Oil Glut leads to a new World of Energy

Why an Oil Glut May Lead to a New World of Energy

This post first appeared at TomDispatch.com.

Screenshot from Bill Moyers video of Bill McKibben 360.org protest of Keystone Pipeline at the White House in 2013.
Introduction
By Tom EngelhardtOn July 14, 2011, at TomDispatch, Bill McKibben wrote that he and a few other “veteran environmentalists” had issued a call for activists to descend on the White House and “risk arrest to demand something simple and concrete from President Obama: that he refuse to grant a license for Keystone XL, a new pipeline from Alberta to the Gulf of Mexico that would vastly increase the flow of tar sands oil through the U.S., ensuring that the exploitation of Alberta’s tar sands will only increase.” It must have seemed like a long shot at the time, but McKibben urged the prospective demonstrators on, pointing out that “Alberta’s tar sands are the continent’s biggest carbon bomb,” especially “dirty” to produce and burn in terms of the release of carbon dioxide and so the heating of the planet.

Just over four years later, the president, whose administration recently green-lighted Shell to do test-drilling in the dangerous waters of the American Arctic, opened the South Atlantic to new energy exploration and drilling earlier this year, and oversaw the expansion of the fracking fields of the American West, has yet to make, or at least announce, a final decision on that pipeline. Can anyone doubt that, if there had been no demonstrations against it, if it hadn’t become a major issue for his “environmental base,” the Keystone XL would have been approved without a second thought years ago? Now, it may be too late for a variety of reasons.

The company that plans to build the pipeline, TransCanada Corporation, already fears the worst — a presidential rejection that indeed may soon be in the cards. After all, we’ve finally hit the “legacy” part of the Obama era. In the case of war, the president oversaw the escalation of the conflict in Afghanistan soon after taking office, sent in the bombers and drones, and a year ago plunged the country back into its third war in Iraq and first in Syria.  Only late in his second term has he finally overseen an initiative worthy of a less warlike legacy: the embattled Iran nuclear deal. Similarly, the man who headed an “all of the above” administration on energy policy in an era in which the U.S. became “Saudi America” has only now launched a legacy-shaping climate change initiative that could matter, aimed at cutting back carbon dioxide emissions from coal-powered plants. So maybe in this legacy era, the Keystone XL will be next to fall. Or maybe Obama will let his final year and a half play out without a decision on whether or not to build it and turn the issue over to Hillary Clinton, who refuses to commit on the matter, or one of 17 Republicans, all of whom would build a pipeline to anywhere carrying anything rather than enact a single climate change initiative, no matter how mild.

Another factor has, however, entered the picture.  As Michael Klare, TomDispatch’s resident energy expert and the author of The Race for What’s Left, explains, the dynamics of the energy industry may be changing in a way that could sink Canada’s vast tar sands enterprise in a sea of red ink.  If so, the tar sands industry, already hit hard by the plunge in oil prices last year, may face an even more rugged future.

“If you build it, he will come” is the classic tag line from the movie Field of Dreams. For the Keystone XL pipeline, however, that might someday have to be rewritten as: “If you build it, it won’t come.”  Even if built, it might prove to be a pipeline to nowhere. Let Klare explain why.


Double-Dip Oil Rout
By Michael Klare

The plunge of global oil prices began in June 2014, when benchmark Brent crude was selling at $114 per barrel. It hit bottom at $46 this January, a near-collapse widely viewed as a major but temporary calamity for the energy industry.  Such low prices were expected to force many high-cost operators, especially American shale oil producers, out of the market, while stoking fresh demand and so pushing those numbers back up again.  When Brent rose to $66 per barrel this May, many oil industry executives breathed a sigh of relief.  The worst was over.  The price had “reached a bottom” and it “doesn’t look like it is going back,” a senior Saudi official observed at the time.

Skip ahead three months and that springtime of optimism has evaporated.  Major producers continue to pump out record levels of crude and world demand remains essentially flat. The result: a global oil glut that is again driving prices toward the energy subbasement.  In the first week of August, Brent fell to $49, and West Texas Intermediate, the benchmark for U.S. crude, sank to $45. On top of last winter’s rout, this second round of price declines has played havoc with the profits of the major oil companies, put tens of thousands of people out of work, and obliterated billions of dollars of investments in future projects. While most oil-company executives continue to insist that a turnaround is sure to occur in the near future, some analysts are beginning to wonder if what’s underway doesn’t actually signal a fundamental transformation of the industry.

