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Topic: Shale Oil (Read 142 times) previous topic - next topic

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Shale Oil
Here is a link to a great article on shale oil production:


Here is the lead paragraph to peek interest:

As the U.S. and Global Oil and Gas Industry continues to cannibalize itself to stay alive, the Shale Dominoes begin to fall as BHP Chairman announced its shale investment was a MISTAKE.  Yes, it's true, BHP Chairman Jacques Nassar said his company's $20 billion shale investment six years ago, in hindsight, was a mistake.

When I worked in the oil business, shale was considered a cap rock, or the impermeable ceiling of a porous and permeable oil bearing reservoir. Porosity is the void space in solid rock where oil, natural gas and water reside. Permeability is the measure of the connectivity or the ability of the fluids to flow within the rock. Putting this in perspective, shale permeability is orders of magnitude less than conventional petroleum rock like sandstone, dolomite or limestone. So what makes shale look so good? Well horizontal drilling, a relatively recent technical development, and hydraulic fracturing, technology that has been commonly employed in the petroleum industry since the first treatment in 1954 (that is not a typo, more than 60 years!) expose enormously more formation to the well bore for production. It is obvious that a two inch well bore  drilled into a formation will produce much less than a 20 foot diameter wellbore. Hydraulic fracturing and horizontal drilling in essence makes the wellbore larger in diameter with the increased exposed rock.

As one might expect the early production is very high as the oil flowing into the well has to travel through short distances. but as more oil is produced, the distance through the matrix rock increases and the effects of near zero permeability start to have more effect, the flow rate diminishes quickly. In a conventional reservoir decline rates will be on the order of 10% to 20% per year, sometimes more or less. For a shale well, decline rates of 50% and even much more are all to common. Shale production increased in the early years because new wells were added contributing early production faster than the legacy wells were declining, so it was easy to dupe investors into funding the drilling and oil companies added to the disaster by borrowing large quantities of cheap ZIRP money. Now that is all changing with rig counts and new well investment moving to near zero as oil price falls and the true economics become painfully obvious. Reservoir engineers with any common sense knew this, thus oil companies should have been more tuned in.

This has huge implications. First, all this new oil bonanza is just as fake as MSM news, and there is no US energy independence as a result of future shale oil production. Second, a lot of independent oil companies are going broke and in bankruptcy their stock and probably bonds will end up worthless. Third, there are a lot of wells operated by the companies going bankrupt that will need to be plugged and abandoned with surface restored. You can bet that will come at taxpayer expense, expect a supposedly expiring specific tax to take care of the problem that will never expire. Fourth, this is going to be a high paid job killer. Expect more social safety net expense and less tax revenue adding more stress to government budgets. Fifth, the decline in oil price now is the result of huge supply from OPEC and Russia. Those supplies are not endless and price will increase when demand increases outstrip supply. When? I do not know, but it is near certainty. Lastly, oil production ad valorem taxes are high and royalties will diminish further stressing state and federal budgets.

This article and the incremental information in this post are not earth shattering to folks in the petroleum industry, the financial press, or wall street financiers, but you will not see this made available to the mainstream citizen because it does not fit the it is well in the energy sector mantra so go buy a gas guzzler. Times will be changing and costs to produce PM's will increase as well.

Hope this was worth the read for everyone.

  • Erich
  • [*][*][*][*]
Re: Shale Oil
Reply #1
Interesting read Dave. Do you have any specific publicly traded companies that you think may go under. I'm always looking for shorting opportunities.
Thanks ER 

Re: Shale Oil
Reply #2
Interesting read Dave. Do you have any specific publicly traded companies that you think may go under. I'm always looking for shorting opportunities.
Thanks ER 

HK is one I held a position in while I thought there was potentially a technical break through that made shale something more than a pipe dream. When I came to my senses realizing the whole shale thing was nothing more than a promotion with less than sufficient backing, I sold for a small loss. Another is EOG. A friend of mine supervised drilling wells for them several years and when he described the cost per well and the high IP's (Initial Production rates) it sounded good, but the miniscule permeability thing kept entering my head. He confirmed the individual wells had steep declines, supporting the aggregate curves such as in the referenced post. I do not research the sector and I have been away from the oil patch since 2003 so I am not a good current source for company specifics, but another company that comes to mind with lots of troubles is CHK. When researching a company, look for % of production from shale and then look for legacy production rate curves, well count, required wells to maintain production rate, production rate divided by debt, etc. to get an idea of company health. Bye the way, that information take a lot of digging because it normally is not flattering, so if it is presented, it is likely buried in foot notes of appendixes.

  • sn00p
  • [*][*][*][*]
Re: Shale Oil
Reply #3
im holding bp at the moment for divideds

Re: Shale Oil
Reply #4

BP is looking dicey technically, but the dividend being over 6% is enticing, and it is a stock I held as a large % of my portfolio for dividends until the gulf spill when I unloaded all of it. MACD and RSI look terrible and %BB is low suggesting an up turn might be near.  Options are suggesting tough sledding for BP as well. For next January expiration, selling a call $2.50 out of the money will fetch about $0.64 to $0.71, but to buy a put $2.50 below current stock price will cost about $1.23 to $1.30, a very strong bias to the downside.
Since there are two dividends, $1.20 at the current rate before January 2018, it might be worth considering a surrender of part of your dividends to protect the underlying capital. My example works, albeit limiting upside gain and protecting most of your investment on the downside, but there are probably better time and spread choices to optimize returns and protect your investment. This is something to consider, not a recommendation.

I would be interested in other dividend stocks you think are worth considering as I am looking to curb my option writing income strategy in favor of more dividends; call it getting lazy I guess.