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.