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The Drilling Frenzy Is Over For U.S. Shale
The Drilling Frenzy Is Over For U.S. Shale
A few high-profile shale executives say the glory days of shale drilling are over.
In a round of earnings calls, the financial results were mixed. A few companies beat earnings estimates, while others fell dramatically short.
But aside from the individual performances, there were some more newsworthy comments from executives on the state of the industry. A common theme emerged from several notable shale executives: the growth frenzy is coming to an end.
The chief executive of Pioneer Natural Resources, Scott Sheffield, said that the Permian basin is “going to slow down significantly over the next several years,” and he noted on the company’s latest earnings call that the company is also acting with more restraint because of pressure from shareholders not to pursue unprofitable growth. “I’ve lowered my targets and my annual targets, a lot of it has to do with…to start with the free cash flow model that public independents are adopting,” Sheffield said.
But there are also operational problems that have become impossible to ignore for the industry. He listed several factors that explain the Permian slowdown: “the strained balance sheets lot of the companies have, the parent-child relationships that companies are having, people drilling a lot of Tier 2 acreage,” Sheffield said. “So I’m probably getting much more optimistic about 2021 to 2025 now in regard to oil price.” In other words, U.S. shale is slamming on the brakes, which may yet engineer a rebound in global oil prices.
He said that this would be good news for OPEC. “I don’t think OPEC has to worry that much more about U.S. shale growth long-term,” Sheffield said. “And all that is very beneficial. So we are probably going to be more careful in the years 2021 to 2025 because there’s not much coming on after the three big countries that are bringing on discoveries over the next 12 months Norway, Brazil and Guyana.”
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OPEC Braces For Drastic Drop In Oil Demand
OPEC Braces For Drastic Drop In Oil Demand
OPEC admitted that demand for its oil over the next few years could be drastically weaker than it previously thought, due to a combination of a weakening economy, rising supply elsewhere, and pressure from climate activists.
In its World Oil Outlook, OPEC said that demand for its oil may only reach 32.8 million barrels per day (mb/d) by 2024, a figure that is substantially lower than the 35 mb/d from last year’s estimate. Demand is still expected to grow in non-OECD countries going forward, but OPEC admitted that demand may peak in the OECD in 2020.
Slower economic growth also factored into the lower medium- and long-term estimates. “Given recent signs of stress in the global economy, and the outlook for global growth, at least in the short- and medium-term, the outlook for global oil demand has been lowered slightly this year to 110.6 mb/d by 2040,” OPEC’s Secretary-General Mohammad Barkindo said in the report.
OPEC said that non-OPEC production continues to rise, particularly from U.S. shale, although not exclusively. The cartel has had to restrain production for several years to keep prices from crashing, even in the face of relentless shale growth. U.S. shale is growing, but is now slowing dramatically. At the same time, countries such as Norway, Brazil, Canada and Guyana are expected to continue to add supplies in the next few years. Steady supply increases puts OPEC in a bind.
Meanwhile, the attention paid to the risks of demand destruction in the OPEC report is notable. The phrase “climate change” appears nearly 50 times in the report and the cartel acknowledged that electric vehicles are “gaining momentum.”
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There’s No Stopping The World’s Most Politically Charged Pipeline
There’s No Stopping The World’s Most Politically Charged Pipeline
This week, Denmark granted Gazprom approval for its Nord Stream 2 gas pipeline project, a project that is set to bring 55 billion cubic meters of Russian gas into Europe annually. It is one of the most controversial pipeline projects in the world and is now moving ahead despite strong opposition from multiple EU members and the United States.
The geopolitical tensions surrounding the development of Nord Stream 2 are unprecedented. To begin with, Russia has very poor relations with the Baltic states and Poland, nations who will almost always fight against anything they see as empowering Russia geopolitically. Then there is Ukraine, a nation that is strongly against the pipeline due to its fear of losing the transit fees that it currently charges Russia for exporting gas to Europe. Finally, and perhaps most importantly, the United States sees this pipeline as a direct threat to its soft power in Europe as well as a threat to its growing LNG exports.
