IT BEGINS… Rapidly Falling Oil Prices First Guts Tar Sands, Then Shale Oil

The rapidly falling oil prices have finally claimed the first victim, but it won’t be the last.  The Alberta government announced late yesterday for a substantial cut in tar sands oil production to stem the hemorrhaging low oil price.  The price paid for tar sands oil has fallen a stunning 77% from its peak just two months ago.

While the Canadian tar sands oil price has fallen the most, various U.S. benchmarks are also experiencing substantial discounts to the standard West Texas Crude Oil price.  For example, the price paid for Bakken oil has dropped by 42% from its peak in October.  This is terrible news for the shale oil producers in North Dakota.

However, as bad as the situation is becoming for the U.S. oil industry, it isn’t as bad as the disaster taking place in Alberta, Canada.  According to the Zerohedge article, Alberta Orders “Unprecedented” Oil Output Cut To Combat Crashing Prices:

So in a long-awaited and according to local energy traders, overdue response, Canada’s largest oil producing province ordered what Bloomberg called “an unprecedented output cut”, an effort to ease a worsening crisis in the nation’s energy industry and adding to global actions to combat a recent price crash ahead of this week’s OPEC+ summit where oil exporters will similarly seek to slash output.

… The plan, which was announced late on Sunday, will reduce production of raw crude and bitumen from Alberta by 325,000 barrels a day, or 8.7% from January until excess oil in storage is drawn down. The reduction would then drop to 95,000 barrels a day until the end of next year at the latest.

The Alberta government plans to cut oil production by 325,000 barrels per day for three months starting in January.  That will cost the Alberta oil industry at least a half of billion dollars at current market prices.  A nice chunk of change.  Unfortunately, if the U.S. and the global economy continues to weaken in 2019, the Alberta government may be forced to extend or increase cuts in oil production.

As we can see the Western Canadian Select oil price has fallen to a new low compared the previous lows set at the beginning of 2016.  When the U.S. oil price was trading at $30 a barrel in January 2016, the Western Canadian Select spot price was higher at $15.  However, with the U.S. oil price now at $53, the Western Canadian Select tar sands oil is trading at nearly a $40 a barrel discount:

(chart courtesy of Zerohedge in the article linked above)

Now, while lower oil prices have prompted the Alberta government to issue a mandatory oil production cut, market forces will likely be the primary factor reducing U.S. shale oil supply.  Why?  Well, the prices paid for oil from the various shale fields and regions have also traded at a steeper discount to the standard U.S. WTI oil price.   For example, Bakken oil (Williston sweet crude) fell to a low of $39.55 a barrel from its peak of $66.50 in October.

Furthermore, the price paid for oil coming from the second largest shale field in the United States, the Eagle Ford, has fallen 36% from its peak in October.  All of these benchmarks are trading at a much larger discount to the standard West Texas Oil price, which is down 30% from its high of $76.41.  So, as we can see, the higher cost unconventional oil supply sources are suffering the lowest prices.  No doubt, a double-edged sword.

The U.S. shale oil industry is in deep trouble as 75% of the companies are still suffering from negative free cash flow.  While I have written about this many times, one of my readers sent me the following article by Rystad Energy, MORE THAN 75% OF DEDICATED US SHALE OIL COMPANIES KEEP REPORTING CAPEX IN EXCESS OF CFO:

Essentially, the market is still not convinced that a typical shale oil E&P is able to grow in a self-sourced manner as more than 75% of dedicated US shale oil companies keep reporting capex figures in excess of cash flow from operating activities.

What is important to understand is that even with higher oil prices this year, three-quarters of the shale companies are still spending more than they are making.  Moreover, the U.S. shale energy industry has racked up nearly $300 billion in debt.  What happens if the oil price continues to slide during the winter months?  I have heard from someone in the industry that energy companies are already laying off workers.

If the oil price continues to weaken over the next 3-6 months, I believe the U.S. shale oil industry could be in serious trouble.  While the Alberta government cut oil production to save its tar sands industry, I bet my bottom dollar that good ‘ole fashion market forces will do the trick for pushing the U.S. shale oil industry over the cliff.

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25 Comments on "IT BEGINS… Rapidly Falling Oil Prices First Guts Tar Sands, Then Shale Oil"

  1. Mighty Bankers will buy them later and don’t worry about debt.It was created from nothing by Bankers.Their assets( Oil companies) are worth more than empty dollars!!
    The Bankers still need time to prepare and steal.

