The Great American Shale Oil & Gas Bust: Fracking Gushes Bankruptcies, Defaulted Debt, and Worthless Shares

Texas at the epicenter. We’re witnessing the destruction of money that loosey-goosey monetary policies encouraged.

By Wolf Richter for WOLF STREET.

Following the sharp re-drop in oil and natural gas prices in late 2018, bankruptcy filings in the US by already weakened exploration and production companies , oilfield services companies, and “midstream” companies (they gather, transport, process, or store oil and natural gas) jumped by 51% in 2019, to 65 filings, according to data compiled by law firm Haynes and Boone. This brought the total of the Great American Shale Oil & Gas Bust since 2015 in these three sectors to 402 bankruptcy filings.

The debt involved in these bankruptcies in 2019 doubled from 2018 to $35 billion. This pushed the total debt listed in these bankruptcy filings since 2015 to $207 billion. The chart below shows the cumulative total debt involved in these bankruptcies since 2015.

But this does not include the much larger losses suffered by shareholders that get mostly wiped out in the years before the bankruptcy as the shares descend into worthlessness, and that then may get finished off in bankruptcy court.

The banks, which generally had the best collateral, took the smallest losses; bondholders took bigger losses, with unsecured bondholders taking the biggest losses. Some of them lost most of their investment; others got high-and-tight haircuts; others held debt that was converted to equity in the restructured companies, some of which soon became worthless again when the company filed for bankruptcy a second time. The old shareholders took the biggest losses.

The Great American Fracking Bust started in mid-2014, when the price of WTI dropped from over $100 a barrel to below $30 a barrel by early 2016. Then the price began to recover, going over $70 a barrel in September and October 2018. But then it began to re-plunge. By the end of 2018, WTI had dropped to $47 a barrel.

Two major geopolitical events in the Middle East – the attack on Saudi Aramco’s oil facilities last September and the US assassination of Iranian Major General Qasem Soleimani – that would have shaken up oil markets before, only caused brief ripples, quickly squashed by the onslaught of surging US production. At the moment, WTI trades at $56.08 per barrel, which is still below where the shale oil industry can survive long-term:

And 2020 is starting out terrible for natural gas producers. The price of natural gas has plunged to $1.90 per million Btu at the moment, a dreadfully low price where no one can make any money. Producers in shale fields that produce mostly gas, such as the Marcellus, are in deeper trouble still, because oil, even at these prices, would be a lot better than just natural gas.

Producing areas with constrained takeaway capacity (it takes a lot longer to build pipelines than to ramp up production) are subject to local prices, which can be lower still. In some areas, such as the Permian in Texas and New Mexico, the most prolific oil field in the US, where natural gas is a byproduct of oil production, limited takeaway capacity has caused local prices to collapse, and flaring to surge.

The chart shows the spot price for delivery at the Henry Hub:

Texas at the epicenter.

The most affected state, in terms of the number of bankruptcy filings, is Texas, the largest oil producer in the US. Since 2015, the state had 207 oil-and-gas bankruptcy filings, of the 402 total US filings. In 2019, Texas had 30 of the 65 US filings.

Delaware, obviously, is not into oil and gas production, but into coddling corporations, and many companies are incorporated in Delaware, including some oil-and-gas companies in Texas. When they file for bankruptcy, they do so in Delaware. These are the eight states with the most oil-and-gas bankruptcy filings since 2015:

Bankruptcy filings are triggered when the E&P companies no longer get funding from Wall Street or from their banks to continue with their perennially cash-flow negative operations and service their debts. And this is what is happening now. Wall Street and the banks have started to demand that these companies stick to an entirely new mantra in the fracking business: “live within cash flow.”

When E&P companies run short on funding, they cut back on drilling activity which puts the squeeze on oilfield services companies that provide products and services to the oilfield, including drilling and completing wells. And then these OFS companies go bankrupt.

This is what happened to oilfield-services giant Weatherford which filed for a prepackaged bankruptcy last July. Back in 2014, before the oil bust, it had 67,000 employees; by July, it was down to about 26,000. The reorganization plan allowed Weatherford to shed $5.8 billion of its $7.6 billion in long-term debt. Old shareholders got wiped out. The creditors got 99% of the restructured company’s new shares.

In its report on the OFS bankruptcies, Haynes and Boone cited this pressure from Wall Street and its cascading effect, which Weatherford had pointed out in its bankruptcy filing:

We note that Weatherford, in its July 2019 filing, attributed its insolvency in part to reduced drilling activity by producers who have also been dramatically affected by the commodity price slump since 2015. Investors’ pressure on producers to “live within cash flow” is further reducing demand for OFS services and supplies leaving the OFS sector with little near term hope for a turnaround in prospects.

What this sector needs are much higher prices for oil and natural gas. But that cannot happen while production continues to surge. A large-scale culling in the sector – a lot more bankruptcies – could reduce production, and support higher prices.

But as soon as prices rise above certain levels, with investors still chasing yield at every twist and turn, the flood of new money will wash over the sector again, with investors having already forgotten by then that shale oil and gas was where money went to die every time. And this new money will cause a new surge in production, which will collapse prices once again. It’s a cycle that the shale industry has a hard time getting out of, under the current loosey-goosey monetary conditions.

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  114 comments for “The Great American Shale Oil & Gas Bust: Fracking Gushes Bankruptcies, Defaulted Debt, and Worthless Shares

  1. 2banana says:

    And predatory credit card companies are incorporated in Delaware.

    Seems like a pattern.

    What esteemed long term serving Delaware senator, VP and presidential candidate made that all happen?

