Jerri-Lynn here. I try not to miss a post in Justin Mikulka’s excellent series covering the fracking beat for DeSmog Blog. Here’s his latest.
By Justin Mikulka, a freelance writer, audio and video producer living in Trumansburg, NY. Originally published at DeSmog Blog
The fracked gas industry’s long borrowing binge may finally be hitting a hard reality: paying back investors.
Enabled by rising debt, shale companies have been achieving record fracked oil and gas production, while promising investors a big future payoff. But over a decade into the “fracking miracle,” investors are showing signs they’re worried that payoff will never come — and as a result, loans are drying up.
Growth is apparently no longer the answer for the U.S. natural gas industry, as Matthew Portillo, director of exploration and production research at the investment bank Tudor, Pickering, Holt & Co., recently told The Wall Street Journal.
“Growth is a disease that has plagued the space,” Portillo said. “And it needs to be cured before the [natural gas] sector can garner long-term investor interest.”
Hints that gas investors are no longer happy with growth-at-any-cost abound. For starters, several major natural gas producers have announced spending cuts for 2019.
After announcing layoffs this January, EQT, the largest natural gas producer in the U.S., also promised to decrease spending by 20 percent in 2019.
Such pledges of newfound fiscal restraint are most likely the result of natural gas producers’ inability to borrow more money at low rates.
As DeSmog has reported, the historically low interest rates following the 2008 housing crisis were a major enabler of the free-spending and money-losing attitudes in the shale industry. Wall Street has funded a decade of oil and gas production via fracking and incentivized production over profits. Those incentives have worked, with record production and large losses.
However, much like giving mortgages to people without jobs wasn’t a sustainable business model, loaning money to shale companies that spend it all without making a profit is not sustainable. Wall Street investors are now worried about getting paid back, and interest rates are rising for shale companies to the point that borrowing more money is too financially risky for them. And because they aren’t earning more money than they spend, these companies need to cut spending.
<CNN Business recently reported that oil and gas companies stopped borrowing money in October 2018, but not out of restraint. Instead, CNN wrote, “investors, fearful of defaults, demanded a hefty premium to lend to energy companies.”
With many fracking companies failing to meet their production forecasts, as The Wall Street Journal has reported, investors may have good reason to be fearful.
The days of unlimited low-interest loans for an industry on a decade-long losing streak might be coming to an end.
As Bloomberg credit analyst Spencer Cutter explained to >CNN: “Investors woke up and realized this was built on debt.”
Canada’s Natural Gas Market Facing ‘A Daunting Crisis’
Prospects for natural gas don’t look much better north of the U.S. border.
Like the Canadian tar sands oil market, the Canadian natural gas market is also in the midst of a long losing streak. The problems facing the natural gas market in Alberta, Canada, is “far worse than it is for oil,” said Samir Kayande, director at RS Energy, according to Oilprice.com.
Canadian natural gas producers are being crushed by the free-spending American companies that could produce records amounts of gas at a loss while using borrowed money.
One reason natural gas is so cheap right now is that fracking for oil in the U.S. ends up producing huge amounts of gas at the same time. This gas that comes out of the wells with the oil is known as “associated gas.” And it is so plentiful that in places like the Permian Basin in Texas, the price of natural gas has actually gone negative.
Paying someone to take the product that a company spent money to produce is not a sustainable business model.
Additionally, the U.S.oil and gas industry chooses to flare large amounts of natural gas in oil fields because it’s cheaper than building the necessary infrastructure to capture it — literally burning its own product instead of selling it.
And the Canadian producers, who used to sell gas to the U.S. market, simply can’t compete.
A natural gas advisory panel to Alberta’s energy minister addressed the crisis for Canadian natural gas producers in the December 2018 report “Roadmap to Recovery: Reviving Alberta’s Natural Gas Industry.” The report’s opening line summarizes the problem:
“Traditional markets for Alberta natural gas are oversupplied. Prices, and therefore industry and government revenues, are crushingly low and have been increasingly volatile locally since the summer of 2017.”
Noting the dire situation, one natural gas executive predicted that “this will only get worse in 2019.”
Too much supply, not enough demand.
To remedy this problem, the report recommended expanding supply, decreasing regulation, and bailing out companies with financial backing from the government, with the ultimate goal of producing more gas and exporting it to Asia.
