A fracking mess

[begreen]

Looks like another house of cards is tumbling.

Big Banks Pull Financing, Prepare To Seize Assets From Collapsing Oil and Gas Industry

The major banks that have funded the money-losing fracking boom are now exploring taking the unusual step of taking over the oil companies

www.resilience.org

 

[WinterinWI]

Not surprising considering the lack of demand/extremely low oil prices, Given your politics, I would've thought that you'd be happy about this?

 

[begreen]

This trainwreck started before the virus. The bug just hastened the issue. I have mixed feelings. If I understand this correctly it's our taxpayer dollars that will be doing the bailing so the debt gets transferred to the taxpayer. The whole fracking scheme ran on enormous debt. That doesn't make me happy at all. Meanwhile, some CEOs made a bundle on this scheme. Also, cheap oil makes renewables less competitive, so possibly no win here. What is your take on it?

 

[WinterinWI]

I'm not really a fan of gov't bailouts of any industry, it's become the standard whenever a very large company is facing default. Both parties have supported bailouts several times, so I don't see it as much of a political issue. Not surprising since neither wants to face the political ramifications of so many job losses and impacts to the economy/life.

There's also the fact that at this point in time (like it or not) we still need a lot of oil. Not only for everyday things, but (God forbid) defense of our country. Total dependence on foreign countries for it is not a good thing.

 

[ABMax24]

My question is why are US banks allowed to lend money to people and businesses that can't pay it back? Predatory lending, particularly with sub-prime mortgages in the US caused the 2008 financial crisis, of course along with all the other schemes like CDO's and the horrendous schemes of insuring these CDO's through companies like AIG.

The way I look at it a big bank shouldn't be bailed out if they offer risky loans that are unlikely to be repaid. The system in place in the US is the sweet-spot for bankers, they can't loose, if they make a risky loan and it gets paid back they make a lot in interest, if the loan is defaulted on the US taxpayer pays for it. I wish I could operate such a business.

If the oil companies and their CEO's are criminals for this situation, then the banks are the kingpins that push these loans that can't be repaid.

 

[semipro]

There's also the fact that at this point in time (like it or not) we still need a lot of oil. Not only for everyday things, but (God forbid) defense of our country. Total dependence on foreign countries for it is not a good thing.

Isn't the U.S. a net exporter of oil and gas now?
We were the world's top producer of crude oil in 2018 and 2019 according to EIA. I believe the same applies to natural gas.
I agree that exporting energy may not be in the best interests of our nation's security though, especially when they have to run a pipeline through my backyard to do it. (not literally in my back yard but close enough that I can hear the pipeline construction equipment backup alarms from my usually peaceful back porch.

 

[begreen]

There's also the fact that at this point in time (like it or not) we still need a lot of oil. Not only for everyday things, but (God forbid) defense of our country.

That is for sure. Total dependence on foreign countries is not a good thing, though our huge strategic reserves should provide a substantial buffer. I don't mind a little dependency on foreign oil if it works out economically but agree there should be a limit. The other side of the story is what disturbs me. First the oil companies borrow like crazy to overfrack the nation to the point where we are rolling in excess. Then they sell this overseas but keep drilling like it's 1999. With the country awash in so much oil and NG then need new markets so they start building huge new plastics refineries because we can never have too many plastics. That's where I call the line. Gluttonous excess may make shareholders happy (well not today for sure) and CEOs wealthy, but it's robbing future generations for the short term gains of a few. And the earth can neither sustain the energy load of these excesses nor the plastic waste load of our current rate of production, nevermind the massive increases projected.

 

[semipro]

This trainwreck started before the virus. The bug just hastened the issue.

True. Many economist types recognize that most recent FF investments will soon be stranded assets.

 

[begreen]

Oil is now worth less than nothing, and since we're running out of places to store it, why not just keep it in the ground?

 

[ABMax24]

Oil is now worth less than nothing, and since we're running out of places to store it, why not just keep it in the ground?

