Newsflash! Fracking's Days Have Been Numbered For At Least A Year

 

The Wall Street Journal's  caterwauling editorial ('Mr. Biden Will Transition You Now', Oct. 24-25, p. A12)   moaned how Joe Biden plans to destroy fracking - not by banning it but by "strangling it with regulations".  By the end we're informed how tens of thousands of jobs connected to fracking will also be lost  - and oh, by the way, "Will laid off roustabouts now get jobs installing solar panels?"   But all the whining misses the point that those jobs, as well as the frackers (and most of the fossil fuel industry) already have one foot in the grave.   

How so?

 The prime clue appeared in the WSJ Finance Section  of June 7, 2019, under the header: ' Frackers Scrounge For Cash As Wall Street Shuts Spigot'', p. B1) .  And it didn't really amaze me in the least. Especially as we read (ibid.):

"The companies behind the U.S. fracking boom are turning to asset sales, drilling partnerships and other alternative financing to supplement their cash flow. These forms of funding often come with higher interest rates or other downsides  - such as giving outside investors a hefty share of future oil and gas profits."

And further (p. B2):

"Producers have been forced to get creative about financing because Wall Street began shutting off the cash spigot  last year after frackers routinely failed to turn a profit over the last decade."

Worse, only a tenth -  10 percent - of large shale companies saw a positive cash flow in the first quarter of 2019.   This according to a Rystad Energy analysis of 40  drillers.  And to sustain  or increase their production these companies have had to drill new wells, as opposed to seeing greater production from each existing well .  The piece also noted some companies have become so desperate for cash to jump start new wells that they are starting to turn to junk bonds.  Well, talk about batting on a losing wicket.  But the central question here is why did the frackers  fail to turn a profit over a decade?   I've explained this in earlier posts in terms of the lower energy returned on energy invested (EROEI) say compared with the light  crude oil of the past, non-shale based.

I also pointed out the difference in EROEI translated into some bad economics given the lower energy content of shale oil (kerogen) meant the frackers would always be in an energy (and hence economic)  hole.  A less efficient energy source means you have to extract more of it, and at ever higher costs given the innate diminishing returns.  It means, basically, endless reinvestment to support the losing operations.  This isn't relativity or rocket science.

The issue first surfaced in Richard Heinberg's book, Snake Oil: How Fracking's False Promise Imperils Our Future', ( p.115).   Therein we learned from a report by a London -based brokerage firm,  Tullett Prebon:

 "Our calculated EROEIs both for 1990 (40:1) and for 2010 (17:1) are reasonably close to the numbers cited for those years by Andrew Lees. For 2020, our projected EROEI of 11.5 to 1 is not as catastrophic as 5: 1 but would nevertheless mean that the share of GDP absorbed by energy costs would have escalated to 9.6% from about 6.7% today. Our projections further suggest energy costs would absorb as much as 15% of GDP (at an EROEI of 7.7 to 1)  by 2030."

The report goes on to conclude that the dismal diminishing energy returns means that the economy we "have known for more than two centuries" will "cease to become viable at some point"

As Heinberg observed, while it may cost less to extract a cubic foot of natural gas or a gallon of oil shale today, it will cost much more in just five years and even more in ten - such that one would have to spend as much or more to get the energy as the benefit it delivers. Heinberg summoned a point that most of the snake oil salesman humping fracking won't tell you, that it costs energy to get energy. And if you are a nation that resorts to employing 15 to 1 EROEI energy to extract  5 to 1 EROEI  oil shale energy.....well, can we say 'stupid'?

As Heinberg puts it (p. 116):

"No evidence suggests that the technology of fracking has actually raised the EROEI for natural gas production. It temporarily lowered prices but only by glutting the market."

Heinberg's book is essentially a tour-de-force exposing the false promise of fracking - whether for oil or natural gas-  with hard statistics and basic energy principles. He also shatters the myth  of "100 years of cheap  natural gas" as  effectively as he does the trope of cheaper and cheaper shale oil.   He observes, for example(p. 110), that "a study of the EROEI for electrical heating of methane hydrate deposits between 1000 and 1500 meters deep yielded ratios from 2:1 up to 5:1, depending on the source of the electricity"

The entire issue of sinking oil shale fortunes pivots on the breakeven price: that amount which the recovered oil needs to earn to have made its extraction worthwhile  If that per barrel amount tends to be below what the market offers, a loss occurs and over years the losses pile up. In many cases, as seen in recent years there is the added factor of an oil glut from over production.  In this case one has an excess supply and so oil prices tend to plummet. According to the Federal Reserve Bank of Dallas:

"The average breakeven price of oil has fallen 4 percent (or $2 per barrel) over the past year, to $50 per barrel, according to the latest Dallas Fed Energy Survey."

