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  • Podcast

    Art Berman: Exposing The False Promise Of Shale Oil

    Estimates of recoverable oil are proving wildly wrong
    by Adam Taggart

    Wednesday, January 16, 2019, 10:44 AM

Art Berman, geological consultant with over 37 years experience in petroleum exploration and production, returns to the podcast this week to debunk much of the hopium currently surrounding America’s shale oil output.

Because the US is pinning huge hopes on its shale oil “revolution”, so much depends on that story being right. Here’s the narrative right now:

  • The US, is the new Saudi Arabia
  • It’s the swing producer when it comes to influencing the price of oil
  • The US will be able to increase oil production for decades to come
  • New technology is unlocking more oil shale supply all the time

But what if there’s evidence that runs counter to all of that?

We’re going to be taking a little victory lap on this week’s podcast because The Wall Street Journal has finally admitted that shale oil wells are not producing as much as the companies operating them touted they would produce — which is what we’ve been saying for years here at PeakProsperity.com, largely because we closely follow Art’s work:

The Wall Street Journal did some research and they got the general point that the wells are not as good as advertised.

But what they missed is just how much farther off many of these reserves are than even the discounted reserves that they’ve reported.

Bottom line: if the understatement is only 10%, that’s a rounding error and it’s not that much of an issue to the average person. But I’ve been trying for a decade to get the number that I independently develop to get anywhere close to the published numbers. In most cases, I can only get near 60% or 70% of them. So, the gap, I think is much more substantial.

The reason that The Wall Street Journal didn’t get it more right is because they don’t do any independent research and of course they didn’t talk to me, they didn’t talk to Dave Hughes, they didn’t talk to people who actually do the work, and so they’re getting one side of the story.

Click the play button below to listen to Chris’ interview with Art Berman (52m:56s).

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Transcript

Chris Martenson: Welcome everyone to this Peak Prosperity features voice podcast. I am your host Chris Martenson, and it is January 9th, 2019. We scour the news; we do this for you so that you don’t have to read the news and we bring you guests that will expand your minds and deepen your understanding of the world and what the future might hold. So, let me start here as the first feature voice podcast of 2019, great place to start. Energy is everything, specifically oil energy is everything. If you walk into any store to buy any item, oil has been involved in its manufacture, it’s transport, it’s storage, anything you want to talk about, look at it, oil’s been involved in that.

Now, in the US, the so-called shale oil story is front and center of our own personal oil story here in the US, and so much depends on that story being right. Here’s how that story goes right now. The US, is the new Saudi Arabia; we’re the swing producer; the US will be able to increase oil production for decades to come and new technology is unlocking more oil all the time. But, what if there’s a different story that pretty much runs counter to all of that?

Today, we’re going to be taking a little bit of a victory lap here because the Wall Street Journal finally discovered that shale oil wells are not producing what the companies operating them said they would produce, which is what we’ve been saying for years, largely because we follow the work of Art Berman whose today’s featured voices guest.

Now, Art, as you may know is a geological consultant with 37 years of experience in petroleum exploration and production, 20 of those at Amoco, now known as BP. He’s published more than 100 articles on geology, technology, and the petroleum industry during the past five years. Hey, he’s got the chops, he’s published more than 20 articles and reports on the shale gas plays including Barnett, the Haynesville, the Fayetteville, Marcellus, Bakken, Eagle Ford shales, we’ll be talking about those today I follow him very closely in his blog, ArtBerman.com as well as on Twitter at AEBerman12. That’s A-E Berman one, two, 12. You should follow him there too. Welcome Art and happy New Year.

Art Berman: Happy New Year to you, too, Chris.

Chris Martenson: Hey, as always, it’s great to have you back on, and Art, I want to start with this somewhat validating article that appeared in the Wall Street Journal. It’s on January 2nd, 2019. It had the title, Fracking’s Secret Problem, Oil Wells Aren’t Producing As Much As Forecast, and that article opened with this stutter of a sentence, “Thousands of shale wells drilled in the last five years are pumping less oil and gas than their owners forecast to investors, raising questions about the strength and profitability of the fracking boom that turn the US into an oil superpower”.

Now, Art, this article seems to validate the kinds of things you’ve been warning about for years, which you and I have had already several interviews on the topic of. My first questions are, what did the Wall Street Journal manage to find, do you feel validated and did they go far enough?

Art Berman: I never feel the need to be validated on this stuff because most people, even if I am validated, still don’t believe it, so it’s really water on a stone, but yeah, I mean, the Wall Street Journal did some research and they got the general point that the wells are not as good as advertised, but the real—what they missed was just how much farther off many of these reserves are than even the discounted reserves that they reported, and I’ve spoken with the author, I’ve known him for many years and I just asked him, I said gee, well, why didn’t you send me an email or something? I would have given you a different—a slightly different perspective, or given you maybe some—and he said, well, yeah, I should have.

We’ll just leave it there. But, bottom line Chris is that, 10%, if it’s only 10% it’s a rounding error and it’s not that much of an issue to the average person, but I have been trying, for years for maybe a decade, to get the number that I independently develop to get anywhere close to the published numbers, and in most cases, if I can get to 60% or 70%, that’s pretty darn good.

So, the gap, I think is much more substantial and the reason that the Wall Street Journal didn’t get it more right is because they don’t do any independent research and, of course, they didn’t talk to me, they didn’t talk to Dave Hughes, they didn’t talk to people who actually do the work, and so they’re getting one side of the story. But, fair enough, I’m glad that they at least got the information out that maybe this isn’t quite as good as we’ve been told.

Chris Martenson: All right. Well, let’s talk about the—I think the headline conclusion they came to was, after—and I don’t know what their methodology was, they were a little vague, but exactly how they did this, bit it fundamentally centered on this idea that companies in 2014, primarily when the oil price fell apart, they had to switch to some new way of keeping the capital flowing, so they went over to this thing called measuring the EUR of a well, which is an estimate of the ultimately recoverable amount of oil, which is a very simple calculation. Please, don’t let me over simplify your business, but for the people listening, it’s as simple as this to me, it cost money to make a hole in the ground, and then money comes back out of that hole.

Now, the difference between those two is your profit or loss in this story. It really matters how much money comes back out of the ground. That’s largely a function of price which you can’t control market price is what it is, but the amount of oil that comes out times the price that gives you your revenues in this story, so what they found was that the EURs that these companies had been promoting were maybe over—maybe 10% too high. That was kind of the conclusion they came to.

They did note it that a couple of companies in there were doing better than they had projected and some were doing worse and they averaged out to 10%, but when you’ve run the numbers and I’ve seen your data, and I look at the charts and I can draw a straight line down a log curve and find out where it terminates, and I’ve discovered that those graphs when I squint at them seem to say that these companies are going to get half what they say out of the ground at best, sometimes less than half. Is that the kind of—when you say that they might not have—they were directionally correct, but didn’t quite get it in the right magnitude that they said maybe there was a 10% problem, you think maybe there’s more of a 50, 60% problem?

Art Berman: Yeah, very likely Chris, and so there are really two fundamental components to understanding this problem. The first is, when a company says and tells the Wall Street Journal, our average well in thus and such a play or basin or whatever is—and they say it’s 750,000 barrels of oil equivalent. Okay, well, when they say average, I mean the next question you have to ask is, average of what? Is that really the average of all of your wells or is that the average of 20 wells in a particularly good part of the play, and that’ll tell you that. I seriously—I don’t want to believe they’re lying, and so therefore, I do believe that the statement is true about some number of wells, but when I look at any company’s wells, I look at all the wells that they’ve drilled since maybe four years ago. I leave out all the wells that happen in ancient history to 10 years ago when supposedly they didn’t know what they were doing or whatever. I’m just looking at recent good faith efforts, and there’s just no way that those numbers work out to the numbers that are stated. That’—it’s called cherry pickingTthat’s number one and there’s no way that a Wall Street Journal writer or independent analyst can know that or maybe even know the right question to ask.

