The shale oil revolution is in danger

[jakeXT]

That’s what is going on today. Oil consumption in the U.S. has fallen by over 8% since 2010, and the shrinkage in Europe is far greater than that. Meanwhile, China and India have not proven nearly as voracious as forecast. The drop in oil prices from over $100 in May to $48 has not, and will not, cause a major or even minor drop in production. That’s true even in high-cost areas such as the tar sands of Canada. In those forbidding fields, major energy companies have invested billions on plans to produce for 50 years, and even though they’re losing money on their total investment, they’re more than recouping their variable costs. So, as prices wobble, drilling will proceed smoothly.

Except for fracking. Unlike conventional projects, shale wells enjoy an extremely short life. In the Bakken region straddling Montana and North Dakota, a well that starts out pumping 1,000 barrels a day will decline to just 280 barrels by the start of year two, a shrinkage of 72%. By the beginning of year three, more than half the reserves of that well will be depleted, and annual production will fall to a trickle. To generate constant or increasing revenue, producers need to constantly drill new wells, since their existing wells span a mere half-life by industry standards.

In fact, fracking is a lot more like mining than conventional oil production. Mining companies need to dig new holes, year after year, to extract reserves of copper or iron ore. In fracking, there is intense pressure to keep replacing the production you lost last year.

On average, the “all-in,” breakeven cost for U.S. hydraulic shale is $65 per barrel, according to a study by Rystad Energy and Morgan Stanley Commodity Research. So, with the current price at $48, the industry is under siege. To be sure, the frackers will continue to operate older wells so long as they generate revenues in excess of their variable costs. But the older wells—unlike those in the Middle East or the North Sea—produce only tiny quantities. To keep the boom going, the shale gang must keep doing what they’ve been doing to thrive; they need to drill many, many new wells.

http://fortune.com/2015/01/09/oil-prices-shale-fracking/

[peacebird]

1. And poison the aquafers while they are at it..... And create new earthquake zones...

Give people the added entertainment of lighting the water out of their spigots on fire!

[silverweb]

2. May it die quickly.

[Vincardog]

6. Agreed

[Gothmog]

3. The shale industry is not dead

First, some formations are far cheaper to drill in. Eagle Ford formations are at a $52 to $57 breakeven now. The Bakken and some Permian formations need $80 a barrel to be viable. Second, the costs of drilling is going down like crazy. It is getting cheaper to drill which will lower the break even for some formations

[FBaggins]

4. Let's not confuse the industry with the resource

Neither is dead... but one of them is endangered. Or rather, some of the companies that are heavily leveraged and play predominantly in the drilling field could easily go under if prices stay down for an extended period of time.

That's doesn't mean much for the resources themselves, because it's clear that the only thing that keeps them out of production is extended lower prices. Even if they stay in the 30s-40s for a couple years, all that happens is that some of these firms go under and larger companies gobble up their assets... then as soon as prices rise again, the production returns. As occurred in the 80s (the last time OPEC crippled economies by jacking up prices only to see other countries ramp up more expensive production)... they can only maintain market share at much lower prices.

[RiverLover]

5. "...this could lead to a collapse in global financial markets similar to the 2008 crash."

Fracking’s future is in doubt as oil price plummets
1/8/15

...Fracking has become a victim of its own success. The industry in the U.S. has grown very fast. In 2008, U.S. oil production was running at five million barrels a day. Thanks to fracking, that figure has nearly doubled, with talk of U.S. energy self-sufficiency and the country becoming the world’s biggest oil producer — “the new Saudi Arabia” — in the near future.

The giant Bakken oil and gas field in North Dakota — a landscape punctured by thousands of fracking sites, with gas flares visible from space — was producing 200,000 barrels of oil a day in 2007. Production is now running at more than one million barrels a day.

Fuelled by talk of the financial rewards to be gained from fracking, investors have piled into the business. The U.S. fracking industry now accounts for about 20 percent of the world’s total crude oil investment.

But analysts say this whole investment edifice could come crashing down.

Fracking is an expensive business. Depending on site structure, companies need prices of between $60 and $100 per barrel of oil to break even. As prices drop to around $55 per barrel, investments in the sector look ever more vulnerable.

Analysts say that while bigger fracking companies might be able to sustain losses in the short term, the outlook appears bleak for the thousands of smaller, less well-financed companies who rushed into the industry, tempted by big returns.

The fracking industry’s troubles have been added to by the actions of the Organization of Petroleum Exporting Countries (OPEC), which, despite the oversupply on the world market, has refused to lower production.

The theory is that OPEC, led by powerful oil producers such as Saudi Arabia, is playing the long game — seeking to drive the fracking industry from boom to bust, stabilize prices well above their present level, and regain its place as the world’s pre-eminent source of oil.

There are now fears that many fracking operations may default on an estimated $200 billion of borrowings, raised mainly through bonds issued on Wall Street and in the city of London.

In turn, this could lead to a collapse in global financial markets similar to the 2008 crash.

http://www.boulderweekly.com/article-13847-frackingrss-future-is-in-doubt-as-oil-price-plummets.html

Also, a really great but sobering article~
Russia Blamed, US Taxpayers on the Hook, as Fracking Boom Collapses