Recently, as if to underscore the magnitude of the current rout, ExxonMobil and Chevron, the top two U.S. oil producers, announced their worst quarterly returns in many years.  Exxon, America’s largest oil company and normally one of its most profitable, reported a 52% drop in earnings for the second quarter of 2015.  Chevron suffered an even deeper plunge, with net income falling 90% from the second quarter of 2014.  In response, both companies have cut spending on exploration and production (“upstream” operations, in oil industry lingo).  Chevron also announced plans to eliminate 1,500 jobs.

Painful as the short-term consequences of the current price rout may be, the long-term ones are likely to prove far more significant.  To conserve funds and ensure continuing profitability, the major companies are cancelling or postponing investments in new production ventures, especially complex, costly projects like the exploitation of Canadian tar sands and deep-offshore fields that only turn a profit when oil is selling at $80 to $100 or more per barrel.

According to Wood Mackenzie, an oil-industry consultancy, the top firms have already shelved $200 billion worth of spending on new projects, including 46 major oil and natural gas ventures containing an estimated 20 billion barrels of oil or its equivalent.  Most of these are in Canada’s Athabasca tar sands (also called oil sands) or in deep waters off the west coast of Africa.  Royal Dutch Shell haspostponed its Bonga South West project, a proposed $12 billion development in the Atlantic Ocean off the coast of Nigeria, while the French company Total has delayed a final investment decision on Zinia 2, a field it had planned to exploit off the coast of Angola.  “The upstream industry is winding back its investment in big pre-final investment decision developments as fast as it can,” Wood Mackenziereported in July.

As the price of oil continues on its downward course, the cancellation or postponement of such mega-projects has been sending powerful shock waves through the energy industry, and also ancillary industries, communities, and countries that depend on oil extraction for the bulk of their revenues. Consider it a straw in the wind that, in February, Halliburton, a major oil-services provider,announced layoffs of 7% of its work force, or about 6,000 people.  Other firms have announced equivalent reductions.

Such layoffs are, of course, impacting whole communities.  For instance, Fort McMurray in Alberta, Canada, the epicenter of the tar sands industry and not so long ago a boom town, has seen its unemployment rate double over the past year and public spending slashed.  Families that once enjoyed six-digit annual incomes are now turning to community food banks for essential supplies.  “In a very short time our world has changed, and changed dramatically,” observes Rich Kruger, chief executive of Imperial Oil, an Exxon subsidiary and major investor in Alberta’s tar sands.

A similar effect can be seen on a far larger scale when it comes to oil-centric countries like Russia, Nigeria, and Venezuela.  All three are highly dependent on oil exports for government operations.  Russia’s government relies on its oil and gas industry for 50% of its budget revenues, Nigeria for 75%, and Venezuela for45%.  All three have experienced sharp drops in oil income.  The resulting diminished government spending has meant economic hardship, especially for the poor and marginalized, and prompted increased civil unrest.  In Russia, President Vladimir Putin has clearly sought to deflect attention from the social impact of reduced oil revenue by ­whipping up patriotic fervor about the country’s military involvement in Ukraine.  Russia’s actions have, however, provoked Western economic sanctions, only adding to its economic and social woes.

No Relief in Sight

What are we to make of this unexpected second fall in oil prices?  Could we, in fact, be witnessing a fundamental shift in the energy industry?  To answer either of these questions, consider why prices first fell in 2014 and why, at the time, analysts believed they would rebound by the middle of this year.

The initial collapse was widely attributed to three critical factors: an extraordinary surge in production from shale formations in the United States, continued high output by members of the Organization of the Petroleum Exporting Countries (OPEC) led by Saudi Arabia, and a slackening of demand from major consuming nations, especially China.
According to the Energy Information Administration of the Department of Energy, crude oil production in the United States took a leap from 5.6 million barrels per day in June 2011 to 8.7 million barrels in June 2014, a mind-boggling increase of 55% in just three years.  The addition of so much new oil to global markets — thanks in large part to the introduction of fracking technology in America’s western energy fields — occurred just as China’s economy (and so its demand for oil) was slowing, undoubtedly provoking the initial price slide.  Brent crude went from $114 to $84 per barrel, a drop of 36% between June and October 2014.

