THE U.S. SHALE OIL INDUSTRY: Swindling & Stealing Energy To Stay Alive

While the U.S. Shale Energy Industry continues to borrow money to produce uneconomical oil and gas, there is another important phenomenon that is not understood by the analyst community.  The critical factor overlooked by the media is the fact that the U.S. shale industry is swindling and stealing energy from other areas to stay alive.  Let me explain.

First, let’s take a look at some interesting graphs done by the Bloomberg Gadfly.  The first chart below shows how the U.S. shale industry continues to burn through investor cash regardless of $100 or $50 oil prices:

The chart above shows the negative free cash flow for 33 shale-weighted E&P companies.  Even at $100 oil prices in 2012 and 2013, these companies spent more money producing shale energy in the top four U.S. shale fields than they made from operations.  While costs to produce shale oil and gas came down in 2015 and 2016 (due to lower energy input prices), these companies still spent more money than they made.  As we can see, the Permian basin (in black) gets the first place award for losing the most money in the group.

Now, burning through investor money to produce low-quality, subpar oil is only part of the story.  The shale energy companies utilized another tactic to bring in additional funds from the POOR SLOBS in the retail investment community… it’s called equity issuance.  This next chart reveals the annual equity issuance by the U.S. E&P companies:

According to the information in the chart, the U.S. E&P companies will have raised over $100 billion between 2012 and 2017 by issuing new stock to investors.  If we add up the funds borrowed by the U.S. E&P companies (negative free cash flow), plus the stock issuance, we have the following chart:

Thus, the U.S. E&P companies tapped into an additional $212 billion worth of funding over the last six years to produce uneconomical shale oil and gas.  Now, this chart is an approximation based on the negative free cash flow (RED color) from the four top U.S. shale fields and the shale equity issuance (OLIVE color).  So, how much money would these U.S. E&P companies need to make to pay back these funds?

Good question.  If we assume that the U.S. shale oil companies will be able to produce another 10 billion barrels of oil, they would need to make $21 a barrel profit to pay back that $212 billion.  However, they haven’t made any profits in at least the past six years, so why would they make any profits in the next six years?

Okay, now that we understand that the U.S. shale industry has been burning through cash and issuing stock to continue an unprofitable business model, let’s take it a step further.  If we understand that the U.S. shale energy industry is not making enough money from producing the oil and gas, then it also means that it takes more energy to produce it then we are getting from it.  Sounds strange… but true.

We must remember, investors, furnishing U.S. shale energy companies with funds are another way of providing ENERGY.  These U.S. shale energy companies are taking that extra $212 billion (2012-2017) and burning the energy equivalent to produce their oil and gas.  For example, it takes a lot more water to frack oil and gas wells.  To transport the water, we either do it by truck or by pipeline.  While this extra water usage is a Dollar Cost to the shale energy industry, it is really an ENERGY COST.  Think about all the energy it took to either transport the water by truck, or the energy it took to make the pipelines, install them and the energy to pump the water.

Moreover, if we add up all of the additional costs to produce U.S. shale oil and gas, the majority of it comes from burning energy, in one form or another.  Again, investor funds translate to burning energy.  Thus, the U.S. shale industry needs more energy to produce the oil and gas than we get from it in the first place.

Unfortunately, investors don’t see it this way because they do not realize they will never receive their investment back.  It was spent and burned years ago to continue the Great U.S. Shale Energy Ponzi Scheme.

Let me put it in another way.  The U.S. and world economies are based on burning energy.  When we burn energy, we create economic activity and hopefully growth.  If the U.S. shale energy industry needed $212 billion more to produce the oil than they made from operations, then it means it burned more energy than it sent to the market.  Do you see that now??

So, the U.S. shale energy industry is STEALING & SWINDLING energy wherever it can to stay alive.  This is the perfect example of the Falling EROI (Energy Returned On Investment) forcing an industry to CANNABLIZE itself (and the public) to keep from going bankrupt.

Lastly, as time goes by the U.S. shale energy industry will behave like a BLACK HOLE, by sucking more and more energy in order to produce even lower and lower quality oil and gas.  At some point, the shale energy industry will collapse upon itself leaving one hell of a mess behind.  While it’s hard to predict the timing of the event, it will likely occur within the next 2-5 years.

