The Counterfeit Shale Revolution & The Epidemic of Over ... · •...

Slide 1 Labyrinth Consul4ng Services, Inc. artberman.com

The Counterfeit Shale Revolution & The Epidemic of Over-Production Art Berman Labyrinth Consulting Services, Inc.

Ray Leonard Hyperdynamics

Dallas Geological Society Dallas, Texas May 12, 2015


•  The shale revolu4on is counterfeit. Tight oil and shale gas are imita4ons of something valuable and shale play promoters inten4onally deceive the public about their true value.

•  It is counterfeit because the cost of produc4on is more than the global economy can bear. •  Producers and analysts deceive the public with misleading and incorrect break-‐even

prices that exclude important costs or are based on exaggerated reserves. •  There is no revolu4on: it is a final, desperate effort to squeeze the last remaining

petroleum from the worst possible rock. •  Oil and gas from shale is called unconven4onal, a euphemism for expensive: neither is

commercial at current prices. •  Over-‐produc4on by shale players has ruined every market they have entered: natural

gas, natural gas liquids and now, crude oil. •  This has been possible because of a capital bubble and disregard for investor value.

The Counterfeit Shale Revolu4on


The Beau4ful Story

•  We imagine that we are in the midst of an energy revolu4on today with the advent of oil and gas produc4on from shale.

•  This new fron4er will refill our energy reserve account and the world will experience growth like never before.

•  That is what we are told and what we want to believe. But it is not true. •  The problem is that it costs more than the market can bear. •  Oil and gas produc4on from shale is not a revolu4on—it is a re4rement party.


Scotia Howard Weil 2015 Energy Conference Paal Kibsgaard March 23, 2015

9

This includes seeking new solutions to reduce costs and increase value for future projects, by creating a step-change in both technical and financial performance throughout the entire E&P value chain.

As seen from the chart, there is currently a wide range in capex intensity between the four main resource types of land conventional, tight oil, shallow water and deepwater.

With a capex per barrel averaging over $40, the urgency of finding these solutions is highest for tight oil and deepwater fields, which today consume around 40% of the global liquids-related E&P capex, while only representing around 12% of global oil production.

Still, there will also be a strong focus on reducing cost per barrel and increasing production from shallow water and conventional land fields, as more investments are likely directed towards these resources types in the short term to meet the ongoing growth in demand.

We see the current industry challenges, and the subsequent need for the industry to change, as a huge opportunity for Schlumberger. And we are in a perfect position to capitalize on this through our ongoing Transformation program, the scale and breadth of our offering, and our unmatched execution capabilities.

So let us look closer at the opportunities we see within each of these four resource types, starting off with tight oil, where I will focus my comments on US land.

The Cost of Tight Oil According to Schlumberger

•  Oil and gas produced from shale reservoirs is much more expensive than conven4onal oil and gas.

•  The marginal cost of 4ght oil produc4on is about $75 per barrel.


Scotia Howard Weil 2015 Energy Conference Paal Kibsgaard March 23, 2015

15

Conventional land and shallow-water developments, with their lower capex intensity, will likely see increased investment levels in the coming years as the industry looks to meet the growth in demand in the most economical way.

Given the significantly lower complexity of these resource types, they are generally not in need of specific solutions beyond the general focus on new technology, reliability, efficiency and integration.

Still, one undeniable trend stands out, representing a unique opportunity in the land market, relating to the steadily increasing drilling intensity required to maintain and grow land production.

Comparing the three key land markets of Saudi Arabia, Western Siberia in Russia, and US land, all with similar production levels, shows a wide spread in drilling intensity.

And, we believe that the rate of new-well drilling is set to grow significantly in lower drilling-intensity markets ranging from Saudi Arabia to Western Siberia, as operators look to drive recovery factors and maintain or increase production rates.

The trend of increasing drilling intensity on land will benefit strongly from a further step-change in drilling efficiency, which we intend to create, by continuing to improve our drilling optimization workflows and to now expand them to also include the land rig.

The Cost of Tight Oil According to Schlumberger

•  U.S. 4ght oil required 100 4mes more wells to produce approximately the same volume of oil as Saudi Arabia.

•  That cost more than 100 4mes as much.