Historically, OPEC has responded to such declines by scaling back production by its member states, and so effectively shoring up prices.  This time, however, the organization, which met in Vienna last November, elected to maintain production at current levels, ensuring a global oil glut.  Not surprisingly, in the weeks after the meeting, Brent prices went into free fall, ending up at $55 per barrel on the last day of 2014.

Most industry analysts assumed that the Persian Gulf states, led by Saudi Arabia, were simply willing to absorb a temporary loss of income to force the collapse of U.S. shale operators and other emerging competitors, including tar sands operations in Canada and deep-offshore ventures in Africa and Brazil.  A senior Saudi official seemed to confirm this in May, telling the Financial Times, “There is no doubt about it, the price fall of the last several months has deterred investors away from expensive oil including U.S. shale, deep offshore, and heavy oils.”

Believing that the Saudi strategy had succeeded and noting signs of increasing energy demand in China, Europe, and the United States, many analysts concluded that prices would soon begin to rise again, as indeed they briefly did.  It now appears, however, that these assumptions were off the mark.  While numerous high-cost projects in Canada and Africa were delayed or cancelled, the U.S. shale industry has found ways to weather the downturn in prices.  Some less-productive wells have indeed been abandoned, but drillers also developed techniques to extract more oil less expensively from their remaining wells and kept right on pumping.  “We can’t control commodity prices, but we can control the efficiency of our wells,” said one operator in the Eagle Ford region of Texas.  “The industry has taken this as a wake-up call to get more efficient or get out.”

Responding to the challenge, the Saudis ramped up production, achieving a record 10.3 million barrels per day in May 2014.  Other OPEC members similarly increased their output and, to the surprise of many, the Iraqi oil industry achievedunexpected production highs, despite the country’s growing internal disorder.  Meanwhile, with economic sanctions on Iran expected to ease in the wake of its nuclear deal with the U.S., China, France, Russia, England, and Germany, that country’s energy industry is soon likely to begin gearing up to add to global supply in a significant way.

With ever more oil entering the market and a future seeded with yet more of the same, only an unlikely major boost in demand could halt a further price drop.  Although American consumers are driving more and buying bigger vehicles in response to lower gas prices, Europe shows few signs of recovery from its present austerity moment, and China, following a catastrophic stock market contraction in June, is in no position to take up the slack.  Put it all together and the prognosis seems inescapable: low oil prices for the foreseeable future.

A Whole New Ballgame?

Big Energy is doing its best to remain optimistic about the situation, believing a turnaround is inevitable. “Globally in the industry $130 billion of projects have been delayed, deferred, or cancelled,” Bod Dudley, chief executive of BP,commented in June.  “That’s going to have an impact down the road.”

But what if we’ve entered a new period in which supply just keeps expanding while demand fails to take off?  For one thing, there’s no evidence that the shale and fracking revolution that has turned the U.S. into “Saudi America” will collapse any time soon.  Although some smaller operators may be driven out of business, those capable of embracing the newest cost-cutting technologies are likely to keep pumping out shale oil even in a low-price environment.

Meanwhile, there’s Iran and Iraq to take into account.  Those two countries are desperate for infusions of new income and possess some of the planet’s largest reserves of untapped petroleum.  Over the decades, both have been ravaged by war and sanctions, but their energy industries are now poised for significant growth.  To the surprise of analysts, Iraqi production rose from 2.4 million barrels per day in 2010 to 4 million barrels this summer.  Some experts are convinced that by 2020 total output, including from the country’s semiautonomous Kurdistan region, could more than double to 9 million barrels.  Of course, continued fighting in Iraq, which has already lost major cities in the north to the Islamic State and its new “caliphate,” could quickly undermine such expectations.  Still, through years of chaos, civil war, and insurgency, the Iraqi energy industry has proven remarkably resilient and adept first at sustaining and then boosting its output.

Iran’s once mighty oil industry, crippled by fierce economic sanctions, has suffered from a lack of access to advanced Western drilling technology.  At about 2.8 million barrels per day in 2014, its crude oil production remains far below levels experts believe would be easily attainable if modern technology were brought to bear.  Once the Iran nuclear deal is approved — by the Europeans, Russians, and Chinese, even if the U.S. Congress shoots it down — and most sanctions lifted, Western companies are likely to flock back into the country, providing the necessary new oil technology and knowhow in return for access to its massive energy reserves.  While this wouldn’t happen overnight — it takes time to restore a dilapidated energy infrastructure — output could rise by one million barrels per day within a year, and considerably more after that.

