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The Finance of Fracking

To outward appearances the U.S. oil and gas fracking industry is in the midst of a decades long energy boom with record output and profits. But what is really going on? The industry has a little secret they don’t want you to know about.

The U.S. Oil and Gas industries are completely dependent on extreme extraction. Except for the Alberta, Canada Tar Sands, that means extraction from shale, a sedimentary rock by use of "hydraulic fracturing", a well stimulation technique in which rock is fractured by a pressurized liquid. The process involves the high-pressure injection of 'fracking fluid' (primarily water, containing sand or other proppants suspended with the aid of thickening agents) into a wellbore to create cracks in the deep-rock formations through which natural gas, petroleum, and brine will flow more freely.

In 1997, Nick Steinsberger, an engineer of Mitchell Energy (now part of Devon Energy), applied the slickwater fracturing technique, using more water and higher pump pressure than previous fracturing techniques, which was used in East Texas by Union Pacific Resources (now part of Anadarko Petroleum Corporation), in the Barnett Shale of north Texas.[38] In 1998, the new technique proved to be successful when the first 90 days gas production from the well called S.H. Griffin No. 3 exceeded production of any of the company's previous wells.[43][44] This new completion technique made gas extraction widely economical in the Barnett Shale, and was later applied to other shales, including the Eagle Ford and Bakken Shale.[45][46][47] George P. Mitchell has been called the "father of fracking" because of his role in applying it in shales.[48] The first horizontal well in the Barnett Shale was drilled in 1991, but was not widely done in the Barnett until it was demonstrated that gas could be economically extracted from vertical wells in the Barnett.[38]

As of 2013, massive hydraulic fracturing is being applied on a commercial scale to shales in the United States, Canada, and China. Several additional countries are planning to use hydraulic fracturing.[49][50][51]

The current hotbed of U.S. fracking is the Permian Shale area

The New York Times highlights this:

Among the many dubious provisions in the 2005 energy bill was one dubbed the Halliburton loophole, which was inserted at the behest of — you guessed it — then-Vice President Dick Cheney, a former chief executive of Halliburton. It stripped the Environmental Protection Agency of its authority to regulate a drilling process called hydraulic fracturing. Invented by Halliburton in the 1940s, it involves injecting a mixture of water, sand and chemicals, some of them toxic, into underground rock formations to blast them open and release natural gas. Hydraulic fracturing has been implicated in a growing number of water pollution cases across the country. It has become especially controversial in New York, where regulators are eager to clear the way for drilling in the New York City watershed, potentially imperiling the city’s water supply. Thankfully, the main company involved has now decided not to go ahead. The safety of the nation’s water supply should not have to rely on luck or the public relations talents of the oil and gas industry. … An agency study in 2004 whitewashed the industry and was dismissed by experts as superficial and politically motivated. This time Congress is demanding “a transparent, peer-reviewed process.”

emails obtained by The Intercept show that State Department officials worked closely with private sector oil and gas companies, pressed other agencies within the Obama administration to commit federal government resources including technical assistance for locating shale reserves, and distributed agreements with partner nations pledging to help secure investments for new fracking projects. The documents also reveal the department’s role in bringing foreign dignitaries to a fracking site in Pennsylvania, and its plans to make Poland a “laboratory for testing whether U.S. success in developing shale gas can be repeated in a different country,” particularly in Europe, where local governments had expressed opposition and in some cases even banned fracking. The campaign included plans to spread the drilling technique to China, South Africa, Romania, Morocco, Bulgaria, Chile, India, Pakistan, Argentina, Indonesia, and Ukraine.

So, fracking became an effective way to release oil and gas from shale in 1997, when higher pressure and new fracking fluids were found. Halliburton owned the original patents from 1940s, and Dick Cheney coached the creation of the Energy Act of 2005 that cut fracking loose from the EPA.

When Barack Obama installed Hillary Clinton as Secretary of State, she supported the adoption of fracking around the world.

Over time, a strong anti-fracking movement has formed because of the water pollution as well as global air pollution via both CO2 and Fugitive Methane.

The U.S. Fracking wells by date:


U.S. Oil and Gas Production vs. time:

Notice that while there was a bust in new well drilling, there was a continued increase in production


But the story that Deborah Romerein wanted to tell is an economic story. It is about the health of the fracking industry in the United states, and it needs to be told against the story of the economy within the United States and it's ups and downs.