The other piece is all these estimated ultimate recoveries, EURs are expressed in something called BOE, barrels of oil equivalent. Okay, what the heck is—I thought a barrel of oil was a barrel of oil, well no. You got oil and you’ve got gas that are produced general at the same time and lucky for you because the gas is what lifts the oil to the surface. How do you convert 1,000 cubic feet of gas to a barrel of oil? Okay, there’s the question. The problem that we have is that, is that conversion is done based on energy equivalency, and so it works out to be about a six to one ratio, 6,000 cubic feet of gas works out to be about a barrel of oil. The problem is that a barrel of oil is worth something like 20 times an MCF for a thousand cubic feet of gas.

So, if you’re working on a ratio of six and it’s 20 or 25, well, you’re giving yourself a huge boost, especially in a play that has a lot of gas, and the Permian Basin has a lot of gas with it, and Eagle Ford shale has a lot of gas with it. Just in that simple conversion you end up with as much as a 35% artificial increase in the value aspect of the EUR. Now, don’t get me wrong, this is perfectly legal to do it this way, but it’s misleading as all get out because as you stated, the economics is calculated based—I mean, you’re basing it on the price of a barrel of oil, and not an MCF. If you’re inflating a third of the value stream by a third, well, that becomes a very significant difference. Those are the two principal areas that they’re cherry picking what they’re saying is the average, and they’re not converting gas—or oil—gas to oil on a value basis; and those two things get you in a world of trouble.

Chris Martenson: Well, on that value basis you might even be ingenuous in saying it’s got that 35% piece, because I’ll tell you why. I was just—in preparing for this interview I just went and looked at some more recent satellite photos taken at night and I still see lots and lots of gas flaring in Bakken and the Eagle Ford, and the Permian Basin - saw the very bright lights on the night satellite photo. In many cases this gas, BOE or not, it’s not even economic in any way because it’s just being burnt off.

Art Berman: Not to mention the fact, putting a lot of methane in the atmosphere, which is not good for the planet. Yeah, and so why are they allowed to do that? It’s not like they’re—it’s obviously not covert. I mean, you can see it from any satellite photo and if you’re in the area you can hardly miss it. They’re being allowed to do it by the state regulatory agencies, and they’re being allowed to do it, I think, for a pretty simple reason and that is that the state wants the tax revenue from the production.

They’re saying look, we’ll flare the gas, we’ll produce the oil, and as we produce the oil we’ll pay you your production taxes and all that kind of stuff, and so it’s a win-win in the regulatory agencies, although, I’m sure there are lots of conscientious—I know there are lots of conscientious worker level people who are saying, wait a minute, this isn’t right, but the agency has the discretion to do that, and in some places like the Bakken, they’re starting to tighten things up. Public outcries has gotten great enough that they’re starting to be more restrictive. But, starting to and being so are two different things. In the Permian, I don’t think they’re anywhere close to becoming more restrictive. It’s a money issue, as it always is.

Chris Martenson: Well, this level of flaring, if we were at war and we absolutely had to get the oil out of the ground as fast as possible, I maybe could understand it, but it looks like a war zone to me. It’s like it’s an—what is the emergency to get this out of the ground as fast as possible. We can’t even wait to tie in some gas pipelines so that we can get economic value and some sort of work value out of that.

Art Berman: Well, the gas is a capital expense. It’s not cheap, and it’s going to cost you a million bucks or so, maybe half a million depending on how far you have to lay a pipeline between your well head and wherever that pipeline is, and you’re probably going to have to go out and buy a compressor to create enough pressure to enter into the pipeline. All of that adds up, it’s not a prohibitive cost, but it sure is a cost and it isn’t free, but to your point, what is the big hurry considering that the world is once again back in an oversupply of oil. The hurry is to produce more oil to create more oil that we don’t need and depress the price even lower, ensuring that the companies are going to make even less money than they were when the Wall Street Journal—when Bradly Olsen published his article a month ago.

Chris Martenson: Right, well our…

Art Berman: And what are we do with all that oil? We export a lot of it. We can’t use it.

Chris Martenson: And I want to talk about why we can’t use it, but I will say, for me, this becomes an issue of generational integrity. I can only imagine people in 50 years looking back saying, you did what? You did what with the last great oil deposits that existed in those source rocks? Yeah, it just doesn’t feel like it’s a very—it might make good capital sense, but it doesn’t make—It’s not very longitudinal thinking in terms of how we’re using, is this the best possible use for this amazing bequeathment of energy that somehow got left for us to use. That’s how I look at it. I’m a conservationist, at heart. I just think that if you don’t have to ruin an area, don’t.

Art Berman: Let me be real direct for you then, since you’re being nice about it. It’s not only a dumb idea, it’s a terrible idea.

Chris Martenson: Thank you. All right, and so…

Art Berman: I’m a conservationist, too.

Chris Martenson: And I’m going to chip away a little further here. A couple pieces from this article, this Wall Street Journal Article, here they said—to harken back to one thing you said earlier, so I can close this loop up. They said, “one reason thousands of early shale wells aren’t meeting expectations is that many companies extrapolated how much they would produce from small clusters of prolific initial wells, and some also included the—excluded their worst performing wells from the calculations, which is akin to eliminating strike outs when projecting a baseball player’s batting average.” To me that’s a conscientious effort to deceive right there.

There’s no other way I can look at that as anybody who understand data, who understands analysis, certainly the people in the oil companies know that if you take your 10 best wells and exclude your 10 worst wells, and then tell everybody that’s how you’re doing on average, you’re fibbing.

Art Berman: Yeah, and it’s misleading at best and it’s probably borderline fraud at worst, but whatever it is, it isn’t honest. But, the way they’re choosing to do it probably is legal that they’ve probably been very careful in vetting the actual statements made. Somewhere there’s an asterisk that leads to an appendix that tells you in fact that what you just said is right, that we’re only including these wells, and we’re excluding those wells. That’s been my experience with it all, but then the issue that I think is so hard for people to grasp and certainly was for me, is the fact that many of these companies, not just oil companies, are not in business to make money, they’re in business to get money.

Okay, and whether or not they turn a profit is apparently not of great concern to the investors that give them money. The fear isn’t that we don’t make money, the fear is that our story doesn’t get people to write checks, doesn’t get private equity to give us infusions to keep the thing going; and don’t get me wrong Chris, investors are not stupid, but they understand I think what you and I understand, which is that for all of the dismissal that goes on publically of peak oil right now, saying how can peak oil possibly been right when we’ve got more oil than we ever had before. I’ll tell you what, smart money never ever doubted the concept of peak oil, and the reason they’re putting their money in these companies is because they’re long on oil, and they know what you know and what I know and that is, it’s only a matter of a very short time, maybe a few years, maybe less, maybe more before oil prices go to the moon, and then the investment will prove to be an incredibly lucrative one.

