CaptTex said:

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Excuse my ignorance, but are you saying that shale plays are not profitable because of the depth and length of horizontal legs that have to be drilled/completed or is this just a case of over promising and under delivering on particular assets? And if the trend is throwing up huge numbers to attract financing, while actually having to take money from peter(the next well) to pay paul(the previous well), at what point will this game plan no longer work because money is going to catch on? If that were to happen, fewer wells might be drilled based on actual projections, and while those fewer wells do produce what they are supposed to to financially make sense, shale in and of itself wont be as attractive no? I know, lots of questions but it is rather eye opening watching yall talk on here.

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Its financial tomfoolery on top of shale being a fundamentally different type of reservoir. A traditional oil field has oil in thick layers, just waiting to be extracted. Carbon based life forms (mostly plankton like) breakdown under heat/pressure. As more seafloor is generated over eons, the lighter hydrocarbon oils migrate upwards and collect under impermeable layers of rock. So now oil companies drag out huge lumbering drilling rigs and production platforms to extract oil from underneath the impermeable rock for decades from a field. The average offshore platform produces just shy of 10,000 barrels a day for like 20 years. And thats the average, not the median. There are some huge platforms that can do 150,000 barrels a day. Exploiting those resources takes 4-6 years of planning, construction and can easily reach into the billions to produce and run the newest biggest rigs. So long lead times, huge capex, but super steady reservoir to drink from for decades.

Shale on the other hand, couldn't be more different. It is not exploiting thick layers of oil hiding under impermeable rock layers, it is squeezing blood from a stone within (relatively) impermeable rock. Shale doesn't produce much oil/gas on its own. Its got a super tight rock structure that doesn't allow for lots of migration of oil/gas to the wellbore. Thats where fracking comes in. You drill those super long horizontal wells, pump water downhole to induce fractures into the stone, through some sand downhole to keep those fractures open, and now there is an easy path for oil to reach back to the wellbore. The only problem is, there isn't much oil hiding out in the pores of that shale rock. So shale wells start off with relatively large production numbers, but taper off super quick. Think a 100 to a 1000 barrels a day having a half life of nine months. So relatively low lead times, low capex, but no real long production tails. The wells quickly die off compared to offshore. To make up for this, oil production companies keep drilling new wells. You don't have to go far, the shale is relatively impermeable. Just get outside of your previously fractured areas and drill/frack again. (I'm avoiding a whole part of this about parent child wells and frack spacing, another day)



Go back in time to 2010-2014. Extracting shale oil becomes a huge hit. Oil is between 70-80 dollars a barrel and now Texas has the ability to contribute significant oil on the global stage at relatively low prices. PE groups form and they start extracting. Texas is generating money out the ying-yang and the global oil demand doesn't really blink at it.

Then a couple things start to happen. First is that traditional reservoir decline analysis won't work for this type of reservoir. The models are overestimating whats left in the ground that can be produced. So new models are created to account for this 'tight' shale formation model. But data that companies are giving investors just isn't lining up to production. Too many fudge factors. Too new. But people are making money. So now there's a pricing surge for land as investors swarm in, raise capital for equity stakes, or like a lot of companies, issue debt on a 7 year timeline.

2014 you start to see some structural changes in oil prices. US land production is now so great that its weighing internationally on the price of oil. And by 2015 oil prices go down into the 40s-50s. Operators are starting to ask for more/better fracking technology to boost their outputs. Its becoming apparent that the production from the first round of wells doesn't cover the cost to drill. But, companies can still get access to debt from PE equity markets and they've got the rest of their field to drill. So off to another round of capex spending and more rigs. You've now got 'dumb' money flowing in with PE houses eager to take their cut, and oil companies needing more cash with problems to deal with later.

Multiply this by a whole field and you get the current predicament. Just look at how steep the aggregate production curves of US land is. Its like a kids bouncy house. If money doesn't keep pouring in to drill, the whole thing immediately deflates.

