Energy
by
Chris Martenson
Executive Summary
- Why prices under $100 per barrel just aren’t cash flow positive for shale oil producers
- VIDEO: all you need to know about the shale oil industry
- Why the Boom/Bust cycle is swinging to ‘Bust’ for shale companies
- Why a prolonged ‘Bust’ in oil prices will create massive economic shockwaves
If you have not yet read Part 1: About That Shale ‘Miracle’… available free to all readers, please click here to read it first.
The Shale Reality
Now, let me build on the case that not only are shale companies not profitable at $50 per barrel oil, but they are often not profitable at prices nearly 100% higher than that.
I’m not about to make the case that all shale operators are unprofitable or about to go bust on the plays, but I am going to make the case that any sweeping statements like “technology will bring us Shale 2.0” are utterly adrift from the evidence at our disposal.
Let’s go back to September 2014, before any oil price weakness had crept into the picture. At that point in time, according the WSJ author, the shale operators should have been swimming in cash.
Well, that’s just not the case. And some of them were losing their shirts:
Sumitomo’s US shale oil foray turns sour
Sept 29, 2014
Sumitomo Corp of Japan has drawn a line under its disastrous two-year foray into shale oil in the US, with writedowns connected to the project almost completely erasing its full-year earnings.
On Monday, Sumitomo, the fourth biggest of Japan’s trading companies by market capitalisation, said that an impairment loss of Y170bn ($1.6bn) on a “tight oil” project in west Texas would form the bulk of Y240bn of charges for the fiscal year to March 2015.
(Source)
Hmmmm. I guess Sumitomo just failed to use enough smart technology or something, because otherwise how is it possible to lose $1.6 billion at a time when oil was solidly priced in the $100 range?
Sarcasm aside, the truth is that it’s all too easy to lose money in the shale plays, something I believe is already completely indicated by the negative free cash flows of the industry.
In fact, that negative free cash flow evidence tells me that…
The Hard Facts About Shale Oil
PREVIEW by Chris MartensonExecutive Summary
- Why prices under $100 per barrel just aren’t cash flow positive for shale oil producers
- VIDEO: all you need to know about the shale oil industry
- Why the Boom/Bust cycle is swinging to ‘Bust’ for shale companies
- Why a prolonged ‘Bust’ in oil prices will create massive economic shockwaves
If you have not yet read Part 1: About That Shale ‘Miracle’… available free to all readers, please click here to read it first.
The Shale Reality
Now, let me build on the case that not only are shale companies not profitable at $50 per barrel oil, but they are often not profitable at prices nearly 100% higher than that.
I’m not about to make the case that all shale operators are unprofitable or about to go bust on the plays, but I am going to make the case that any sweeping statements like “technology will bring us Shale 2.0” are utterly adrift from the evidence at our disposal.
Let’s go back to September 2014, before any oil price weakness had crept into the picture. At that point in time, according the WSJ author, the shale operators should have been swimming in cash.
Well, that’s just not the case. And some of them were losing their shirts:
Sumitomo’s US shale oil foray turns sour
Sept 29, 2014
Sumitomo Corp of Japan has drawn a line under its disastrous two-year foray into shale oil in the US, with writedowns connected to the project almost completely erasing its full-year earnings.
On Monday, Sumitomo, the fourth biggest of Japan’s trading companies by market capitalisation, said that an impairment loss of Y170bn ($1.6bn) on a “tight oil” project in west Texas would form the bulk of Y240bn of charges for the fiscal year to March 2015.
(Source)
Hmmmm. I guess Sumitomo just failed to use enough smart technology or something, because otherwise how is it possible to lose $1.6 billion at a time when oil was solidly priced in the $100 range?
Sarcasm aside, the truth is that it’s all too easy to lose money in the shale plays, something I believe is already completely indicated by the negative free cash flows of the industry.