Chris Martenson: Yeah, and so I want to get to that because I mean, this is what I’m really trying to do with outreach and educational pieces like this is help people understand really what’s going on and where we are in this story because, for instance, Ford Motor Company just last year in 2018 made the decision that they were going to scrap sedans and focus on their more lucrative light truck sales because that’s where they make more money, and clearly they had to be factoring—they know as well as any company out there that rising oil prices kill demand for the exact kind of vehicle that they were going to be focusing on, so they bought—on some strategic level they said, it looks like oil’s here forever, the United States is new Saudi Arabia, let’s go over the EIA, the experts on this; hey, look at this, they’re projecting that oil and gas output is going to rise through the year 2050 in the United States, hey, that’s long enough for our planning cycle.

Art Berman: You got it, that’s it.

Chris Martenson: Let me ask you this, how much of those projections by the EIA are depending on these projections by the companies at root, where do they get their data from, how do they build their ground up analysis that says, here’s how much oil we think we’re going to be having in across the future decades?

Art Berman: I actually think that the EIA has the resources available to them that I—and I say this because I’ve actually seen reports that they put out that don’t get a lot of publicity that totally support the kinds of points that I’ve been making over the years. But, they’ve got—they use some very sophisticated forward modeling. Now, the most important thing to understand here is that if there are any geologists or other geoscientists in the EIA, I don’t know where they are.

These are smart people that are good at economics and business and accounting and whatever, and they’re running models. The models are somewhat unconstrained by geological reality, but I think they start in a reasonable place and what they do then is they look at projection trends, and if you’re looking at something like the Permian Basin, you can project production very conservatively and get to rising production until 2040 or 2045 and then it just starts to flatten off a little bit, and voila you’ve got ten times the proved reserves that people have claimed and the question I ask is, well, that’s great guys, but where are the reserves going to come from? Oh, well don’t worry about that, they will come. If we build it, they will come. That’s where I think those forecasts are in error.

I don’t think the EIA is—I don’t think they’re amateurs, I think they’re trying to do a good job, but I believe that they are overwhelmed by the empirical data of production increase and then they say, well, okay, maybe the proved reserves aren’t there, but there’s so many probable reserves, and they look at technically recoverable resource estimates, and they say, yeah, yeah, there’s just so much out here it doesn’t matter. We’re good. That’s what I think. Are they part of a government strategy to promote US energy dominance? Well, they’re part of the government, so I don’t see how they couldn’t in some way be part of that push. But, whether it’s conspiratorial, I don’t think so.

Chris Martenson: Well, the conspiracy such as if it’s like that is just a conspiracy of bad data. I don’t—I’m really a big believer in this idea that there are acceptable ranges of thinking, and they get put out and sort of adopted by a culture. They could be completely wrong, but still it’s what most people—reasonable people think. Reasonable people at Ford, look forward many years and said, hey, we’re going with light trucks here, and you and I would look at the data very differently and say, hold on, look at the lack of global investment, look at where we really are and all this and maybe you should want to put some caution to that particular strategy.

People can disagree, that’s fine, the conspiracy of bad ideas and bad data for me would center on this idea that the companies have been overstating how much they’ve got and that that’s the base data that feeds into the longer term projections of what the EIA is up to because when David Hughes does it, he says, well, you’ve got tier one, you’ve got tier two, you got tier three areas, there’s only so many you can put in per section, there’s only so many benches or strata that you can drill into. We add it all up, there’s room for 49,000 more wells in the Bakken or whatever the number is, and you can get your hand around that and each of those different tiers and benches has its own output profiles and everything in that—we can argue, could you get three per section or is it two? Can we get—are there three strata that are worth drilling or is it four? We can argue about that, but if your EURs on a well basis are off by 100%, that’s the biggest source of error you could possibly have.

Art Berman: And the number of wells that you can—the well spacing is the source of an awful lot of error, also, that the companies will say, we can ultimately drill these wells on, say, 40 acre spacing when I look at it or Dave looks at it or any kind of professional journal does and say, nah, we don’t think so, we think at most it’s probably 90 or 100. They’re overestimating—because the wells are going to interfere. I mean, you can drill as many wells as you want, there’s no problem.Tthe problem becomes when the wells are too close together they start stealing production from the nearby wells, so you have two wells where only one was needed. But, investors, they like the idea of more wells, because that says—a company can say, well, we’ve got 75 years of locations. Oh, well, that sounds like growth to me.

But, yeah, Dave is completely right. He’s got a really good handle on the way this works, and so there are many—but here’s the bottom line, the bottom line for me is that despite the fact I’m a geologist and I pay attention to fundamentals and details, the most important factor in the whole thing is capital and if the money continues to flow, then the oil will also continue to flow. Now, it may cost an ungodly amount of money per barrel, but we got enough oil in there that—and enough technology that at some price, yeah, we can meet those goals. And so the evidence to date is that there doesn’t seem to be any hesitation in the willingness of people to pour capital into this deal. That is the number one concern.

Chris Martenson: Yeah, so let me ask you about that because a couple months back, I interviewed Dr. Scott Tinker at the Bureau of Economic Geology down your way in Texas who was of the opinion that—he was very bullish, very optimistic, and he was of the opinion that shale recoveries only had to improve by a percent or two. For people who don’t know, when we’re drilling into these shale rocks, we’re drilling into—basically, it’s like the chalkboard you’d see in a school, it’s hard stuff and we were getting just a very low percentage recovery of the oil in place because, guess what, it’s pretty hard to pull a liquid out of a solid like that.

Anyway, he was of the opinion that if we could get just a percent or two more out of the rock, then we would have twice as much oil in these things, and there’s already a lot there, so he was really optimistic. He thought future technology was going to meet us right when we need it, when we got out there. What are your thoughts about that view?

Art Berman: Right, well, first of all, Scott Tinker is a friend and I respect him as a colleague, as well. Scott has a much more optimistic view of oil and resources and reserves than I do, and I don’t see myself as a pessimist, so that’s just where I’ll start with this. Look, before shale plays came into existence, just when we had regular conventional oil, people have known for 100 years that we leave something like two-thirds of the oil in the rock. We just can’t get it out. It’s a surface tension, it’s a capillary pressure problem, and so if we could only figure out a way to get another percent or two out of conventional reservoirs, we’d have enough oils to last for a couple more centuries.

That idea, enhanced oil recovery, that has been around for longer than I have been alive, and you know what the net results of all that optimism have been? It’s worked in a few places and it generally hasn’t done a thing to prolong the life of conventional oil supplies, which is why we’re into shale. Again, not to in any way disparage Scott’s viewpoint, but let’s balance it. The balance is, okay, if you believe that, then show me where it’s worked with enhanced oil recovery because I’ll show you that, again, there have been some success stories, but on balance, it hasn’t done a thing to reverse the depletion of existing fields.

But, the second question is, yeah, the technology may be there, but what does it cost? What does it cost to get that additional one, two, three percent out? That’s the part that you never hear—nobody even wants to talk about it, and I don’t know what that’s going to cost. All I can say is it’s going to cost a lot. I can promise you that. The third thing I will add is, for as much as—I mean, I’m a scientist, all right, so technology is paramount to me, but I think and I argue all the time, Americans in particular place way too much faith and confidence in technology that’s going to come along and save our asses that doesn’t even exist yet. Forget about what it costs. Elon Musk is going to move us to Mars. Forget about the fact we can’t live on Mars, but, really? Really? Is that the kind of future we want, that technology will solve every problem, including saving us from the destruction of our own planet? I mean, this is Buck Rogers kind of stuff. I just don’t see it, Chris.

