U.S. Producing A Lot Of Natural Gas, But Still Not Any Making Money

Even though the United States continues to produce a lot of natural gas, the energy industry is still struggling to make any money doing it.  This is likely the reason that U.S. natural gas production has finally declined this year versus the peak in 2016.

While the Mainstream media continues to promote “Energy Independence” and that the U.S. will be a major exporter of LNG, Liquid Natural Gas, it is difficult to do so if production starts to decline.

Yes, it’s true.  According to the data put out by the U.S. EIA, Energy Information Agency, U.S. natural gas production peaked at 92 billion cubic feet per day (bcf/d) in February 2016, and declined to 89.6 bcf/d March 2017:

Now, the EIA estimates that U.S. natural gas production will likely increase to 93 bcf per day in 2018 due to increased drilling and higher prices.  It will be interesting to see if their forecast materializes.  However, the companies producing natural gas in the U.S. continue to spend more money on CAPEX – Capital Expenditures than they receive from cash from operations:

This chart is very easy to understand.  The data in the chart is from 22 U.S. natural gas producers.  The green line represents what they are spending in capital to drill the wells to produce the gas, while the brown line shows how much cash they are making from operations.  Normally, the operating cash has to be high enough to pay for the capital expenditures or the there is a deficit.

So, if the companies are making enough operating cash to cover their capital expenditures, the brown line should be located above the green line, but as we can see…. it isn’t.  Thus, these 22 natural gas companies continue to fork out more CAPEX then they are making from their operating cash.  Which translates to NEGATIVE FREE CASH FLOW.

However, these companies negative free cash flow margin has declined as the two lines are now closer together.  This is due to a reduction in CAPEX spending by these companies.  When companies reduce their CAPEX spending, then it becomes quite difficult to increase production.

Unfortunately, many of the companies have already exploited the SWEET SPOTS in many of the Shale Gas Fields.  So, it is going to be increasing difficult to increase production as they move out to the less profitable and less economic wells outside the sweet spots.

Americans have no idea that they have been SOLD A FAIRY TALE about “U.S. Energy Independence.”  At some point, U.S. oil and gas production will decline in a BIG WAY… for good.  When this occurs, it is only a matter of time before our way of life becomes unsustainable.

We will notice the SYMPTOMS about the same time the U.S. Pension and Retirement Markets start to experience huge problems with funding and benefit payouts.

If you haven’t considered putting some of that soon to be increasing worthless retirement assets into physical gold and silver… you may want to think LONG & HARD about it.

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34 Comments on "U.S. Producing A Lot Of Natural Gas, But Still Not Any Making Money"

  1. The US just sent its first tanker of LNG to Poland. The price of that gas is not disclosed, and I imagine that it is much higher than the gas piped there by Russia. Shipping costs would be a real killer. But if you have vassals who are forced to buy your LNG at a much higher price then the business can be dragged out for just that little bit longer. The situation would thus be much worse if they didn’t force sales onto other nations.

    • Rob,

      From data I was able to acquire from an U.S. LNG EXPORT REPORT Done in 2015, Cheniere Energy (ticker- LNG) needs something between $7-$8 a mmbtu to BREAK-EVEN.

      Now, at the time of this report, Europe was paying between $6.60-$7.20 for their LNG. While the market price of LNG may have increased since then, it may not have increased by much. So, at that price, Cheniere isn’t making much money…unless Poland is getting RAKED OVER THE COALS….LOL.

      steve

      • Diogenes Shrugged | June 9, 2017 at 11:42 am | Reply

        Condensation of gas to liquid requires a lot of energy, and generates enormous amounts of heat (thermodynamically, the latent heat of vaporization). At the other end, converting liquid back to gas requires enormous inputs of heat. I don’t have numbers, but the extent to which these conversions subtract from EROI can’t be trivial.

        • DisappearingCulture | June 10, 2017 at 8:26 am | Reply

          Outside air can be used to dissipate or supply heat or cold in conversion from gas to liquid and back to gas [depending on ambient temperature and how much how fast the conversion]. The energy used by compressors to liquify must be impressive however!

      • lastmanstanding | June 10, 2017 at 6:56 am | Reply

        LPG price in western Montana yesterday was $1.19 gal.

        LPG also has a higher energy content. Much better value.

        But then you already knew that…:)

    • Of course, shipping uses alot of gasoline. It makes the LNG expensive. The most efficient way to distribute natural gas is by piping, like Russians do.

  2. Hi Steve

    I know you have focused on nat gas in this article. But I am wondering if this statement is correct: that broadly, the current market prices for oil, nat. gas, and coal, are below the costs of sustainable production, for most firms.

    If true, it is stunning to contemplate. Our most important industries are going out of business.