    • I think your comment is extremely wise, and few people really understand it. I have believed for a long time that many (banker) asset acquisitions have been taking place in plain sight right on the stock and other markets… they have been buying up everything with fraudulent fiat currency they print for free. The “valuations” they manipulate onto assets are there only for the theft from us (to pay us as little as possible) while the financial reports are a complete fraud and utterly meaningless for those who counterfeit currency and buy up everything hand over fist.With only perhaps 1 in 10,000 people noticing they bought up all the world’s infrastructure to enslave us all even more.

  2. The Hallmark Card is starting to cost more than the gift.

  3. Are we finally on the verge of the decoupling of PMs and Oil? Or will the lower price of petro products lower the costs of production and result in even lower PM prices?

    Thanks for another good one.

    • Oil price decline is only temporary as oil is the basic commodity for the economy. There will be one more price spike before oil becomes obsolete and its price falls to zero.

      • DisappearingCulture | December 4, 2018 at 5:58 am | Reply

        “… before oil becomes obsolete and its price falls to zero.”

        What on earth do you mean by that? Oil will not become “obsolete” because we need every BTU of energy from oil [like liquid fuels].

        • In the course of time oil extraction will become too energy consuming to be profitable. Humans will have to turn to other fuels or sources of energy.

          • Ed,

            Correct… I see humans turning to burn wood and cow dung. Low tech, but it works.

            steve

          • Yep. Which is why I think it is now imperative to do essential things like super insulate your home and cut out all the modern crap to reduce future energy needs, while also growing your own food and doing your own maintenance. I think times will get very tough in future and being lean is the way to survive.

  4. Hi Steve
    A small point.
    The Providence of Alberta in Canada is like a State in the USA.
    Unless I am mistaken it is the Providence that is mandating
    a cut in production not the Federal Government “Canadian government”
    above.

    • That’s ‘province,’ not ‘providence,’ though we could certainly use a hand from Providence. Steve has it right: the production cut is being mandated by left-leaning Alberta Premier Notley.

      I viewed a presentation in Alberta recently that addressed the wave of insolvencies in the Alberta oil patch (of which the OILsands are just one part). While the list of insolvencies is long already, and growing, it appears that the Alberta Energy Regulator is allowing an even larger list of companies to overstate their netback in estimating deemed assets of licencees, because if more realistic estimates were reported, it would cause the Licence Liability Rating of large numbers of operators to fall below a critical 1.0 rating, forcing the companies to post security with the AER to cover off future abandonment and reclamation liabilities, which would turn the wave of insolvencies into a tsunami. Alberta has more than one crisis to deal with. It would sure be nice if they could get some support from Ottawa (federal government).

      It’s fascinating that this stuff happens on the eve of a broader energy crunch. I’m still struggling with the dynamics of falling EROI and hope Steve will come back to it again.

      Thanks for another good article, Steve. Everybody, we need to support Steve by donation.

  5. LOL @ DARYL,
    Thanks for trying, it was a good effort for an American 😀
    (I’m half Yankee so kinda bilingual)
    It is similar to a state, but it’s a PROVINCE.
    Providence is more like relating to GOD, and I assure you Alberta politicians are not deity.

  6. The current state of the U.S. auto market paints a picture of oil & the global economy. Sales are way down, 0% financing & huge incentives still rule 10 years after the Great Recession. GM & Chrysler have been bailed out once & propped up for 10 years & counting. Their future is not what one would call “bright”. As deflation continues to strengthen across all industries, oil & real estate are showing us where we’re headed.

  7. Yeah, it’s the Alberta provincial government that cut the production, as it has jurisdiction over oil extraction. However, that doesn’t stop the feds to prop up the industry with tax dollars- on top of the province doing the same. I’ve heard a lot of talk about the demise of the tar sands for a long time , and will continue hearing it until the dirt nap (hopefully not too soon:-). Tar sands or shale extractors don’t need to make money. They get paid by existing. The fed backstops the banks, who lend perpetually to the drillers. Even if the drillers go bust, the fed just bails our the banks , overtly or covertly. Wash, rinse, repeat.

  8. Michael Kohlhaas | December 4, 2018 at 4:59 am | Reply

    The U.S. shale oil industry is toast!!!

  9. The economics of oil extracting will be propped up with fiat as long as printing is possible. Governments are cognizant of the alternative.