The Cost of Shale Gas According to a Marcellus-‐U4ca Player’s 10-‐Q

•  The marginal cost of shale gas produc4on is about $6 per mcf. •  This includes the value upli\ of NGLs and condensate. •  10-‐K & 10-‐Q filings represent op4mis4c es4mates of break-‐even

prices because they only reflect current period costs and not the cost of legacy produc4on or write-‐downs.

Antero'Resources

Total'MCFE 133,642,000Realized'Price'MCFE $4.42Net'Per'MCFE A$1.53

$"Thousands $/mcfeOperating'Expense $122,388 $0.92Production'Taxes $21,039 $0.16G&A $50,985 $0.38Interest'Expense $31,342 $0.23Total'NonACapital'Cost $225,754 $1.69Capex $569,068 $4.26Total'Costs $794,822 $5.95Impairments $8,577

Q1#2015ProductionNatural#Gas#mcf 112,000,000NGL#bbl 3,241,000Crude#Oil#bbl 366,000Total#MCFE 133,642,000

Source: Company 2014 10-‐Q Filings and Labyrinth Consul4ng Services, Inc.


Tight Oil & Shale Gas Plays Are Not Profitable for Most Companies

•  The counterfeit shale revolu4on has been funded by debt, public offerings, bond sales and a variety of other sources of capital other than cash from opera4ons.

•  Nega4ve free cash flow and growing debt characterized the balance sheets of most companies involved in shale plays before the recent drop in oil prices.

•  Companies are chronically cash-‐flow nega4ve: outspend cash flow by 25% (4ght oil) and 32% (shale gas).

•  Unmanageable debt that can never be paid from cash flow & must be con4nually re-‐financed. •  The E&P business has become financialized—the only measure is produc4on-‐reserve growth. •  The appeal is the rela4vely short-‐term ROCE compared with deep-‐water, etc.

Source: Company 2014 10-‐K Filings and Labyrinth Consul4ng Services, Inc.

Oil$Weighted 2014/FCF 2013/FCF FCF/Change CF/CE Debt/Equity 2014/DEBT 2013/DEBT Debt/ChangeOXY $451 $3,247 ,$2,796 1.04 0.20 $6,838 $6,939 ,$101EOG $402 $269 $134 1.05 0.33 $5,910 $5,913 ,$3MRO $327 $504 ,$177 1.03 0.30 $6,391 $6,597 ,$206WTI ,$46 $8 ,$54 0.92 2.67 $1,360 $1,205 $155SFY ,$80 ,$229 $149 1.53 1.35 $1,075 $1,142 ,$68COP ,$350 $550 ,$900 0.98 0.43 $22,565 $21,662 $903CRZO ,$360 ,$421 $61 0.58 1.22 $1,351 $900 $451PDCE ,$392 ,$236 ,$156 0.38 0.58 $665 $605 $60PVA ,$491 ,$243 ,$249 0.37 1.64 $1,110 $1,281 ,$171OAS ,$528 ,$1,756 $1,228 0.62 1.44 $2,700 $2,536 $164MUR ,$570 $48 ,$618 0.85 0.35 $3,002 $2,963 $39ROSE ,$570 ,$1,237 $667 0.53 1.20 $2,000 $1,500 $500MHR ,$581 ,$520 ,$61 0.03 1.78 $949 $880 $69NFX ,$741 ,$650 ,$91 0.65 0.74 $2,892 $3,694 ,$802HES ,$810 ,$970 $160 0.85 0.27 $5,987 $5,798 $189WLL ,$1,153 ,$650 ,$503 0.61 0.99 $5,629 $2,654 $2,975PXD ,$1,210 ,$731 ,$479 0.66 0.31 $2,665 $2,653 $12CLR ,$1,361 ,$1,176 ,$185 0.71 1.21 $5,998 $4,716 $1,282APA ,$2,419 ,$1,385 ,$1,034 0.78 0.43 $11,245 $9,725 $1,520TOTALS $$10,482 $$5,577 $$4,904 0.75 0.92 $90,331 $83,363 $6,968

Stock&Ticker 2014&FCF 2013&FCF FCF&Change CF/CE Debt/Equity 2014&DEBT 2013&DEBT Debt&Change

