Friday, September 5, 2014

Shale the savior

Shale the savior, until it's not.

Just an interesting blip on the radar screen.  Not a proven point, but the logic has been noted before:

Trader Who Scored $100 Million Payday Bets Shale Is Dud
Bradley Olson, Bloomberg, 3 Septemeber 2014 (hat tip: NC)
Hall is going all in on a bet that the shale-oil boom will play out far sooner than many analysts expect, resulting in a steady increase in prices to as much as $150 a barrel in five years or less.
Investing ever-larger sums of his own money, he’s buying contracts for so-called long-dated oil, to be delivered as far out as 2019, according to interviews with two dozen current and former employees and advisers who are familiar with Hall’s trading but aren’t authorized to speak on the record. To attract buyers, the sellers of these long-dated contracts -- typically shale companies that have financed the boom with mounds of debt -- need to offer them at a discount to existing prices.
Hall’s strategy -- which in a May letter he described as more akin to “loan-sharking” than market speculation -- has already shown some signs of success.
Hall's response to the neigh-sayers who think the shale boom will lower prices:
Hall’s main problem with the falling-price scenario is that it contains the seeds of its own demise. Shale drilling depends on high prices to survive. If oil falls toward $75 a barrel, much of the wave of new U.S. production would become unprofitable, prompting output to be cut, Hall wrote in April.
Scarcity would then start to drive up prices. Hall’s position is that the world may be awash in new oil but that new oil isn’t cheap to produce. The fact that the U.S. shale revolution has been able to replace most of the crude lost to strife in recent years in places such as Iraq and Libya is a fluke, in his opinion.
And while energy powers such as Russia and Saudi Arabia still have plenty of oil, they’ll have to significantly increase investments to maintain production levels. In a June letter, Hall made note of a statement from an OAO Lukoil executive, who acknowledged the “threat” that Russia’s “traditional reserves are being exhausted.”
A preliminary conclusion of sorts:
So far this year, there are signs that he may be on the right track. In North Dakota’s Bakken and Texas’ Eagle Ford formations, which have accounted for almost all of the jump in U.S. output, the combined year-over-year growth in production in July fell below 30 percent for the first time since February 2010.
Two central questions about technology and shale will likely determine the outcome for Hall: how many wells producers will be able to drill in a finite amount of land that sits atop oil-bearing layers of rock and whether the U.S. renaissance will be repeatable abroad. Hall is betting no on both counts.
It has been noted before, by myself and many others, that peak oil does not mean the world runs out of oil.  It means that it runs out of cheap oil.


Harry Flashman said...

People will still buy working interests in shale oil, as long as the depreciation and other credits makes it profitable for them, regardless of what the royalty interests pays.

There's also the distinct possibility that the Federal government will step in and subsidize production as a strategic initiative to prevent increased reliance on foreign oil.

Who knows how it will play out? Not me that's for sure.

russell1200 said...

Harry: Yes, but if the extraction is more expensive than the historical norm, they are just band aids. Even oil rich countries have a problem with their local fuel subsidies getting out of hand. Fracking seems like a perfectly reasonable band aid aid to me. It's just that people act as if it is a permanent solution.

PioneerPreppy said...

Shale is a complete dud. The companies have already been getting massive backdoor subsidies and despite that those with a play are hemorrhaging cash at a rapid pace.

Gail over at Finite world has it all laid out. Plus the more shale plays add to the current reserves while actual use keeps plummeting they are actually hurting themselves even more due to the overall price dropping.

In a sense they are already losing money on the shale and tight oil plays.

PioneerPreppy said...

I meant to add... They are losing money but the government smoke and mirrors is passing the cost off to us.

russell1200 said...

Pioneer: It wouldn't be such a dud if it wasn't priced so ridiculously low. A lot of that is pure and simple bubble popping mechanics, but I will take your word for it that their are government incentives involved as well.