Saturday, August 3, 2013

Shale Plays Not Working For Big Oil


Recent revelations and write-downs of shale assets in North America by Shell, ExxonMobil and Chevron support our research that big companies cannot make money on low rate-low volume shale wells.

The majors exited North America in the 1980s because they could not support the operating costs associated with managing this kind of production even though the wells were profitable.  They went to the overseas arena where things worked for a few decades as deep water plays emerged.

In the last 5 years, international opportunities have been exhuasted and national oil companies hold all the cards.  This means that remaining international opportunities carry onerous production-sharing agreements or other difficult contractual obligations (note the deals that Shell, etc. have entered in Iraq where they must spend $billions to get a $2/barrel payment for incremental added production--these deals are being re-considered.

So, the majors jumped back into North America with the lure of large reserves from shale.  This trend began when ExxonMobil acquired XTO Energy in early 2010.  At the time, this was viewed as a validation of shale plays and their economic viability.  I refer you to my comments about this acquisition in February 2010:

"The mainstream belief that shale plays have ensured North America an abundant supply of inexpensive natural gas is not supported by facts or results to date. The supply is real but it will come at higher cost and greater risk than is commonly assumed. The arrival of ExxonMobil and other major oil companies on the shale gas scene is positive because they will not follow the manufacturing approach, and will do the necessary science that should make shale plays more commercial. This does not, however, ensure success.

"ExxonMobil has come late to the domestic shale party. They may have overvalued XTO's existing wells without fully taking high production decline rates into account. It is also possible that XTO has already drilled the best areas in more mature shale plays, while the potential of newer plays has not yet been established. It is unclear how ExxonMobil’s enormous overhead structure and its associated cost will fit with operating thousands of relatively low-rate gas wells."

Now that the shale plays are not working at least for the major oil companies, what next?

I believe that we are seeing the slow liquidation of these organizations but they cannot let the investment public know that this is what is occurring, hence the cornucopian rhetoric about the shale revolution and North American beoming the next Saudi Arabia--pure poppycock, of course.  Will the recent write-downs and announcements affect investors?  Probably not for now.

7 comments:

Evan said...

The scary part of this is that as the high priced expertise of the oil majors is priced out of existence the talent pool necessarily retires and is not replaced. We are left at some point with the expertise of the National Oil companies which although good in some cases, is erratic and does not provide the highest levels of a mobile talent pool that the international oil industry currently provides. This kind of expertise is built up over generations within organizational support structures and once dismantled is not easily rebuilt.
So once we lose this talent and knowledge reserve we are left with both capital and knowledge restraints in combating the decline slope of peak oil. This is not disimilar to expertise in some areas of the nuclear industry in which the rejuvenation of the knowledge and skill sets in some types of nuclear engineering is not recapturable without substantial capital investment in the basic researches of operations knowledge; which were only gained at great expense and which have been subsequently lost.

Anonymous said...

Art: It is strictly astounding to me that Exxon, of all the companies, failed to have reservoir engineering capabilities sufficient to evaluate this with the same usual brutal objectivity they are known for. My immediate assessment of this transaction was that I wished I had been high enough on the food chain at XTO to get a piece of this sweetheart deal.

sathyam shonkho said...

Dan beecroft says for drilling, Oklahoma is the most precious place. She is well known for her historical oil and gas reserve This state has shown a hard time in oil production but things have changed and Oklahoma is moving on and now it is 5th greatest producer of crude oil, and has the 2nd-largest number of active drilling rigs.

PENNY STOCK INVESTMENTS said...

Outstand in depth research on energy use.

Anonymous said...

Art is clearly behind in his research. He seems not to understand that each year advances in frac technology continues to unlock additional oil and that the majority of liquids resource plays are moving EUR's upward. Mr Berman seems to use a rearview mirror when looking at shale plays instead of in front of him. The best example I can think of to illustrate my point is EOG in the western part of their Eagle Ford acreage. The average Eagle Ford well by EOG in 2012 averaged about 40,000 barrels of oil in the initial 120 days online. The average 2013 well produced 60,000 barrels of oil in the inital 120 days. Shale plays in dry gas window is obviously uneconomic at current prices. But with oil prices at $90 companies can make 20-30% rate of return in shales.

Anonymous said...

Looks like Exxon is now entering the Permian Shale plays. Buying Endeavor for Wolfcamp oil.

Shows you they just don't know how to exploit shale plays like the independents. Art Berman what say you?

sathyam shonkho said...

Prodigy oil and gas is looking developments of reserves in and across the borders of United States