So now, in 2020, everyone knows the marketing slide decks are chock full of lies. The PE market dries up. Those 7 year debts issued back in 2014? They're coming due and the companies do not have the money to pay it. Their options are either A) issue a second layer of debt but there is not capital market who is willing to fund throwing good money after bad anymore. B) Declare bankruptcy today. C) Don't drill, just keep producing your current wells. But your revenue supply will start drying up pretty soon. Potentially declare bankruptcy tomorrow.

Coronavirus is just an acceleration of what was going to happen eventually. OPEC+ can't stand america undercutting everyone else on the world stage. Thats why theres been a price war before coronavirus to wipe out the low cost oil in the US, and scare investors away from the industry for good.

US shale will be a strategic asset in the future. To be used as a peaking facility for excess demand. I don't think we will see the return of US land to its peak.


The biggest winners in all of this, if there are any, are those companies who had the land the cheapest before the boom took off. Anyone who paid top dollar for the acerage is basically toast.

We still haven't even gotten to oil/gas ratios shifting to more gas over the life of the shale well, and how lightweight the oil is that refineries aren't set up to take it, they need to blend it with heavy stuff. There's also long term electricity price consequences because fracking makes natural gas stupid cheap. Environmentalist cheer the destruction of oil, but will feel the pain on their electricity bills eventually plus deal with rolling brownouts.

I hope this helps. If anyone finds anything I've said to be in error, please feel free to add on.

CaptTex said:

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The production during the entire life of a well doesn't equal the amount of money put into it huh? It almost seems like technology needs to improve in order to get the cost of the well down, so that can justify the current drilling rate and production characteristics of today's wells. In essence, we have to do something otherwise the United States will be "energy independent" in name only, and while I know a large company has a way of looking at things differently, but if the ship isn't tight and making money I don't want to run it. Fracking is an amazing technology, but I have read it is extremely expensive, and a lot of companies are making thin margins providing this service(please correct me if I'm wrong). There has to be a way to get that down, since it is one of the biggest expenses, and the rest of the world doesn't have to contend with that extra expense.

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Offshore is a whole lot more expensive than shale is. The platform alone can basically cost as much as our entire company's capital budget last year. It isn't
about cost, it's about what you get for a given a cost. Ultimately costs aren't as important as oil production for economics. Cost savings are always nice, and maybe get you to eek out an extra well or two at the end of the year, but production is what makes the business work. You can drill extremely profitable wells even in current commodity price environments with the right production profile - **** gas is actually worth something in the Permian for the first time in 2 years. But it's very easy to turn profitable wells into money losers. In my experience in both conventional and unconventional, when the companies I worked at prioritized cost savings on completions, we have lost far more money due to lost production. Beyond the completion itself, there aren't many dials to turn. The majority of our non-fixed capital costs are out of our control - they go up and down with demand for those services.

Again, I've drilled many wells that in a given commodity/capex environment made **** loads of money in shale. I've had many wells payout in less than 8 months. That's not the problem. It's recovering from ****ty well spacing sinking $100MM of capital and commodity crashes that really hurt because there's nothing left but short cycle, high decline assets. That still doesn't mean there aren't opportunities, I mean we drilled 2 wells 1st prod in May that economically are going to be some of the better wells we've drilled in the past year - easily sub 1 year payout. They make a lot of gas and they don't have spacing/parent well issues. But on a portfolio basis, we're stuck watching our production decline with not enough cashflow to drill beyond obligation drilling.

If you can't make money in shale ever, as some people on this board like to pretend, EOG would not exist... Let alone be as large as they are. That company was literally built on shale oil development, how are they not bankrupt? Because like all oil and gas wells, you can make them work in the right capex-commodity price environment.

Ultimately, shale going forward needs to be a piece of a more diverse portfolio of oil and gas assets. It's still valuable, it's still possible to make good money and fast, but you can't rely on it at all times as the sole investment opportunity in your portfolio. That's why, unfortunately, the independent should be swallowed up by the integrated companies... As sad as I find that personally.