The forgotten commodity: #NaturalGas, #Alberta
Western Canadian natural gas markets that have faced weak prices for more than a year. Importantly, what actions can be taken to fix the market?https://t.co/ArXPDMTctO
— Evin Enry (@TulliiLLC) 1 February 2019
With Alberta’s reliance on oil and gas to support its economy, it is easy to see why its politicians are loathe to recognize the economic realities of the natural gas (and tar sands oil) industries.
However, some politicians feel the same way about the American coal industry, and that is dying primarily because renewables and natural gas are cheaper ways to produce electricity.
Desperate Times for Leading Gas Producer
Chesapeake Energy is often held up as a case study for the fracking boom. It was a huge early financial success story (based on its stock price, not actual profits), and in 2008, its then-CEO Aubrey McClendon, known as the “Shale King,” was the highest paidFortune 500 CEO in America.
Since those high times, it has been a rough decade for Chesapeake. The stock price is near all-time lows — where it has remained for years.
Chesapeake has stayed afloat by borrowing cash and currently owes around $10 billion in debt. Unable to make money fracking gas in America since the days of the Shale King, Chesapeake has a new strategy — fracking for oil.
The Wall Street Journal recently reported this shift in Chesapeake’s strategy, referring to it as “ill-timed” and “straining already frayed finances.”
But Chesapeake is all-in on this new strategy. According to The Wall Street Journal, Chesapeake CEO Doug Lawler said the company “plans to dedicate at least 80 percent of 2019 capital expenditures to oil production because it sees crude as the key to a more profitable future.”
One of the top gas producers in America and a “fracking pioneer” is abandoning fracked gas as a path to a profitable future. The fact that Chesapeake now believes fracking for oil is a path to a profitable future — despite all the evidence to the contrary — gives this move an air of desperation.
While U.S. politicians from both parties have given standing ovations for the U.S. oil and gas industry, investors appear to be losing their enthusiasm. The so-called shale revolution, the fracking miracle, may have resulted in record oil and gas production in North America, but the real miracle — in which shale companies make money fracking that oil and gas — has yet to occur.
Fascinating new study: going 100% renewable is the cheapest way to power North America. https://t.co/bA1yfn652n
— Bill McKibben (@billmckibben) 7 February 2019
The North American natural gas industry is facing a crisis with an oversupplied market and producers that are losing money. Those producers desperately need higher natural gas prices.
However, higher gas prices mean renewables become even more attractive to investors, which may lead to gas following in the footsteps of coal — dying at the hands of the free market.
It may take some time, but eventually investors wake up — or run out of money.
Follow the DeSmog investigative series: Finances of Fracking: Shale Industry Drills More Debt Than Profit
Main image: Flare Off and Pumpjack, Permian Basin Oil Field, Eddy County, New Mexico. Credit: blake.thornberry,
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I no longer wonder why US press treats the Nord Stream 2 as “controversial” with this glut of debt fuelled natl. gas. Instead, the media should be clamoring against gas flaring, a practice that should be banned. ClimateChange101 regulation.
It does illustrate what any Green New Deal would be up against. Not only are simple environmental steps like no flaring opposed, but investors and drillers cling to an extraction process that doesn’t even make money rather than give in to a more rational, government planned energy system. You begin to think it’s not even about the money but more about who’s in charge. Before we conquer AGW we may have to conquer human nature. The assumption behind the GND and indeed all AGW activism seems to be that if the world is just shown the rational path then the world will take it. The above illustrates how very irrational the world really is.
but the real miracle — in which shale companies make money fracking that oil and gas — has yet to occur.
Which will be a miracle.
I was involved in the service part of the Peace River area gas extraction (and some oil) since the early 1980, and also when the shale gas extraction started in the early 2000’s with horizontal drilling changing the face of gas production.
By 2006/8 there was talk after heavy investment by Petronas of up to TEN LNG plants at the west coats in the Kitimat area…not one has been build to date, no pipeline exists and no means to get any gas to market other than to the internal Canadian and the now oversupplied US market. It was a failure of politicians and regulatory agencies to speed up the permissions and likely as well the dithering by investors, that now Australia has taken on the supply of the Asian market.
Granted they are speaking of canada as the source of bailout, but the country will be bailing globalist investors which maybe has gone on long enough? Anyway, the same neoliberal playbook…”I got your free market right here…shame if somethin’ was to happen to it…”
To remedy this problem, the report recommended expanding supply, decreasing regulation, and bailing out companies with financial backing from the government, with the ultimate goal of producing more gas and exporting it to Asia.
Of all the questionable practices of oil and mining companies flaring is probably the most abhorrent.