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45 Comments on "THE U.S. SHALE OIL INDUSTRY: Swindling & Stealing Energy To Stay Alive"

  1. Thank you Steve.

  2. As long as USA have world reserve currency , they will print money from nothing.
    They have trillions of debt, so another $212 billion , that’s no problem for them.
    At the end , industry and crook system will collapse , but many people have to wake up first , because they see what is happening and they do nothing , I mean politicians etc.
    It’s shocking !!??

  3. thanks Steve…..you’re (it almost seems) the only hope we have…..it sounds ironic because what your’re saying is bleak….however, we need to hear it, because it is reality…..without admitting the reality of the situation to ourselves we can’t begin to address the problem……we can start with ourselves by acknowledging that wants DO NOT equal needs and act inline with this tenet….or we can just read the webot report and be transported to a magical Disney world where everything will be ok, where there is always someone to rescue us….

  4. This is utterly insane and reminds me of a quote attributed to P.T. Barnum “There is a sucker born every minute”. And it appears that they have all been buying the energy stocks. Not that any other stocks are much better, Amazon and Netflicks lose money on every transaction. The insane part is how cheap gold and silver remain.

    So the big money question remains “When is the FED tightening going to reach critical mass and blow up the whole house of cards?”

    Pf you don’t hold it you don’t own it. Buy for cash and stash.

  5. Steve,
    Can you some quantify in energy terms the rough amount of energy that is wasted in shale oil. Given that eroi is about 5 to 10 for these wells, it means they must produce some net energy. Dollars do not necessarily correlate to energy expense. They could have some very expensive labor or lawyers, etc. I think if shale oil were an energy losing enterprise it would have been shut down years ago. Even then, by the looks of it these are very poor investments. Only a fool would buy them.

    • Eddy,

      Please see my comment to Dave below. Again, we fail to understand that if the Shale Energy Industry continues to need more MONEY than they make from operations, then they are burning more energy than they are delivering to the market.

      MONEY = ENERGY.

      We can’t see this because all that MONEY that is being used to supplement the Shale Energy Industry is ENERGY IN DISGUISE.

      Do you see that now?

      steve

      • EnergyInDisguise | December 27, 2017 at 1:46 pm | Reply

        Indeed, more and more ENERGY IN DISGUISE is what the market must be heading for, no doubt of it, or the laws of physics are wrong – Energy=Money, resource depletion is a lie and money CAN manufacture finite fossil fuel resources!
        Potential disguising scenarios are already in circulation on the web since 2012 and earlier. The one I remember claims that by 2022, OPEC is better to be made slowly converting into OPEM[ilitias], like how control over Iraq’s vast oil reserves is being systematically handed to local armed tribal groups for years now. Saudi is expected to be the next, where the 5 m/b a day domestically consumed crude oil supplies are better to be de-routed to exports, maintaining stability in the energy market and the style of our world for the coming 15 years.
        When ME armed groups take over exports (like in Libya today), UN sanctions. Warlords sell the oil for $1 a barrel smuggled (like what happens with Syrian oil today). Bitcoins becomes the Bitrodollar.

        Smuggled oil can then be blended with US, Canada and UK shale/sand oil rendering it suitable for transportation and other applications. US and UK and very few other countries may become the major oil re-export hubs in the coming 10 years, displacing today’s Saudi, Iraq and maybe Russia.
        ENERGY IN DISGUISE is Money and one cannot overestimate humans’ ability so solve Energy problems!

        • EnergyInDisquise,

          Nice screen name. Where did you get that from?? Just to make sure I follow your line of thinking, you believe in Peak Oil and the Falling EROI… correct?

          steve

          • EnergyInDisguise | December 28, 2017 at 3:34 pm |

            I got my ‘EnergyInDisguise’ name from your article!

            If crude oil reserves are self-generating and never deplete, how they know the extent to how much they self-generate and stop, just to satisfy current humans’ needs but not any more than that – so they don’t keep self-generating and fill oceans with crude oil?

            Since the 1914 invasion of Iraq by Britain, it is now strongly felt that our collective evolutionary psychology as humans might be, actually, driving us to deplete all easy oil resources the fastest possible, being too strategic to be left accessible for the masses.

            In the last few days, news have come up on new contracts with the Chinese to extract oil from East Baghdad oil field in Iraq, estimated to have 8 billion barrels, despite that Iraq currently exports more than 4 million b/d + all non-accounted-for smuggled supplies (Iraq has very poor grid electricity supplies since 1991, if at all).