I gave a presentation, actually, the last time I physically saw Scott Tinker. I was up at an energy conference in Dallas and the laser pointer crapped out on me. It stopped working, so they bought me a new one, and that worked for a while and then the batteries went out, and they replaced the batteries. I went through three laser pointers in one presentation. Now, this is really pretty primitive technology and we can’t even get a damn laser pointer to work consistently through a 20-minute talk, but we’re going to figure out a technology that’s going to get all this extra oil out and save the planet.

I wouldn’t count on it. Again, I’m a technology guy, but I think we have to know the limits of technology and the timeline of that technology to develop, to be commercialized, and etcetera, and it’s—let’s just be very honest and optimistic. We’re talking decades, okay, and guys like you and me worry about, there may not be decades of energy left. There may not be decades of atmosphere or temperature on the planet left that we have that luxury of time. I hope we do. I hope everything I’m telling you right now, for the last 20 minutes, is wrong.

As a scientist and what I think is an honest broker, I got to tell you what I think is the truth, and I’m telling you what I think is the truth.

Chris Martenson: Well, and I appreciate that. I love the truth, as well, and the reason that I spend so much time, want to educate people about this, look, I don’t think, Art, that everybody needs to be a full-on geologist, but since so much hinges on this particular story and getting it right, so let’s imagine, okay, the EIA’s right, we don’t have to worry about it, by 2050, we’re still finding more, and it’s just flowing out of the ground like they say, but what if you and I are right?

What if it turns out that the Federal Reserve and the other central banks have overdone it, there’s a big—they’ve blown their third credit cycle, the first one in 2000, the second in 2008, here we are in the third, the largest? It’s global. It’s amazing. When it breaks, guess what? Getting capital is going to be hard to come by, so regardless of the price of oil, we might find that there’s just not enough capital to throw another quarter to a half a trillion dollars at the shale space, and the next thing you know, the United States finds itself needing to import more and more and more on a year over year basis, and now we’re up against all the other countries that want to import more and more and more for their own purposes, and that’s a very different future.

We ought to have at least something, a few chips on red when all the rest are stacked on black in this story if we’re playing roulette here, but it feels to me like everything’s just all geared towards, we have one story and that’s it. It’s the shale story, it’s going to work, and there can’t be—it will work and all of that. This is why I think it’s important for people to understand. We’ve been using some terms here. Maybe we should just back up for just a second. Art, explain for our listeners, please, the difference between an oil and a gas reservoir in a conventional sense and a source rock or the stuff we’re calling shale.

Art Berman: Sure, so the source rock is the black, goopy, crummy stuff, the organic accumulation of all the dead algae and plankton and stuff in the oceans that ultimately gets converted into oil through being buried, put under pressure, and put into a higher temperature environment. It takes a long time, but think of it as a refining process. You’re cooking up a batch of stew. You start with a lot of raw things that either you wouldn’t want to eat or you can’t chew because they’re too hard. You put it in water, you boil the crap out of it, and eventually it gets soft and eventually it turns into something edible.

Well, I mean, that’s a simplistic way to think about it, but so the source rocks are that. They’re the pot. They’re the kitchen. That’s where you cook the raw materials to produce the stew, which is oil. Now, the first thing the oil wants to do once it’s generated is to get out of Dodge. It wants to—it has buoyancy, it has gas in it, and it’s got force and pressure. It wants to break out of that shale, which it does. It fractures it.

It’s a natural frack job, if you will, and it finds its way as quickly as it can into a lower pressure environment, which usually means moving up vertically, and if it can find a nice sandstone or limestone along the way that has big holes in it, well, that’s an even lower pressure kind of environment and it just scoots itself right into that sandstone and migrates upward towards the surface until it runs up against a trap where it can’t get move any farther. That’s called an oil field. That’s how you find conventional oil. You find it in a nice sandstone or a limestone that has a lot of pore space that’s all filled with oil and gas and some water.

Now, what’s left behind, I mean, if you want to take everything out of the stew pot, what are you going to do with it? Well, what most people do is they either throw it in the trash or they throw it in the compost because it doesn’t have any more use. That’s the shale. That’s what’s left in the shale play, and so what our technology and our lack of better opportunities, frankly, because of depletion—what we’ve done is we’ve figured out, well, the oil did its own natural fracturing to get out, but we can do an even better job. We can bust it up even more and we’re going to free what’s left, the residual. We’re going to free a certain percentage of what couldn’t get out on its own and we’re going to get it out for ourselves, and that’s the play. That’s the shale play right there in its simplest terms.

Chris Martenson: Excellent description. Thank you for that. And so, if these ancient marine shales, that’s the source rock, that’s the kitchen, that’s where this stuff’s getting cooked, this is the critical part, what do we turn to, what do we drill after those are gone?

Art Berman: Well, I think we’re kind of done. I’m a petroleum geologist and if there is—I mean, there are all kinds of pie in the sky sorts of things. You can talk about gas hydrates, frozen methane at 30,000 feet off Japan, but that’s not liquid petroleum, that’s methane. There are some crazy ideas about how there’s actual petroleum generated in the mantle of the earth. I don’t think anybody really believes there’s very much of that, but yeah, so based on current understanding of the earth and how petroleum is created, I think we’re done.

Chris Martenson: Yep, and that’s important because people—it seems like there’s always more and more stuff being announced or discovered or something like that. In fact, the EIA and USGS have both come out with things. I think it was—wasn’t it—it was just this past November. Let me look at my notes here. Yeah, November 2018, the United States Geological Survey, the USGS, the big news flash, they came out with the announcement that the Wolf Camp and Bone Springs formations alone, just two formations, two stacked layers down there in the Permian contained some 46 billion barrels of oil, 281 trillion cubic feet of natural gas, 20 billion barrels of natural gas liquids.

Holy smokes, Art, huge numbers, and first, how much did those estimates rely on the stuff we’ve been talking about before, but I think it’s—people think, oh, my gosh, we just discovered that, we didn’t know about that before, so this is new stuff.

Art Berman: No, it hasn’t been discovered. This is a resource. A resource hasn’t been discovered yet, so this is basically—this is the USGS’s estimate of how much is in place, how many molecules of oil and gas and natural gas liquids exist in that rock that they believe could be technically brought to the surface. Now, cost is not an issue. Some of that might be at 50,000 feet, some of it might be under a national park or under a city and therefore never accessible, but it’s technically recoverable, and it might cost $1,000.00 a barrel, but that’s okay because that’s not the purpose of that particular analysis.

It hasn’t been discovered, but let’s ignore all of those sort of annoying details. I looked at that exact same report and the USGS is always very good about giving you a table somewhere in there, and they’re going to tell you exactly what the drainage area of each one of the wells that they modeled was an what the average recovery EUR, if you will, is going to be, and so I did a calculation which I believe the survey would agree with and to access that 46 billion barrels and everything that goes along with it required, if I remember correctly, 311,000 wells at $10 million apiece.

Chris Martenson: What?

Art Berman: Yeah, and using the average EUR, the mean, I guess, you know, they give you ranges, using the mean, which I can’t remember what it was, but it was something like 170,000 barrels of oil equivalent, well, run that through an economics program and the break-even price on that great new discovery that isn’t a discovery was $135.00 a barrel.

Chris Martenson: As a break-even, no return.

Art Berman: As a break even.

Chris Martenson: No return to capital, yeah.