That will happen yet. Many of our big producers are slashing spending by the billions of dollars, and some have already announced 30% production cuts. It will happen in the US as well as world wide. Most oil companies in North America can't operate on sub $20 oil.

 

[begreen]

Money losing oil companies will not be able to refinance debt and they have a mountain of it. The entire sector is distressed. There will be many bankruptcies filed. That is if the banks don't repossess first.

 

[ABMax24]

That really depends on the company. I'm not sure how many small junior companies operate stateside but they are the ones most at risk. The large established companies will probably weather this fairly well.

 

[woodgeek]

The market cap of the domestic oil industry never really recovered after the 2016 crash, which wiped out $300B in investor value. While production of tight oil (and Permian oil, which is rather 'loose' tight oil) increased a lot since then, the profits at $60/barrel (with high-grading, only tapping the best reserves) were not nearly as good as the profits at $100/barrel before that. It seems unlikely they can do much with prices below $40, which seem likely in a post-peak oil demand world.

It took several years for global oil demand to reach its earlier peak after 2007. It might regain the demand we saw in 2019 in a few years, but I wouldn't be surprised if it didn't either. COVID-19 has pulled a lot of societal changes forward (like video conferencing and WFH), I would bet that peak global oil demand might be one of them.

As for renewables, my magic 8-ball says 'Reply Hazy'. CW seems to say that cheap oil will undercut renewables, but there is a wildcard...the price of NatGas. NG demand has gone through the roof over the last 5 years with the cutback in Coal for electricity production. That demand however is way ahead of N American **conventional** gas production (which peaked more than a decade ago). While some fracked wells (like here in PA) are designed to pull gas, a LOT of the gas in the US is a 'byproduct' of tight oil production, consistent with its recent rock-bottom fire sale price. If the oil frackers all shut down, we will suddenly find ourselves with a NG 'shortage', which we will alleviate by higher prices....which would hypothetically support a rollout of BOTH Renewables AND Coal.

Which road we take over the next 5 years, to scale renewables OR coal, or both, in the new low Nat Gas US, will probably come down to which party controls the gov't after the 2020 election.....

Of course a lot of oil frackers might hang on if the price of the NG they are currently dumping on the market picks up....shut in the wet (oily) holes, reopen the dry (gassy) holes. LOL.

As for bailouts....the oil and gas extraction industry employs ~150,000 people in the US, less than 0.1% of the workforce and slightly more than JC Penney. JC Penney and a lot of its similarly-sized Department stores will be declaring bankruptcy in the next year, and I haven't heard a peep about bailing out them.

As for the oil majors like XOM, even before the crash, there were zero energy companies in the top 20 of the SP500, and the whole sector had dropped to 3% of the index's valuation, from 20% in 1980. So while XOM remains a 'big business', it hasn't been the largest US company since Apple bumped it off after rolling out the iPhone. I've jokes with my buddy that works at Exxon R and D that he might want to look for the exits, since 2017. I have not changed my position.

 

[peakbagger]

Mexico has been in the news lately as they had met a reverse hedge on a big drop in oil prices with various New York investments firms. With the prices dropping Mexico gets paid for the difference in what they made the hedge at and what the current prices are. Its supposedly worth several billion.

This sad song of producers going bankrupt has been played for years. Its a high risk bet, in good times everyone makes a lot of money, in bad times the disaster is hyped hoping that the government steps in and reduces the damage. Meawhile a lot of the smart money is long gone. If the price goes back up in 18 months, a different bunch of finance folks will step in to fund new operations with a lot of the same faces. Fracking and its far more effective cousins direction drilling and enhanced oil recovery is out of the bag and its not going to be forgotten. Long ago talking to someone in the oil service industry, he explained that the cost to pump the oil was very much related to potential short term profit. They were told to get in the field drill some holes and get the oil (or gas) flowing, they werent paid to worry about anything but getting the flow going. Thats why environmental and landowner issues frequently show up, the crews doing the work are paid not to care, its drill baby drill. The investment horizon is very short term,any investments that slow down short term profits that are longer term rarely get spent. On the other hand the next time there is boom, those new ideas may be incorporated into the next drilling operation. Sadly most of the workers and communities forget about the feast or famine aspect and dont keep reserves. The giy I was talking to did it for about 20 years and couple of divorces until he switched to the power industry.