            Testing wells have been drilled there since the 1970s and 1980s but the oil found then is high in sulphur and other corrosives. Testing volumes have damaged then components in the local refinery.

            What drives us to exploit such an oil field just to help China produce higher and higher mountains of bed-fluffy teddy bears and other junks sold in $1 shops around the world, generations of badly designed and produced useless 3D printers, useless drones, useless cars, severely defected solar panels, defected wind mills, defected invertors and transformers, defected backup power generators, tyres, pipes, shafts, cables lights – and the list goes on and on?

            Below I leave a video from a Russian car body repairer demonstrating how Chinese products are so poor they are not fit for installation in any life-critical applications such as cars. You can see how much energy was wasted in making the useless heavy part, energy put in its handling and transportation, too (sorry, the video is spoken in Russian).

            Are Chinese products only? No, products from everywhere, even German car engines and other components are miserably failing after no time in operation – widely reported in many geographies.

            Since the 2008 financial crisis, it became in the public domain that money CAN be synthesized at will. The question is, why not synthesized as much as the ‘synthesizers’ wish and distribute them the way they like but leaving finite oil reserves, farming lands, water resources and the rest of the environment alone – only sensibly and safely used?

            Why real energy-intensive fake dynamics are needed to create wealth when money can be improvised at will?

            Why only burning energy in the air, drilling empty oil wells, burning good oil for bad and polluting the environment unnecessarily – give the sense that a real positive work is done and real value is created, when no useful work is done and huge negative value is caused?

            Humans are very weird creatures, indeed!

            Chinese car part that is very poorly made – Video

  6. As M. King Hubbert (1962) shows, Peak Oil is about discovering less oil, and eventually producing less oil due to lack of discovery.
    https://imgur.com/a/6dEDt

    IEA Chief warns of world oil shortages by 2020 as discoveries fall to record lows
    https://www.wsj.com/articles/iea-says-global-oil-discoveries-at-record-low-in-2016-1493244000

    Peak Oil Vindicated by the IEA

  7. I have to agree with Eddy. It is true that more resources have gone into each well in terms of proppant and water, but well productivity has also increased markedly. If you have any data to prove that these wells are net energy negative I’d sure like to see it. Others have suggested that the net energy return is quite high. See for example Brandt et al. on the Bakken field who state “The total energy consumption is of order 1.7% of the energy content of produced crude.”
    https://greet.es.anl.gov/publication-bakken-oil

    • Dave,

      Thanks for your comment. Yes, I have seen studies showing higher EROI’s, such as Brandt. But, if we are looking at the financials, we can plainly see right in front of our eyes, that if the Shale Energy Industry needs additional funds, over and above their cash from operations, then we must construe that to mean the industry is burning more energy to produce the oil than they are sending to the market. We just can’t see it because the ENERGY BEING BURNED is hidden in VARIOUS LINE ITEM COSTS.

      Furthermore, the notion that well productivity has increased may be a bit of SLIGHT OF HAND, or magic. According to Nick Cunningham’s article, “Shale Growth Hides Underlying Problems,” he stated the following:

      Rystad looked at two counties in particular – Karnes and De Witt – where infill drilling was especially dominant. In these two counties, the IP rates increased sharply between 2011 and 2016. In 2011, the IP for a new well in De Witt County peaked at about 500 barrels per day (bpd), a figure that nearly doubled to 900 bpd by 2016. Based on that, it appears that the shale industry has become dramatically more efficient, and it suggests that if such breakthroughs can be replicated, U.S. oil production can continue to climb.

      But the huge gains fizzled after the first few months. Rystad concludes that when taking into account the first full year of production, not just the first month or two, the 2016 wells only resulted in an additional 40,000 barrels of oil compared to the 2011 wells. By the second year of production, the newer wells do not outperform the older ones at all. In other words, the 2016 wells had a stronger burst of output right away, but that was offset by steeper declines as the year wore on. “By any means, this cannot be classified as a significant uplift for the well ultimate recovery when considering a 100 percent increase in the peak production rate,” Rystad concludes.

      Rystad even looked at a specific lease held by Marathon Oil. The first well drilled in 2012 had a peak IP rate of 35,600 barrels of oil equivalent per month. 13 months later that flow fell to just 8,000 boe per month.