Art Berman: Okay, so that’s the—and again, I’m not in any way criticizing the US Geological Survey. They’re doing what they get paid to do, which is to estimate, basically, undiscovered resources, and they give you all the data. They gave me all the data to very quickly come up with the answers that I just gave to you, but where in the world do you ever see those kind of, oh, well, by the way, excuse me, but it’s going to take a third of a million wells at $10 million apiece and it’s not going to be economic at triple current oil prices. Whoops.

Chris Martenson: We just have to find 3 trillion laying about and have at it. It’ll be fine.

Art Berman: Well, we have to have a very urgent need for it, don’t we?

Chris Martenson: Yeah, and, of course, all the things, the damages to the road, the amount of water, do we have that much sand, a lot of questions about all of that, too, so there might be some other limiting factors in all of that, and instead, it feels like the conversation really ought to be, look, there’s stuff here; I’m not saying we shouldn’t go after it, but we should understand its limits, and the question is, how big is it and what are we going to do with it, because that’s what every company does that’s worth its salt. They have a strategic plan and a strategy consists of, where am I going, how am I going to get there? What’s the vision? What are my resources?

The country ought to be saying, where do we want to be in the year 2050, what kind of world do we want our kids to inhabit, oh, and how much energy do we have to get there? And put those two pieces together. If there’s energy left over, go ahead, sell F-150s or whatever you feel is best, right, but in the meantime, what I’m trying to sort of argue against here and convince people of is that there’s a bit of a propaganda—there’s a bit of a campaign out there to convince us that we basically have no decisions to make and that oil’s unlimited, and that, oh, by the way, when we do get out to the future, we’ll figure something out. I’m not sure that’s a good strategy. I’ll go further, it’s a bad strategy, and I’d like to help people understand that.

Art Berman: It’s a terrible strategy, and you say a bit of propaganda, I’d say there’s a whole lot of propaganda. I mean, that is the dominant message that one gets from paying attention to even the more reliable press, and the reason for that is most of the people that report that information are honest, good, intelligent people who have never worked a day of their life in the oil and gas business. On some level, they know not of what they speak, or at least the details.

The so-called analysts, the people that work for, you-name-it, Goldman Sachs or Deutsche Bank, again, most of those, they’re smart, they’re great guys, they read a lot. Almost without exception, they’ve never worked a day of their life in the oil and gas business, so how do you know? How do you know that the inputs that the costs that a company—how do you know if it’s right? You never had to write a check for a well. You don’t know.

Now, again, I’m not disputing that they’re smart and they learn fast, but there’s just nothing—I mean, if you’re talking about our country’s energy security and future, don’t you think it’d be kind of helpful to ask some people, not the CEO of Exxon Mobil, but the Average Joe who works a Exxon Mobil or me who actually does the work and say, what do you think about this? Does this make much sense to you? And I think what I hear when I go around and give talks is that, first of all, nobody actually disputes the data that I show them. They say, oh, Berman doesn’t know what he’s talking about or he’s a peak oil guy and we know what those guys are like, and etcetera, but nobody has ever disputed the data that I put out there.

The economics tables, the EURs, nobody’s ever said, no, you’re wrong, so what—it’s cognitive dissonance. They don’t want to hear it. They’ve made an unconscious decision that that’s not the message that I want to hear. I want to hear the good news, and guys like you depress me.

Chris Martenson: Because that’s not what I wanted to hear. Well, I’ll tell you, you’ve given me cognitive dissonance because, on the one hand, I read in the news about the United States continuing to put enormous pressure on Germany to some recent success because apparently some German politicians are now questioning whether they want to scrap the Nord Stream 2 gas pipeline from Russia to bring natural gas and under the theory that the US is going to supply the US with liquefied natural gas.

My dissonance comes from you, Art, because I go over to your Twitter feed and I go to your website, and I look at your natural gas scores charts for the United States and they’re really kind of concerning to me because we don’t have that much in storage compared to a five-year average, and I can’t make those two pieces fit together. Either we’re swimming in gas and we have enough to supply Germany forever, or we don’t even have enough for our own uses. There’s a big gap between those two stories. What’s going on here?

Art Berman: Yeah, so, well, we’ve never produced more natural gas than we are producing right now and the growth of natural gas production has never been higher than it has been in the last two years, and nor has the amount of natural gas consumption and export been higher. So, what you have to do when you’re looking at these number, and I don’t expect anybody except a giant nerd like me to do it, is to come up with a gross supply, so say all right, this is everything we’re producing and this is the rate that consumption is increasing every year, and this is how much we’re exporting. What are our net imports or imports minus exports?

And what you then find is that our real supply, our gross supply has probably peaked and it’s flat and it’s going to start going down, and the reason for that is that, again, we go back to this phenomenon of the frat boys that find something good, whether it’s shale gas or tight oil, and they can’t keep their pants on and they overproduce it. Oops, what are we going to do now? We just drove our price down. Oh, I got a good idea. Let’s export it. Let’s send it out to the rest of the world. That’ll relieve the pressure and allow us to continue wasting the natural resources we have and not making any kind of profits for our investors.

The natural gas situation is quite simple, and that is, if we were just doing what we ordinarily have done for the last however long, which is to say produce and import the rest, we’d be fine, but we are exporting a lot and because we’re displacing coal, partly because the natural gas is cheaper, but also because we don’t—as a society, we’ve decided that coal is probably not a great thing to base our future on, so we’re increasingly using more natural gas than coal to generate electric power.

Electric power is the future of the country. All right, that means more natural gas, so that’s the story, and so we went into this winter with the lowest amount of gas in storage that we’ve ever had. I mean, totally unprecedented, and we got a little bit of coal weather in November and December and gas prices went higher than they’ve been in five years. Now things are back down to normal because we’ve had some warm weather, but you’re playing with fire.

That’s the point and that’s the message I’ve been putting out there. If you guys want to live on the edge and be prepared to, in some localities in the Northeast, in New England, you want to pay $50.00 in MCF for a little while, be my guest. I live in Texas. That never happens here. It’s your choice. That's what happens when you don’t have enough put away. It’s like your bank account. You decide, well, I don’t need to save anything because I’m 25 years old and I never get sick, and then all of a sudden you get hit by a car and suddenly you’ve got some big medical expenses and you didn’t save anything. What do you do? Well, you borrow or you don’t fix it or whatever.

You put yourself at risk. You’re playing with fire and that’s what we’re doing with natural gas; but again, why do we do that? Because of the assumption that we got so much we could give it away. I mean, they are giving it away in the Permian Basin. They’re selling it for almost nothing, just to get it out of here so we can produce the good stuff, which is the oil, so I see what amounts to me to be a [tragic] management of our natural resources in this country, and I say that as a guy that’s had his whole life in the oil and gas business, for crying out loud.

I’m not on a Greenpeace ship somewhere being militant about getting rid of the fossil fuel industry, that’s not who I am, and if it bothers me, then other people ought to be bothered, not because I’m such a great authority, but because I know stuff that the average guy doesn’t. I’m on the inside.

Chris Martenson: Well, all very well said and I think I’m harkening back to what you said that many of these oil companies are actually in the business of obtaining money, not making money, and they haven’t made money for a very long time, which has been my clue that something is not right here in this story; and of course you dig under it a little bit and you find a lot of this data that we’ve been talking about here today that these companies have been claiming their going to get a million barrels of oil equivalent BOE out of a well, but maybe it’s half that, actually.

The Wall Street Journal’s finally come onto that just a tiny bit. I certainly hope people in Germany think long and hard and avail themselves in statistics before they would do away with access to a natural gas pipeline from Russia that might provide them with reliable, cheap gas for the next 50, 60 years for some hype. Look at that stuff very carefully, Germany. That’s my free tip to you, today.