Here is what is told at https://www.hardassetsalliance.com/our-blog/chuck-ponzi-treks-to-the-oil-patch-a-dangerous-corporate-debt-bubble#

The hard truth is that the fossil fuel business is highly capital-intensive. It takes boatloads of cash (i.e. debt) to explore, drill, and then if you’re lucky, put your wells into production. The major oil giants stay in business because they go after elephant deposits, ones that will continue to gush profit, year after year, for decades on end. Yes, they have to find replacements as their resources are drawn down, but it’s a long-term venture. E&P fracking is a short-term game. Thus companies in the space have to come up with a different strategy. However, the evidence suggests that while they are desperately trying to generate positive cash flow, they are actually falling further and further into a financial black hole.

The needed capital does not derive from cash flow. So where is it coming from? Or, to put it baldly: who’s propping them up? Here’s a shocker. The answer is: Wall St, with a little help from Washington, DC. Let’s return to those 60 leading E&P firms we referenced earlier. According to Reagan’s former OMB Director, David Stockman, “From 2012 through 2017, these 60 E&Ps burned [through] $212 billion in the shale patch. Half of that came from the liquidation of balance sheet capacity through borrowing and asset sales. The other half was through new equity issue. Yes, the ‘shale revolution’ put the U.S. on a path toward ‘energy independence.’ All it took was the massive falsification of asset prices on Wall Street.”

As Deborah put it, in 2007/8 the Fed's interest rate went to essentially zero:

_ Target 2008 Present
Inflation Rate 2 % 0% 3.7%
Fed Funds Rate 2 - 5% .025% 2.5%

2008 -2011 Quantitative Easing dropped Fed Funds Rate from approx. 4.5% to 0%. This made lots of cheap $ available for the huge capital requirements of the fracking industry. Fracking has a gas drawdown of approx. 70% over the first 5 years, so capital infusion is required on an ongoing basis to keep gas flowing. With the Fed Funds rate now at 2.5%. those cheap $ from the early days are not available, so higher gas prices are required to make a profit.

So, with a little help from the funds rate… we have had two major hits to the economy over the last 20 years. The 9/11 impact that finished off the Internet Boom Years, and the 2007-8 bust of the housing market and it's junk bonds. The result is that just as the U.S. fracking industry was “booming” it was refinancing itself year on year at near-zero interest rate through the bond market and some fancy dancing.

The needed capital does not derive from cash flow. So where is it coming from? Or, to put it baldly: who’s propping them up? Here’s a shocker. The answer is: Wall St, with a little help from Washington, DC. Let’s return to those 60 leading E&P firms we referenced earlier. According to Reagan’s former OMB Director, David Stockman, “From 2012 through 2017, these 60 E&Ps burned [through] $212 billion in the shale patch. Half of that came from the liquidation of balance sheet capacity through borrowing and asset sales. The other half was through new equity issue. Yes, the ‘shale revolution’ put the U.S. on a path toward ‘energy independence.’ All it took was the massive falsification of asset prices on Wall Street.”

What’s happening in the oil patch is not precisely a Ponzi scheme, i.e. one in which new investors are lured in by promises of outsized returns and then their money is used to pay off earlier investors. But when you are consistently paying off earlier debt by taking on new debt, and not because your cash flow is increasing, that’s close enough. And pretty soon we run smack into what Bloomberg calls the Debt Wall.


As expected interest rates increase the debt needing financing from year to year is expected to grow quite rapidly. The ability to continue this is not expected to go beyond mid 2020s.


In this desperate rolling-debt world, any sources of financing become important to the company. Of of them is their ability to raise new capital. In such a world, divestments of the company stock can cripple the company's ability to issue new stock profitably.

It might be time to read: The Guardian - 2018/12/18 - At last, divestment is hitting the fossil fuel industry where it hurts -- by Bill McKibben

which says: Now the contagion seems to be spreading to the oil and gas sector, where Shell announced earlier this year that divestment should be considered a “material risk” to its business. That’s how oil companies across the world are treating it – in the US, petroleum producers have set up a website designed to discredit divestment,. and for a while had me under round-the-clock public surveillance. The pressure is not preventing anyone from acting: when Yale arrested 48 brave students who were occupying its investment offices last week, they left chanting: “We’ll be back.”

References:


NYT Blog -- The Halliburton Loophole


At last, divestment is hitting the fossil fuel industry where it hurts Bill McKibben


Chuck Ponzi Treks to the Oil Patch: A Dangerous Corporate Debt Bubble


Can U.S. Shale Overcome Its Cash Flow Problem?


Hydraulic fracturing From Wikipedia, the free encyclopedia


u.s._shale_oil_industry-_catastrophic_failure_ahead.pdf


red-flags-on-u.s.-fracking_october-2018.pdf


ccpi2019_results.pdf

actions_previous/the_finance_of_fracking.txt · Last modified: 2019/01/13 04:07 by admin