But for all the politics and attention that this pipeline is attracting, the simple truth of the matter is that Europe, and more specifically Germany, needs this natural gas. Germany plans to shut down all its nuclear reactors by 2022. Many have questioned the wisdom—and some even the sanity—of that decision, but it remains government policy. The generation capacity the is being lost in that sector will need to be replaced, in the short term at least, by natural gas.
Despite its green reputation, Germany is a country that generates a surprisingly large portion of its total energy from coal. Its total installed coal-fired capacity is close to its solar capacity, at 44.9 GW, versus 47.9 GW for solar. At today’s growth rates, it’s current solar and wind capacity will not be enough to replace the retired nuclear plants.
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Is The Era Of U.S. Energy Dominance Already Over?
Is The Era Of U.S. Energy Dominance Already Over?
The global oil industry is a highly lucrative sector that is strongly influenced by geopolitical developments. As the Post-Cold War era comes to an end, a new status quo is arising. The U.S. was once the only player with the capability to significantly influence energy markets around the globe. The country’s military and global alliances proved powerful tools in controlling developments in regions such as the highly volatile Middle East. But Washington’s global reach is fading and both Russia and China are on the rise.
Moscow has become a force to reckon with in several regions due to a combination of diplomacy and energy politics. In addition to that, Washington’s foreign policy blunders have created power vacuums for other actors to take advantage, blunders such as the recent unexpected withdrawal from Northern Syria. Arguably, Russia has now become the most important power broker in the Middle East. Moscow’s plans, however, are not regional, but global. The first-ever Russia-Africa summit is a testament to the Kremlin’s global ambitions.
Moscow has also fostered strong relations with several countries in Latin America. Ever since the Monroe doctrine of 1823, the U.S. considers Central and South America as its ‘backyard’. Countries such as Venezuela, however, have resisted Washington’s power and influence. Therefore, when the rumor spread of the sale of South America’s biggest energy company to Russia’s Rosneft, panic spread in Washington of potentially another foreign policy setback.
Venezuela’s national oil company is estimated to be worth $186 billion and is the country’s economic engine. The Orinoco region, where the majority of the country’s oil is produced, contains approximately 300 billion recoverable barrels of oil and is the biggest in the world. Despite the massive energy reserves, Venezuela is spiraling towards an economic and political meltdown.
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A Mining Explosion: The Dirty Little Secret Of The Green Revolution
A Mining Explosion: The Dirty Little Secret Of The Green Revolution
Leftwing darling Alexandria Ocasio-Cortez’s proposed Green New Deal, despite its flimsy 14 pages total, is nothing if not all-encompassing and vaulting in its ambition. The bill was also crucial to Ocasio-Cortez’s rapid ascent to acronym status and anointing as the queen of green.
Thanks to her How Dare You tour, 16-year old Greta Thunberg is now the undisputed leader of the growing ranks of school-bunking climate crisis warriors all over the world.
The Greta show arrived in MINING.COM’s hometown of Vancouver last week to take Make-Love-Not-CO2 youths (and second-life hippies) on yet another march and bridge-blockade. The footslogging Greta groupies are beginning to resemble the disastrous 1212 children’s crusade – with higher ground now doing service for holy land.
Much of the response to AOC and Thunberg (who seem to get on like a house on fire if the Guardian is to be believed) on the right has been mocking and dismissive, accusing the pair of swapping hamburgers for pie in the sky.
This is a mistake.
Red turns green
Some estimates put the green economy in the US at $1.3 trillion in annual revenue already – that’s 7 percent of GDP – with a workforce of 9.5m Americans.
Within the Green New Deal is a goal of “meeting 100 percent of the power demand in the United States through clean, renewable, and zero-emission energy sources”. AOC has no deadline of course, but no doubt Greta would want that for the whole world before she hits drinking age.
A seminal paper by Bernstein’s European mining and metals team led by Paul Gait outlines just how fundamental a restructure of the global industrial economy is necessary to bring this – or even a fraction of this – about.