In fact, that negative free cash flow evidence tells me that…
by
Chris Martenson
Executive Summary
- The wisdom and value of scenario planning
- Scenario #1: A Slow Burn
- Scenario #2: Fragmentation
- Scenario #3: A Hard Landing
- The prudence of taking individual action now, vs depending upon "the system" to react to future events
If you have not yet read Part 1: Ready Or Not… available free to all readers, please click here to read it first.
It all begins with the clear-eyed recognition that the old way of doing business is clearly unsustainable. And yet knowing that the various governmental and institutional powerbrokers are doing everything they can to perpetuate the status quo way of doing business.
Business-as-usual is literally going to end in some flavor of disaster, and yet we collectively adhere to it, even when the end-point is as obvious as calculating the linear rate of withdrawal of water from a non-renewing aquifer.
But there's nothing linear about the nested and/or intertwined complex systems we call the Economy, the Environment and Energy. Each of these is independently complex, meaning they often easily defy the attempts to manage them. And they are utterly unpredictable for anything longer than the immediate term.
For example, of the three, Energy seems the simplest, and it is. But even there, we note that the amount of energy that can and will be extracted is a function of the price of energy, available technology and skills, capital available for investment, and what's actually down there in the earth to be pulled up. In that list, several factors are courtesy of the Economy, which is itself dependent on Energy. A glitch in one can feedback rapidly to create a glitch in the other.
Given all of this complexity, one good way to get a handle on things is to identify the scenarios we deem to be most likely given all available evidence, and then assign probabilities to each. Asking ourselves, What can we today to prepare for Scenario X? then allows us to begin constructing action plans to mitigate our vulnerability, and even better in cases, position ourselves to prosper as the future unfolds.
Scenario #1: A Slow Burn
In 2008, the practice of borrowing too much caught up with the developed world and a serious financial crisis threatened to take down the entire financial system. Indeed, according to after-action reports from Hank Paulson (then Treasury Secretary) and Mervyn King (then BoE chairman), the world came within mere hours of a full-blown global banking system meltdown…
The 3 Likeliest Ways Things Will Play Out From Here
PREVIEW by Chris MartensonExecutive Summary
- The wisdom and value of scenario planning
- Scenario #1: A Slow Burn
- Scenario #2: Fragmentation
- Scenario #3: A Hard Landing
- The prudence of taking individual action now, vs depending upon "the system" to react to future events
If you have not yet read Part 1: Ready Or Not… available free to all readers, please click here to read it first.
It all begins with the clear-eyed recognition that the old way of doing business is clearly unsustainable. And yet knowing that the various governmental and institutional powerbrokers are doing everything they can to perpetuate the status quo way of doing business.
Business-as-usual is literally going to end in some flavor of disaster, and yet we collectively adhere to it, even when the end-point is as obvious as calculating the linear rate of withdrawal of water from a non-renewing aquifer.
But there's nothing linear about the nested and/or intertwined complex systems we call the Economy, the Environment and Energy. Each of these is independently complex, meaning they often easily defy the attempts to manage them. And they are utterly unpredictable for anything longer than the immediate term.
For example, of the three, Energy seems the simplest, and it is. But even there, we note that the amount of energy that can and will be extracted is a function of the price of energy, available technology and skills, capital available for investment, and what's actually down there in the earth to be pulled up. In that list, several factors are courtesy of the Economy, which is itself dependent on Energy. A glitch in one can feedback rapidly to create a glitch in the other.
Given all of this complexity, one good way to get a handle on things is to identify the scenarios we deem to be most likely given all available evidence, and then assign probabilities to each. Asking ourselves, What can we today to prepare for Scenario X? then allows us to begin constructing action plans to mitigate our vulnerability, and even better in cases, position ourselves to prosper as the future unfolds.
Scenario #1: A Slow Burn
In 2008, the practice of borrowing too much caught up with the developed world and a serious financial crisis threatened to take down the entire financial system. Indeed, according to after-action reports from Hank Paulson (then Treasury Secretary) and Mervyn King (then BoE chairman), the world came within mere hours of a full-blown global banking system meltdown…
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