  10. Some probably won’t understand this but:
    There is more money in the calcutta than in the game.

  11. Three of the largest tar sands companies did and do NOT want what was done in Alberta. Exxon, Husky, and Suncor disagree with the cuts. All three, unlike every other producer of tar sands and SAGD products, have upgraders. Their products get a much better price than shipping dilbit! All three make billions of $$ in profits every year! All three came out publicly against the cuts! But still, none of the subsidies to tar include an upgrader – something many on the left (which does not include the current government!!!) have called for for years.

    • @ DBTurton: Does your sun rise in the west?! How could an Albertan be so uninformed about local politics? Notley’s New Democrat Party is EXPLICITLY LEFTIST. Go to the NDP website and read their platform. It practically DRIPS with leftism. Moreover, “Ye know them by their works.” See how they’ve ruined Alberta’s balance sheet: classic big-government socialism.

      As for the oil patch, can you please post statements to back up your assertion about unreported revenue? Alberta is drowning in big-government debt predicated on absent revenue, so if you have inside info, it needs to be exposed ASAP.

      The biggest travesty is the current federal and provincial government’s obstruction to any increase in export capacity, hobbled by anti-Canadian foreign lobbyists (see Tides Foundation) and ideology influenced by thirty years of anthropocentric “climate change” / “global warming” indoctrination. Building and expanding those pipes ought rationally to be recognized as a matter of national security, particularly in light of the looming crisis industry-wide and phased collapse of the petrodollar.

  12. Will these companies fall further into debt if they continue to cut production?

    Trying to artificially stimulate demand by cutting supply sounds like a no-win game

  13. Alberta oil only has one buyer. US refiners. Hence the steep discount and the extorted price fix. Currently the Prime minister of Canada has grand stranded on being a champion of the environmental movement and cancelled or bought all of the pipeline projects in the land locked province. Saudi tankers arrive daily on the east coast of Canada and not a word is said about that or the cancelled pipeline project from Alberta that would have replaced the Saudi tankers by the prime minister. The fact that mostly US owned oil sand companies are thriving even at this steep discount actually prove the complete opposite of your point in this article. I have been a fan of your perspectives for over a year now but find you are having a harder and harder time staying relevant putting your EROÍ template on all current market movements. After reading your views on a industry I have worked in for over two decades you are incorrect why the output was put into place. The supply has backed up with lack of pipeline capacity to point of insanity with no way to access other markets and the US companies which send this oil south is bypassing normal government royalties because of the discount price and the taxpayers are actually the only losers in this as the US companies are for the most part shipping there own oil to themselves and only paying what they want as they are the only customer and nothing is actually lost actually huge profits are realized once it reaches their refineries.

    • Marc Tarap

      It has taken me most of my life to learn; “I cannot assume” ANYTHING. It is the reason I like this website. I don’t always agree with Steve’s personal views BUT what I find interesting is his numbers, numbers that are generally taken from official sources and displayed in his unique form.

      I am not disputing your knowledge and experience within the industry BUT what you say from personal experience; is in conflict, with the chart above“. TRUE?

      “MAJOR DECLINES IN VARIOUS SPOT OIL PRICES 2018”

      • Yes I agree the charts do show a decline. I also like Steves impressive ability to share his vast knowledge for the greater good I only mean to challenge him with his EROI theory as I am growing Skeptical of his doom prediction in a fiat monetary system where the real powers dont actually hoard the dollars they print the money as needed In my opinion. Thus being said the given values of energy are not important only the ability of the leaders to force us to work keep maintaining the status quo. I felt the point needed to be said that tarsand oil is able to compete with Ither north amercian producers just fine if the market was on the same level playing field and Canada wasnt hamstrung by our current government in bringing in more pipeline capacity which is very unfortunate and a serious pitfall. I do agree however that obvi the oil price has fallen but I believe it was the lead up to the Iranian sanctions commencing, potential syrian conflict escalating and then dropping on no real disruption after the realization no further dramatic events transpired alongside with output gluts all around. I would like to add I have admiration to Steve and the platform for discussion he has created and from readers such as yourself who I have learned a great deal. Just wanted to challenge Steve on his EROI theory which im on the fence about.

        Regards,

  14. Well it seems mr. St. Angelo’s forecasts were right and so oil prices were poised to fall. I thought oil prices had to rise because the oil sector cannot survive much longer with such low prices but I was probably wrong. Oil prices may not rise again because oil’s EROI is falling fast and demand is simply too weak. Are we seeing the beginning of the collapse of the once mighty oil sector ?
    I fear we are going to live very interesting times.

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