And all of it to the great benefit of mining.
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Texas Hit Hard By Shale Slowdown
Texas Hit Hard By Shale Slowdown
Texas’ economy is perhaps the most vulnerable to oil price swings given its leading role in the country’s oil industry. Recently, as prices have remained low, talk has begun about the outlook for the state’s economy.
According to a recent Reuters report, for example, smaller independent oil and gas producers in the Lone Star State are struggling to get loans from banks as the latter become increasingly wary of the ability of the borrowers to return the money when the time comes.
Jobs in the Texas oil and gas industry are falling, too. The Houston Business Journal reported this month that September saw a 1,100 decline in the number of jobs in the mining and logging sector—the category that includes oil and gas jobs. Over the 12 months from September 2018, the state’s oil and gas industry added just 1,700 new jobs, which was the lowest number of new job additions to any Texas industry over the same period, data from the Texas Workforce Commission showed.
Yet not everyone is worried. The University of Houston Energy Fellows, for instance, wrote in an article for Forbes that “the alarm bells are premature.” While the experts that make up the group acknowledge there are plenty of reasons to be worried about the economy of Houston—the article focuses on the city—oil prices are not among them.
The trade war with China and the anticipation of a global economic slowdown caused by it is a top concern for any economy and Houston is no exception. Political economic problems in Europe are also a cause for worry. Yet, according to the University of Houston Energy Fellows, bankruptcies in the Houston oil and gas industry are only slightly higher this year than last, and the credit crunch energy independents are facing now is “far from comparable to 2015-16.”
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U.S. Shale Braces For Brutal Earnings Season
U.S. Shale Braces For Brutal Earnings Season
A lot of big names will report third quarter earnings this week, and the results are expected to be worse than the same period in 2018.
The timing comes as the shale sector is facing somewhat of a reckoning. After years of price volatility – with more downs than ups – oil prices have failed to return even remotely close to pre-2014 levels. For several years, shale E&Ps took on debt and issued new equity, promising investors that they would profit both from a rebound in prices and from rapid production growth.
They delivered on gains to output, but not on profits. At some point in the last year, investors really began to lose faith. Oil stocks have been the worst performers in the S&P 500 this year.
The latest release of earnings will probably do little to quell unease from big investors. Oil and natural gas prices have dropped this year, by about 17 percent and 31 percent, respectively. Job cuts have returned and bankruptcies are on the rise again.
The oil majors are pressing forward with their aggressive shale development plans. That may prevent a noticeable decline in production. But their earnings – many of the majors report this week – are expected to be down roughly 40 percent from a year ago, which will raise some tough questions.
Some of the largest banks have slashed their credit lines to smaller shale E&Ps. According to Reuters, JPMorgan Chase, Wells Fargo and the Royal Bank of Canada are among some of the lenders that have reduced the amount of credit they are offering to drillers.
The so-called credit redetermination period happens twice a year, and banks tend to offer financing based on a company’s reserves. Lower prices lower that assessment because some reserves become uneconomic to produce. As a result, the ability to access financing becomes more restricted.
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California’s Blackouts Are Part Of A Far Bigger Problem
California’s Blackouts Are Part Of A Far Bigger Problem
This past weekend, Pacific Gas & Electric had to resume electricity blackouts to 930,000 customers affecting upwards of three million people around San Francisco. Meanwhile, two major wildfires, one of which may have been caused by malfunctioning utility equipment, are burning and evacuations are underway. PG&E has informed customers that power in the affected areas may be out for up to one week.
It would not be overstating the case to talk about an air of crisis or panic in the state. Unfortunately, good ideas to resolve difficult, thorny issues seldom arise in troubled circumstances. And California’s Governor Newsom provides us with a ready case in point.