ECA $141 '$423 $564 1.06 0.98 $7,813 $7,668 $145UPL $100 $96 $4 1.16 '19.73 $3,378 $2,470 $908PQ $3 '$241 $243 1.02 3.53 $425 $425 $0XCO '$30 $30 '$60 0.92 3.81 $1,447 $1,891 '$444KWK '$116 '$153 $37 0.04 '1.85 $2,038 $1,989 $49GDP '$201 '$180 '$21 0.38 1.79 $569 $486 $83CRK '$234 '$262 $28 0.63 1.03 $1,070 $799 $272TLM '$242 '$696 $454 0.89 0.71 $5,274 $5,540 '$266COG '$243 '$170 '$73 0.84 0.50 $1,752 $1,147 $605BBG '$323 '$182 '$140 0.45 1.15 $829 $984 '$155RRC '$470 '$554 $84 0.67 0.94 $3,073 $3,141 '$68XEC '$489 '$248 '$241 0.77 0.35 $1,500 $924 $576SGY '$536 '$76 '$460 0.43 0.85 $1,041 $1,027 $14AR '$611 '$521 '$90 0.62 0.96 $4,363 $2,079 $2,284CHK '$673 '$1,962 $1,289 0.87 0.71 $11,555 $12,904 '$1,349SD '$951 '$645 '$305 0.40 1.95 $3,195 $3,195 $1DVN '$1,007 '$1,322 $315 0.86 0.58 $11,262 $12,022 '$760APC '$1,042 $1,167 '$2,209 0.89 0.69 $15,092 $13,565 $1,527SM '$1,063 '$277 '$786 0.58 0.92 $2,366 $1,600 $766QEP '$1,184 '$411 '$773 0.57 1.18 $2,273 $3,107 '$834NBL '$1,365 '$1,010 '$355 0.72 0.55 $6,241 $4,887 $1,354SWN '$5,006 '$344 '$4,662 0.32 0.45 $6,967 $1,950 $5,017TOTALS A$15,541 A$8,383 A$7,159 0.68 A0.01 $93,522 $83,798 $9,724


Over-‐produc4on Of Shale Gas & Tight Oil Has Destroyed Prices

•  Prices of natural gas, natural gas liquids, crude oil and propane have been progressively destroyed by over-‐produc4on of shale gas and 4ght oil.

•  The behavior is conscious and inten4onal because produc4on and reserve growth are the only support for stock prices and, therefore, company asset value.

•  Companies con4nue to produce oil and gas at sub-‐commercial prices despite the value implica4ons for investors.

Source: EIA

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WTI$Crude

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Source: EIA


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Millions'of'B

arrels'of'LIquids'Per'Day'

EIA'Top'15'Liquids;Producing'Countries'

US"&"Canada"

United"States"

Russia"

Saudi"Arabia"

China"

Canada"

Iraq"

Mexico"

Iran"

UAE"

Brazil"

Kuwait"

Venezuela"

Nigeria"

Norway"

Angola"

U.S.'&'Canada'Oil'ProducEon'

Source: EIA

Current Oil Price Crisis Because of Oil-‐Supply Surplus & Demand Destruc4on

•  Over-‐produc4on of 4ght oil in the U.S. is the principal cause of the global collapse in crude oil prices that began in 2014.

•  Current price slump will slow produc4on & increase demand due to low prices.


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Tight$Oil$New$Producing$Wells$Added$&$WTI$Price$Eagle#Ford# Bakken# Permian# WTI#Price#

WTI$Price$

Tight Oil Produc4on Has Begun to Decline

•  Oil produc4on has recently begun to decline but not because of decreased rig count. •  It is because cash flow at current oil prices is too low to complete most wells being

drilled. •  Decreasing well comple4ons in the Bakken, Eagle Ford and Permian basin plays with

decreasing WTI oil price.

Source: Baker Hughes and Drilling Info


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Rig Count is Irrelevant for Now

•  Bakken spud to first produc4on is about 5 months; 3 months for Eagle Ford & Permian: not a factor yet in decreased produc4on.

•  Correla4on of rig count and well comple4ons is poor. •  Well comple4ons based on operator decisions, service company schedules, regula4ons

and economics. Rig count based on long-‐term contracts.