      By 2016, Marathon came back and drilled more wells armed with new knowledge and drilling techniques. It drilled longer laterals and used much more frac fluid. Only four of the completions outperformed the older ones, and on average, the IP peaked at 32,500 boe per month (less than the older average) and declined to just 8,000 boe per month in seven months as opposed to the 13 months the first time around.

      In other words, Marathon drilled more aggressively in 2016 and arguably came up with less impressive results.

      —————————

      Again Dave… if we break down EVERYTHING to its ROOT, then water, fracking fluid, proppant, extra pipe, and so and so forth, can be seen as EXTRA ENERGY. I imagine you would agree that these additional items were not manufactured out of thin air by energy fairies.

      We must look at the shale energy industry like a physicist would. Break everything down to ENERGY. It took one hell of a lot of energy to produce pipe, proppant, etc. We just don’t see it as energy because it is shown as VARIOUS LINE ITEM COSTS or CAPTIAL EXPENDITURES on the financial statements.

      steve

      • Steve,

        You say: “if the Shale Energy Industry needs additional funds, over and above their cash from operations, then we must construe that to mean the industry is burning more energy to produce the oil than they are sending to the market”

        WHY? The issue is energy expended vs energy returned, not dollars expended vs dollars returned. If you can point to actual tabulations of energy expended vs oil recovered, such as some of the other studies out there, and it proves negative, then I’ll believe you. But so far I have yet to see any convincing evidence.

        Dave

        • Dave,

          I look at DOLLARS as ENERGY. For example, when a Gold Mining Company purchases (10) large CAT 797F Haul Trucks to move the gold ore, they list that as a Capital Expense. However, you would agree that that CAT 797F Haul Truck, that includes (4) tires 13 feet tall, is the product of a great deal of ENERGY. We don’t see the energy that is consumed in the total process, only the diesel that is burned by the CAT 797F Haul Truck in the transportation of the ore.

          However, the raw materials that were extracted by the mining industry, then transported, then the thousands of parts manufactured in many plants, then transported to the final assembly plant and then the CAT 797F transported to the actual Mine… CONSUMED ONE HELL OF A LOT OF ENERGY. Again, the CAT 797F Mining Truck was not made by Star Trek Replicators or Energy Tooth Fairies.

          Because you do not extend the TOTAL ENERGY COST to its ROOT, you don’t see that MONEY = ENERGY.

          While it is true that the shale oil industry is growing production, you also are quite aware that is based on massive amounts of capital, which comes from the burning of a lot of energy. Furthermore, due to the massive decline rates in the shale industry, Capital expenditures now behave more like Production Costs. I no longer look at Capital or Funds as MONEY, but ENERGY, in one form or another.

          I gather we will have to agree to disagree on this one.

          steve

          • Steve,

            The analysis you are talking about is full life cycle analysis of a we’ll. It is a difficult one. Here are some factors.

            1. Finding costs. Surveys, wildcatting, engineers, etc.
            2. Equipment construction. How far back do you take this?
            3. Well and field costs.
            4. Production costs.
            5 transportation costs.
            6. Refinery costs
            7. Reclamation costs.

            I think the environmental protection agency tried to do this analysis in the spirit of greenhouse gas emissions. Some of this data may be out there.

            In summary, I think Bedford hills got it right.they look at the whole system on only shale wells. I think it takes an eroi of 8 to maintain the system that we got. Once it gets too low we are in dead state. I think that is all we can say given the data we have.

          • Eddy,

            You are correct. You bring up some excellent additional information. Yes, if we include all the additional costs that are necessary to produce oil, we will see how much lower the EROI has fallen.

            Unfortunately, some people (you not included), do not understand that if the Shale Energy Industry is spending $200+ billion more to produce oil and gas than they made from operations, then that translates to burning more energy to get the energy than what the energy is worth.

            This is the perfect definition of the DEAD STATE.

            steve

  8. Great article Steve,
    It would not surprise me if the Federal Government comes to the rescue(our taxpayer money at work) of the E & P companies under the guise of “emergency measures”.

  9. Steve, Dave and Eddy make good points. Not all of the dollar input into drilling and completing a well is directly convertible to energy. Some can be calculated. There is the direct fuel cost of the rig, trucks etc. That is fairly straightforward to calculate. One could also calculate the energy needed to manufacture the pipe, trucks, drill rig, and other equipment and parts. That total energy would need to be divided by the number of barrels of oil or MCF of gas produced over the life of the equipment. One could come up with a reasonable figure for that. But how do we calculate the energy use of the labor costs? You have the salaries of the well crews themselves plus the labor costs of all the administrative workers. It is not easy to calculate the BTUs they expend that only relates to each well and barrel of oil produced. There are also energy costs for the overhead of labor costs. Things like travel to the work site, constructing and maintaining office buildings etc. That is not easy to calculate.