Yesterday Bloomberg News reported that the California Governor was interested in a takeover of PG&E by Warren Buffett’s Berkshire Hathaway Corp. On its face, it sounds logical in several ways. First, Berkshire already owns utilities serving California, Oregon, Washington, Nevada, Utah. Wyoming and Idaho. PG&E would fit in. Second, Buffet notoriously has told investors to buy when there is “blood on the streets”, that is, where the investment outlook looks bleak and most investors stay away, fearful of principal risk. Presumably, the governor envisages Berkshire purchasing the PG&E’s equity at a steeply discounted price, replacing a considerable portion of the utility’s outstanding long-term debt and appointing new senior management and a new Board of Directors.
There is one difficulty here in viewing Mr. Buffett as a potential financial white knight riding to California’s rescue. The current crisis is caused by an extensive above-ground high voltage transmission network sparking wildfires in an increasingly arid environment. Stated differently, the world that this transmission system was built for no longer exists. This is a profound operational problem.
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The Warning Signs Are Flashing for U.S. Shale
The Warning Signs Are Flashing for U.S. Shale
U.S. oil production growth has slammed on the breaks, as low prices and the loss of access to capital markets has forced a slowdown in drilling.
Third quarter earnings reports will soon start to trickle in. Three months ago, the shale industry saw improvement in some of the headline cash flow figures, but the second quarter results also revealed some deeper concerns about drilling operations and raised questions about the longevity of an unprofitable oil boom.
The problem for the shale industry is that, if anything, the outlook has only become gloomier since. Oil prices have languished and investors have grown more skeptical.
Ahead of third quarter earnings, some analysts downgraded several prominent shale drillers.
Imperial Capital analyst Irene Haas issued a double downgrade this week to Extraction Oil & Gas, a Colorado shale driller. Imperial Capital cut the company’s outlook to Underperform from Outperform, and lowered its price target to just $2 per share from $7. Extraction saw its share price plunge by 9 percent at one point during trading on Thursday before recovering some losses.
Irene Haas says that Extraction’s production is likely to be flat during the third quarter due to unplanned outages on the Western Gas system. More importantly, Haas says that Extraction’s business model is “fundamentally more risky, compared to other DJ Basin peers.” Haas also raised concerns about Extraction’s near-term fortunes, noting that the company “might not be equipped to weather additional commodity prices downdraft or operational upsets, planned or unplanned.”
Meanwhile, SunTrust cut Concho Resources to Hold from Buy, pointing to the company’s efforts to rein in “inflated well costs.” The move also comes in the wake of Concho’s high-profile announcement over the summer, in which it admitted that its densely-packed 23-well “Dominator” project produced poor results.
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Solar Storms Can Devastate Entire Civilizations
Solar Storms Can Devastate Entire Civilizations
Climate has inarguably become a hot topic of discussion in developed economies over the last decade, and it is getting hotter by the day as study after study warn we are close to doomed if we don’t change our ways urgently. Yet climate on Earth is not the only problem that humankind faces. There is another climate we need to pay attention to, and there is nothing we can do to change that.
Solar storms, whose more scientific name is coronal mass ejections, were until recently believed to be a rare occurrence—only happening once every couple of centuries or so. However, there is reason to believe they may be a lot more frequent than that. In a world increasingly dependent on electricity, this is, to put it mildly, a problem.
In 1859 the Sun spewed concentrated plasma that broke through its magnetic fields in the direction of the Earth. Commonly referred to as the Carrington Event, that coronal mass ejection hit the Earth’s magnetic field, which warped it and caused telegraphs around the world to fail. For a long time, the scientific consensus was that solar storms of this magnitude were a rarity.
That was in the 19th century where telegraphs were cutting-edge tech. Now, we have power grids, airplanes, satellites, and computers, and all of them are potentially susceptible to the effects of another solar storm. We also know that solar storms of the magnitude of the Carrington Event or even worse occur more frequently.
“The Carrington Event was considered to be the worst-case scenario for space weather events against the modern civilization… but if it comes several times a century, we have to reconsider how to prepare against and mitigate that kind of space weather hazard,” the lead research in a study that reached that conclusion, Hisashi Hayakawa, said after the release of the study earlier this month.