This has long been one of my concerns in the field. I’ve long held that the federal government should simply outlaw the practice, forcing drillers to find something to do with the gas (bury it, ship it or use it to create electricity). At the very least, it should be prohibited on federal lands as part of the contracts that are signed.
Flaring is the second worst thing to do with NG. Methane is 20x more potent than CO2 as a greenhouse gas, so burning it is better than just venting.
As with coal, just leaving it in the ground is of course the best solution.
>in the U.S. ends up producing huge amounts of gas at the same time.
And thus they were family-blogged. For the simple reason that this wasn’t your, let alone your father’s “oil bidness” anymore.
Once upon a time wells were dug for water. You pumped water out, more seeped in. Should have been forever but… well that’s another discussion.
Then you dug wells for oil. They were finite, but they lasted decades.
Now you think you are “digging wells”, but what you really are doing is building an underground factory. In a factory, you seed the inventory and say “go” and stuff comes out the other end. To make another batch the crank needs to be turned again.
They don’t have any model in their heads that matches this. Thus they wind up with what to a manufacturer is obviously “scrap” production, aka stuff that they don’t have a market for. Why it took Wall Street so long to understand this is a mystery, except I do wonder if many of them knew it but just wanted to “screw the greenies”. They aren’t going to miss any meals, so why not I guess.
This is just f*&%”#g depressing. A decade of using debt that will be never be paid back to put carbon into the atmosphere that will never go back in the ground, sometimes not even extracting the energy from it first. We deserve what is coming.
I read “investors are showing signs they’re worried that payoff will never come” as “investors can’t borrow money for cheap anymore now that the Fed has raised rates”.
If the Fed were to reverse course and CUT interest rates, the party will continue. Wanna bet?
In another topic, how would MMT prevent people from investing in fracking?
MMT is not a policy, it is an explanatory framework. And it certainly doesn’t explain human behavior.
I fear they might be encouraged – the government can simply print money to make them whole (as long as there is no serious inflation). If investors and the oil industry have “friends” in legislative places, the temptation to press for government money that just can be printed will be severe.
Cutting rates won’t help. You don’t get it, do you?
Please explain. These companies only managed to come to existence because of the Fed’s super low rate policy. If say rates were to get low again, there’s no reason why these things can’t continue. Investors borrow money as well.
#Fieldwork
Talking to a 2nd or 3rd generation owner of a small family run oil and gas company that maintains local wells about 8 months ago. I expressed my concern about fracking locally. He laughed. Then said in a serious and not at all condescending tone that there is no money going into fracking at these NG prices and it’s unlikely to change in the future. He went on to explain where the deposits were, the expense and environmental issues the large frackers are up against and basically said he doesn’t see a scenario where it’s ever expanded close to populated areas, if it recovers at all. He genuinely didn’t see much future in it.
That would be reassuring but he was using, you know, “logic”. That doesn’t really match the fracker’s MO, does it?
Of course there is no future in it. Shale deposits are vertically small that horizontally extend large distances, which means horizontal drilling. Not only that, usually you need parallel wells for water injection to force the oil or gas out. The cost are much greater compared to conventional vertical drilling with the technical solutions necessarily involved. The wells deplete rapidly within a few years, requiring new wells.
I have been on sites in the Peace where wells were producing mainly water after three years.
Those opposed to fracking for environmental reasons should perhaps also consider opposing it on national security grounds, since, given the limitations/costs of fracking, those resources should be seen as emergency rations, to be tapped only when absolutely necessary.
That fracked oil and gas is being spewed into the atmosphere when prices are low and falling, and more easily-obtained stocks are plentiful elsewhere, is just compounding the mania with insanity.
It also suggests to me that, since there isn’t real money being made, there are geo-strategic, National Security State-related reasons for the US’ sudden impulse to jack up oil production.
Michael Fiorillo,
“…geo-strategic, National Security State-related reasons…”
Nope. Greed is all you need. Read Steven’s post below, the last sentence.
I’m in no position to argue against anything Steven writes, and don’t mean to sound unduly conspiratorial (especially since I’ve presented no evidence).
It’s just that petroleum and gas issues are such fundamental drivers of Pentagon policy that it’s almost unimaginable that industry isn’t getting at least a nod-and-a-wink pass from the National Security Eminences.
Then again, that may presuppose a certain amount of rationality that the article under discussion suggests is in very short supply.
Michael Fiorillo,
“Then again, that may presuppose a certain amount of rationality…”
I agree completely.
