Fracking’s Economic Sham: Stripped Bare by Virus/Trade War

April 11, 2020

Energy Exec: “Trump needs to do something or he will lose all the energy states in this election.”

Long but very worthwhile NYTimes piece, excerpted here.

New York Times:

Ever since the oil shocks of the 1970s, the idea of energy independence, which in its grandest incarnation meant freedom from the world’s oil-rich trouble spots, has been a dream for Democrats and Republicans alike. It once seemed utterly unattainable — until the advent of fracking, which unleashed a torrent of oil. By early 2019, America was the world’s largest producer of crude oil, surpassing both Saudi Arabia and Russia. And President Trump reveled in the rhetoric: We hadn’t merely achieved independence, his administration said, but rather “energy dominance.”

Then came Covid-19, and, on March 8, the sudden and vicious end to the truce between Saudi Arabia and Russia, under which both countries limited production to prop up prices. On March 9, the price of oil plunged by almost a third, its steepest one-day drop in almost 30 years.

As a result, the stocks that make up the S.&P. 500 energy sector fell20 percent, marking the sector’s largest drop on record. There were rumblings that shale companies would seek a federal lifeline. Whiting Petroleum, whose stock once traded for $150 a share, filed for bankruptcyTens of thousands of Texans are being laid off in the Permian Basin and other parts of the state, and the whole industry is bracing for worse.

On the surface, it appears that two unforeseeable and random shocks are threatening our dream.

In reality, the dream was always an illusion, and its collapse was already underway. That’s because oil fracking has never been financially viable. America’s energy independence was built on an industry that is the very definition of dependent — dependent on investors to keeping pouring billions upon billions in capital into money-losing companies to fund their drilling. Investors were willing to do this only as long as oil prices, which are not under America’s control, were high — and when they believed that one day, profits would materialize.

Even before the coronavirus crisis, the spigot was drying up. Now, it has been shut off.

The industry’s lack of profits wasn’t exactly a secret. In early 2015, the hedge fund manager David Einhorn announced at an investment conference that he had looked at the financial statements of 16 publicly traded shale producers and found that from 2006 to 2014, they spent $80 billion more than they received from selling oil. The basic reason is that the amount of oil coming out of a fracked well declines steeply after the first year — more than 50 percent in year two. To keep growing, companies have to keep plowing billions back into the ground.

The industry’s boosters argue that technological gains, such as drilling ever bigger wells, and clustering wells more tightly together to reduce the cost of moving equipment, eventually would lead to a gusher of profits. Fracking, they said, was just manufacturing, in which process and human intelligence could reduce costs and conquer geology.

Actually, no. The key issue is the “parent child problem.” When wells are clustered tightly together, with so-called child wells drilled around the parent, the wells interfere with one another, resulting in less oil, not more. (This may not surprise anyone who is attempting to be productive while working in close quarters with their children.)

The promised profits haven’t materialized. In the first half of 2019, when oil was around $55 a barrel, only a few top-tier companies were profitable. “By now, it should be abundantly clear that the current shale oil business model does not work — even for the very best companies in the industry,” the investment firm SailingStone Capital Partners explained in a recent note.

Policymakers who wanted to tout energy independence disregarded all this, even as investors were starting to lose patience. As early as 2018, some investors had begun to tell companies that they wanted to see free cash flow, and that they were tired of compensation models that rewarded executives with rich paydays for increasing production, but failed to take profits into account. As a result, fracking stocks badly underperformed the market.

But with super-low interest rates, investors in search of yield were still willing to buy debt. Over the past 10 years, the entire energy industry has issued over $400 billion in high-yield debt. “They subprimed the American energy ecosystem,” says a longtime energy market observer.

Even as the public equity and debt markets grew cautious, drilling continued. That’s because one big source of funding didn’t dry up: private equity. And why not? Private equity financiers typically get a 2 percent management fee on funds they can raise, so they are incentivized to take all the money that pension funds, desperate for returns to shore up their promises to retirees, have been willing to give them.

You can see how all of this is playing out by looking at Occidental Petroleum. In 2019, Oxy, as it’s known, topped a competing bid from Chevron and paid $38 billion to take over Anadarko Petroleum, which is one of the major shale companies. Since that time, Oxy’s stock has plummeted almost 80 percent in part due to fears that the Anadarko acquisition is going to prove so wildly unprofitable that it sinks the company.

Greentechmedia:

Low oil prices will test the resolve of the majors’ energy transition plans, but analysts expect the companies’ long-term commitments to decarbonization and renewable energy to remain intact.

A dispute between Russia and Saudi Arabia has sent a flood of cheap oil and gas into global markets just as the COVID-19 pandemic is stifling demand.

This market dislocation comes at a time when European oil majors including ShellTotalRepsol and BP are embarking seriously down a path toward emission reductions and the diversification of their businesses into renewables, e-mobility and other energy services.

“The argument that has often been put forward is that they can’t invest in renewables because renewable projects offer much lower returns than oil and gas projects. That argument no longer holds at $35 per barrel,” Valentina Kretzschmar, director of corporate research at Wood Mackenzie, told GTM.

“Average returns from oil and gas projects are now the same as renewables projects and, in fact, renewables projects are much lower risk. Already, we have seen companies like Occidental cutting dividends by 90 percent. It’s a discretionary spend,” she added.

8 Responses to “Fracking’s Economic Sham: Stripped Bare by Virus/Trade War”

  1. dumboldguy Says:

    It’s nice to hear some good news for a change. It IS good news that all the fossil fuel players—large and small, corporate and national, here and abroad—-are ripping each others throats out. Stand back so you don’t get spattered with too much blood (or oil) and enjoy the show. It’s also nice to hear that the mayhem may also hurt Trump’s reelection chances.

    PS Pay no attention to Greentechnica’s wishful thinking and brightsided foolishness. The oil companies forays into RE were mostly eyewash and gaslighting—-their hearts and pocketbooks are still firmly with fossil fuels—-that’s why there’s all the whining in the video clip.

  2. Brent Jensen-Schmidt Says:

    As implied above, much of the profit in shale fracking came from investors. Interesting times. Societal change is likely, probably in multiple directions. Fascinating to watch from a comfortable, and still hopefully, bullet proof armchair.


  3. […] via Fracking’s Economic Sham: Stripped Bare by Virus/Trade War | Climate Denial Crock of the Week […]


  4. Trump has twittered several times. This is what he thinks is ruling a country is about.


  5. Reblogged this on The Most Revolutionary Act and commented:
    “In reality, the dream was always an illusion, and its collapse was already underway. That’s because oil fracking has never been financially viable. America’s energy independence was built on an industry that is the very definition of dependent — dependent on investors to keeping pouring billions upon billions in capital into money-losing companies to fund their drilling. Investors were willing to do this only as long as oil prices, which are not under America’s control, were high — and when they believed that one day, profits would materialize.”

  6. rhymeswithgoalie Says:

    In 2019, Oxy, as it’s known, topped a competing bid from Chevron and paid $38 billion to take over Anadarko Petroleum, which is one of the major shale companies. Since that time, Oxy’s stock has plummeted almost 80 percent in part due to fears that the Anadarko acquisition is going to prove so wildly unprofitable that it sinks the company.

    But the people who arranged and promoted the sale at Anadarko, including hired consultants and M&A brokers, walked away with a big chunk of money from the sucker Occidental on the deal.


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