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Capital Flight Is Killing The US Shale Boom
Capital Flight Is Killing The US Shale Boom
The growth in U.S. shale production is grinding to a halt as low prices put drillers in a financial vice.
The slowdown has been unfolding for much of 2019, but the latest slide in oil prices is another blow to cash-strapped companies. Share prices for many E&Ps are down sharply. For instance, Devon Energy’s stock is down 20 percent since mid-September; EOG Resources is off by 17 percent and Pioneer Natural Resources is down by more than 13 percent. Many other companies have seen similar declines.
Rig counts have fallen by 20 percent since last year, drilling is down, hotel rates are down, and employment is in decline. “If you can’t wring out any costs savings then you’ve got to buy less stuff if you want to get your costs down, and that’s the phase we’re entering into,” Jesse Thompson, senior business economist at the Houston branch of the Federal Reserve Bank of Dallas, told Bloomberg.
As Bloomberg noted, annualized employment grew only 0.7 percent through August, compared to 11.4 percent for the same period in 2018. The unemployment rate has ticked up from 2 to 2.3 percent. The number of fracking crews has fallen to its lowest level in 30 months.
For embattled shale drillers, there is another imminent hurdle that they must clear. For the first time since 2016, Permian shale drillers could see their access to borrowing slashed. Lenders periodically reassess the borrowing base that they offer to oil and gas producers, a so-called “credit redetermination” period.
According to a survey of financial institutions as well as oil and gas firms by law firm Haynes and Boone, the industry is set to see “a decrease in credit availability for producers and a strong interest in alternative sources of capital.”
In other words, lenders are turning off the spigots.
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China’s Renewable Boom Hits The Wall
China’s Renewable Boom Hits The Wall
When earlier this year China announced subsidies for 22.79 GW of new solar power capacity, those following the country’s renewable energy story must have started to worry. The capacity subsidized is half the amount approved in 2017, at 53 GW. And chances are that solar and wind additions will continue to fall.
Subsidies are one reason. In January, Beijing said it will only approve solar power projects if they are cost-competitive with coal. Judging by the size of subsidies announced in July, more than 22 GW in projects can boast cost-competitiveness with coal.
Yet there is another reason: curtailment. China-based journalist Michael Standaert wrote in a recent story for Yale Environment 360 that China’s solar and wind farms continue to produce electricity that is wasted because there is not enough transmission capacity.
Renewable energy is a top priority for China as it fights one of the worst air pollution levels in the world while subject to an uncomfortably high degree of reliance on energy imports, namely oil and gas. At the same time, it is one of the biggest—if not the single biggest—driver of global energy demand as its middle class grows fast and with it, energy demand. Now, it seems, energy demand is taking the upper hand.
China has substantially increased subsidies for shale gas exploration and methane separation from coal, Standaert writes. He also quotes a former IEA official as saying, “Though China is the largest clean energy market in the world, wind and solar only accounted for 5.2 percent and 2.5 percent of China’s national power generation in 2018.”
What’s more, Kevin Tu, now a fellow at the Center on Global Energy Policy at Columbia University, tells Standaert that “Against the backdrop of an ongoing U.S.-China trade war and a slowing Chinese economy, political priority of climate change in China is unlikely to become very high in the near future, indicating great difficulties for Beijing to further upgrade its climate ambitions.”
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Secret Survey: U.S. Shale In A State Of ‘Deep Anxiety’
Secret Survey: U.S. Shale In A State Of ‘Deep Anxiety’
The financial stress sweeping over the U.S. shale sector has led to a sharp contraction in activity.
Oil and gas activity in Texas and parts of New Mexico declined in the third quarter, with the Dallas Fed’s business activity index reporting a reading of -7.4, down from -0.6 in the second quarter. A negative reading signals contraction while a positive reading indicates expansion. Falling deeper into negative territory indicates that shale drillers in the Permian further cut drilling activity over the last three months.