 

[ABMax24]

Thinking we have reached peak oil is optimistic at best. In North America maybe, but the demand isn't really dropping significantly here either, with the exception now with coronavirus. The big demand is going to come from newer markets. China, India, Indonesia, Phillipines, and soon to be Africa. What happens in a world of sustained sub $50 oil? These countries will quickly begin to take advantage of cheap energy in the same way the west has for well over 100 years now.

 

[woodgeek]

We shall see @ABMax24, we shall see. Pre-virus, there were plenty of forecasts for a global demand peak in 2022, or 2025, with most of the oil majors themselves conceding the peak is baked in before 2030. And that was assuming $60 oil. Its not hard to imagine a lower demand, $40 world where OPEC+ can keep their budget lights on with a little currency devaluation, and the US tight oil crew is a shadow of its former self.

And while the developing world is where a lot of that future demand was supposed to be, it remains to be seen if they'll have as much money for that projected new fleet of cars in the next 3-5 years, given that a lot of the West will be rehoming their supply chains.

 

[peakbagger]

Given the current relatively rapid onset of climate change, throw in a likely collapse of a glacier in Antarctic soon and its highly likely that carbon "taxes" of some sort will hit the developed world soon. Mostly likely cap and trade on a global stage. The rich countries end up paying for the poor countries to adopt petroleum alternatives.

 

[ABMax24]

Given the current relatively rapid onset of climate change, throw in a likely collapse of a glacier in Antarctic soon and its highly likely that carbon "taxes" of some sort will hit the developed world soon. Mostly likely cap and trade on a global stage. The rich countries end up paying for the poor countries to adopt petroleum alternatives.

I've been paying carbon taxes on every carbon based non-renewable energy I consume since 2017 due to government action. I have yet to see more than a few percent of that tax money go to any meaningful change. There was $30 million given to help subsidize solar panels installed on homes and businesses, of which I received $2700 toward mine. As well as maybe $100 million more spent on energy efficient home upgrades (LED bulbs, energy efficient appliances, etc), and a handful of utility scale renewable electricity projects. The vast majority of the collected taxes were given to coal power plants to shutdown (they were shutting down in the same timeline anyway), or as rebate checks to low income individuals (essentially wealth re-distribution hidden under the guise of a "green tax"), and of course the rest just to general revenue for the government.

What I'm getting at is a carbon tax could be beneficial if done correctly, if every dollar was used to develop low carbon energy sources. But in my experience this isn't the case, and at the $30/tonne it doesn't have a meaningful impact on energy prices, at least enough of one to change consumption habits.

 

[ABMax24]

We shall see @ABMax24, we shall see. Pre-virus, there were plenty of forecasts for a global demand peak in 2022, or 2025, with most of the oil majors themselves conceding the peak is baked in before 2030. And that was assuming $60 oil. Its not hard to imagine a lower demand, $40 world where OPEC+ can keep their budget lights on with a little currency devaluation, and the US tight oil crew is a shadow of its former self.

And while the developing world is where a lot of that future demand was supposed to be, it remains to be seen if they'll have as much money for that projected new fleet of cars in the next 3-5 years, given that a lot of the West will be rehoming their supply chains.

To date every peak oil prediction has been wrong, mainly because these predictions have been estimating a decline to supply rather than demand. But I'm not holding my breath that the current predictions are right either.

I'm basing my opinion as much on the lack of alternatives though as much as oil prices/production. The renewable technology and manufacturing of the available renewable technology still isn't here yet to reduce our need on oil significantly, and without drastic changes to lifestyles the energy must still come from somewhere. I very much applaud the actions of companies like Tesla for the technology they are bringing to market, but the world needs at least another dozen companies of Tesla's size to make an appreciable difference and begin to reduce the need for fossil fuels in a meaningful way.