Shale oil is a lower EROEI source and hence much more work must be done to extract it and process it (i.e.g from kerogen) and hence this inefficiency must appear in the lowered GDP over a future track, as reported by Tullet Prebon, e,g,  "Our projections further suggest energy costs would absorb as much as 15% of GDP (at an EROEI of 7.7 to 1)  by 2030."

Energy costs absorbing as much as 15% of GDP by 2030? What does this mean? It means our present energy-intensive civilization with its HDTVs,  Ipads, Smart phones, F35 bombers, Dreamliner and MAX jets,  ICBMS, drones and SUVs will need to go into ever  more debt to function at the same level. That is, to produce the same energy intensive devices, products, gadgets, toys etc.  much greater manufacturing and processing costs will have to be born.  That almost certainly implies much higher levels of debt, namely for the U.S. frackers 

The much higher processing costs for shale oil also contributed to its producers never having made profits over the past 10 years, and always seeking loans or going through the junk bond route in desperation.   Why? Look no further than the fact (from FactSet) that 40 of the largest oil and gas frackers  since 2009 have collectively spent over $200b  more than they took in from operations.  

This is something to keep in mind as one reads more and more media accounts of how the frackers are going into debt, and basically getting nowhere fast in extracting their product and selling it beyond the breakeven threshold.  The problem for them now is getting the money to support their continued operations. As  noted at oilprice.com in a more recent (May, 2020) assessment:  

"The poor economics predate the global pandemic and the economic downturn.  Large U.S. oil drillers spent a combined $1.18 trillion over the past decade, but only generated $819 billion in cash flow from their operations. According to Evercore ISI and the Wall Street Journal. In other words, oil drillers are more than $350 billion in the hole over a ten-year period. For much of that time, oil prices were trading at $50 per barrel or higher."

And further:

"Between 2015 and 2019, more than 200 North American oil and gas companies filed for Chapter 11 bankruptcy. The pace of bankruptcies actually accelerated last year as investors began to sour on the industry. Again, that predated the pandemic. 

At $30, the financial blood-letting will continue. Roughly 73 E&Ps in the U.S. could be forced into bankruptcy this year if oil remains stuck at $30 per barrel, according to Rystad Energy. Another 170 companies would go under in 2021. If oil falls back below $30 per barrel again, the number of bankruptcies would climb even higher.."

This is all you need to know regarding why fracking's days are numbered and Biden was quite on message and correct to state originally (in the Dem primary debates) it would be phased out.  I mean why on earth would you keep an industry that's cratering into a financial hole, unable to even get enough junk bonds for financing?

The other problem is breaking it to those workers in the fracking industry - whether in Pennsylvania, Ohio, Colorado or Texas -  that they are literally working on borrowed time.  

Fracking's days are numbered and it is dishonest for the WSJ editorial hacks - as eager as they are for Trump to pull out a re-election win - not to level with their readers.

See Also:

Oil sinks to lowest since May on fears new Covid rules will hit demand

AND:

Energy Policy | Environmental Policy

Banning Fracking Isn’t Bad Politics — It’s Good Science

by Joshua Cho | October 25, 2020 - 5:53am | permalink

— from OtherWords

Excerpt:

Whenever there are discussions about banning fracking, media coverage seems to prioritize potential “risks” to Democrats’ electoral prospects, or potential economic downturns. Unfortunately, a lot of this coverage is quite sloppy.

For instance, the New York Times quoted absurd claims that a fracking ban would mean “hundreds of thousands” of Pennsylvanians would be “unemployed overnight.” In reality, about 26,000 people work in all of Pennsylvania’s oil and gas sector.

Still, the Times suggested that any presidential candidate who supports a national fracking ban would risk losing Pennsylvania, calling the issue “a political bet.” A fracking ban “could jeopardize any presidential candidate’s chances of winning this most critical of battleground states — and thus the presidency itself,” the paper wrote.

NPR likewise made dubious pronouncements on the opinions of swing-state voters the focal point of the story, reporting that “aggressive” climate action “could push moderate voters in key swing states to reelect President Trump,” and even cited — without rebuttal — a claim from the U.S. Chamber of Commerce that a fracking ban would eliminate 17 percent of all U.S. jobs.