    You have demonstrated that shale oil and gas producers have lost money over the last several years. You have not proven that more BTUs are expended to produce each barrel of oil or MCF of gas than the BTUs available from the produced barrel of oil or MCF of gas.

    Here is an illustration. Let’s say I hire someone to cut down trees on my woodlot, buck them up into 18 inch lengths, split the rounds, and then stack the firewood. Let’s say I pay him more to produce the cord of wood than I sell it for. I’ve lost money. But that doesn’t prove that my woodsman expended more energy to produce the cord than the cord of wood can produce in heat.

    • Paul,

      Apples and oranges. It really doesn’t matter what you sell the wood for, it is not about the money. What matters is how much energy, from all sources, that the woodsman used to produce the stack of firewood and how much energy you can get out of the wood when you burn it.

      As with oil/gas this is the easy part
      ” A standard cord of well-seasoned hardwood (stack of wood 4’X 4’X 8’ or 128 cubic feet) contains the heat equivalent of about 20 million BTU’s. By way of comparison this is more or less equivalent to the heat value in 145 gallons of #2 fuel oil or 215 gallons of LP gas.” http://msue.anr.msu.edu/news/how_much_heat_energy_is_in_firewood

      The hard part is calculating ALL of the energy inputs for the removal, processing and delivery to the end user. Write them all down, prorate over the life of the equipment (productive life in amounts not time or money), add them all op. Compare the easy to the hard to see how you came out.

      Good luck.

      • SteveW,

        I felt when the statement “energy required for transportation, drilling, pumping and other operations, plus sustaining the continuity of manpower involved, also the energy required not only to make those above pieces moving, but the energy that makes their industrial base and infrastructure available” – is mentioned, I feel a new, wider concept in thermodynamics that’s been published recently is being unknowingly touched on:
        https://the-fifth-law.com/pages/press-release

        • Paul,

          The Fifth Law may in fact be true but will depend on the definition of the word “device”. It may apply to nuclear power plants, cold fusion reactors, hydrogen production plants and every other device designed to transform substances. The critical difference is the transformation.

          I would suggest that mining doesn’t employ “devices” but only employs tools. A simple example is a guy that takes a shovel and digs in an open coal seam. He gets far more energy out for energy invested, including the shovel.

  10. Wow Steve! We are at a crossroads here. I own 3 MLPs and one carries Nat Gas, NGLs and crude. Their balance sheets are terrific. The Permian yielded 1 million barrels in 2008 and as of December 2017 yielded 2.7 bpd according to EIA. They project in January 2018 to increase by another 68,000 bpd. They have 4 NGL lines and are cutting one back to carry crude. All of this even though Bakken and Eagle Ford becomes immaterial. They forecast a growth trend line for the next 20 years. I’ve owned these MLPs for 5 years plus and average 6.5% dividends with growth. Their P&L statements show profits. Their balance sheets are great. Can’t you see that
    you are 20 years too soon with your doom and gloom?

    • Joe Lindell,

      Good for you. As long as you are making profits, then the hell with everyone else. Excellent way of thinking.

      Okay, do me a favor, will you? The next time you see your grandkids, look at them DEEP IN THEIR EYES and tell them that ole Granddad won’t have to worry about the dire energy problems in the future, but they will.

      Let’s see how well that goes over. Nice way to being thoughtful of future generations. No worries, that is the sort of short-term selfish thinking that has infected much of the population today.

      steve

      • What kind of response is that? Just because I made a profit doesn’t mean I don’t care. I bought my grand children 10,000 ounces of silver and you knew that. All I’ve been trying to get through to you you is THAT I BOUGHT IT 20 years too soon. Silver is at $16 for a darn good reason. And it will remain there or in the teens for another 10 years at least. Your EROI story is way too soon and like everyone else I’m sick of hearing about peak oil. That story
        is already 30 years old and counting.

    • DisappearingCulture | December 27, 2017 at 9:34 am | Reply

      Joe is a moron. A repetitive one at that.

