Lots of Talk, Not Much Profit, In U.S. Shale Boom
Shale fracking for oil and gas has been a huge hit for self-styled American patriots, restoring the country’s bragging rights as the world’s top petroleum producer after many decades. But not so much for its investors, who are beginning to wake up to the realization that the boom hasn’t reached their portfolios.
Gushing production from new technology applied to release gas and oil previously locked in hard shale has brought frenzied economic activity to some American regions, notably North Dakota’s Bakken and Texas’ Eagle Ford deposits.
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“Yet shale has been a lousy bet for most investors,” the Wall Street Journal writes, in an article reposted by the Institute for Energy Economics and Financial Analysis (IEEFA).
“Since 2007, shares in an index of U.S. producers have fallen 31%, according to data provider FactSet, while the S&P 500 rose 80%. Energy companies in that time have spent $280 billion more than they generated from operations on shale investments, according to advisory firm Evercore ISI.”
And the money is losing its patience, the Journal reveals.
After “12 major shareholders in U.S. shale oil and gas producers” met in Manhattan in September, the paper writes, “they came away determined to force operators to turn profits. In following weeks, normally cordial discourse at company presentations and investor meetings occasionally grew tense, according to shareholders, shale executives, and bankers familiar with the discussions.”
One factor behind the sector’s “persistently paltry returns,” the Journal asserts: executive incentives that encourage shale producers to reinvest profits in expanding production, rather than rewarding shareholders. At least one company has elected to buy back shares rather than bloat its production plans. But other factors may be harder to address.
As the Financial Times observes in a separate report, the “golden age of gas” heralded a few years ago by the International Energy Agency “has not turned out quite as the forecasters and the gas producers who promoted the slogan expected.”
The Times cites two unforeseen factors: unexpectedly stiff competition from renewables, and the emergence of transoceanic shipping of liquefied natural gas (LNG). Plummeting prices for solar and wind have meant that gas has had to share the spoils of utility conversions away from coal with those upstart forms of generation. Meanwhile, the development of LNG trading on short-term global markets has begun to break a sclerotic legacy pricing model based on long-term contracts that locked in suppliers and consumers joined by a single trunk pipeline.
Both developments are forcing down profits on the gas component of shale resources. Meanwhile, the very techniques that unlocked the oil gusher from hard shale are now revealing their limits.
Central to those techniques is the practice of drilling long, deep holes that may go straight down for a mile, before making a wide turn to the horizontal and running another mile or so through a petroleum-bearing zone. While the injection of water under pressure to fracture the surrounding rock (hydro-fracturing, or “fracking”) often produces an immediate gush of hydrocarbons, the flow quickly subsides as geological pressure is released. After that, oil must be pumped from the bottom of those long, narrow holes in the rock.
And the familiar “nodding donkey” pumpjacks that dot oil country are turning out not to be up to the task, Rigzone reports. Pumps that serve five or six years on a conventional well are failing after two on deep shale holes—and cost a quarter of a million dollars to replace.
“If you’re failing your pump all the time, you’re not getting low lifting costs,” said Jeff Saponja, CEO of Heal Systems, a Calgary oilfield engineering company. And “every horizontal well—no matter where you are—has this problem.”
Reuters analyst John Kemp issued a warning to the industry earlier this year, writing that “drilling and production are rising. Prices are declining. Companies are barely breaking even or losing money. Costs are starting to rise. And share prices are sliding.”
Investors seem to have begun taking note.