With all of that, Art, it’s just, again—you’ve been on this story the whole way through. I do wish they had consulted with you a little bit more in this, maybe in a future article, but you’ve been all over this story, and I’ve certainly been tracking it, so the minute I saw that article, I thought, well, finally, at least they’re getting to this a little bit. I, too, know a lot of wonderful people in the gas business and oil business. Nothing to say about that, but the finances and the way this has been run, and the hype, the propaganda, the way Wall Street has been peddling this story has been annoying to me, intellectually dishonest, and it falls apart so easily. Who are the people pouring hundreds of billions into this industry? They’re smart people. I don’t—I’ve been confused by all of that.

With all of that, Art, thank you so much for your time today. For people listening, his website, artberman.com, you can check out. Wonderful, he’s got his presentations that are just amazing. Also, @AEBerman12 at Twitter, I follow a lot of great charts there that you’re putting up with all of that. Art, hey, thanks so much for your time today and it’s great talking with you first here in 2019.

Art Berman: Always a pleasure, Chris. Thanks a lot.

About the Guest
Arthur Berman

Arthur E. Berman is a geological consultant with thirty-six years of experience in petroleum exploration and production. He currently is consulting for several E&P companies and capital groups in the energy sector. He frequently gives keynote addresses for investment conferences and is interviewed about energy topics on television, radio, and national print and web publications including CNBC, CNN, Platt’s Energy Week, BNN, Bloomberg, Platt’s, Financial Times, and New York Times. He is a Director of ASPO-USA (Association for the Study of Peak Oil & Gas USA). He is on the editorial board and a frequent contributor at The Oil Drum, and an associate editor of the AAPG (American Association of Petroleum Geologists) Bulletin. He was past Editor of the Houston Geological Society Bulletin (2004-2005) and past Vice-President of the Society (2008-2009).

He has published 100 articles on geology, technology, and the petroleum industry during the past 5 years. Publication topics include petroleum exploration, oil and gas price trends and cycles, petroleum play evaluation, sequence stratigraphy, coastal subsidence, earthquakes, tsunamis, and petroleum geopolitics. He has published 11 articles on shale gas plays including the Barnett, Haynesville and Fayetteville shales.

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17 Comments

  • Wed, Jan 16, 2019 - 3:21pm

    #1

    AKGrannyWGrit

    Status Bronze Member (Offline)

    Joined: Feb 06 2011

    Posts: 450

    Please Explain

    “That’s been my experience with it all, but then the issue that I think is so hard for people to grasp and certainly was for me, is the fact that many of these companies, not just oil companies, are not in business to make money, they’re in business to get money.”
    Sooooo – how is that NOT a Ponzi scheme, or at the very least immoral and unethical?
    AKGrannyWGrit

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  • Wed, Jan 16, 2019 - 11:21pm

    Reply to #1

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    Affordability Controls Prices

    AKGrannyWGrit wrote:

    Sooooo – how is that NOT a Ponzi scheme, or at the very least immoral and unethical?

    Granny,
    That was the “ah-ha moment” for me in this podcast. I was wondering why investors would continue to fund an investment that keeps losing money. Why do people hold gold or bitcoin? Obviously, those are losing propositions based on recent price performance. It’s because they are betting on the come.

    https://www.urbandictionary.com/define.php?term=betting on the come
    Betting on the Come” is derived from a gambling expression and means you don’t have what you want or need, now at the moment; but, you are betting or hoping you will have what you want or need when the time comes.

    Granted, there may be nefarious shenanigans ongoing, but the everyday investors are willing to lose a little money in the short term in order to secure a sizeable quantity of the most valuable resource (oil) in the future when the price finally reflects its importance to modern society. Those investors are buying the rights to the oil in the ground.
    Will their play work out? It could, but likely won’t. I like Gail Tverberg’s idea that price is determined by affordability. If the non-elite workers can’t afford the product, less of it gets sold and consumed. It’s a bell curve situation. Some will get sold at astronomical prices. If there is very little to be sold, it can be sold at high prices. If lots of product need to be sold, the price has to drop to where enough can afford it. Since the non-elites are doing the majority of consuming, they determine what the price will be.
    I like to think of it as a floor/ceiling system. The producers set the floor price and consumers set the ceiling price. In other words, the producers need to receive a certain amount to make the effort of bringing a product to market worth the endeavor. Consumers need to see the price of the product as worthwhile. They have an upper limit they’re willing to spend for a given unit. As long as the floor price is beneath the ceiling price, there is space for both the producer and the consumer to live. What happens when the price is too low for producers to be profitable at the same time it is too high for consumers to accept?
    Look back to 2007-08 for an example of what happens when oil prices get too high. It works for a while to charge ever higher prices … but leads to a recession. It costs other companies more to produce their products when energy prices increase. At the same time that consumers are strapped by high energy prices, the companies are also strapped and can’t pay higher wages. Credit cards can soften the blow for a while, but what happens when the cards for most are all maxed out?
    If shale plays are the last “best” option for our modern society, we’re digging the bottom of the barrel. Can technology figure out a way to get a few percent more recovery out of these plays? Possibly. I really don’t know. It better happen quickly. How long will the investors remain satisfied to lose investment money in the short term?
    Grover

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  • Thu, Jan 17, 2019 - 5:52am

    #2

    AKGrannyWGrit

    Status Bronze Member (Offline)

    Joined: Feb 06 2011

    Posts: 450

    What If

    Thank you Grover for taking the time to post and presenting an interesting explanation!
    “It’s because they are betting on the come.”
    https://www.urbandictionary.com/define.php?term=betting on the come
    Betting on the Come” is derived from a gambling expression and means you don’t have what you want or need, now at the moment; but, you are betting or hoping you will have what you want or need when the time comes.
    This is an assumption.  It assumes the motivation for acquiring money is a specific outcome, perhaps a big oil discovery.  However there has been no evidence presented to support betting on the come. Art Berman said 

    “That’s been my experience with it all, but then the issue that I think is so hard for people to grasp and certainly was for me, is the fact that many of these companies, not just oil companies, are not in business to make money, they’re in business to get money.”
     
    IF companies were betting on the come then its reasonable to assume they were trying to make money. So that discounts the original statement.  Perhaps the business of acquirung money and acquiring oil are only loosely related?  Perhaps THE business is to acquire money.  Making money and “getting” money are vastly different.
     
    AKGrannyWGrit

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  • Thu, Jan 17, 2019 - 6:50am

    #3

    Snydeman

    Status Member (Offline)

    Joined: Feb 06 2013

    Posts: 481

    Five Star Review

    Chris, I really like Art Berman as a guest. He speaks clearly, has a good sense of humor, entertains your questions without a second thought, and answers them very well. So, five stars! Hell, his description of the difference between shale and conventional oil alone was worth the time of listening to this podcast, and I’m going to incorporate his analogy when I talk about it with everyone in my world, too. Really, excellent podcast!
     
    As to the technology thing, I think what you guys talked about is key; remembering that there is a major difference between technology that exists and technology that is reliable, dependable, and affordable. Just this morning, as I was coming in to teach my World History I kids – a lesson about the Sui and Tang Dynasties in China that absolutely required me to use my computer – my laptop, which is normally in excellent shape because I know how to keep it so, literally went into a death loop where it couldn’t start but wouldn’t shut down. As you might imagine, I was glad I had a plan B that did not rely on that technology. But, as you point out, there’s a big difference between a teacher’s tech not working as intended and oil extraction technology not working as intended, because no civilization will tremble at the former, while the latter…
     
    Anyways, thanks for having him on again!
     