      • Thank you. Those of you who listened to Steve, Cloud and such have lost money in silver every year for the past 7 years. Last year instead of silver I bot MLPs and I’m up
        35%. Not bad for a moron? Or should I ask “Who is the moron?”

        • Last yr instead of silver I bought cryptos in May and up 1500%. There’s always a better game, trick is to know when to get back into silver.

        • DisappearingCulture | December 28, 2017 at 4:07 pm | Reply

          Perhaps moron is too strong of a word. Maybe obtuse or bitter is better. I don’t think Joe really reads what Steve posts. Maybe he skims over it. But then he posts the same lines of thought [belief], which are purely opinion, apparently based only on frustration that his silver holdings have not gone up in dollar value since serious price manipulation kicked in circa 2011/2012.
          Good for him that last year he bought something that has brought a return. I haven’t considered silver an investment for quite some time, but in time it will be seen as an investment…maybe a couple years; not a couple decades as he flippantly throws out on virtually every post. By saying it will take a couple decades for silver to go up in price, and that he bought it for his grandchildren, he somehow feels better about its lack of investment performance since he bought his.
          That doesn’t mean Steve is wrong about EROI, or that silver production is down, or that there is a bubble in almost every conventional asset class. From what I read here Steve recommends PM’s as a store of value, not as an investment.

  11. Eddy,
    Another way to look at it instead of questioning whether $ = energy and whether the EROEI is negative is this: the economy cannot generate a sufficient economic return from the activity powered by the shale oil delivered to the economy to pay the true cost of the shale oil, but had to burn/cannibalize $212 billion in equity and borrowing over the last five years in order to get that oil. Shale oil does not generate sufficient return from the economic activity powered by the oil to pay for itself! This is a pretty bad state of affairs. We are cannibalizing accumulated savings from past activity in order to keep the shale oil flowing, but that strategy has a limited life span. At some point, the equity investors and lenders will realize that those funds aren’t coming back, let alone any return on them, and the only way left to fund shale operations will be for CBs to directly purchase Shale OilCo bonds and bail out the Shale OilCo loans that their client banks lent by buying those bad loans from the banks.
    If, on the other hand, we cease shale operations, it will be obvious that we have passed the point of peak oil and that we have noticeably fewer barrels of oil each year. Shale is the only thing keeping production on a relative plateau. Ceasing shale production will likely bring about an economic crash because everyone will then realize we have declining energy stores, so all those stocks and bonds bought on hopium for a rosy economic future will lose a lot of value. Massive losses of apparent wealth, massive bad loans.

    • Tagio
      I agree that the shale oil biz cannot continue for long as a going concern. Low interest rates are saving it. However, costs vary all over the the place. One important variable is the demand for the products. You really have tough problem solving on a net energy balance.

      I think all we can say is the system itself is vulnerable at too low an eroi. I suspect that number is around 8 and below. Thankfully we are still higher than that, but it is from legacy fields only.

  12. Shale has a significant history, and one that clearly demonstrate the material realities on which it rests. Indeed, encouraging shale production was one response to the oil price shocks of the 1970s. Wanting to reduce American dependence on foreign oil, the Carter administration initiated a programme to develop ‘synfuels’ that focused first and foremost on shale.

    This shale project attracted significant investment from oil companies, and production began in the late 1970s in the Green River Formation, which straddles Colorado, Wyoming and Utah and contains the largest shale oil deposits in the world. But when the price of oil crashed in 1982 at a time of relatively high interest rates these projects were rendered unviable. (Hirsch et al. 2005) (Yergin 2012)

    -Thompson, Helen. Oil and the Western Economic Crisis

  13. Here is another way to look at the energy expended to produce oil and gas from shale, compared with the energy the oil and gas yields. Ten years ago when shale oil and gas production was just beginning, how many millions of barrels of oil per day were we importing? Now with shale oil being produced, how many millions of barrels of oil per day are we importing? We are importing several million barrels per day LESS than we were before shale oil was being produced in any significant quantity. So we have a net energy gain. If it took more energy to produce shale oil than the energy the oil yields, then our oil imports would have had to go up to make up the difference. They haven’t gone up. They have gone down.

    Let’s look at natural gas. In 2010 we were a significant net importer of natural gas, much of it from Canada. Now in 2017 we have significant gas production from shale. We are no longer a net importer of natural gas. Our exports to Mexico by pipeline and our LNG exports exceed our imports from Canada by 1 to 2 BCF per day. Again if it took more energy to produce the shale gas than the energy the shale gas yields, our imports of natural gas would have to have gone up. They haven’t. The net imports have swung over to modest net exports.