These Wall Street fracking and shale subsidies percolate through the entire economy. In addition to obvious hangers-on like the automobile industry, you have privately owned electrical utilities rushing to load up on as much stranded asset, centralized fossil fuels generation and distribution infrastructure as they can jam through their respective state public utilities commission before the gas bubble bursts.
What is important here is extending and preserving stock price rallies, elevated CEO salaries and coupon-clipping opportunities for rentiers as possible, not economic efficiency in any form that could be understood by anyone but bankers and financiers.
> Are Investors Finally Waking up to North America’s Fracked Gas Crisis?
No, because they are not investors but gamblers.
More to the point, no Wall Street criminal was harmed because not one was stupid enough to throw his or her own money on the roll of the dice, but they certainly took the gamblers money and for a fat fee, throw the dice for them.
This is getting old. Why does anyone believe in free-market economics in an emergency? It’s puzzling that just when oil went into a huge glut and the heavy, full-to-the-brim tankers lined up in all the deep ports, like treasure chests, and the price of oil dropped because the global economy had been slashed by a third… it was just at this time that Obama made his panicked decision to frack, to deregulate, and to subsidize it. So these so-called “investors” who are raising their prices for loans, have either seen demand come back and want their fair share of the whole ponzi operation, or the QE that facilitated it all has been tapped out politically, regardless of the economics. No one seemed to care that all the natgas blown off each well was accelerating the CO2 effect, measurably. No one cared about the polluted ground water. Nobody acknowledged that Germany didn’t want our LNG. Only free money could have caused this perversion of productivity, all this destruction, this gold rush to nowhere. Our sovereign money should be distributed wisely. Never like this. And never into a deregulated market.
Yikes, ugh, and AAARRRRRGH! Not the 1st I’ve heard of this (Gas Bubble), but this nails it all down.
Was this (partly/directly) caused by QE? My impression is that QE pumped a bunch of “money” into the top end of the economy (Assets/Wall Street), propping up the Stock Market, but I’ve never gotten exactly HOW they did it. Did the Fed just buy lotsa Stock (or Corp Bonds)? If so, did they (partly) create the Gas Bubble by (over-) investing in Fracking companies? If so, they are now stuck bursting that bubble as they “De-QE”; either they (We!) get out of that market early – blowing it up sooner – or wait until it deflates “normally” and lose a bunch of (Our?) money.
Are the details of QE (how much of which assets the Fed bought) public?
QE doesn’t create money. The US is flush with capital dude, get that, understand that. The global boom which crested in 2011 was the bigger reason for the initial surge. Then came the bust.
Um, where does the money come from to buy the assets and what do the banks do with the proceeds of the asset sales? QE is most definitely monetary expansion policy. What do you think fueled that global boom? The Fed increased their balance sheet by $1.3 trillion between 08 and 11.
Flaring should be banned on national security grounds… we might need it in a decade or two.
If you didn’t let them flare it, they’d just release it. “Oopsie Sorry. Didn’t mean to!”
And methane is much worse as a climate gas than CO2
Again, demand drives the need. Subsidies underwrite the debt, but are side players in all reality. The US is flush with capital and that leads toward easy debt expansion. This is the problem with goldbugs/commodity money types. Basically the dollar standard has become very similar to the gold standard due to the influx of capital. On the goldbug theory, we should not be having this type of capital expansion in a fiat debt based system, but we are. This takes the general demand that natural gas is and debt expansion blows it up like the metal standards of the 19th century blew up railroads or new industrial technology. Then it busts. Up and down we go.
I just don’t know why people think this is new. Capitalism IS the debt based system. It was how the 14th century bankers sold it to monarchies to rebuild from the plague. How they pushed the monarchies then to explore the world once Europe reached its resource constraints by the late 1400’s and why these same bankers were the creators of the globalized slave trade of the 18th and 19the centuries. Maybe goldbugs would understand their failure then. Without debt, the ponzi-scheme collapses which only 1929(and maybe the 1840’s) has the bourgeois state allowed people the true face of capitalism. No, commodity money does not stop debt expansion, it helps spurs it on until it collapses, then makes it worse on the downside until the next high and we repeat.
You can create debt based on commodity money, but the commodity money (assuming the commodity is finite) is more limited than fiat money and whatever the abstraction we now call ‘funny money’ actually may be, so I suppose it might inspire more restraint in borrowing and lending. However, when you say ‘the world is flush with capital’ I can’t guess exactly what that means. What kind of capital? I see evidence of a lot of funny money and the games that are played with it, but not much difference in wealth from years ago, where wealth means stuff you can use and enjoy or make other stuff with or out of or live in.