    -S

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  • Thu, Jan 17, 2019 - 6:54am

    Reply to #1

    Snydeman

    Status Member (Offline)

    Joined: Feb 06 2013

    Posts: 481

    AKGrannyWGrit wrote: “That’s

    AKGrannyWGrit wrote:

    “That’s been my experience with it all, but then the issue that I think is so hard for people to grasp and certainly was for me, is the fact that many of these companies, not just oil companies, are not in business to make money, they’re in business to get money.”
    Sooooo – how is that NOT a Ponzi scheme, or at the very least immoral and unethical?
    AKGrannyWGrit

     
    Granny-
    It is unethical and immoral, but as I’m sure you know, if money can be made on it and no one is willing to call them on it, they’ll do it. That’s not conspiratorial thinking. Humans will do whatever they can get away with doing, and nowhere moreso than when the rewards are highest.
     
    As to why investors are willing to invest in the shale space, I wonder how much of that “chasing the only yield left” dynamic plays in here? Art, Chris or others of that knowledge level would know better than I.
     
    -S 

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  • Thu, Jan 17, 2019 - 9:43am

    #4
    Uncletommy

    Uncletommy

    Status Bronze Member (Offline)

    Joined: May 03 2014

    Posts: 514

    Planning for a new future in inefficiency?

    It certainly makes sense for “forward thinking” companies to look at current trends and developing technologies that make the best use of available resources. Art’s observations and concerns are well warranted; and his predictions for an increase in the future price of LNG may have been noted by some of these companies. The most recent announcement by VW and Ford to combine efforts towards an enhanced use of self-driving and electric vehicles seems to me to be a response to available and future resources.
    https://www.bbc.com/news/business-46880937
    Heavy oils from Canada and other heavy crude sources may be more viable for diesel vehicles and ships to haul cargo rather than people. Much of the current supply of lighter hydrocarbons comes from shale plays( which are currently keeping the price of gasoline down because of the glut produced from these plays) and probably won’t be used to produce electricity(but great for pickups and SUV’s). More and more coal fired generators are converting to LNG, so, guess what; where is the price going there? Art is very correct in saying that we are dumping LNG, currently, and will be paying the higher price for it later. 
    But, the nagging problem still remains, “are we using the availble resources efficiently? As long as we continue to use dollars to measure the useful value of resources, we will be stuck in this revolving door of waste and inefficiency driven by the moguls of “un-earned capital”.

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  • Thu, Jan 17, 2019 - 11:00am

    #5
    DennisC

    DennisC

    Status Bronze Member (Offline)

    Joined: Mar 19 2011

    Posts: 101

    Can't Get Rid of it Fast Enough

    Article on LNG export capacity/growth:
    https://www.eia.gov/todayinenergy/detail.php?id=37732
    Volumes and prices:
    https://www.eia.gov/dnav/ng/ng_move_expc_s1_m.htm
    Someday, perhaps, we’ll be happy to pay $50/1000 cu. ft. to import from the evil empire and say “thank you, please sir, can I have some more?”
    Trans-aleutian pipeline anyone?

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  • Thu, Jan 17, 2019 - 1:18pm

    #6

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    Red Queen Race

    AKGrannyWGrit wrote:

    IF companies were betting on the come then its reasonable to assume they were trying to make money. So that discounts the original statement.  Perhaps the business of acquirung money and acquiring oil are only loosely related?  Perhaps THE business is to acquire money.  Making money and “getting” money are vastly different.

    Granny,
    My post was focusing on the investors who buy bonds of the oil companies rather than those running the oil companies. Art’s idea that the oil companies are more focused on getting money instead of making money wasn’t lost on me. (Where do they get the money?) The oil companies are in some Red Queen race where they are running as fast as they can just to stay in place. Are they more concerned about maintaining market share than being profitable? I don’t know.
    Since the price of energy has such importance in economic affairs, it wouldn’t surprise me to learn that the federal reserve is funnelling funds surreptitiously as well. The price of money is just one component of running a successful business. Lower any component of a business’ operational cost and it improves the bottom line and hence, the overall economy. Since the price of energy gets set on the edge, a little more supply drives the clearing price down of all of it. (DaveFairtex wrote a post or two about this phenomenon a while back. Hope I read it right.)
    It doesn’t take too much twisting and torturing of logic to make this fit within their mode of operation. Who would have thought it was okay for the federal reserve to buy mortgage backed securities (MBS) before they did it? If buying MBS is okay, why not oil company bonds?
    Slippery slopes can be fun as long as stopping isn’t necessary.
    Grover

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  • Thu, Jan 17, 2019 - 6:37pm

    #7
    Hotrod

    Hotrod

    Status Member (Offline)

    Joined: Apr 20 2009

    Posts: 159

    Farming is no different than shale

    In this rural depression, I would bet that 50% or more of agricultural commodities are produced by entities that are technically insolvent.  As long as these operations continue to have access to more credit they will continue to produce more grain, meat, and dairy than can be profitably sold.  An economist from Minnesota has determined that the average corn farmer there is losing $38/acre growing corn.  How many more acres does it take to find a profit?/sarc  (Monsanto, through seed and chemical inputs, is making much more per acre than the farmer who is taking all the risk.)
    As a last resort to obtain credit for planting, the USDA through the FSA guarantees operating loans for farmers to produce even more of an already large surplus of every major commodity.  So, market clearing through supply and demand can’t possibly work.  This will continue until there is a major drought, or some other catastrophe emerges to bring some sense back into the marketplace.  Until then it’s full speed ahead, profit or no.
    My point is that access to credit is much more important than profitability in determining who stays in business, at least in the short term.  Not right, but that is the system we have, until it collapses.

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  • Thu, Jan 17, 2019 - 10:48pm

    Reply to #1
    David Allan

    David Allan

    Status Member (Offline)

    Joined: Nov 15 2009

    Posts: 27

    Affordability controls prices - but its worse than that

    Grover wrote
     I like Gail Tverberg’s idea that price is determined by affordability. If the non-elite workers can’t afford the product, less of it gets sold and consumed. It’s a bell curve situation. Some will get sold at astronomical prices. If there is very little to be sold, it can be sold at high prices. If lots of product need to be sold, the price has to drop to where enough can afford it. Since the non-elites are doing the majority of consuming, they determine what the price will be.
    I agree and it’s even worse than that. How many production companies and distribution companies can survive on decreasing volumes year after year. The current business model is based on volume (and growth). If the volume drops too much even a high price will not keep businesses viable. If infrastructure crumbles away even the wealthy will not be able to buy petrol. I suspect this is another potential tipping point – beyond a certain volume / price point the game just doesn’t work.

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  • Fri, Jan 18, 2019 - 7:42pm

    #8
    Munson008

    Munson008

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    Railroads and history

    Great insights on the previous comments. One thing that popped out in my mind when the idea of oil companies being in the business of getting money v making money was brought up is the railroads.  I recently learned in the heyday of railroads is that most of the railroad operators lost money but the owners of those operations also owned the construction companies that were contracted to build the railroads at highly inflated prices causing in part the operators to lose money but still funnel capital to the owners. So the railroad operators obtained massive amounts of land at cheap prices from and protected by the various governments then funneled that capital to the construction of the railroad where the real money was made. So to finish my point, I would not find it surprising to find that the owners of some level of oil company are making money hand over fist while the vast majority of the space is losing money throughout this effort. At some point this story will break down and many investors will be left with hat in hand while a few of the “smart” ones will be extremely enriched in the process.