    For nat. gas discussed here in this post and oil in previous posts, do you think primary cause of selling at prices below costs/market imbalance is due to the massive central bank intervention for the last ~8 years? What (who?) is allowing these 22 Nat Gas firms analyzed in your article to continue to sell product at negative free cash flow?

    Thanks for any comment.

    Shawn

    • Shawn,

      It’s impossible to figure out what the U.S. Oil & Gas Industry must be thinking, but my best guess is that… THEY KNOW THEY ARE IN BIG TROUBLE. Which is why we continue to hear that it is now profitable to produce wells in the Permian for $30-$40 a barrel. I find this quite hilarious because most of the companies who are claiming this, either lost a lot of money or made very little when the price of oil was over $100.

      The reason the price of Oil and NatGas is so low is due to two factors:

      1) The real value of the shale oil and gas isn’t that high, so why should it receive a high price?
      2) The huge ramp up in production of shale oil and gas has led to gluts (in oil) and the notion of infinite supply for natgas… thus, the market is under-valuing it.

      The only reason I believe these companies continue to produce Shale Oil & Gas at a loss is because they have plenty of SUCKERS to buy their Bonds-Debts. They pay investors a high rate of return to use their money. If these investors didn’t realize they would not get back their investment, they probably wouldn’t invest. Unfortunately, all logic and sound investing goes out the window when individuals are DESPERATE FOR HIGH YIELD.

      steve

      • Northwest Resident | June 9, 2017 at 12:40 am | Reply

        “plenty of SUCKERS to buy their Bonds-Debts.” A large percent of those suckers would probably be corporate 401K retirement owners who are forced to keep their money “in the market” because their employment contract stipulates it. Getting out is not an option unless they quit their jobs, and these days one has to think long and hard about doing that. And then of course there are the billion$ in CB and FED printing that almost all go into the stock/bond markets, a lot of which ends up in oil/gas sectors. I believe it is ONLY this constant input of massive amounts of money that keeps shale companies going. That, and suckers.

        • Northwest Resident,

          Agreed. Furthermore, a lot of Insurance and Pension Market has been investing in Shale oil and gas because it pays a higher yield. As you know… YIELD IS KING today, regardless of the risk.

          steve

      • DisappearingCulture | June 10, 2017 at 8:33 am | Reply

        “Unfortunately, all logic and sound investing goes out the window when individuals are DESPERATE FOR HIGH YIELD.”

        Splitting hairs perhaps, but few individuals make that decision, it is big fund managers. The importance of that distinction is how many INDIVIDUALS are ignorant [and stay ignorant] of the facts & fundamentals…including media individuals. To them if it is making THEM money in the short run, all must be well. And then they extrapolate it will be that way ad infinitum.

    • My take is, that commodity producers (NG, oil, PMs, base metals, grains et al.) are with the back against the wall. Many have (way) too much debt to service and it they stopped selling, it’d be lights out immediately. So they rather continue making losses that can for the moment be hidden at a quick glance, choosing a slow bleeding to death while hoping that some miraculous turn-about might materialize and save their day. The fundamental problem is that the real economy, the shrimps, the end consumers are mostly tapped out themselves, often also just hanging on living pay-check to pay-check. Higher commodity/energy prices would be their financial ruin… So the only people with significant amounts of money are the every-growing richer elite and top 5% (that including some new crypto-millionaires) that profited from the global CB fiat injections that created trillions of new debt (and liquidity on the other side) to prop up the financial assets. At some point the cruel realities and consequences of the monetary madness we’re living through will strike back with vengeance and it ain’t gonna be pretty.

      • Diogenes Shrugged | June 9, 2017 at 12:05 pm | Reply

        I can’t help but think the federal government will EVENTUALLY step in and nationalize the entire industry. Hydrocarbon prices would then skyrocket with embedded taxes. Winters will become especially chilly for those who can’t afford the cost.

        Wherever latitudes give rise to seasons, an efficient wood stove or coal burner might be a wise investment at this point. Before the rush, you know.

  3. Steve,
    Well done again.
    Declining NG production combined with increasing drilling costs now having to move into less prolific production sites by O&G companies swimming in mountains of junk bond debt. Adding to the misery index, a presidential administration which is now gutting renewables, suspending environmental regs and opening the pipeline spigots to ship NG out of the U.S. A U.S. news media soaked in O&G ad dollars who cannot and will not report the truth to millions of underinformed and overly emotional nervous Americans in search of easy answers and a return to the “good ole days”.
    Best regards,
    Bob

    • Bob Magyar,

      Great to hear from you again. Yes, the U.S. Natgas Industry is most certainly in BIG TROUBLE.

      Furthermore, I have a strange GUT FEELING that when things fall apart, we are not going to experience a SLOW DECLINE in natural gas production. If individuals really understood the huge Legacy Decline rates of some of these Shale Gas Fields, it would scare the living hell out of ya.

