Oil is down - and this is bad?

[aja8888]

Heard this podcast where they discuss the economics of fracking.

Low interest rates as a result of the financial crisis led to a boom in fracking, which is capital intensive.

One of the guys interviewed is Jim Chanos, hedge fund manager who has studied the economics of fracking.

He believes unlike standard wells, fracked wells require constant capital infusion to keep up production.

But with interest rates rising, that makes the economics precarious.

He also thinks there are bad incentives in the industry, where production rather than profitability is incentivized.

He didn’t say it but sounds like he was shorting or considering shorting many of these fracking companies.

The "fracking companies? Who are these subcontractors to the oil producers?

First of all, we (U.S.) have been fracturing rock formations in oil/gas wells for 100 years. Nothing new here. What's different is we are now able to drill horizontal wells with multiple long laterals and break the rock (shale, limestone, etc.) using high pressure liquids and small explosive charges. Then the wells produce more liquids and gasses than a conventional well used to produce.

I don't know about this "constant capital infusion" being something new as ALL wells need to be re-entered and serviced occasionally, regardless of whether or not they are conventional or horizontal. Nothing new here.

In the scheme of things, we are now producing more hydrocarbons as a nation due to the ability to recover hydrocarbons from shale formations, the advent of horizontal drilling, and the ability to fracture hard rock formations in long lateral wells.

It's all good for the U.S. as it takes the dependency legerage away from OPEC and we can be more self reliant on our energy needs.

Since crude oil is a worldwide commodity, the contract price will find its way to one that (hopefully) most producers will make money at.

 

[RobLJ]

We are swing producer + of oil now and a significant exporter of LNG. There is more than a few shale companies that are profitable (not greatly) at 40$ oil or above, and we are the largest producer now.

Meanwhile, as new electric generation sources, wind and solar are cheapest, so we're in a sweet spot of increasingly shifting renewables while exporting/producing carbon-based needs. Electric cars will ride that tail, increasingly over the next 10-15 years.

We still import about 1/4 of our crude oil needs. We export many products, including diesel fuel, gasoline, natural gas liquids, etc.

What the U.S. producers have done in the last decade is become a threat as to being the "swing producer" in worldwide crude oil production. Our ability to develop horizontal drilling and figure out how to economically get hydrocarbons out of hard shale has given our producers about 2 MM BPD of increased production over the last decade.

Our shale reserves are large and as an example of our ability to bring on crude oil production quickly, we have about 3,600 wells drilled in south Texas that are "not completed" (not fracced) and could be producing in 30 days or so. Similar drill and shut in but not complete strategy is going on in North Dakota.

So it's all good.

 

[DEC-1982]

Given that there are more oil consumers than producers, low prices are good for most people.