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  • Sat, Jan 19, 2019 - 5:25am

    Reply to #8

    Chris Martenson

    Status Platinum Member (Offline)

    Joined: Jun 07 2007

    Posts: 4505

    Making money in shale

    Munson008 wrote:

    Great insights on the previous comments. One thing that popped out in my mind when the idea of oil companies being in the business of getting money v making money was brought up is the railroads.  I recently learned in the heyday of railroads is that most of the railroad operators lost money but the owners of those operations also owned the construction companies that were contracted to build the railroads at highly inflated prices causing in part the operators to lose money but still funnel capital to the owners. So the railroad operators obtained massive amounts of land at cheap prices from and protected by the various governments then funneled that capital to the construction of the railroad where the real money was made.
    So to finish my point, I would not find it surprising to find that the owners of some level of oil company are making money hand over fist while the vast majority of the space is losing money throughout this effort.
    At some point this story will break down and many investors will be left with hat in hand while a few of the “smart” ones will be extremely enriched in the process.

    That’s a good point worth repeating.  The “picks and shovels” companies are making money, a lot of money, in the shale space.
    Those would be:
    Water suppliers
    Water disposal companies
    Sand suppliers
    Truckers and haulers
    Pipeline operators
    Frackers
    Drillers
    Service technicians
    Land/lease owners

    And a hundred others not named here.  Real money is flowing into real pockets.  Lots of it.  That money is coming from both operations and investors.  The investors may never see that money again.
    One really dumb point I see shale boosters trying to make lately (presumably to lure more “investors” to the table) is that now the shale companies are drilling really effective and productive wells.  If you just look at the wells being drilled now these producers are breaking even at cheap oil prices and producing monster wells.  
    Of course these boosters are usually leaving out such things as SG&A, land costs and other clearly assignable costs, but even if they are more honest than the average booster by including these, they are almost universally leaving out all of the previously betrayed capital.
    As if the debt already on the books and all of the equity already obtained could be overlooked and we can just assess things from this moment in time forward.
    No, we cannot.  An enterprise has value based on BOTH it’s accumulated assets/liabilities AND its forward prospects.  Something the Johns-Manville investors learned the hard way.
    No reason to re-learn that lesson, the financial anlysis is easy enough to perform.  
     

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  • Wed, Jan 23, 2019 - 8:23am

    #9

    Chris Martenson

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    Joined: Jun 07 2007

    Posts: 4505

    Schlumberger Drops an Egg in the Shale Patch

    One narrative is that US oil companies, displaying the usual plucky ingenuity, are finding ways to extract more and more oil from shale at lower and lower costs.
    A different narrative says that they’ve been overstating the results and buring cash to maintain that illusion.
    A prominent oil field servicing company, Schlumberger, with serious skin the game and every reason to spin things positively, also has to report to its own shareholders about future prospects.
    They laid a couple of decent sized eggs in their most recent quarterly statement:

    The first red highlight I’ve put in calls out the fact that more than half (54%) of total Capex is currently eaten up simply to cover the ferocious decline rates of the prior drilled wells.  It should be noted that since the shale operators are currently cash flow negative as a group, that this represents a number far higher than 54% of cash flows.
    Then they go on to observe that by 2021 total capex required to offset declines will rise to 75%!
    If the price of oil remains where it is, there’s no doubt that this will represent more than 100% of cash flows from operations.  Obviously any business concern that is spending more than 100% of its cash flows to generate more cash flows is a bankrupt concern.  None of this even includes the idea of paying back debt and equity already secured.  That’s extra.
    The second red box highlights the fact that the precious sweet spots, termed “Tier 1” agreage, are already seeing significant parent-child well interference.  In other words, it’s all drilled up.
    When the companies then are forced to move to Tier 2 acreage, the spots are decidedly less sweet, and there are lower returns (i.e. less oil to be gathered) per well drilled.  
    Someday, when thoughtful future humans look back on all this, they’ll wonder why there was such a haste to rip all this tasty oil and gas out of the ground that it was done with economic losses and at such a furious pace that much of the associated gas had to be “flared” (burned uselessly into the atmosphere) because there was no infrastructure to gather it.
    So it was burned.
    The “unavoidable treadmill effect” is gathering speed in the shale space, and the only way out of it would be for the Federal reserve to begin buying up this bad debt and equtiy and letting it die on its books.  They might do this, of course, as a “necessary” step to prevent reality from intruding unpleasantly on their dreams of infinite growth.  We shall see.
    All of this reminds me, sadly, of this:

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  • Wed, Jan 23, 2019 - 1:25pm

    Reply to #9
    DennisC

    DennisC

    Status Bronze Member (Offline)

    Joined: Mar 19 2011

    Posts: 101

    Stumps (or 40 watters)

    I really enjoyed that posting.  Thanks Chris.
    One of my favorite quotes in the quarterly statement box: “…we could be facing a more moderate growth in U.S. shale production…”  So, moderate means (whatever you think)?  Less than robust?  OK, but not bad?   I guess it depends on what the definition of is is.
    I also felt like a little word play on one sentence: “One narrative is that US oil companies, displaying the usual plucky ingenuity, are finding ways to extract more and more money from investors with lower and lower IQ’s.”
     

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  • Tue, Feb 05, 2019 - 10:16am

    #10

    AKGrannyWGrit

    Status Bronze Member (Offline)

    Joined: Feb 06 2011

    Posts: 450

    Granny’s Late Night Ponderings

    Art Berman – 

    I’ll tell you what, smart money never ever doubted the concept of peak oil, and the reason they’re putting their money in these companies is because they’re long on oil, and they know what you know and what I know and that is, it’s only a matter of a very short time, maybe a few years, maybe less, maybe more before oil prices go to the moon, and then the investment will prove to be an incredibly lucrative one.

    Can’t wrap my head around that statement. It just doesnt make sense when paired with the following.  A lucrative investment when faced with the future as seen by M King Hubbert – the insanity is incomprehensible!

    M. King Hubbert –

    So long as oil is used as a source of energy, when the energy cost of recovering a barrel of oil becomes greater than the energy content of the oil, production will cease no matter what the monetary price may be.

    Hmmmmm

    Isnt it interesting that other podcasts and articles get a bunch of responses yet oil/energy is the basis of our civilization and yet only gets a few comments.

    AKGrannyWGrit

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  • Wed, Feb 06, 2019 - 12:10am

    #11
    TechGuy

    TechGuy

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    Posts: 295

    DennisC WroteQuoted: I also

    DennisC WroteQuoted:
    I also felt like a little word play on one sentence: “One narrative is that US oil companies, displaying the usual plucky ingenuity, are finding ways to extract more and more money from investors with lower and lower IQ’s.”
    I knew the game was over when the big oil companies cancelled all of there expensive drilling projects and opted to drill wall street with stock buybacks. Shale was just the side show.
    That said, I have been making good use of the low energy prices to put myself on track to be self reliant.

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  • Sun, Feb 24, 2019 - 7:04am

    #12
    jdmikeska

    jdmikeska

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    Joined: Jan 04 2015

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    The Shale Oil Miracle

    Isn’t the shale oil boom largely a result of advances in drilling technology and well development methods (automation of drilling rigs, better directional control, faster deployment/mobilization of drilling operations, shortening of time required to drill and complete a well, fracking, etc.)?

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