Source: Drilling Info and Baker Hughes


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ProducDon"Predicted"From"New"Wells"Added" Actual"ProducDon" Oil"ProducDon"

Correla4on Between New Producing Wells and Produc4on Growth

•  Correla4ng between number of producing wells added each month and corresponding produc4on growth is poor.

•  Calls into ques4ons the claims and logical arguments about drilling efficiency and produc4vity..

Source: Drilling Info and Baker Hughes


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uc8o

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Bakken'Produc8on'&'New'Well'Model''New"Producing"Wells" Oil"ProducHon"

Forecast'Data'

Producing'Wells'Added'(rhs)'

Oil'Produc8on'(lhs)'

C305,000'bopd''Jan'2016'

The Produc4on Decline Has Begun

•  January 2015 produc4on in Eagle Ford (EF), Bakken (BK) and Permian basin (PM) decreased 111,000 bopd because of decreased well comple4ons.

•  Modeled decreased comple4ons using 2008-‐2009 rig count decline as a guide. •  Suggests almost 400,000 bopd of produc4on decline in 4ght oil plays by July 1. •  600,000 bopd decline possible by year-‐end 2015. •  Only con4nued prices below $60 per barrel through at least year-‐end 2015 will lead to

market balancing.

By#July#1 Total ByEF .136,000 162,000 Sep.15BK .165,000 305,000 Jan.16PM .60,000 92,000 Dec.15TOTAL .361,000 559,000

Source: Drilling Info and Labyrinth Consul4ng Services, Inc.


The Economics of Tight Oil From SEC Filings Whiting'Petroleum'Corp

Total'BOE 15,000,000Realized'Price'BOE $35.22Net'Per'BOE C$54.44

$"Thousands $/mcfeOperating'Expense $166,365 $11.09Production'Taxes $44,378 $2.96G&A $43,980 $2.93Interest'Expense $74,257 $4.95Total'NonCCapital'Cost $328,980 $21.93Capex $1,015,974 $67.73Total'Costs $1,344,954 $89.66Impairments $80,924

Continental)Resources

Total)BOE 18,614,667Realized)Price)BOE $31.65Net)Per)BOE A$40.32

$"Thousands $/boeOperating)Expense $109,589 $5.89Production)Taxes $48,362 $8.20G&A $45,380 $2.46Interest)Expense $75,063 $4.03Total)NonACapital)Cost $278,394 $20.58Capex $956,700 $51.39Total)Costs $1,235,094 $71.97Impairments $147,561

Carrizo'Oil'&'Gas

Total'BOE 3,114,000Realized'Price'BOE $32.13Net'Per'BOE ?$42.44

$"Thousands $/boeOperating'Expense $28,708 $9.22Production'Taxes $7,051 $2.26G&A $31,577 $10.14Interest'Expense $18,196 $5.84Total'Non?Capital'Cost $85,532 $27.47Capex $146,678 $47.10Total'Costs $232,210 $74.57Impairments

Pioneer'Natural'Resources

Total'BOE 17,444,070Realized'Price'BOE $29.63Net'Per'BOE A$20.99

$Thousands $/boeOperating'Expense $205,000 $11.75Production'Taxes $39,000 $2.24G&A $82,000 $4.70Interest'Expense $46,000 $2.64Total'NonACapital'Cost $372,000 $21.33Capex $511,000 $29.29Total'Costs $883,000 $50.62Impairments $138,000

•  Whi4ng a pure Bakken player; Con4nental a Bakken and SCOOP player; Carrizo an Eagle Ford player; Pioneer a Permian and Eagle Ford player.

•  Basic costs are $50-‐$90 per barrel for players in key 4ght oil plays. •  These costs only reflect Q1 2015 and are spread across all produc4on from other periods. •  They do not include sunk costs or write-‐downs. •  They aren’t discounted. •  They represent a minimum break-‐even price.

Source: Company 2014 10-‐Q Filings and Labyrinth Consul4ng Services, Inc.


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$85$BreakHEven$Price$

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$75$BreakJEven$Price$

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$85$BreakJEven$Price$

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The Economics of Tight Oil From Comple4on Declines

•  Decreased comple4ons suggest $75-‐$85 per barrel break-‐even price.