A slowdown in drilling is an even larger problem for oilfield services companies, who provide the equipment, manpower and drilling services that oil companies need. A producer may be able to do more with less, but that “less” falls on the service providers, who have been hit hard. The Dallas Fed said that the business activity in the oilfield services sector fell to -21.8 in the third quarter, down from 6.6 in the second.
Another reading demonstrated the pain for oilfield services. The Dallas Fed’s “equipment utilization index” plunged to -24 from 3, and the figure for the third quarter was the lowest since the oil market’s nadir in 2016.
Problematic for shale drillers is that costs still grew, although at a much slower rate. The “input cost” index stood at 5.6 in the third quarter, an indication of slowing cost increases compared to the 27.1 reading in the second quarter. But the bad news for the industry is that the reading was still in positive territory.
Employment is also weakening. The employment index fell to -8.0 from -2.5, meaning that the Permian likely saw job losses for the second quarter in a row.
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‘’Too Much Too Fast’’ Gas Glut Crushes Shale Drillers
‘’Too Much Too Fast’’ Gas Glut Crushes Shale Drillers
Appalachian shale drillers are getting squeezed by low prices, and a supply glut may mean that there is little prospect of a pricing rebound anytime soon.
Earlier this month, IHS Markit put out a press release entitled, “U.S. Natural Gas Price Will Fall to Levels Not Seen Since 1970s.” The firm said that persistent oversupply from the Marcellus would be “reinforced” by a surge in associated gas production from the Permian basin. That could keep average natural gas prices below $2/MMBtu next year, which would nominally be the lowest since 1995, but in real terms it would be the lowest since the 1970s.
The market is set to see falling prices despite structural increases in demand from new gas-fired power plants and LNG export facilities. IHS noted that U.S. demand has climbed by 14 billion cubic feet per day (Bcf/d) in annual consumption since 2017, but supply has expanded by even more than that amount since the start of 2018.
“It is simply too much too fast,” Sam Andrus, executive director of IHS Markit, said in a statement. “Drillers are now able to increase supply faster than domestic or global markets can consume it. Before market forces can correct the imbalance, here comes a fresh surge of supply from somewhere else.”
The bust in gas prices create significant dangers for gas-focused shale companies. “With the news from IHS Markit that natural gas prices in the United States will drop below $2 MMBtu in 2020 and remain low through at least 2024, if not longer, heads must be exploding in the board rooms of oil and gas producers throughout the U.S. and Canada,” Tom Sanzillo and Kathy Kipple wrote in a commentary for the Institute for Energy Economics and Financial Analysis (IEEFA).
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Yergin: Expect Extreme Volatility In Oil Markets
Yergin: Expect Extreme Volatility In Oil Markets
Rising pipeline takeaway capacity in the Permian and global oil demand growth at its weakest in a decade are set to lead to more volatility in oil prices in the near term, a prominent energy expert said, joining a growing number of analysts who see prices further depressed by slowing economies and crude demand.
“The pipeline bottlenecks are in the process of being resolved, so a lot more oil is going to come onto the market by the end of the year. We expect the U.S. (crude oil output) to be up to 13 million barrels a day,” IHS Markit’s vice chairman Daniel Yergin told CNBC on Tuesday.
While U.S. production will continue to add more supply in an already oversupplied global market, on the demand side, expectations are getting increasingly pessimistic.
“We’re in one of the weakest periods since 2008 and we think demand growth this year is under a million barrels per day. So you have that factor at the same time as you have more oil coming to the market. So expect some volatility,” Yergin told CNBC in an interview on the sidelines of a conference in Abu Dhabi.
Despite expectations of volatility, IHS Markit’s vice chairman sees Brent Crude prices range-bound in the US$55-65 range.
Yergin is not alone in predicting substantially lower oil demand growth this year than originally anticipated.
The International Energy Agency (IEA) revised down its demand growth estimates for 2019 in its latest Oil Market Report, by 100,000 bpd to 1.1 million bpd, after seeing that between January and May demand growth was just 520,000 bpd, the lowest increase for the period since 2008.
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