor economics of individual wells, where production dramatically falls over time.

That requires more and more capital for new wells just to maintain constant volumes.

If you only look at aggregates it can appear there's a boom, when in reality it's a bit of a shell game that only works as long as you're constantly drilling new wells.

> Oil prices aren't particularly low by historical standards.

True. But I think that fracking only became financially viable (or at least, plausibly so) when oil prices were at historic highs. Similarly for tar sands.

But there have also been subsidies, to help ensure adequate domestic production. For the oil and natural gas industries overall.

And this will be the go-to technology as traditional oil and gas reserves dwindle. At least for petrochemicals.

Shale became economically viable due to fracking, whereas previously shale had to be steam heated to release the oil which is extremely energy intensive and thus expensive, which is why Shell tried it in the 70s but abandoned the tech.

Fracking is a more expensive means of extraction than traditional drilling. IIRC, the oil is also of lower quality. I dont recall the precise price, but fracking is only profitable if crude is over ~$80/barrel.

The number for at least one major petrochemical company is closer to $30/barrel

Really it is a matter of diminishing returns of cheaper oil - the easier wells and methods of extraction get depleted and while it is possible to reduce the extraction costs through technological advancement it is very unlikely it will ever reach historic lows. Just like how surface deposits of copper and bronze and especially native ore were quickly depleted in areas with long term civilizations.

> 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.

I discussed a few years ago this with my brother who's working in the oil industry. And he said that much, this type of well have much shorter lifespan than traditional oil well and new wells are required every few years. Of course it's just an anecdote from someone who's not even involved in that part of the industry, so take it with a grain of salt.

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.

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...

2. http://marinereast2.com/index.html

3. https://www.google.com/maps/@40.0571635,-75.6675604,3a,75y,1...

4. https://www.google.com/maps/@39.9789588,-75.5377762,3a,75y,2...

5. https://www.google.com/maps/@40.0390132,-75.6366127,3a,75y,1...

6. https://www.google.com/maps/@39.9874756,-75.5431866,3a,75y,3...

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.


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.

> The only thing slowing us down really is things like pipeline takeaway and labor shortage.

I am under the impression that this field has pretty well paid jobs. How is there a labor shortage in a mature industry with high pay?

From what I understand there are a number of reasons.

One of them is that domestic oil and gas production was on the decline until the tech for horizontal drilling and fracking started the shale boom of the last 10-12 years. Combined with demographics (big boomer generation, small generation X, big millennial generation) this means you have to find and train all these millennials who probably had other plans. And then, I'm told, the highly cyclical dynamics of the industry make any kind of long-term investment difficult, so there's high overhead for a labor market that still relies on fax machines.

If you're macro-minded and you want policies that keep that labor price high so alternative energy becomes more attractive, something like the Green New Deal is probably a good bet.

The pay is good but working conditions?

Then the pay is not good enough.

The pay is good enough but their are other constraining factors when it comes to extreme rapid growth in an area. Housing shortages are one example.

True, but that's part of the issue. Volatility affects people's lives, and they need to be paid extra to deal with it (assuming they have other options). Moving around a lot, living in the middle of nowhere, inconsistent income due to changing markets, these are all negatives that need to be compensated for in the wages.

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:


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.


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.

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

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.

Extraction industries do turn on a dime between boom and bust though; there isn't a lot of warning things are going south and the symptoms can be a bit weird. Then everyone who can be sacked is out of a job. Indeed, for weird symptoms, one option in the face of financial problems is to scale up production to reduce unit costs and try and widen the margin.

Not that your friend and family are wrong, I've just worked in extraction companies that were expanding and short on labor, then 12 months later were reviewing their options for bankruptcy. That isn't a great metric for corporate health.

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

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.

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

Not if interests rates go up. I'd recommend this book by Bethany McLean: https://www.amazon.com/gp/aw/d/0999745441/ref=dbs_a_w_dp_099...

The reason investment has died off even with the price of oil rising, I'm guessing (based on the book) is because of the slight increase in interest rates.

I suspect that fracking companies are not using debt to finance expansion - they are flush with cash atm.

My prediction is the fracking industry will go bankrupt like the nuclear and coal industries.

One can hope.

A setback for fracking would be the best thing that could possibly happen to coal.