    Also in the interval from 2010 to 2017 our coal production has gone down. Several nuclear power plants have closed. Despite the decrease in energy produced from coal and nuclear, our natural gas and oil imports have declined. That is a net energy gain.

    Now I’m not disagreeing with the economic facts and interpretation that Steve has put forward. These companies have lost money as he demonstrated from the free cash flow.

    The other issue I’m not addressing is how long the shale oil and gas reserves will last. If we are about 10 years into it, I’m not claiming there is 90 years left to agree with the 100 year supply of shale natural gas. My rough estimate is there is about 20 years of significant supply left to be produced from the Marcelus and Utica shales.

    I concur that the United States does need to develop renewable energy sources that do indeed produce a net energy gain. Renewables that consume more energy than they produce are not the answer.

    • Exactly Paul. There have been several studies by reputable scientists that show shale has a fairly high EROI. Shale production is now over 5 mbd. Steve is telling us that we are spending more than 5 mbd to produce it, yet that doesn’t show up in any stats. The US is consuming less oil overall than when the shale boom started in 2005 and as you say importing a lot less. The stats on profitability of shale companies are correct but going from there to saying shale is net energy negative is a wild stretch not supported by the data.

      • Alfred (Melbourne) | January 3, 2018 at 12:56 am | Reply

        Paul & Dave,

        The reason we all deal with one another using money and why we employ accountants is because that is the best measure we have of resource utilisation.

        The fact that shale is bleeding cash and has been doing so for many years means that it is energy-negative. Pretty obvious, I would have thought.

  14. Is anyone familiar with the work of Richard Koo? All this talk about oil vendors making or losing money makes me think that the oil market right now is in what Richard calls a “balance sheet recession”. Except rather than this applying to other industries- like retail, manufacturing, or construction, this applies to the specific case of oil. Oil producers have such a bad situation underlying their viability and current profitability that they are effectively lost in a race to the bottom, and they need to be subsided to avoid massive state bailouts and defaults on underlying government bonds that these cashflows are tied to.

    How hard is that to imagine? They already recognize the pervasiveness of a balance sheet recession in several western economies. It is an ongoing and persistent phenomenon.

    Trading oil for debt is a perfect wash. For now.

  15. An example; a country is importing 100 barrels of oil a day. A company wants to make money by exporting some oil it discovered. It produces 10 barrels a day but uses 12 barrels to get it. During this time the country goes in recession and uses only 85 barrels a day, excluding the 12 the oil producer uses. The total used by country is 97 barrels a day with 10 barrel export and 97 barrels import. Hey, its importing 3 barrels a day less, so our new oil must be giving back more than its using. Wrong. That’s why you can’t look at one part of system, you need to see whole, but in reality it is impossible to seperate oil used by oil companies from entire oil usage. I believe profits of oil producers is best way to see eroei. I’m sure by now the costs, and thus energy usage, of these companies are as efficient as possible. If every person in a country was working to produce, or support, oil production I’m sure production would increase, but a lot of other production in country would go away.

  16. William J Sturm | December 30, 2017 at 5:26 am | Reply

    Same thing digging a deeper hole National Debt. The answer is probably solar which
    will stress the supply of silver. Will silver hit $1,000 an ounce before oil hits $1,000 a barrel?

    wild bill

  17. Very few talk about the quality of shale oil . Shale oil as comes out now is above 45 API . This is not oil . This is condensate . It gives no middle distillates which are gasoline ,Diesel and ATF where the refineries make profits . This can only be used as a refinery feed stock or a dilutant to enable the flow of thick heavy oil . The net USD that accrue to the driller after discounting (this is not oil), paying transportation (no pipelines) ,LOE etc is barely USD 20 per barrel .No body makes a profit at that price . In my opinion TPTB know that the oil must flow AT ALL COSTS . Better a slow bleeding of the oil economy than an immediate total collapse of the non- oil economy . Of course if the non- oil economy crashes ,the oil economy will follow . It is a ^Catch 22^ .

  18. Thank you for bringing attention to fresh water issues, particularly in West Texas. It is becoming an issue that I do not believe the shale oil industry is going to be able to skate much longer: https://www.oilystuffblog.com/single-post/2017/12/16/Oil-or-Water-

    Keep up the good work, Steve.