Source: Drilling Info and EIA.


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t&Crude

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Millions&of&B

arrels&of&Liquids&Per&Day&

World&Liquids&Supply&and&Demand&July&2013DFebruary&2015&Supply# Demand# Brent#Price#

Supply&>&Demand&Supply&<&Demand&

The Simple Explana4on for the Current Oil Price Collapse: Supply Surplus

Source: EIA

•  In the 2nd half of 2013, world liquids demand exceeded supply. •  Beginning in 2014, supply exceeded demand because of surging North

American 4ght oil produc4on and weakening demand. •  The market lagged the signal by about 6 months and prices began to fall in

June 2014.

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Oct)11"

Nov)11"

Dec)11

"Jan)12"

Feb)12"

Mar)12"

Apr)12"

May)12"

Jun)12"

Jul)1

2"Au

g)12"

Sep)12"

Oct)12"

Nov)12"

Dec)12

"Jan)13"

Feb)13"

Mar)13"

Apr)13"

May)13"

Jun)13"

Jul)1

3"Au

g)13"

Sep)13"

Oct)13"

Nov)13"

Dec)13

"Jan)14"

Feb)14"

Mar)14"

Apr)14"

May)14"

Jun)14"

Jul)1

4"Au

g)14"

Sep)14"

Oct)14"

Nov)14"

Dec)14

"

Millions'of'B

arrels'of'LIquids'Per'Day'

EIA'Top'15'Liquids;Producing'Countries'

US"&"Canada"

United"States"

Russia"

Saudi"Arabia"

China"

Canada"

Iraq"

Mexico"

Iran"

UAE"

Brazil"

Kuwait"

Venezuela"

Nigeria"

Norway"

Angola"

U.S.'&'Canada'Oil'ProducEon'

Source: EIA


$0#

$20#

$40#

$60#

$80#

$100#

$120#

$140#

$160#

)3#

)2#

)1#

0#

1#

2#

3#

4#

Jan)03#

May)03#

Sep)03#

Jan)04#

May)04#

Sep)04#

Jan)05#

May)05#

Sep)05#

Jan)06#

May)06#

Sep)06#

Jan)07#

May)07#

Sep)07#

Jan)08#

May)08#

Sep)08#

Jan)09#

May)09#

Sep)09#

Jan)10#

May)10#

Sep)10#

Jan)11#

May)11#

Sep)11#

Jan)12#

May)12#

Sep)12#

Jan)13#

May)13#

Sep)13#

Jan)14#

May)14#

Sep)14#

Jan)15#

CPI$A

djusted,Bren

t,Pric

e,(Dollars,Per,Barrel),

Millions,of,B

arrels,of,Liquids,Per,Day,(2

,MMA),

World,Liquids,Rela@ve,Surplus,or,Deficit,&,Brent,Price,2003$2015,Rela8ve#Surplus#or#Deficit# Brent#Price#

Low,OPEC,Spare,

Capacity,

Global,Financial,Collapse,

OPEC,Cut,Produc@on,4.2,

mmbpd,

Arab,Spring,

Deep,Water,Produc@on,

Global,Peak,of,Conven@onal,Oil,

2014,Oil,Price,

Collapse,

Rising,Prices,Despite,Supply,Surplus,

Longest,Period,of,Sustained,High,Oil,Prices,in,History,

China,Demand,Expansion,

Onset,of,Tight,Oil,

Produc@on,

The Context For The Current Oil Price Crisis: Supply-‐Demand Fundamentals

Source: EIA

•  Oil prices rela4vely insensi4ve to supply-‐demand fundamentals below ~$90/barrel. •  In 2004, the rela4ve supply surplus reached 1.94 mmbpd & in 2005, it reached 4.1

mmbpd but oil prices con4nued to rise: oil was less than $75/barrel. •  Greatest rela4ve surplus in the current episode was 1.7 mmbpd but average price

from Nov 2010 – Oct 2014 was $91 and was more than $100 for 18 months.


The Context For The Current Oil Price Crisis: Demand Destruc4on

Source: EIA

•  Demand generally increased un4l September 2007 and decreased a\er 2007. •  Tight oil produc4on began in earnest in 2011. •  CPI-‐adjusted WTI oil price passed $90/barrel in November 2011.

