Fracking Cracking in US and Downunder

March 28, 2020

And Corona virus not helping.

Institute for Energy Economics and Financial Analysis:

“The fracking sector as a whole has been struggling mightily throughout the decade to register positive free cash flow but for those based in Appalachia, the numbers have been even more dismal,” said IEEFA financial analyst and briefing note co-author Kathy Hipple.

Negative cash flows for the full year, at $466 million, actually represented the decade’s best performance for these companies. Yet only two of the eight firms in the IEEFA sample, Cabot Oil and Gas and EQT, were cash flow positive for the year. Five of the eight companies—Antero Resources, CNX, Chesapeake, Gulfport, and Range Resources—reported negative cash each year throughout the decade. Southwestern’s cash flow was negative in nine of the 10 years, including 2019.

“The paradox for the fracking sector is that the oil and gas production bonanza has been a cash flow bust,” said IEEFA energy finance analyst Clark Williams-Derry. “Q4 2019 was no exception.”    

On an annual basis, U.S. benchmark gas prices peaked in 2008, at $8.86/MMBtu. But prices have dropped dramatically since then, falling to just $2.56/MMBtu on average in 2019,  and well below $2.00 more recently.

For a brief period in March 2020, some Appalachian-focused gas producers saw their stock prices improve, even as stocks for other oil and gas companies plummeted. This bounce was propelled by an emerging narrative that lower oil prices would curtail drilling in the Permian, translating into reduced gas production from the U.S.’s most prolific shale basin. This comparative improvement in some Appalachian producers’ stock performance lost steam by late March, as natural gas prices continued to decline along with the price of oil, hitting $1.60/MMBtu. 

“We expect gas prices to remain depressed for the foreseeable future and add to that decreased demand from the coronavirus pandemic and that spells continuing distress for producers in Appalachia,” said IEEFA’s director of finance Tom Sanzillo.

Bruce Robertson for Institute for Energy Economics and Financial Analysis:

GLOBALLY, RENEWABLE ENERGY IS THE CHEAPEST SOURCE OF POWER GENERATION. Increasingly, it will be more so. It is a matter of time. In China, this will happen as soon as 2027. In Australia it’s already the case. Wind and solar are already cheaper, even unsubsidised.

Inside the industry, gas executives see very little demand for their product beyond 30 years from now. The proposed Burrup project in Western Australia has a 50 year life. The Northern Territory fracking projects have a minimum 30 year life. But for both, it’s unlikely they will see their 30 year life out.

Prior to covid-19, the gas industry saw increasing demand for their product, even if only within the 30-year projected life span. It will take a long while for all of us to crawl out of the economic effects this virus will heave. It will last for years.

Then there is another issue: there’s an oversupply of gas. The global gas glut will not resolve now until about 2030. It was previously projected to resolve by 2025. So why would any gas company look to build new gas now?

THE LARGEST COST OF RENEWABLE ENERGY IS THE FINANCING. Running a solar plant, for instance, costs very little. In our current climate, financing costs are declining for renewables as interest rates fall, while financing costs for fossil fuels are going up. This is because the debt markets have lost patience. They are downgrading the debt of oil and gas companies.

Currently, the U.S. fracking industry is experiencing a flood of bankruptcies, and soon, some US$86 billion dollars of debt will be due. This will be very difficult for the industry to manage. When enough fracking companies go broke in the U.S., this will force prices back up, at which point gas will become uneconomic to produce.

Whether prices are low or high, it is not good for the fracking industry. Too low and they can’t make money, and too high and they lose market share to renewables.

Origin’s Kyalla fracking project in the Northern Territory’s Beetaloo Basin was pulled this week. It is not, however, just the virus that is stopping them.

Origin, via a consortium, have already invested $25 billion dollars at Gladstone LNG plants in Queensland. They need more gas to put through these plants. If they stop supplying those plants, they go bankrupt.

THE GAS INDUSTRY HAS BEEN GIVEN A FREE RIDE TO CONTINUE FOR SOME YEARS NOW, but they are pulling out because they don’t have the money to continue.

In fact, they are pulling out globally. They simply cannot make money when oil is below $35/barrel. Even if oil prices recover a little, fracking companies will still be below their break-even prices. Simply, they cannot fund their projects at the moment.

At a time when globally oil and gas companies are cutting projects and shrinking their ambitions, some large renewable projects, on a globally significant scale, are forging ahead.

ACCIONA have just announced a new 1026 megawatt (MW) wind farm in Queensland. The project will begin construction in mid-2021 and will require a total investment of AU$1.96 billion (€1 billion) over three years. The MacIntyre complex will be ACCIONA’s biggest renewable energy facility and one of the largest onshore wind farms in the world.

WHILE ACCIONA HAVE BEEN INVESTING LARGE CAPITAL IN NEW PROJECTS, Woodside today has deferred a final investment decision on the major elements of its Burrup Hub expansion project as weak global LNG prices takes its toll.

