by S. Tom Bond on June 23, 2015
See also: www.Marcellus-Shale.us
Shale production retreats as oil & gas prices do not support the high cost of production
Commentary by S. Tom Bond, Retired Chemistry Professor & Resident Farmer, Lewis County, WV
There were two impressive article in Bloomberg recently. One titled “Speculators Retreat From Oil as OPEC Oversupply Crowds Out Shale” and a second called “The Shale Industry Could Be Swallowed By Its Own Debt.” Deborah Rogers Lawrence has been predicting something of this sort for years, and now it seems to be coming to pass.
The first article says “Trading in futures is falling as WTI swings in a $5 range, the narrowest in 19 months. The Organization of Petroleum Exporting Countries pumped the most oil last month since October 2012, while the U.S. government says output will start falling from this month. Investors are watching a June 30 deadline for Iran and six other nations to reach a nuclear deal that could lift oil sanctions and further swell a global supply glut.’ The higher cost of extracting oil in the U. S. seems to be catching up with the market.
It continues ” Saudi Arabia, OPEC’s biggest member, is ready to produce more oil if demand rises, Oil Minister Ali-Al Naimi said June 18. It has 1.5 million to 2 million barrels a day of spare capacity, he said.” and further, Libya may double output to 800,000 barrels a day by next month, according to Mohamed Elharari, a Tripoli-based spokesman for the state-run National Oil Corp.” Moreover, Iran wants to pump 4 million barrels a day, up from 2.8 million.
And according to a financial news letter I get, both Royal Dutch Shell and Total (France) want to return to Iran as soon as matters can be cleared up. Elsewhere the same source (out of Israel) says Total is seeking the equivalent of up to $15B in Chinese financing to fund its expansion in Russia, despite U.S. and European sanctions imposed on the country. The company expects Russia to be the most important region for its oil and gas output by 2020, when it hopes for production of around 400K bbl/day. Last year Total produced 2.2 Mbbl/day out of world production 94 Mbbl/day.
OPEC’s principal interest is to continue with its market share, while U. S. producers want to maintain oil’s current price, or put it back to where it was when they borrowed so much money. Futures traders are withdrawing, because they are not sure what the signals mean. Drillers are loosing their nerve. The number of rigs searching for oil dropped by 4 to 631 in the week ended June 19, the lowest level since August 2010, Baker Hughes Inc. data show.
The second article reports “The debt that fueled the U.S. shale boom now threatens to be its undoing. Drillers are devoting more revenue than ever to interest payments.” It gives as an example one company that is spending almost as much in interest as a company twenty times its size.
The reason this is dangerous is that oil has fallen 43% in the last year. Bloomberg says, ” Interest payments are eating up more than 10 percent of revenue for 27 of the 62 drillers in the Bloomberg Intelligence North America Independent Exploration and Production Index, up from a dozen a year ago. Drillers’ debt ballooned to $235 billion at the end of the first quarter, a 16 percent increase in the past year, even as revenue shrank.”
More from this Bloomberg article: “The question is, how long do they have that they can get away with this,” said Thomas Watters, an oil and gas credit analyst at Standard & Poor’s in New York. The companies with the lowest credit ratings “are in survival mode,” he said.
The problem for shale drillers is that they’ve consistently spent money faster than they’ve made it, even when oil was $100 a barrel. The companies in the Bloomberg index spent $4.15 for every dollar earned selling oil and gas in the first quarter, up from $2.25 a year earlier, while pushing U.S. oil production to the highest in more than 30 years. (End of quote.)
Some 45 of the 62 companies are rated “junk bond” by Standard and Poor. The $20 billion in bonds of the 62 are trading as distressed bond yielding more tha 10% above U. S. Treasury bonds. the most conservative bonds available. S&P has lowered the investment ratings of 105 exploration companies. World-wide oil and gas companies comprised one-third of the 36 corporate- debt defaults.
One bad example given in this article: Oklahoma City-based SandRidge issued $1.25 billion of second-lien debt this month at 8.75 percent interest, more than all but one of their existing bonds, records show. The company paid $24 million in fees and will add $109 million a year to interest payments, which are already eating up 29 percent of its revenue.
So far this is all about oil. What about gas? The net-short position on U.S. natural gas (that is the promises to deliver by speculators) decreased 23 percent. Nymex gas rose to $2.894 per million British thermal units. Baker Hughes gas drilling rig count in the Marcellus has fallen from 141 in 10/28/11 to 64 in 6/19/15.
Gas and oil are somewhat linked since the principal use for both at the present is to burn them for energy. Oil can be moved as liquid cheaply, and gas can not. Gas lines are the big boom at present. The Energy Information Administration says that about 4,600 miles of new interstate pipelines could be completed by 2018. That’s on top of the 6,800 miles of existing pipelines as of April, 2014. Compare the two numbers. Quite a bonanza for the executives in the agencies that move the money and the companies that build them. It is reflective of very high optimism – or is it simply “get mine now, to hell with what follows.”
Is optimism about substituting gas for coal justified? The U. S Energy Information Administration says 205.7 pounds of carbon dioxide is given off per million BTU’s produced. With natural gas it is 117.0 pounds of carbon dioxide per Million BTU’s. 57% as much.
What’s more, the conservative Deutsche Bank has just concluded that in 14 states of the US, solar power is now as inexpensive as that from coal and natural gas. And get this: by 2016– next year! — Deutsche Bank concludes that solar will be competitive with coal and natural gas in all but three or four states.
Must be a lot of clenched toes and queasy stomachs among the oil and gas gamblers.