$0#

$20#

$40#

$60#

$80#

$100#

$120#

$140#

$160#

92%#

94%#

96%#

98%#

100%#

102%#

104%#

Apr.03#

Aug.03#

Dec.03

#Ap

r.04#

Aug.04#

Dec.04

#Ap

r.05#

Aug.05#

Dec.05

#Ap

r.06#

Aug.06#

Dec.06

#Ap

r.07#

Aug.07#

Dec.07

#Ap

r.08#

Aug.08#

Dec.08

#Ap

r.09#

Aug.09#

Dec.09

#Ap

r.10#

Aug.10#

Dec.10

#Ap

r.11#

Aug.11#

Dec.11

#Ap

r.12#

Aug.12#

Dec.12

#Ap

r.13#

Aug.13#

Dec.13

#Ap

r.14#

Aug.14#

Dec.14

#

CPI$A

djusted,WTI,Oil,Price,(Dollars,Per,Barrel),

Consum

p=on

,Percent,of,P

rodu

c=on

,

World,Liquids,Consump=on,Percent,of,Produc=on,Consump<on#Percent# CPI.Adjusted#WTI#Price#

Increasing,Demand, Decreasing,Demand,

Tight,Oil,Produc=on,Growth,Began,in,Earnest,When,Oil,

Prices,Exceeded,$90,November,2011,,September,2007,


2010-‐2014: The Longest Period of High Oil Prices in History in Real Dollars

$0#

$20#

$40#

$60#

$80#

$100#

$120#

$140#

$160#

Jan,70#

Mar,71#

May,72#

Jul,7

3#Sep,74#

Nov,75#

Jan,77#

Mar,78#

May,79#

Jul,8

0#Sep,81#

Nov,82#

Jan,84#

Mar,85#

May,86#

Jul,8

7#Sep,88#

Nov,89#

Jan,91#

Mar,92#

May,93#

Jul,9

4#Sep,95#

Nov,96#

Jan,98#

Mar,99#

May,00#

Jul,0

1#Sep,02#

Nov,03#

Jan,05#

Mar,06#

May,07#

Jul,0

8#Sep,09#

Nov,10#

Jan,12#

Mar,13#

May,14#

CPI$A

djusted,WITCrud

eOil,Price,(Dollars,Per,Barrel),

Oil,Prices,in,2015,Dollars,

Sept,1979$Sept,1981:,26,months,

Sept,2007$Sept,2008:,13,months,

Nov,2010$Sept,2014:,33,months,

1974,Arab,,Oil,Embargo,

1979,Iran$Iraq,War,

2008,Financial,,Crisis,

2005,Peak,of,ConvenSonal,Oil,,&,Prices,Exceed,$60,

Source: EIA and Federal Reserve Board

•  November 2010 – September 2014 was the longest period of oil prices > $90 per barrel ever (all prices in 2015 U.S. Dollars.

•  Probably created demand destruc4on as occurred in a\er 1981 and 2008. •  Oil prices were depressed for almost 20 years a\er 1981. •  Oil prices rebounded in a year a\er 2009.


The Larger Concern About Demand & The Global Economy

•  Decreasing GDP and labor produc4vity growth in the U.S. over the last 30 years suggest long-‐term deteriora4on in economic condi4ons in the U.S.

•  Complex causes but suggest slowing growth. •  A troubling backdrop to the present oil-‐price collapse. •  OPEC and EIA forecast lower oil prices for the next decade.

Source: U.S. Bureau of Labor Sta4s4cs

$0#

$20#

$40#

$60#

$80#

$100#

$120#

0.0#

0.5#

1.0#

1.5#

2.0#

2.5#

3.0#

3.5#

4.0#

1995# 1996# 1997# 1998# 1999# 2000# 2001# 2002# 2003# 2004# 2005# 2006# 2007# 2008# 2009# 2010# 2011# 2012# 2013# 2014#

CPI$A

djusted,WTI,Oil,Price,(M

arch,2015,Do

llars),

Percen

t,Produ

c@vty,Grow

th,

U.S.,Major,Sector,Labor,Produc@vity,&,Oil,Price,Produc4vity# WTI# Linear#(Produc4vity)#