Origin have previously said the Beetaloo Basin is liquid rich, which means they can see oil. This oil wasn’t discussed in the Pepper fracking enquiry, which is dishonest because they know it is there. But even with oil and gas underground, Origin cannot afford to continue.

For Origin to receive any return from their LNG export business APLNG, they need oil to be higher than US$36/barrel. They will struggle this year to receive any return. They may need to prop up their failing investment with new equity.

And Santos were looking at developing the Barossa gas field offshore in the Northern Territory. That project has now been put on ice. Santos sold a 25% interest in Darwin LNG and the Bayu Undan offshore gas field to SK E&S for US$390m, contingent on the Barossa field getting the final investment decision. In the current climate, it could be that the Darwin LNG and Bayu Undan sale falls through.

SIMILAR TO THE U.S. EXPERIENCE, FRACKING IN AUSTRALIA HAS BEEN A FINANCIAL DISASTER. It is a massive loss making industry. Santos has written off nearly US$7 billion dollars over the last 5 years, and if you include Origin’s losses, this rises to over US$10 billion.

This is before the impact of the coronavirus. We will see further large write-offs from these companies. It will seriously strain them and their ability to raise debt or equity.

The gas industry has also been lying about their emissions, to the tune of 25-40%.

Gas emissions are 50% less than burning coal IF the gas is just used to produce electricity in a gas baseload plant. But in Australia, we use gas in gas peaking plants which are far less efficient. In those plants, gas is only 31% more efficient than coal. Australia also exports its gas. Making liquefied natural gas (LNG) uses an awful lot of gas and electricity. The LNG process involves burning an extra 17% of gas. In addition, if we look at fugitive emissions along the supply chain, even more methane is released. We only need about 2-3% of fugitive emissions to make gas worse than coal. Which means, gas is a high emitting fuel that needs to be recognised as such in order to reduce global emissions in line with the Paris Agreement.

GAS USAGE FOR POWER IN AUSTRALIA HAS DECLINED BY 59% SINCE 2014. Gas is not a transition fuel. The decline has occurred while renewable energy capacity has increased. Further, there is no committed investment into gas powered generation in Australia, and at this stage, it could only occur with bloated subsidies.

The Australian Energy Market Operator (AEMO) sees a smaller role for gas into the future. They have developed an Integrated System Plan (ISP) which states that under current policy conditions, without any changes, they see a decline in gas usage in Australia to 2042. Instead, the vast majority of proposed projects in Australia are in solar, wind, hydro and batteries.

In addition to living in a dream, the gas industry is a poor tax and royalty payer. The Australian government budget will be under enormous pressure over the next 12 months. They will need to find more money.

5 Responses to “Fracking Cracking in US and Downunder”

  1. dumboldguy Says:

    Good news, all of it! Too bad the greedy rich bastards are going to take down so many real Americans with them.

  2. cookscanoes Says:

    This is NOT a factual article and the author needs to check his sources.

    In late 2008, the price of natural gas in the US was over $13/mcf (MMbtu), NOT $8.86 for a peak rate. In early 2009, due to vast production in the Barnett Shale of Texas resulting in market saturation the price dropped to under $1/mcf. Since that time it has barely topped $4/mcf a few times for short periods and is currently at about $1.67/mcf. The production cost less severance taxes, royalties and transportation fees is about 3-4 times higher than the market cost, so I s eriously doubt that ANY gas producer is making a profit, or has since early 2009.

    The claim that lower production in the Permian Basin of Texas resulted in slight profits for Appalachian producers is also false. Permian Basin producers are not even trying to capture natural gas, and have not ever been! The price is too low and the market is too saturated for them to spend billions of dollars building pipelines to carry a market-saturated product that would further reduce the market value of the product. In the Permian Basin producers vent or flare the gas to get rid of it. A trip down US 287 south of Carlsbad, New Mexico to Fort Stockton, Texas will confirm this fact – you will see gas flares on every producing well for miles around in any direction.

    I stopped reading after these two glaring errors. There may be others I did not read. If we are going to effectively fight this battle, then we need to do so with truth, not manufactured “facts.”

    • rhymeswithgoalie Says:

      Is there a difference in pricing classes for gas as there is for crude?

      • Brent Jensen-Schmidt Says:

        Gaseous Gas is priced according to the quantity of heat produced, which varies according to content. Extracted fractions, liquids etc, priced separately. Am not expert.

  3. Brent Jensen-Schmidt Says:

    Banging the regular drum. Emission calculations never mention the inherent CO2 content of natural gas. This can be very high and can make NG the worst emitter fuel of all. Extreme example, a one well gas field in Sth Oz contains 98% Co2. (It is the most prolific individual well in the state producing, no sht, CO2. (For fire extinguishers?, fizzy drink?, silly))
    Apropos the post. Another economic problem for Oz fracker’s has been the, horrors, ‘overestimation’ of reserves to fill local and overseas commitments.

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