 

[CaptSpiff]

As for bailouts....the oil and gas extraction industry employs ~150,000 people in the US, less than 0.1% of the workforce and slightly more than JC Penney. JC Penney and a lot of its similarly-sized Department stores will be declaring bankruptcy in the next year, and I haven't heard a peep about bailing out them.

JCP workforce is low pay and low impact due to being widely dispersed.
Fossil workforce is high pay and highly concentrated and therefore well represented.
Not best example.

 

[blades]

you all forgot to factor in that little tidbit of oil war concerning Russia vs the Arabs vs US production part of this is designed to distrup the fracking of oil in the US - which at this point looks to be acomplishing it 's goal

 

[begreen]

The big tidbit is the coronavirus which has demolished global oil consumption.

 

[SpaceBus]

Honestly, after watching some depressing information on youtube, we might as well just use the coal and carbon capture tech. With coal being used in solar panel production, the extremely limited payoff from wind, environmental disasters of hydro, lithium strip mining destroying ecosystems, and all the fossil fuels used in the logistical side of "Green" energy, we might as well just burn coal, peat, and trees for electricity. Nuclear seems like the best deal at this point. If solar power, without any fossil fuels used in the process, can be used to produce hydrogen from the atmosphere or liquid water perhaps liquid fuels could be synthesized with carbon captured from the atmosphere.

 

[ABMax24]

Honestly, after watching some depressing information on youtube, we might as well just use the coal and carbon capture tech. With coal being used in solar panel production, the extremely limited payoff from wind, environmental disasters of hydro, lithium strip mining destroying ecosystems, and all the fossil fuels used in the logistical side of "Green" energy, we might as well just burn coal, peat, and trees for electricity. Nuclear seems like the best deal at this point. If solar power, without any fossil fuels used in the process, can be used to produce hydrogen from the atmosphere or liquid water perhaps liquid fuels could be synthesized with carbon captured from the atmosphere.

You really need to fact check a lot of the stuff on Youtube, most is heavily biased to one side or another.

Or look at it this way, the solar panels on my roof generate electricity from coal, they just happen to be 25,000% efficient when converting that coal used to make them into electricity.

I do understand where people come from when they say that fossil fuels are used to make renewable energy, but fossil fuels are used to make everything anyway, so that's kind of a mute point. But as technology moves on we will find a way to make steel with renewable carbon. We will find a way to build wind turbine blades without thermo-setting plastics that are land-filled after use. We will find ways to recycle the precious metals from lithium ion batteries to reduce our need to mine virgin metals.

What I suggest you do is turn away from Youtube and have a look at the Islands of the Future series on Netflix, pretty cool stuff on there.

 

[SpaceBus]

You really need to fact check a lot of the stuff on Youtube, most is heavily biased to one side or another.

Or look at it this way, the solar panels on my roof generate electricity from coal, they just happen to be 25,000% efficient when converting that coal used to make them into electricity.

I do understand where people come from when they say that fossil fuels are used to make renewable energy, but fossil fuels are used to make everything anyway, so that's kind of a mute point. But as technology moves on we will find a way to make steel with renewable carbon. We will find a way to build wind turbine blades without thermo-setting plastics that are land-filled after use. We will find ways to recycle the precious metals from lithium ion batteries to reduce our need to mine virgin metals.

What I suggest you do is turn away from Youtube and have a look at the Islands of the Future series on Netflix, pretty cool stuff on there.

It was a Michael Moore doc, so to be viewed with a grain of salt, but most of the "green" energy is far from it. It's just worse than I thought it was. Like the Ivanpah molten salt solar plant that is started by burning natural gas in an external combustion engine... It will probably reach obsolescence long before it pays for the carbon used to build it. There are many other examples, not only from the Michael Moore doc either.