While the Mainstream media continues to put out hype that technology will bring on abundant energy supplies for the foreseeable future, the global oil and gas industry is actually cannibalizing itself just to stay alive. Increased finance costs, falling capital expenditures and the downgrade of oil reserves are the factors, like flesh-eating bacteria, that are decimating the once great oil and gas industry.
This is all due to the falling EROI – Energy Returned On Investment in oil and gas industry. Unfortunately, most of the public and energy analysts still don’t understand how the Falling EROI is gutting the entire system. They don’t see it because the world has become so complex, they are unable to connect-the-dots. However, if we look past all the over-specialized data and analysis, we can see how bad things are getting in the global oil and gas industry.
Let me start by republishing this chart from my article, Future World Economic Growth In Big Trouble As Oil Discoveries Fall To Historic Lows:
The global oil industry only found 2.4 billion barrels of conventional oil in 2016, less than 10% of what it consumed (25.1 billion barrels). Conventional oil is the highly profitable, high EROI oil that should not be confused with low quality “unconventional” oil sources such as OIL SANDS or SHALE OIL. There is a good reason why we have just recently tapped in to oil sands and shale oil…. it wasn’t profitable for the past 100 years to extract it. Basically, it’s all we have left…. the bottom of the barrel, so to speak.
Now, to put the above chart into perspective, here are the annual global conventional oil discoveries since 1947:
You will notice the amount of new oil discoveries (2.4 billion barrels) for 2016 is just a mere smudge when we compare it to the precious years. Furthermore, the world has been consuming about an average of 70 million barrels per day of conventional oil production since 2000 (the total liquid production is higher, but includes oil sands, deep water, shale oil, natural gas liquids, biofuels and etc). Conventional oil production has averaged about 25 billion barrels per year.
As we can see in the chart above… we haven’t been replacing what we have been consuming for quite a long time. Except for the large orange bar in 2000 of approximately 35 billion barrels, all the years after were lower than 25 billion barrels. Thus, the global oil industry has been surviving on its past discoveries.
That being said, if we include ALL liquid oil reserves, the situation is even more alarming.
Global Oil Liquid Reserves Fall In 2015 & 2016
According to the newest data put out by the U.S. EIA, Energy Information Agency, total global oil liquid reserves fell for the past two years. The majority of negative oil reserve revisions came from the Canadian oil sands sector:
Of the 68 public traded energy companies used in this graph, total liquid oil reserves fell from 116 billion barrels in 2014 to 100 billion barrels in 2016. That’s a 14% decline in liquid oil reserves in just two years. So, not only are conventional oil discoveries falling the lowest since 1947, companies are now forced to downgrade their total liquid oil reserves due to lower oil prices.
This can be seen more clearly in the EIA chart below:
The “net proved reserves change” is shown as the black line in the chart. It takes the difference between the additions-revisions, (BLUE) and the production (BROWN). These 68 public companies have been producing between 8-9 billion barrels of oil per year.
Because of the downward revisions in 2015 and 2016, net oil reserves have fallen approximately 16 billion barrels, or nearly two years worth of these 68 companies total liquid oil production. If these oil companies don’t suffer anymore reserve downgrades, they have approximately 12 years worth of oil reserves remaining.
But… what happens if the oil price continues to decline as the global economy starts to really contract from the massive amount of debt over-hanging the system? Thus, the oil industry could likely cut more reserves, which means… the 12 years worth of reserves will fall below 10, or even lower. My intuition tells me that global liquid oil reserves will fall even lower due to the next two charts in the following section.
The Coming Energy Debt Wall & Surging Finance Cost In The Energy Industry
Over the next several years, the amount of debt that comes due in the U.S. oil industry literally skyrockets higher. In my article, THE GREAT U.S. ENERGY DEBT WALL: It’s Going To Get Very Ugly…., I posted the following chart:
The amount of debt (as outstanding bonds) that comes due in the U.S. energy industry jumps from $27 billion in 2016 to $110 billion in 2018. Furthermore, this continues higher to $260 billion in 2022. The reason the amount of debt has increased so much in the U.S. oil and gas industry is due to the HIGH COST of producing Shale oil and gas. While many companies are bragging that they can produce oil in the new Permian Region for $30-$40 a barrel, they forget to include the massive amount of debt they now have on their balance sheets.
This is quite hilarious because a lot of this debt was added when the price of oil was over $100 from 2011 to mid 2014. So, these companies actually believe they can be sustainable at $30 or $40 a barrel? This is pure nonsense. Again… most energy analysts are just looking at how a company could producing a barrel of oil that year, without regard of all other external costs and debts.
Moreover, to give the ILLUSION that shale oil and gas production is a commercially viable enterprise, these energy companies have to pay its bond (debt) holders dearly. How much? I will show you all that in a minute, however, this is called their DEBT FINANCING. Some of us may be familiar with this concept when we have maxed out our credit cards and are paying a minimum interest payment just to keep the bankers happy. And happy they are as they are making a monthly income on money that we created out of thin air… LOL.
According to the EIA, these 68 public energy companies are now spending 75% of their operating cash flow to service their debt compared to 25% just a few years ago:
We must remember, debt financing does not mean PAYING DOWN DEBT, it just means the companies are now spending 75% of their operating cash flow (as of Q3 2016) just to pay the interest on the debt. I would imagine as the oil price increased in the fourth quarter of 2016 and first quarter of 2017, this 75% debt servicing ratio has declined a bit. However, people who believe the Fed will raise interest rates, do not realize that this would totally destroy the economic and financial system that NEEDS SUPER-LOW INTEREST RATES just to service the massive amount of debt they have on the balance sheets.
As an example of rising debt service, here is a table showing Continental Resources Interest expense:
Continental Resources is one of the larger energy players in the Bakken oil shale field in North Dakota. Before tapping into that supposed “high-quality” Bakken shale oil, Continental Resources was only paying $13 million a year to finance its debt, which was only $165 million. However, we can plainly see that producing this shale oil came at a big cost. As of December 2016, Continental Resources paid $321 million that year to finance its debt…. which ballooned to $6.5 billion. In relative terms, that is one hell of a huge credit card interest payment.
The folks that are receiving a nice 4.8% interest payment (again… just a simple average) for providing Continental Resources with funds to produce this oil at a very small profit or loss… would like to receive their initial investment back at some point. However….. THERE LIES THE RUB.
With that ENERGY DEBT WALL to reach $260 billion by 2022, I highly doubt many of these energy companies will be able to repay that majority of that debt. Thus, interest rates CANNOT RISE, and will likely continue to fall or the entire financial system would collapse.
Lastly…. the global oil and gas industry is now cannibalizing itself just to stay alive. It has added a massive amount of debt to produce very low-quality Shale Oil-Gas and Oil Sands just to keep the world economies from collapsing. The falling oil price, due to a consumer unable to afford higher energy costs, is gutting the liquid oil reserves of many of the publicly trading energy companies.
At some point… the massive amount of debt will take down this system, and with it, the global oil industry. This will have an extremely negative impact on the values of most STOCKS, BONDS & REAL ESTATE. If you have well balanced portfolio in these three asset classes, then you are in serious financial trouble in the future.
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