All in all, then, global oil production remains on an upward trajectory.  What, then, of demand?  On this score, the situation in China will prove critical.   That country has, after all, been the main source of new oil demand since the start of this century.  According to BP, oil consumption in China rose from 6.7 million barrels per day in 2004 to 11.1 million barrels in 2014.  As domestic production only amounts to about 4 million barrels per day, all of those additional barrels represented imported energy.  If you want a major explanation for the pre-2014 rise in the price of oil, rapid Chinese growth — and expectations that its spurt in consumption would continue into the indefinite future — is it.

Woe, then, to the $100 barrel of oil, since that country’s economy has been cooling off since 2014 and its growth is projected to fall below 7% this year, the lowest rate in decades.  This means, in turn, less demand for extra oil.  China’s consumption rose only 300,000 barrels per day in 2014 and is expected to remain sluggish for years to come.  “[T]he likelihood now is that import growth will be minimal for the next two or three years,” energy expert Nick Butler of the Financial Timesobserved.  “That in turn will compound and extend the existing surplus of supply over demand.”

Finally, don’t forget the Paris climate summit this December.  Although no one yet knows what, if anything, it will accomplish, dozens of countries have already submitted preliminary plans for the steps they will pledge to take to reduce their carbon emissions.  These include, for example, tax breaks and other incentives for those acquiring hybrid and electric-powered cars, along with increased taxes on oil and other forms of carbon consumption.  Should such measures begin to kick in, demand for oil will take another hit and conceivably its use will actually drop years before supplies become scarce.

Winners and Losers

The initial near collapse of oil prices caused considerable pain and disarray in the oil industry.  If this second rout continues for any length of time, it will undoubtedly produce even more severe and unpredictable consequences. Some outcomes already appear likely: energy companies that cannot lower their costs will be driven out of business or absorbed by other firms, while investment in costly, “unconventional” projects like Canadian tar sands, ultra-deep Atlantic fields, and Arctic oil will largely disappear.  Most of the giant oil companies will undoubtedly survive, but possibly in downsized form or as part of merged enterprises.

All of this is bad news for Big Energy, but unexpectedly good news for the planet. As a start, those “unconventional” projects like tar sands require more energy to extract oil than conventional fields, which means a greater release of carbon dioxide into the atmosphere. Heavier oils like tar sands and Venezuelan extra-heavy crude also contain more carbon than do lighter fuels and so emit more carbon dioxide when consumed. If, in addition, global oil consumption slows or begins to contract, that, too, would obviously reduce carbon dioxide emissions, slowing the present daunting pace of climate change.

Most of us are used to following the ups and downs of the Dow Jones Industrial Average as a shorthand gauge for the state of the world economy.  However, following the ups and downs of the price of Brent crude may, in the end, tell us far more about world affairs on our endangered planet.


The views expressed in this post are the author’s alone, and presented here to offer a variety of perspectives to our readers.

Oil crash could be the worst in history

Oil crash could be the worst in history

 Morgan Stanley has been pretty pessimistic about oil prices in 2015, drawing comparisons to the some of the worst oil slumps of the past three decades. The current downturn could even rival the iconic price crash of 1986, analysts had warned — but definitely no worse.

Why nobody will win in this shoving match between oil’s superpowers

Peter Tertzakian: The U.S. and Saudia Arabia are like two playground bullies fighting over one swing. The results are predictable: No one will be allowed to swing.

This week, a revision: It could be much worse.

From Morgan Stanley:

“We have been expecting the current downturn to be as severe as the one in 1986 – the worst for at least 45 years – but not worse than that. Still, if oil prices follow the path suggested by the forward curve, our thesis may yet prove too optimistic.”

Until recently, confidence in a strong recovery for oil prices—and oil companies — had been pretty high, wrote analysts including Martijn Rats and Haythem Rashed, in a report to investors Wednesday. That confidence was based on four premises, they said, and only three have proven true.

1. Demand will rise: Check

In theory: The crash in prices that started a year ago should stimulate demand. Cheap oil means cheaper manufacturing, cheaper shipping, more summer road trips.