Coal is dead man walking because wind and solar beat them both on price. Coal went bankrupt and will go bankrupt again.

Fracked natural gas killed coal years before solar and wind could get there. Solar and wind may yet kill gas, which would be nice.

Fracking though was heavily subsidized by Wall Street using other peoples money. It never was, nor will be profitable and it's a dead end technology.

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

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

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.

Really? Please look up some references. Eg. https://jancovici.com/en/

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.

We didn't luck out, global CO2 output is still increasing, we have never output so much as in 2018.

All the green energy we've added so far is only in addition to burning fossil fuels, it hasn't replaced any yet.

Many individual nations have simultaneously reduced total fossil fuel generation while increasing renewable use. At least in some places in the world, replacing is probably the right word.

We would've never gotten into this mess if people would recognize the concept of negative spillover / externalities and that the world is worse off for them not being taxed appropriately.

Maybe you can come down to New Orleans and explain this to our bought and paid for City Council that can't seem to understand the sentence "Peakers will be stranded assets by 2025"

> Humanity lucked out

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

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.

In Sweden homes are heated with heatpumps and district heating. [1] The electricity is producerar with hydro, nuclear, wind and some biofuel (remains from the wood industry). The fossil fuel part has nearly been relegated to history. [2] Now it is mainly transport and the mining industry left to fix.

Mind you, some of these graphs are four years old. So we are really doing a lot better.

[1] https://bjelkeman.wordpress.com/2014/12/10/sustainable-energ...

[2] https://bjelkeman.wordpress.com/2014/12/14/sustainable-energ...

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.

Not everyone lives in California.

Heat pumps aren’t sufficient in the northeast without a substantial ($50k+) investment in a ground loop. Many homes require significant retrofit to even use one.

Just use an air to water heat pump. We've got one installed in the netherlands, costs was about €6k (ex subsidies) and we're disconnected from the gas supply. The newest generations can go up to -25 degrees celcius (look up Mitsubishi zubadan for example)

You shouldn't assume that your climate is the same as the one GP referenced.

Air to water heat pumps are also used in harser climates. If you're interested here is an example datasheet of an air to water heat pump (2018) (using Celsius here):

PUHZ-SHW112YAA Guaranteed operating range (outdoor): Heating: -28 to +21 Domestic hot water: -28 to +35

On page 108 you can find the actual co-efficient of performance (COP) for different outside temperatures and inside water heating temperatures. As an example: at -10 and an water temperature for heating at 25 you still get a COP of 3+ (which are the average low temperatures in Maine). That means that 100% electricity moves 300% of heat into your house.

The climate is harsher than -25C/-15F in the winter?

GP cited Netherlands. No way that's a typical temperature.

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.

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.

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

Looking at the grafana chart of the data scrapped from my smart thermostat, less than 10 days this winter season. The use is for "emergency heat" when it's too cold for the heat pump alone to effectively heat the premises.

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.

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."


> 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.

I'm in eastern Canada and there are many heat pumps here. Our cold here is typically a "wet cold" due to the Atlantic ocean, rather then the frigid cold of a central province like Ontario. I suspect they would work fine in Maine for the most part as well, for the same reasons.

There was a UK govt report, only a few days ago, that suggested new homes not be connected to gas after 2025, and to use heat pumps or other low carbon heating.

They also called for a plan to retrofit existing housing.


Thanks for the reminder, here's the actual report:


> How are people going to heat their homes?

Considering global warming, not natural gas or fuel oil.

Your history is incorrect. The US and several other leading industrial nations invented nearly everything of consequence in the solar industry's modern history. NASA was busy innovating on solar all the way back in the 1960s. Look at the history of solar inventions from 1950 to 2010, you won't find much Chinese invention in there. China lowered the cost of manufacturing of tech invented by other nations.

You're talking about development of solar prior to 2000. I'm talking about after 2000. The big investment in solar production was at the behest of the Chinese government. They are the ones that spent the hundreds of billions needed to commercialize solar, not the US.

At the same time the US spent a $1T on fracking. And a couple of $T on pointless wars.

> US spent a $1T on fracking

Citation? I suspect this a grossly over stated figure.

Edit: formatting

WSJ article recently pointed out that the Fracking industry lost $280 Billion over the last 10 or so years.

Are we to read the entire website? I'm not even sure which part you disagree with.


Click the "web" link above.

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