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US oil production is the highest in the world, BUT July 7, 2015

Posted by hslu in Economics, Energy, Oil.

You see, there is always a proverbial BUT somewhere even as the almighty United States replaces Russia to be the largest oil producer in the world.

The BUT is this:soon the United States will surrender that No. 1 position back to Russia or the Saudis。 The American shale oil boom would be remembered as a bubble because one can’t fight the mother nature.

The U.S. got to the top producer position by drilling and fracking the hell out of Bakken of North Dakota (image below), Woodford in Oklahoma, Niobrara in Colorado and Spraberry and Eagle Ford in Texas.

Source: Internet image.

With the obvious damage to the environment aside, the real problem with shale “revolution” is the rapid decline of the oil production rate which is anywhere between 50 and 65% in the first year. As a result, the shale oil companies have no option but to keep drilling if they want to keep the overall oil production rate of the field at a steady pace.

So, what do they do?

They borrow and borrow and borrow;sometimes at 8 to 10% interest rates to pay the service companies to drill and drill, often with multiple rigs at the same time.

Now, here is the catch according to an article on Yahoo:

“The problem for shale drillers is that they’ve consistently spent money faster than they’ve made it, even when oil was $100 a barrel. The companies in the Bloomberg index spent $4.15 for every dollar earned selling oil and gas in the first quarter, up from $2.25 a year earlier, while pushing U.S. oil production to the highest in more than 30 years.”

Source:  “The Shale Industry Could Be Swallowed by Its Own Debt”


How can any company survive in this kind of situation?

The answer is “None” and the Saudis will make sure many of American shale drillers won’t survive in the long run.

I used to call American shale oil companies “敗家子“ and gave them four to five years to spend the new found wealth. Unfortunately, they only last 2 years thanks to their own success of producing oil from the ultra tight formations.

The shale drillers still have many wells on their backlog and collectively these companies have hundreds if not thousands of wells already drilled but not fracked. Some shale oil companies will frack theses wells once oil price recovers to the $60 to $65 level because they still can make some money at that level. Others will have to frack these backlog wells because they have to get oil out of the ground at any price just to pay the interests on their loans.

It seems to me that the shale oil bubble is bursting and the day of reckoning for American shale drillers is fast approaching.

Cheap money from the banks and enthusiastic investors made the “shale revolution” possible using $100/barrel oil in the ground as collateral. With WTI selling at ~$50/bbl,these companies have a tough time to make it though.

They conveniently forgot one thing: technical success wasn’t the same as economic success.




1. anniepani - July 19, 2015

Interestingly I heard a theory, it came from someone in the Russian state oil company (sorry I forget who), that OPEC had launched a deliberate price war to last about 18 months to drive the ‘frackers’ out of business. I wonder if you heard anything about this?


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