In practice: Despite a softening Chinese economy, global demand has indeed surged by about 1.6 million barrels a day over last year’s average, according to the report.

2. Spending on new oil will fall: Check

In theory: Lower oil prices should force energy companies to cut spending on new oil supplies, and the cost of drilling and pumping should decline.

In practice: Sure enough, since October the number of rigs actively drilling for new oil around the world has declined by about 42 per cent. More than 70,000 oil workers have lost their jobs globally, and in 2015 alone listed oil companies have cut about $129 billion in capital expenditures.

3. Stock prices remain low: Check

In theory: While oil markets rebalance themselves, stock prices of oil companies should remain cheap, setting the stage for a strong rebound.

In practice: Yep. The oil majors are trading near 35-year lows, using two different methods of valuation.

4. Oil supply will Drop: Uh-oh

In theory: With strong demand for oil and less money for drilling and exploration, the global oil glut should diminish. Let the recovery commence.

In practice: The opposite has happened. While U.S. production has leveled off since June, OPEC has taken up the role of market spoiler.

OPEC Production Surges in 2015

Bloomberg
Bloomberg

For now, Morgan Stanley is sticking with its original thesis that prices will improve, largely because OPEC doesn’t have much more spare capacity to fill and because oil stocks have already been hammered.

But another possibility is that the supply of new oil coming from outside the U.S. may continue to increase as sanctions against Iran dissolve and if the situation in Libya improves, the Morgan Stanley analysts said. U.S. production could also rise again. A recovery is less certain than it once was, and the slump could last for three years or more—”far worse than in 1986.”

“In that case,” they wrote, “there would be little in analyzable history that could be a guide” for what’s to come.

Bloomberg.com  reprinted from earlier news reports

Related Notes

Liquidity Stress Spikes as Collapse Continues

excellent article reprint from WolfStreet.com

Liquidity Stress Spikes to Worst Level since Financial Crisis

Moody’s blamed oil and the collapse of commodity prices. Earlier in August, it blamed the financial turmoil around the globe and the implosion of the stock market bubble in China. Earlier, it blamed the debt crisis in Greece. Because month after month, it has been getting worse.

But it should have blamed investors and banks. They’re licking their wounds from hefty losses on these deals. More losses are on the horizon. Folks began to look at these deals more closely. And now they don’t want them anymore, not at these low yields.

So Moody’s reported today that its Liquidity Stress Index, which rises when corporate liquidity weakens, spiked to 5.1% in August, from 4.1% in July. The worst level since December 2010.

The biggest contributor? The energy LSI. It spiked to 12.7% in August, from 10.5% in July, the worst level since January 2010, at the depth of the Great Recession.

More oil-and-gas companies fell into liquidity purgatory, as Moody’s downgraded them to its lowest liquidity rating, SGL-4. Energy companies account for a little over half of the denizens of SGL-4 purgatory.

Downgrades and defaults marked August – but not all in energy. Of the 11 downgrades to SGL-4, seven were energy companies. One of them, Pioneer Energy Services, saw its liquidity rating knocked down two notches. And after seven defaults in August, the trailing-12-month speculative-grade corporate default rate rose to 2.4%, the worst in two years.

But the word is that the liquidity crisis tearing up the energy sector is not yet spilling over into other sectors. John Puchalla, a Senior VP at Moody’s:

“Excluding energy from the LSI paints a different and more benign picture of speculative-grade liquidity – showing that underlying credit conditions remain supportive and weakness in energy is not spreading broadly to other sectors.”

At least not “broadly.” And not yet. But these things always spill over eventually. That’s why Moody’s is watching it. Two week ago, he’s said that “liquidity pressures are not widespread outside of energy as steady cash flows, the slowly improving economy, and ready access to credit markets continue to provide fundamental support for US speculative-grade company liquidity.”

Junk-rated energy companies are in the grip of a liquidity death spiral. Many of them will have to be restructured, either in bankruptcy court or outside. But the non-energy junk-rated companies hope they won’t be affected, that investors will continue to buy their bonds as if nothing had happened.

So what has happened?

It’s more difficult for junk-rated companies, especially in the energy sector, to sell new bonds. Without new bonds, they can’t pay off their maturing debt, and they can’t service their bank loans and make interest payments on existing bonds. Without a constant flow of ever increasing, cheap, new credit, the fruits of the credit bubble turn toxic.

