Saturday, October 25, 2014

The fracking con

Nothing, but nothing so dramatically confirms the end of the Age of Petroleum like the practice of fracking.  The whole idea is based on the notion that shale formations contain gas and oil deposits that can be liberated if those formations can be fractured.  There is not a lot of petroleum in most shale formations, but there are many them which drives the fracking boosters to proclaim that they are the future of fossil fuel production.

Well, no.  The very idea of fracturing stable underground stone deposits require folks to ignore just how energy-intensive this process is.  So from the git-go, the whole enterprise is hobbled by the reality that maybe fracking will just barely produce more energy than it consumes (on a good day).  Basic rule of energy production—if it is thermodynamically preposterous, the economics will never work out.  And because fracking is so energy-intensive, it is also dangerous, environmentally insane (it can actually trigger earthquakes), and EX-PEN-SIVE!

So far, the various fracking operations have been able to keep going on borrowed money.  Borrowing so much money is usually pretty difficult but because there are so many people who want to believe the fossil fuel party cannot end, the spigot is still on in spite of growing doubts that extracting energy using fracking is ever likely to be profitable using any accepted definition of the term.

So the fracking enthusiasts have been forced into using that old standby whenever the facts contradict the hype—they tell big juicy lies.  When the fracking bubble crashes, the real economy will take a serious hit.  Will it be as serious as when the real estate bubble collapsed under its enormous pile of BS in 2008?  Probably not—but since so much monetary ammunition has been used up to counter the baleful effects of the Crash of 2008, even a small hit could get very serious.

And like the collapse of the real estate bubble, there will be plenty of folks who saw through the fracking hype.  gjohnsit over at Dailykos will be one of those who can say, "I told you so."

The Frackonomics Con Job about to be Exposed

by gjohnsit  OCT 10, 2014

The numbers for the fracking industry have never really added up, but according to yesterday's Bloomberg article the amount of lies and deception is a bubble waiting to burst.

“They’re running a great risk of litigation when they don’t end up producing anything like that,” said John Lee, a University of Houston petroleum engineering professor who helped write the SEC rules and has taught reserves evaluation to a generation of engineers. “If I were an ambulance-chasing lawyer, I’d get into this.” The discrepancy at issue here is the difference between what the frackers are telling their investors and what they can actually deliver.

62 of 73 fracking driller reported higher potential energy reserves to investors than they did the the SEC, averaging 6.6 times higher.

“Shareholders understand,” Sheffield said. “We’re owned 95 percent by institutions. Now the American public is going into the mutual funds, so they’re trusting what those institutions are doing in their homework.”Which is circular logic. "If the investors believe our lies then they must not be lies."

So how do the frackers get away with telling the SEC one thing and investors something else?

The SEC requires drillers to provide an annual accounting of how much oil and gas their properties will produce, a measurement called proved reserves, and company executives must certify that the reports are accurate.

No such rules apply to appraisals that drillers pitch to the public, sometimes called resource potential. In public presentations, unregulated estimates included wells that would lose money, prospects that have never been drilled, acreage that won’t be tapped for decades and projects whose likelihood of success is less than 10 percent, according to data compiled by Bloomberg. The result is a case for U.S. energy self-sufficiency that’s based more on hope than fact. The SEC loosened regulations for frackers in 2010, allowing them to report reserves of “reasonable certainty” and allowing them file more speculative estimates, known as probable reserves and possible reserves.

At Pioneer Natural Resources, the number they cite to potential investors has increased by 2 billion barrels a year in each of the last five years -- even as the proved reserves it files with the SEC have declined. The real bubble dynamic here isn't so much the lies they are telling their investors. It's that they depend on investors so much. Without that cashflow, the frackers are sunk.

Based on data compiled from quarterly reports, for the year ending March 31, 2014, cash from operations for 127 major oil and natural gas companies totaled $568 billion, and major uses of cash totaled $677 billion, a difference of almost $110 billion.

Oil and gas fracking companies went out and sold $73 Billion in assets to partly fill that gap, which pleased analysts, but also left them with more debt and fewer ways to pay for it.

More and more wells are being drilled. More capital/debt is being used to get at that oil and gas. But production has stalled because the low-hanging fruit has already been picked. Unlike traditional oil drilling, shale oil taps out very quickly. That is simple geology.

the average decline of the world's conventional oil fields is about 5 percent per year. By comparison, the average decline of oil wells in North Dakota's booming Bakken shale oil field is 44 percent per year. Individual wells can see production declines of 70 percent or more in the first year.

Shale gas wells face similarly swift depletion rates, so drillers need to keep plumbing new wells to make up for the shortfall at those that have gone anemic.

The IEA states that the shale oil business needs to bring 2,500 new wells into production every year just to sustain production, and these shale fields will increasingly become more expensive to drill, “a rising percentage of supplies…require a higher breakeven price.”

Just look at this chart below of fracking companies and interest they pay on existing debts.

Of 61 fracking companies their debts have nearly doubled in the past four years while their revenue has increased just 5.6%.

This is the second-to-last step in a investment bubble. The last step is when those companies have to borrow just to pay the interest on existing debts. Judging by the charts above, that day will arrive soon.

What is likely to happen before the bubble bursts is a) a media campaign to sell the public how profitable the shale oil/gas business is, followed by b) the selling of assets to gullible investors.

This will be followed by c) the search for scapegoats, and there is only one scapegoat here - environmentalists.

The fracking business is a milti-billion business with more than $100 Billion invested. When it busts, it's going to shake the economy.

Could investors be sensing that something is wrong?


No comments:

Post a Comment