      I mean, the Mighty Marcellus is losing a staggering 580 million cubic feet per day of gas production EACH MONTH… LOL. They have to drill that sucker like crazy just to keep production from falling off a cliff.

      steve

  4. So many things to consider! Steve always does a FANTASTIC job at explaining things…!

  5. Thanks Steve

  6. Hi Steve,
    Is this as relevant in the case of India? I mean, is India going to be just as badly affected when the crisis hits?

    • pranav,

      Yes. I would imagine even China and India will feel the collapse under the disintegrating energy system. Unfortunately, our leaders have not prepared us for what is coming.

  7. So, At what point will Las Vegas become a complete ghost town? Out in the middle of nowhere, in a hot desert with no water. Do you think all those hotels on the strip were built with borrowed money or paid in advanced? If borrowed then I expect the Strip to shut down due to bankruptcies, just after the crash. Have you seen the long lines of taxis at each hotel? The amount of gas that goes into that place is staggering. Tourism should be drying up soon.Was there yesterday. Just as busy as it has always been.

    • Dan,

      Agreed that the economy and energy seems like business as usual. However, if you read my guest post, “Collapse Has Arrived: Dimming The Bulb 3”, the author suggests that what happened to Egypt (Arab Spring due to becoming a Net Importer of oil) will finally happen to the western countries, such as the United States, within 10 years.

      From looking at the horrible financials of the U.S. oil and gas companies, as well as what is taking place in the Global Oil Industry, 10 years seems about right.. .but it could be sooner.

      stev

  8. Diogenes Shrugged | June 9, 2017 at 12:58 pm | Reply

    “U.S. is now world’s largest oil reserve … but current rate of production oil supplies will only last 70 more years.”

    Source:
    https://www.theguardian.com/business/2016/jul/06/report-us-world-largest-oil-reserve-global-supply-small

    “All in all, despite much skepticism and open doubts in the actual performance of U.S. shale, the fact is that shale drillers are indeed boosting production. There is a school of thought that says the shale bubble will burst at some point, when producers stop being able to service the debts they are taking out to increase production but let’s bear in mind that they are not just investing in more production. Shale drillers are also investing in efficiency improvements that lower their production costs.”

    Source:
    http://www.zerohedge.com/news/2017-06-09/new-us-shale-play-emerges-rig-count-rises-21st-week

    I guess this all points to a bright side if Steve’s contentions turn out to be misguided. It might still be wise to prepare for the worst in hopes of being pleasantly surprised later on.

    • Diogenes Shrugged,

      Ahhhh… the U.S. now has the largest oil reserves in the world …LOL. While Rystad Energy states that the U.S. has 264 billion barrels of oil reserves, they are quoting “TECHNICALLY RECOVERABLE.” That is a much different metric than “COMMERCIALLY VIABLE.”

      For example, there are billions of gallons of technically recoverable water in the cement in the United States Interstate highways and state roads. However, it isn’t commercial to extract that water.

      Anyhow…. people will continue to be fooled by the HYPE as the energy situation disintegrates.

      I would kindly like to remind everyone that the MIGHTY MARCELLUS is losing 580 million cubic feet of natural gas every month due to its super high decline rate. They have to drill that much just to keep production from falling. New shale gas production in the Marcellus last month was only 550 million cubic feet, so the next loss was -30 million cubic feet.

      At some point… we are going to have to get back to REALITY and stop allowing the BRAIN DAMAGE to spread.

      steve

      • I believe the natural decline rate for US nat gas production is in the order of 22% per annum. So 20 Billion cubic feet per annum has to be replaced entirely afresh. The entire US nat gas supply will have to be refreshed so to speak in 4.5 years. Without which the system collapses. The long road to nowhere.

        • VK,

          Actually, that is a very good figure. I have seen some estimates as high as 25%, but either way, to replace all natural gas production every 4-5 years is not sustainable.

          steve

  9. My name is Sheikh Ibn All In Al Saud Bin Arab and i would really appreciate you buying my Aramco ipo at the price of $113,- per share. Not because of its value, but because i need the g*ddamn dollars to prevent my inmates from rioting.

    Regards, Sheikh Ibn All In Al Saud Bin Arab

  10. As to huge reserves, it’s meaningless. 125% more rigs year over year for 9% more production in the USA. The end isn’t that far off unless you get more oil while sticking fewer holes in the ground.