Early this year, junk bond issuance in the US still ran ahead of last year. But June was bad; only $21.2 billion in junk bonds were issued. It sent shivers down Wall Street’s spine. They blamed the Greek debt crisis. And July was terrible. China’s stock market bubble was imploding. Frazzled investors lost their appetite for risk; and only $10 billion in junk bonds were issued. August was no better at $10.2 billion, according toS&P Capital IQ’s LCD. Year-to-date, $205.8 billion of junk bonds were issued, down 1.4% from the same period last year.

It didn’t help that oil and commodity prices re-collapsed after a false-hope rally, even as the Fed stubbornly refuses to categorically and forever back away from raising rates.

Trying times for bond investors. They’ve been spoiled by a bull market that, aside from a few panics, lasted for over three decades. For companies that had to issue bonds in August no matter what, it got a lot more difficult and expensive:

Already, several of the 19 deals that priced in August had to come with healthy concessions as investors pushed back amid tough conditions. As seen in June and July, the bulk of issuance came from time-sensitive M&A and LBO issuers, to represent 39% of total volume for the month, although dividend and recapitalization/stock repurchase use of proceeds both grew as compared to previous months.

These are the spill-over effects that are still being denied. And note: junk-rated energy companies were excluded.

Energy companies borrow from banks to drill this money into the ground. These loans – usually lines of credit – are secured by oil and gas reserves. Then companies issue bonds, often unsecured, to pay off the bank loans and have some operating cash. The cycle works, until it doesn’t.

And now it doesn’t.

The value of the collateral has plunged by more than half with the price of the hydrocarbons they’re estimated to contain. Twice a year, in April and October, banks look at this collateral to determine how much they want to lend on it. So during the re-determination next month, banks are going to cut back their loans by 10% to 15% on average, according to Bloomberg, thus wiping out $15 billion in sorely needed credit.

It sets off the liquidity death spiral. Companies will have to issue new bonds or leveraged loans to pay down these credit lines. But this time, investors won’t be lining up to buy them. They’ve learned their lesson. Bloomberg:

About $7 billion of junk bonds issued by oil and gas producers in the first quarter to refinance debt have since lost 17%….

Penn Virginia, for example, one of the companies that Moody’s downgraded to SGL-4, had told investors during its July 30 earnings call that the bank would reduce the $425 million borrowing base on its credit line. Its shares became a penny stock. And the $775 million of bonds due in 2020 plummeted below 29 cents on the dollar, from 90 cents at the beginning of July. The company expects to have “sufficient liquidity” into 2016. But that’s only a few months. And it would try to raise capital as markets improve.

But raising capital will be tough. Oil markets might not improve anytime soon, given record quantities in storage in the US and internationally. And waiting for the junk bond market to improve, as the biggest credit bubble in history is beginning to deflate, is going to require a lot more patience.

Stock markets have been volatile recently, plunging and soaring sometimes the same day, and now folks that supply the juice to the startup ecosystem – VCs, pension funds, mutual funds, hedge funds even – are getting nervous.

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  12 comments for “Liquidity Stress Spikes to Worst Level since Financial Crisis”

  1. robert h siddell jr
    September 2, 2015 at 10:52 pm

    OK, the debtors are broke and can’t pay the banks back (liquidity crisis) but what do we call it when the borrowers are broke and can’t afford to borrow at 0% (banks pushing on a string)?

  2. CrazyCooter
    September 2, 2015 at 11:42 pm

    Wise men do not invest in overcapacity. Shale/frack oil has always been a revenue skim.

    To provide some history, my grandfather was a landman in the 40s and worked for Haroldson Lafayette. My old man was an auditor for the Railroad Commission in Texas. So I was encouraged to be a geologist as a kid (I am not) but along the way I got lots of hand-me-down advice, adages, stories, and so on … along with all the colorful colloquialisms and independence of the area where I grew up. Oh, and maybe some smart/crazy genes, but I digress.

    One of the most impactful was a story about an offer on land/rights owned to share in profits of an oil exploration company in exchange for the mineral rights. The offer was refused, but the deal was offered, offered, and offered again, each time at a higher share/percentage. Eventually the offerer was told a share of REVENUE would be considered and to restructure the offer.

