This week, the Wall Street Journal highlighted that theย U.S. oil and gas shaleย industry, already struggling financially,ย is now facing โcore operational issues.โ That should be a truly frightening prospect for investors in American fracking operations, but one which DeSmog has long been warningย of.
This one line from the Journalย sums up the problems:ย โUnlike several years ago, when shale production fell due to a global price collapse, the slowdown this year is driven partly by core operational issues, including wells producing less than expected after being drilled too close to one another, and sweet spots running out sooner thanย anticipated.โ
As we have reported at DeSmog over the last year and a half, the shale oil and gas industry, which has driven the recent boom in American oil and gas production, has been on a more than decade-long money-losing streak,ย with estimated losses of approximately a quarter trillion dollars. Those losses have continued inย 2019.
This failure to generate profits led to the Financial Times recently reporting that shale investors are having a โcrisis of faithโย and turning away from U.S. oil and gas investments. That’s been bad news for frackers because the entire so-calledย โshale revolutionโ was fueled by massive borrowing, and these companies are increasinglyย declaring bankruptcy, unable to pay back what they borrowed because theyย haven’t been turning aย profit.
Scott Forbes, a vice president with leading energy industry research firm Wood Mackenzie, also has noted the structural problems in the finances of the fracking industry, referring to the current business model asย โunsustainable.โ
When DeSmog first began reporting on the failed finances of the fracking industry, publications like the Wall Street Journal were writing about the optimistic financial future for shale companies.ย A year and a half later, that optimism has died. But all of these dynamics played out before the industry ran up against โcore operationalย issues.โ
The shale patch is seeing some serious pain today in junk-bond land as oil prices drop. Diamond Offshore, Rowan Cos. & Valaris bonds are the biggest losers, with bonds down 5 or more cents on the dollar. pic.twitter.com/1jkVBjdX9P
โ Lisa Abramowicz (@lisaabramowicz1) October 2, 2019
Core Operationalย Issues
Over the last 10 years, the fracking industry has made impressive gains with technological improvements that have resulted in lower costs and higher performing wells. But despite these improvements, shale companies haveย failed to be profitable, and two years ago,ย industry analysts at Wood MacKenzie were warningย about the limits of technology inย overcomingย geology.
More recently, the industryโs attempts to extract more oil and gas out of the shaleย โ dubbed Fracking 2.0 by the Wall Street Journal โ have flopped.ย Even the longest drilled wellsย have not made money,ย indicatingย a limit toย optimal well length. Likewise,ย attempts to drill many wells in the same area โ so-called cube development โ haven’t been the financial savior the industry needsย either.
Shows the potential surface impact of vertically drilled wells, Jonah gas field, Wyoming. Credit:ย Peter Aengst, The Wilderness Society,ย CC BY–SAย 4.0
Perhaps the surest sign of desperation amongย shale firmsย is the issue of โfrac hitsโ or โchild wells,โย an issue DeSmog flagged over a year ago. These companiesย are awareย that if secondary or โchild wellsโ are drilled too close together around the primary, or โparent well,โ the fracking process can damage the nearby wells. And they also knowย that, as a result, these wells do not perform as wellย as those with greaterย spacing.
Nevertheless, they continue to doย it.
Instead, wells are declining faster, meaning the output of the wells drops off very quickly andย leadsย to lower overallย well production โ and more losses for the increasinglyย financially insolventย companies.
James West, a managing director at Investment bank Evercore ISI, assessed the situation for the Wall Street Journal.ย โWeโre getting closer to peak production and we are reaching the peak of the general physics of these wells,โ heย said.
Physics, Geology, and Disappearing Sweetย Spots
Perhaps the most important fact in the Wall Street Journal’s recent storyย was only mentioned once:ย โsweet spots [are] running out sooner thanย anticipated.โ
Sweet spots are the areas of shale basins that have the best-performing wells. David Hughes, earth scientist and author of the 2019 report, โHow Long Will The Shale Revolution Last: Technology versus Geology and the Lifecycle of Shale Plays,โ has estimated that these sweet spots (also known as โTier 1 acreageโ) make up 15 to 20 percentย of a shale basin (also known asย aย โplayโ).
In a recent online presentation, Hughes noted that these productive areas, โof course, are exploitedย first.โ
As shale companies have chased profits, they first drilled the sweet spots, but now that most of those have been depleted, drillersย must try to make a profit with Tier 2 acreage, which isnโt going soย well.
Scott Sheffield, CEO of Pioneer Resources, told investors in August that โTier 1 acreage is being exhausted at a very quickย rate.โ
Inย Hughesโ 2019 report, he maps the sweet spotsย of the Bakken Shale using well performance, withย the highest producers shown inย red.
Bakken wells showing peak month production. Credit: How Long Will the Shale Revolutionย Last?
As theย Wall Street Journal noted,ย โAcross North Dakotaโs Bakken Shale region, well productivity hasnโt improved since late 2017,โ with a notably dismal example coming from fracking firm Hess.ย Bakken wells this company drilled in 2019ย โโฆgenerated an average of about 82,000 barrels of oil in their first five months, 12 percentย below wells that began producing in 2018 and 16 percentย below 2017 wells,โ the Journalย reported.
There is plenty of evidence โ includingย warnings from industry leaders like Scott Sheffield โ thatย the fracking industry has depleted most of the sweet spots in the major shale plays over the past decade or so. With fewer of those plum acresย left,ย firms are forced to drill in areas with less favorable geology for production, which means spending the same amount of money to drill wells but produce lessย oil.
And that means shale companiesย have no way to pay back the huge amount of debt, which theyย incurred to drill the sweet spots in the firstย place.
Even though it began as Enron Oil and Gas, a spinoff of Enron, EOGย is considered the gold standard of fracking companiesย and has earned the nickname โthe Apple ofย Oil.โ
The Wall Street Journal reported the declining performance of new EOG wells in the Eagle Ford Shale, noting that EOG โdeclined to commentโ on this issue,ย which is rarely an indication of goodย news.
Many signs are pointing to the fact that geology โย how much oil and gas is present in the shaleย โ will be the defining factor going forward for the U.S. frackingย industry.
In June DeSmog reported that Steve Schlotterbeck, former CEO of shale company EQT, told a petrochemical industry conference, โThe shale gas revolution has frankly been an unmitigated disaster for any buy-and-holdย investorโฆโ
Those buy-and-hold investors were buying and holding companies that were drilling sweet spots. But todayโs buy-and-hold investors are holding companies working with less productive shale, which doesn’t bode well for the industry’s futureย fortunes.
What. A. Sh*tshow. Sub $2Bn market cap E&P companiesโฆ
Most of these companies are dead men walking.
We all knew a reckoning was coming in 2016/2017 but never thought it would come with such force. Truly a bubble burstingโฆ pic.twitter.com/QuYx1q8fWe
โ EnergyCynic (@EnergyCynic) October 2, 2019
Follow the DeSmog investigative series:ย Finances of Fracking: Shale Industry Drills More Debtย Thanย Profit
Main image:ย Pawnee National Fracklands, Colorado.ย Credit:ย Bryce Bradford,ย CC BY–NC–NDย 2.0
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