!2%$

!1%$

0%$

1%$

2%$

3%$

4%$

5%$

6%$

7%$

8%$

1984$

1985$

1986$

1987$

1988$

1989$

1990$

1991$

1992$

1993$

1994$

1995$

1996$

1997$

1998$

1999$

2000$

2001$

2002$

2003$

2004$

2005$

2006$

2007$

2008$

2009$

2010$

2011$

2012$

2013$

2014$

2015$

GDP$Grow

th$Rate$Pe

rcen

t$

U.S.$Real$GDP$Growth$GDP$Growth$ Linear$(GDP$Growth)$

Source: U.S. Bureau of Labor Sta4s4cs and EIA


The Financializa4on of the Explora4on & Produc4on Business

$0#

$20#

$40#

$60#

$80#

$100#

$120#

$140#

$160#

0%#

1%#

2%#

3%#

4%#

5%#

6%#

7%#Jan000#

Jun000#

Nov000#

Apr001#

Sep001#

Feb002#

Jul00

2#De

c002

#May003#

Oct003#

Mar004#

Aug004#

Jan005#

Jun005#

Nov005#

Apr006#

Sep006#

Feb007#

Jul00

7#De

c007

#May008#

Oct008#

Mar009#

Aug009#

Jan010#

Jun010#

Nov010#

Apr011#

Sep011#

Feb012#

Jul01

2#De

c012

#May013#

Oct013#

Mar014#

Aug014#

Jan015#

WTI$Oil$Price$Janu

ary$2015$US$Do

llars$

Interest$Rate$

Federal$Funds$Interest$Rates$January$2000>January$2015$

Source: EIA and Federal Reserve Board

•  In a zero-‐interest world, where could reasonably secure yields be found? •  Investment banks iden4fied the U.S. E&P business as the solu4on. •  Yields for corporate junk bonds, preferred stock and other capital instruments in the

range of 6-‐10% interest. •  In the United States and “backed” by a hard asset in the ground. •  E&P companies became the sub-‐prime deriva4ve of the post-‐Financial Crisis period. •  Shale gas and later, 4ght oil companies had access to almost infinite capital with no

performance requirement other than to avoid debt covenants.

“Easy credit feeds our love of immediate gra4fica4on, distorts self-‐regula4on, crea4ng a destabilizing posi4ve-‐feedback loop…that dominates the calculus of risk.” -‐-‐Peter Wybrow, WSJ May 11, 2015


The Problem With The Counterfeit Shale Revolu4on

•  The story stresses success based on resource es4mates but not reserves. •  Produc4on volumes but not the cost of that produc4on. •  The benefits of technology but not its price. •  Claims of profit that exclude important expenses. •  The government and press accept this story because it paints a picture that fulfills so

many aspira4ons of energy independence, U.S. re-‐emerging poli4cal strength, dominance in energy affairs and economic growth.

•  Warning signs of poten4al risk have so far been ignored.


The Counterfeit Shale Revolu4on Concluding Observa4ons

•  Shale plays have been mis-‐represented as providing cheap and abundant oil and natural gas supply.

•  The current oil-‐price collapse is because of expensive unconven4onal oil and the market’s inability to support its cost.

•  $90 per barrel appears to be threshold for demand destruc4on. •  Only the core of the core areas of the best 4ght oil plays are profitable at oil

prices around $70 per barrel. •  Shale gas plays have never been commercial since prices collapsed in 2008 but

have been propped up by easy money based on zero-‐interest rates. •  Easy money has also funded zombie 4ght oil plays and companies. •  The present oil-‐price collapse is severe because of the accumulated, long-‐term

price fa4gue since late 2007 and longer-‐term economic considera4ons. •  The key to recovery is demand—low price will cure demand but it may take a

long 4me. •  The effect of reduced E&P spending on the U.S. economy is unclear and could

reduce demand by slowing the weak economic recovery. •  Con4nued non-‐commercial over-‐produc4on will subside faster than most

imagine especially a\er 1st Quarter 2015 earnings reports. •  Capital availability for the counterfeit shale plays will be an important factor in

how long low oil prices persist.

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