  11. An extensive new scientific analysis conducted by the Former Chief Economist Michael Jefferson at Royal Dutch Shell published in Wiley Interdisciplinary Reviews titled “A Global Energy Assessment 2016” : says “that PROVED conventional oil reserves as detailed in oil industry sources are likely “overstated” by HALF.” & “Punt bluntly,the standard claim that the world has “PROVED” conventional oil reserves of nearly 1.7 trillion barrels is overstated by about 876 billion barrels. Thus, despite the fall in crude oil prices from a peak in June 2014, after that of July 2008, the “Peak Oil” issue remains with us.”

    http://onlinelibrary.wiley.com/doi/10.1002/wene.179/pdf

  12. The New York Times reviewed thousands of pages of documents related to shale gas, including hundreds of industry e-mails, internal agency documents and reports by analysts. A selection of these documents is included here; names and identifying information have been redacted to protect the confidentiality of sources, many of whom were not authorized by their employers to communicate with The Times.

    Here are some highlights

    Shale Gas Called a “Ponzi Scheme”
    Where is the S.E.C.?
    Drill Fast, Con Wall Street
    “Always a Greater Sucker…”
    “Corporate Hubris and Bad Science” May Lead to “Enron Moment”
    Drilling for Press Release Purposes

    http://www.nytimes.com/interactive/us/natural-gas-drilling-down-documents-4-intro.html?_r=1&

  13. It’s interesting that I was just talking about this issue with somebody yesterday on an extended weekend trip.

    The strategy to kill Russia has morphed a bit from the 1986 playbook that we’ve all discussed before.

    Last time, they didn’t have these crazy, dual-passport neocons forcing everybody to go much further than they ever would normally, to try to kill Russia. It’s starting to look like the strategy to kill Russia has morphed into a 3-way game of balance-sheet “chicken.”

    How long will the banks keep feeding money to the money-losing shale cos?

    How long will Saudi keep spending down their cash pile on bribes to prevent social unrest and mercenaries to fight their proxy war with Iran in Yemen?

    How long will Russia use its cash pile to prop up underperforming sectors of their economy?

    Russia got lucky this time. In 1986, they had a closed currency, and there was no way to influence it from foreign markets, so the impact of lower oil prices was much greater.

    This time, the neocons blew it by having their friends at the banks knock down the Ruble by 50%. Well, when you take oil down from $100 to $50 and at the same time you take the Ruble from 30 to 60, guess what? You’ve got the same amount of Rubles coming in as you did before the assault. If you don’t worry about import prices, you can support the local economy forever.

    The Tribe shot themselves in the foot even further by forcing the Germans and the rest of the Europeans to sanction and embargo exports to Russia, which gave Putin perfect cover to counter with his import ban on EU products, which helped blunt the impact of the currency drop even further. Once they realized their true situation, the Central Bank was ordered to stop wasting hard currency trying to support the Ruble in the FX markets, and all depletion of hard currencies stopped. As of the last numbers I saw, their cash pile went from roughly $500 billion down to $400 billion, then stopped shrinking and may even be coming back up a little bit.

    Contrast this with Saudi, who has seen their cash pile drop from its starting point of about $750 billion when the attempt to kill Russia began down to about $450-500 billion, and the cash drain is accelerating, courtesy of increased military spending combined with increasing “throat-slit” insurance to a rapidly-growing population of poor people. Saudi has one of the most rapidly growing populations in the world. At their current burn rate, they’re out of cash in 3 years. (Fire up, the private jets and head for Switzerland, boys!)To extend this they either have to borrow or sell something. This makes the Aramco IPO absolutely pivotal.

    If next year’s Aramco IPO doesn’t deliver at least something close to Saudi’s current valuation expectations, they’re in big trouble. Not only will the sale not raise enough cash to keep the game going; it will also reveal the decreased loan value of their remaining oil assets, so a big debt increase to fund everything probably won’t work, either.

    Lastly, the US banks are propping up the eternally money-losing shale cos who can barely service their debt and cover their current costs. Don’t believe the hype about decreasing operating costs due to improved fracking technology. The attached article lays it out better than I ever could:

    http://www.artberman.com/low-break-even-prices-everyone-not-just-shale/

    If the banks follow their usual game plan which they used for LBO’s at the end of the’80’s and real estate in the middle of the 90’s and again in 2008, they’ll use the next big stock market downturn to flush all the bad oil loans down the drain. To mix metaphors, a big stock price drop gives them an excuse for “take a bath” style accounting charge-offs.

    So this seems to all point to the next 9-18 months being the crunch time for everybody. All I know is, history has shown that betting against Russia in a fight is always a mistake. Or, to put it in financial terms: it’s Gazprom’s world – we just live in it.

  14. ME oil production vs US Shale production
    http://imgur.com/a/BqLQN

    &

    Limitations of Oil Production to the IPCC Scenarios: The New Realities of US and Global Oil Production. (Murray 2016)
    https://link.springer.com/article/10.1007%2Fs41247-016-0013-9

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