    Mike Shellman

  19. Thanks for the article, Steve.

    I would like to point out that although shale has lost money at an oil price of $50-$100/ barrel, it does not mean that it is net energy negative. It only means that the oil price is too low for it to be profitable.

    Let’s say that the oil price rose to $200/ barrel. At this point, shale becomes profitable. However, the cost to society is huge, because at $200/ barrel, we cannot support a rapidly growing global population of 7.5 billion people. Maybe only 4-5 billion people. But in this case, the EROEI of shale is still positive (let’s say 6:1), but at this rate, our society would have to face a significant downward adjustment in living standard expectations in order to continue as is.

    As BW Hills put it; even though shale loses billion of dollars a year, its presence essentially has dropped the global oil price by about $10/barrel. This discount represents a subsidy to the refiners, and in turn, the end customers like you and me, by giving us a lower price at the pump. So essentially, the banks are subsidizing shale, but they are essentially subsidizing the entirety of the mid and down- stream markets as well (such as Mr. Lindell above with his profitable MLP’s). Which I guess is why the big bankers continue to push the story in order to keep the whole economic machine running.

    Please keep putting out stories like this, I will join Patreon at some point.

  20. ROBERT G. DEARDORFF, J.D. | January 6, 2018 at 6:44 pm | Reply

    Please let me interject in this debate on finding another form and place for water. I’d like to see the U.S. continue to develop all forms of energy including shale. Why?
    We have trust Big Oil all the days of my life and they have done nothing but lie and cheat us. But I want to talk about where we can get all the fresh water in the world. An unlimited supply of water in the billions of gallons per day for each state in the union. This would include all of California, Nevada, New Mexico, Colorado, Utah, West Texas, Oklahoma, and Idaho with Montana too. The greatest reserve of fresh water is the Artic Ocean. Bring it on, if we can have a Valdez, Keystone Pipeline we can easily have Artic Water Fresh Water. Pipeline just like the Roman’s and Greek’s did build aqueducts across Canada. This would easily supply all the fresh water California would need for all the row crops, plus grapes for wine and California vegetables. Oh, before you attack me and the concept please know that the hydraulic engineering necessary to build the aqueducts was completed in 1955. You won’t believe who did the engineering? The Department of the Interior, Bureau of Reclamation, Corp. of Engineers (the U.S. Army).

  21. dry hole dutton | January 8, 2018 at 5:37 am | Reply

    not that it means much, but i have been saying this for years. i’m just relieved to see i might not be as delusional as i once suspected.

    one topic the author didn’t touch on is the havoc, wrought by the shale ponzi scheme, on conventional oil industry; most notably, the engineering sector. academic studies report that between 77k, and 105k, u.s. oilfield engineers have become unemployed as a result of the pernicious drop in oil prices. these individuals possess highly specialized capabilities, and abilities; ones which are not easily replaced, or re-acquired.

    should, as the author suggests, the shale bubble ultimately collapse, the destruction of the conventional oil industry will be doubly problematic as there will scant engineers available to fill positions needed to ensure reliable energy production capabilities at a time when oil price must necessarily rebound due to diminishing shale production rates. the resulting spike in oil prices could derail burgeoning global economic recovery, and imperil agricultural capacity. jack perry’s, the coming famine, paints a dim future should the perfect storm of falling production, and rising prices be simultaneously realized.

    i can’t predict what will happen in the coming months/years with any certainty, however, i will go out on a limb and predict that future generations of economists will lambast the fed’s zirp, and quantitative easing policies.

  22. I am the originator of the term EROI (In 1970s…originally for fish!) and have (arguably ..even by me) undertaken the most and perhaps best analyses. ( google “Charles Hall energy”.)

    Undertaking good EROI studies is arguably as important as good financial studies, but we have only a few people capable of doing the former compared to thousands or millions of the latter. There is no federal support for this and needed federal data quality is declining.
    If you are wealthy and want t o help fund the next generation of graduate students well trained scientifically to do this contact me at chall@esf.edu. If you want to learn more about EROI and it’s relation to our economy check out our books: Energy return on investment: a means of integrating biology, economics and sustainability. And also the more detailed: Energy and the wealth of nations: an introduction to Biophysical Economics (second edition in Feb 2018) both available from Springer or Amazon. If you write a review for a journal or well-read site I can get you a freebie. We need to reach the financial as well as scientific community.

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