    There was never a subsequent offer made.

    The lesson here acutely describes the shale patch; they lived on borrowed money and never really wanted to give up REVENUE. The execs and such no doubt high roll and live with good benefits, options, bonuses, and all that, but they don’t have an interest in sharing REVENUE. They only want to share profit AFTER they have applied all their expenses. This has always been about insiders feeding on cheap money and insider status and ignorant land/rights owners and ignorant investors.

    Let’s face it, if you opened up Bongo’s Nail Salon and borrowed all your revenue, wouldn’t you live high on the hog? Would you STOP after a year, or two, or three? Sure you are doing nails, but the continuous flow of capital INTO your business is required for dividends to go OUT (and more importantly your salary/bonus structure).

    That is fracking in a nutshell.

    Folks, here is a FACT. Shale/fracking is an EIGHTIES technology. It never had legs because of ECONOMICS. If you are tired of this EIGHTIES technology, lets talk about CO2 injection for tertiary recovery in old fields (really nice production rates for dead fields) … but it requires a HUGE source of CHEAP CO2. Come up with a huge supply of cheap CO2 and you can make money in the old Woodbine formation.

    https://en.wikipedia.org/wiki/Woodbine_Formation

    Maybe global warming will create a market for CO2 sequestration … in old oil fields … because government … like that is CO2 negative … but whatever. I don’t see how things hold together that long because the free money is gone and so are businesses that rely on free money (to enrich insiders).

    Thus our current situation.

    I have no doubt that that the “shale revolution” would have failed miserably if most land owners had had this same adage beat into their heads as small children. If they wanted revenue sharing, they (as landowners) wouldn’t have so much of a concern right now, as production is flowing and generating REVENUE. I suspect that most leased based on PROFIT, not revenue, so now they are screwed and/or not fairly compensated.

    Back to my opening comment, demand is cratering because more debt doesn’t really fix anything and things are just rolling downhill and getting bigger. More QE isn’t going to fix anything, but that is what is coming. I giggle when folks say rates are going up – it implies we have a market.

    We don’t.

    Rates will go where the insiders want them to go – but that is a hell of a choice to make at this point.

    Regards,

    Cooter

    • night-train
      September 3, 2015 at 4:35 am

      Cooter. Well said. Prior to 1973, I couldn’t spell geologist, now I are one. A retired one, but of the petroleum vintage. The first thing I learned in the patch was to never use your own money. That is the cardinal rule. It is amazing what you can drill during a boom. Many wells that never should have been drilled included. So when you look at the amazing shale plays, thousands of wells that should never have been drilled now exist, with questionable future utility.

      But don’t worry, the operators already have a new technology which is going to make shale oil that wasn’t economical to produce at $70/bbl economic at $50, or $40, or whatever you need. And if we hurry, we can probably still get in.

    • Petunia
      September 3, 2015 at 7:00 am

      They expand with other people’s money while spending all the revenue on management. This was what gave us the big box store boom. All the money for expansion came from Wall St. and all the revenue was socialized by management. In South Florida even after the bust, all these stores were still open even with no business because the money they did produce was going into the pockets of management, while the expenses were being paid by investors.

  3. rich black
    September 3, 2015 at 5:52 am

    “Year-to-date, $205.8 billion of junk bonds were issued, down 1.4% from the same period last year.”

    1.4% fewer junk bonds, issued over approximately 8 months, does not sound like a catastrophic downturn in junk bond creation.

    “although dividend and recapitalization/stock repurchase use of proceeds both grew as compared to previous months.”

    And there, folks, is the biggest bubble of all. It is these stock buybacks, that produce nothing (not even energy), that have driven stock prices. I had read that IBM, for instance, borrowed enough money for stock buy backs, over the last six years, to triple its debt load, while, during that same six year period, has seen little, if any, sales growth. Even apple, the gold standard of the stock market, is well along in the process of borrowing $130 billion, in order to pay dividends, pay off some of its bond debt, and execute its stock buybacks. How is this not a ponzi scheme? Tying executive pay to stock prices has been the driver of the stock price ponzi

    This is not to say that fracking financing isn’t the most immediate ponzi. Back when oil was at $60 a barrel, David Einhorn called fracking:
    “A business that burns cash and doesn’t grow isn’t worth anything,” Einhorn called Pioneer Natural Resources (PXD) the “mother fracker” of the industry.

