Reality Check

If you are looking for excuses not to read this report, don't use the Post Carbon Institute as a mecca for ultra left wing, anti-oil liberalism as a reason. It predicts a coming worldwide energy crisis and advocates for hydrocarbon conservation and an eventual transition to renewables. But, so what? Even Exxon and BP and Total, etc. are getting onboard the renewals train. And David Hughes has excellent credentials as a scientist. He uses Drillinginfo, World Oil, Rystad and a host of respected industry information services in his study. The purpose of the report is to refute the lofty predictions of the Energy Information Agency. Even Harold Hamm thinks the EIA is all over the map with its absurd production estimates.

Click here to read the full report. It won't hurt you, promise.

Before you get started, this was an interesting exercise I did the other day while watching my rig pull tubing:

A well respected analyst recently sent me what his staff had determined was the total indebtedness of the US (public) shale oil business. The data was gleaned from several days researching SEC 10K's and Q's and hundreds upon hundreds of corporate earnings reports in all of America's shale basins. Best they could determine, $229,000,000,000 of long term debt. There are, of course, countless privately held entities that are reliant on private equity for funding but that do not report to the public. We have no way of knowing the total amount of debt associated with the now, decade old shale oil phenomena in America actually is. Lets just go with $230 billion.

I like to use the net-back metric for quick-look economics of shale oil basins. I call it "take home pay."

I deduct severance (production) taxes, property (ad-valorem) taxes, royalty deductions, lift costs, including weighted well intervention costs, general administrative (corporate overhead) and interest expense on borrowed capital, all extrapolated on a per incremental BO basis. After that exercise, depending on the exact basin, and of course, the exact company, I believe take home pay is generally anywhere from $24 to $29 per BO at $60 gross oil. I don't like the BOE metric, not at 6:1, that's fake economics, particularly when a lot of associated gas goes up the flare stack for the first 6 months of the well's life. At 25% of the production stream and 20.1 ($2.85/MMBTU), associated gas does not change the economic picture that much. As shale basins deplete, however, and things get gassier, and liquids get lighter, gas is going become a key component in shale economics... if it can be sold. If you want to use it, use it. Not me. For now lets just use $26 dollars per BO take home pay, and call it good.

What all that means is that for the American (public) shale oil industry to pay off its 230 billion dollar indebtedness it must produce, starting tomorrow, at $60 oil prices, 8.9 billion more barrels of oil ! None of those barrels can be used to replace reserves, or pay shareholder dividends, none can be used to grow reserves or will help America get closer to the land of plenty the EIA promises; those are barrels needed just to get out of existing debt. Between now and then the interest to be paid on that $230B of long term debt is enough to choke a big horse.

Let that sink in a minute. If you need to make yourself a drink, I understand.

Now, I took this stuff from David Hughes' 2018 Shale Reality Check:

Since 2008-2009 there have been over 17,000 Eagle Ford shale oil wells drilled in South Texas and the cumulative production to date from all those wells has been 2.34G BO.

During the same time frame, over 13,000 shale oil wells have been drilled in the Bakken shale basin in North Dakota for a total cumulative oil production to date of 2.36G BO, basically the same as the Eagle Ford.

So, essentially everything the US shale oil industry has produced over the past decade, in two of the three largest shale basins in North America, its going to have to do again... 3.75 more times. It has to produce the equivalent of another two Eagle Ford's and one and a half more Bakkens...just to get out of debt.

Yikes !!