An Uncomfortable Truth for the American “Shale Revolution”
USA — July 6, 2018
The latest publication of the U.S. Energy Information Administration relating the short term energy market forecast prognosticates an increase of more than 1 million barrels a day from the previous year, averaging a production rate of 10.3 million barrels a day for 2018.
However, respected outlets such as WSJ, FUSE and Forbes prefer to stay skeptical on the matter.
The basis for such skepticism is explained by Arthur E. Berman, a petroleum geologist with 36 years of oil and gas industry experience. Berman is also an expert on U.S. shale plays and is currently consulting for several E&P companies and capital groups in the energy sector.
According to Berman, the oil deposits’ reserves significantly influence the shale production in the U.S. as they might be seriously overvalued. Berman suggests that real storage could be 15 times less than earlier predicted.
Increase of oil production also depends on the financial health of the companies within the industry. Berman estimates that, in his experience, not more than 5% of the involved structures can afford to finance production expenses based on pure cash flow. In other words, he warns that shale oil extraction is not possible without investment capital inflow.
Further, U.S. shale oil producers are no longer able to ignore the investors’ and owners’ desire ] to realize an actual profit for their dividends. This is why the shale oil companies are not eager to enlarge drilling volume or craft large investment plans for 2018 regardless of the 40% half-year increase. Even such a giant as Chevron has announced a 10% reduction of well-drilling and expenses for 2018, the WSJ reported.
According to research by Jefferies Consulting Company, only 8% of producers may increase their investments in the relevant sectors compared to the previous year’s 55%.
Thus the shale production in the United States is rather vulnerable from investors’ expectation versus actual oil prices. This year oil producers will have to direct more money for dividends instead of devoting resources to drilling new wells. Experts have observed that the shale boom will results in American companies sustaining losses rather than gains for some time.
This is not the first year investors are asking for repayment of capital while calling for a halt on new well drilling. Generally, since 2010, the shale oil companies spent more than what they earned from the shale boom, according to the WSJ.
Additional concerns have been caused by the high debt burden in the shale industry. The shareholders are likely to require a period of high oil prices to ensure debt repayment rather than an increase in production.
Harold Hamm, Executive Director of Continental Resources, Inc., announced that all additional profit grained on oil sales will be allocated to the reduction of debt. It is probable that this trend is going to be supported by other industry players who also plan to concentrate on accumulating profit, debt redemption, and dividend payments.
For the past two years, the largest shale companies have experienced losses. FCF Whiting Petroleum is one such company. A previously reported $41 profit per one million oil barrels sold has dwindled to just $2 per one million barrels, a significant decrease.
During the previous two years, approximately 120 companies declared bankruptcy. In contrast, just 15 did so in 2017.
So, while it could be said that the "shale revolution" is slipping and not meeting expectations, it can also be said that it has turned out to be extremely dangerous for the population and the environment.
New scientific research and industry observation has shown the increasingly negative consequences deriving from oil production using the wells horizontal directional drilling (HDD) and hydraulic fracturing methods. The significant damage reported do not support the idea of a shale revolution being a success.
Another issue has seemingly come out of nowhere. There is sweet oil coming from the main shale deposits in the U.S. OPEC members usually produce high-sulfur oil on average with heavy density, and the majority of oil plants in the Gulf of Mexico are constructed to refine the heavy types of oil.
Oil refining companies used to invest in transportation and reprocessing assets before the shale revolution because they expected to refine oil from Saudi Arabia and Venezuela. Light oil is good for producing gasoline, but average and heavy oil are needed for diesel and aviation gas. Due to shale production, the refineries are now facing an overabundance of sweet oil.
In general, American refineries are able to increase sweet oil reprocessing to maximum capacity, but the demand for gasoline would be affected by the development of the electrical car market and other factors. At the same time, diesel fuel growth might sharply rise after 2020 when the new International Marine Organization’s regulation for “dirty” fuel goes into effect, and the sea industry must switch to diesel from black oil. This change will immediately increase diesel demand to upwards of 2 million barrels a day.
In other words, by increasing sweet oil over gasoline the market faces a downward trend of heavy oil supply required for growing diesel demand. If oil refinery plants are not going to buy each additional barrel of sweet oil, the shale producers will probably have to further reduce prices over the next several years.
According to Wood Mackenzie’s research, approximately 75% more U.S. shale oil is to be exported overseas since the refineries won’t be able to process them domestically.
That point of view is supported by other experts as well, including IHS Markit director, Rob Smith. He expects that shale oil production in the United States will increase to another 4 million barrels a day by 2023. Only one million barrels could be utilized domestically and the rest is to be exported, according to Smith’s knowledge.
Thus sweet oil surplus it is additional serious problem for shale producers.
The proverbial nail in the coffin for shale oil production is the damage it causes to the environment by horizontal directional drilling and hydraulic fracturing methods. Application of these new technologies, which happen to be quite “dirty”, has created the following ecological risks:
- First, shale production requires a tremendous amount of clean water.
- Secondly, there are a lot of chemicals used in order to keep gaps and channels open.
- Third, drilling of shale wells is 5 to 15 times more expensive than standard wells with lower extraction efficiency.
- Pollution and contaminated drinking water is already a reality for many residents affected by these intrusive drilling methods.
- Changing the subsoil structure is the next risk, which is not even critically evaluated now. The permanent intrusion into earth's crust and the destruction of its natural stability by HDD and hydraulic fracturing may increase the frequency of earthquakes, volcanic activity and other natural cataclysms.
Finally, the shale bluff exposes the vulnerability of American foreign policy, making the country dependent on foreign oil producers and forcing it to look for compromises even with like Iran, Venezuela, and Russia.