    If Einhorn is shorting, it’s hard to imagine that even someone like Carl Icahn is taking the other side of that trade.

    The domino effect on derivatives will be the canary in the coal mine (fracking field):

    “This ongoing credit, which in large part has fueled the bubble, will dry up as repayment will look increasing unlikely to lenders. Ultimately this dynamic will result in default on many of the ‘junk’ bonds triggering the the execution of credit default swaps (CDS or derivatives tied to defaults). This would be the toppling of the first domino, breaking the daisy chain of trust and likely causing a derivative ‘blood bath’ on all associated contracts and beyond.

  4. Robert
    September 3, 2015 at 10:32 am

    Even more interesting is the move away from US Government credit instruments. Putin now working to pass legislation to eliminate the use of the U.S. dollar within the Federation. Chinese devaluation scheme was too effective and now China dumping US paper to support the Yuan.
    When the recycling of US reserve currency stops flowing back into US markets, the shit will hit the fan. The U.S. Markets will no longer be larger than the rest of the world combined!
    The days are numbered.

    • Spencer
      September 3, 2015 at 4:39 pm

      I am with you, fake markets, toilet paper for money, fake numbers. Let this shit pile blow. Please, someone pull the plug, I want to see the crap circle the toilet ring into the sewer.

  5. merlin
    September 3, 2015 at 12:53 pm

    Cooter: did you intentionally leave the “HUNT” off Haroldson Lafayette?? That’s quite a colorful family……They could have been the inspiration for the “Dallas” TV show back in the day.

    • CrazyCooter
      September 3, 2015 at 10:13 pm

      Kind of how it was back then, at least that is how I heard it. Not sure what to make of that other than it is what it is.

      The man ran a whore house for a corporate office. Times where very hard back then. My grandfather actually did a three sport scholarship to law school, graduated 3rd in his class, and played pro ball afterwards (leather helmet, 1/2 a pint of whiskey allowed on the bench per game, etc) and bounced bars for money in the depression. Oil saved his ass. He met my grandmother at his new law office (very late in life) and they had five children (Catholic family). My grandfather was very principled and refused repeatedly to be anywhere near it (he specialized in LA Napoleon land law – not like British common law). Eventually he was told he was going to move to Jackson Mississippi and was told they would pay his price – just name it.

      He told them it would be cheaper to move Jackson to Shreveport.

      End of story. :-)

      Regards,

      Cooter

      • Night-train
        September 4, 2015 at 2:57 am

        Cooter. I too enjoy old stories. Your grandfather sounds like some of the folks I met early in my career in the oil business. Men of respect. Men who did what they said they would do.

        When I was in grad school, I was visiting a friend who was working for a company in Jackson, Ms. He was showing me around his office and introduced me to his boss who had come up through the majors where he started his career in the 1940s. He invited me into his office and we had a nice visit. He called me a few days later and told me that he had hoped to be in position to offer me a job, but was unable to at that time. He told me that he would offer me a position when he could. I was siting on an offer from Gulf Oil, but was not really wanting to move to Kilgore. I passed on Gulf and took a job with a local operator and did some consulting while working on my thesis. Two years later, the gentleman in Jackson called and asked if I remembered our last conservation. He offered me a position and I accepted with the caveat that I would report in three to six months after receiving my MS. During that time the company reorganized and the gentleman who had offered me the job was involuntarily retired. I forgot about it, until the man who replaced him called to find out when I was coming to work. I told them I wasn’t. He pressed the issue saying that I had a verbal agreement with the company. I told him that my agreement was with the gentleman he replaced and I wasn’t that crazy about how they treated their personnel. That was in the early 80s when a lot of things were getting more cut-throat. Fewer people could be counted on to follow up on anything that wasn’t in writing and the idea of following up on one’s word was all but gone.

  6. Julian the Apostate
    September 4, 2015 at 1:49 am

    Cooter, I love hearing the old stories; not only do they give one a feel for the times, they are a catalyst for change from ‘modern’ norms. Without the context they provide, the new normal proceeds apace without check or balance. But if the stories knock one person out of the rut and gets him or her thinking, the carefully crafted meme begins to fall apart. Or as my grandfather used to say, “I think the bobbin’s wound too tight.”