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Low oil prices and high output threaten US energy boom
by Joseph Earnest November 25, 2014
Newscast Media HOUSTON—Oil prices have slumped recently as the world's biggest oil producers refuse to cut output. The drop is undermining the US shale oil industry's profits, soon after it made the US the world's number one oil producer.
In the Ardmore basin in the US state of Oklahoma, BNK Petroleum operations are running at full tilt. Shale oil and gas producer BNK's Q3 sales were 230 percent up on the same time in 2013. The company is doing well out of the shale oil boom which has made the US the global leader in oil output.
Drilling for shale oil, what is termed ''unconventional extraction'' or ''hydraulic fracturing'' in industry parlance and dubbed ''fracking'' by the media, is a complex, and many say environmentally destructive method of extracting oil from hard to access deposits. It involves drilling down to the required depth, then drilling horizontally to the oil, before pumping high pressure water and chemicals into the shale formations to squeeze it out.
BNK US Operations Vice President Ray Payne has grown up with the technique, which he says was in its infancy when he began 30 years ago. And he is one of the more optimistic players these days. The BBC reported him as saying BNK would continue its development program even if oil was much lower than 80 dollars a barrel. But currently the only upward pressure on oil is that being used on the shale deposits.
Since this summer the price of oil has plunged by almost a third, trading below 80 dollars a barrel for weeks now. At this level a lot of US producers are starting to get nervous. "It is going to remind folks, that we may be the new kid on the block, and we are a big kid on the block", says Robert McNally, a former energy advisor to the White House in Washington. But, ''we are a vulnerable kid on the block, we are sensitive to low prices."
The US energy boom was brought about by the widespread application of fracking. The controversial technology is also a very costly way of oil exploitation and consequently needs high sales returns to be viable.
"The International Energy Agency says that the prices would have to go to 50 dollars a barrel per year before you would reduce US shale oil by 500 barrels a day", says McNally. That would be a lot lower than most people think, he says and, "estimates range from 80 to 50 Dollars". And he says prices would have to go down to those levels level and stay there at least a year before there would be any curtailment of new shale oil drilling.
The main problem the frackers face is the rapid decline in exploitable reserves in a shale layer. A shale oil well can only maintain maximum output for a limited time before production starts to decline sharply. By the end of the first year, a given shale oil well falls far below 50 percent of its output during the initial drill. That forces producers to constantly start new wells to maintain profitable output levels: the spending never stops.
"I call them cash-eating monsters", says Deborah Lawrence Rogers, who works for the non-profit Post Carbon Institute. "These companies can go through cash like you cannot believe. And the wells aren't making money." The US energy boom has never been cheap, and always highly supported with Wall Street financing.
Banking giant Barclays Plc. says more than 150 million dollars will flow into shale oil production and exploration this year alone. And besides shares in their companies, shale oil producers have also been issuing bonds.
Credit rating agency Standard & Poor's says almost 75 percent of energy exploration and production companies are below investment grade. Their average bond yield is much higher than most investment opportunities out there - reflecting the accompanying risk. Officially called high-yield bonds - most call them plain and simple "junk bonds."
A Barclays study says junk-rated exploration and production companies spend more than two dollars for every one dollar earned. But Post Carbon Institute's Deborah Rogers says it's frequently much more. "They have to keep production going in order to meet debt service", she argues. "But you still have this bluster and bravado coming out of the shale industry right now: 'Oh we can weather this, no problem'." But in the meantime, she says, oil prices have only been down a few weeks and firms are already cutting back investments. Add Comments>>
Source: Deutsche Welle
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