    “Delaware, obviously, is not into oil and gas production, but into coddling corporations, and many companies are incorporated in Delaware, including some oil-and-gas companies in Texas. When they file for bankruptcy, they do so in Delaware.”

    • Zantetsu says:

      Well I’m not personally going to vote for the man but … doesn’t your comment imply that he is *good* at his job of being a politician and looking out for his constituents?

      • You know where this comment leads, don’t you? The downward spiral into politics and gold-hoarding? Wait… That’s what we like. Bring it on!

        • Frederick says:

          Why is owning gold in this environment a “ downward spiral” You need to readjust your way of thinking bubba Or not and pay the consequences

      • nick kelly says:

        Here in Canada we’ve just had a one- time major Pengrowth sell to an outfit called Cona for 5 cents a share. Was over a dollar in few years ago.

        What is worth noting is that the transaction at a nickel was a 70% discount to the share price at the time. Take away: the share price has no necessary connection to company value.

        • Prairies says:

          The shares were only worth 20 cents before the sale. It wasn’t a big company to begin with.

        • nick kelly says:

          Note in comment: ‘One time major…..’

          ‘Established in 1988 by Calgary entrepreneur James S Kinnear, it was one of the largest of the Canadian royalty trusts (“Canroys”), with a market capitalization of US$4.12 billion at the end of 2007.’

          Its shares were $12 not long ago. The largest single investor, an individual, lost 180 million.
          A sale at 5 cents is a 70 % discount to the share price of 20 cents

      • Mira says:

        ah yes, the facilitator.
        in that he is providing an escape from realty ??
        & therefore perpetuating the game of delusions / an idiosyncratic belief or impression maintained despite being contradicted by reality.
        fracking is not a financially viable endeavor, with untold, extravagantly expensive, before, during & after the fact, environmental destruction.
        the goal is to live a lifestyle based on the romantic theory .. better to have loved & lost.
        the fish that got away story.

    • MC01 says:

      The Delaware General Corporation Law has been around since 1899 with the stated purpose of “attracting more businesses” to the State. So unless this Delaware legislator is named Methuselah he’s very likely long in the grave.

      PS: according to Federal law benefits from “relaxed interest rules” to the extent it conducts business in Delaware but it’s subject to restrictions of other States’ laws if it conducts business in another State.
      Benefits for companies incorporated in Delaware are many (see how the board of directors is to be composed) but are of other nature. ;-)

    • Cobalt Programmer says:

      At the times of usury laws, banks cannot lend credit card to common people at a high interest rates. So, there was a judgement which permits high interest rates if the bank operates in a different state. Delaware and south dakota jumped in to the business. Also, sioux city has the largest postal sorting facility because, they send credit card offers and other letters to poor people.

      • sunny129 says:

        ‘Delaware and south dakota jumped in to the business’

        Banks friendly senator Biden is from Delware. HQ for most incorporation of multi-nationals. All one needs a PO BOX!

  2. Cheap seats says:

    I recall reading about this cycle of capitalist overproduction in some excellent Kautsky books. Let us finally replace it with rational planning!

    • Cas127 says:

      “finally replace it with rational planning”

      Look at the success the Soviet Union has had with it.

      And the resounding triumphs of US gvt involvement in medical care, higher education, lower education….

    • Xabier says:

      We can certainly reason about an economy; but it is not, ever, rational at root. Like life itself…..

    • Greg Hamilton says:

      Rational planning isn’t synonymous with centralized planning. Although if you are hoping for the latter, it appears we are moving in that direction.

    • LB says:

      Karl Marx demonstrated that the capitalist system is such that it is not amenable to any planning which will obviate the problems & contradictions which it throws up. Lenin recognised this when he acknowledged that his revolution had created state capitalism in Russia.

  3. Am I crazy in imagining at least some degree of a game of chicken being played here, seeing who can debt-fund their holdings the longest, hoping the competition flinches so the survivors can inch back up to profitable? Or maybe… Texas Hold’em?

  4. Anyone got an idea what percentage of the market these bankruptcies represent?

    • andy says:

      A third of Facebook dot com, give or take few billions.

      • Essau says:

        Simply because facebook is the real prosperity contributor here.

      • ChangeMachine says:

        Sorry, I shoulda specified the petro market. But that’s a good point. This must boost Facebook’s stock in some way.

    • GotCollateral says:

      ~10-25% of the companies, by sector (and by some digging into what OTHF and OTHS listed companies do) from firna bond fact api, that make up HYG underlying market are directly exposed to O&G.

  5. David Hall says:

    If the oil companies go bankrupt, production will drop, prices will rise and drilling will start again. Thank God you do not live in a quota driven communist controlled economy. Oil production continued to rise to about 13 million barrels a day. More deep water oil fields have been discovered as well. It may lead to global warming and coastal flooding.

    • roddy6667 says:

      Living on a roller coaster of boom and bust and constant failure benefits a few. For many, it is a very low quality life. Of course you can’t see this. But then you bought into Manmade Gobal Warming, Cooling, Change and live in fear of rising seas.

    • Thomas says:

      A major issue that is only occasionally brought up, is that not all potential fracking well areas are the same, in the terms of input to output. The frackers have some idea which areas are better, the A list fracking areas are the best and first to be used. Over time the frackers have to settle for areas, that take more effort and give less back. New areas that are good quality can become open over time, but on average, the overall output to input will keep falling.

  6. John Taylor says:

    I wonder if the whole oil re-flation trade will work out over the next couple years.

    My idea is basically this… now we be patient as the dollar strengthens a bit and politicians (particularly in the EU so far) talk about replacing oil with renewables and such. Oil companies fall out of favor a bit more, and we watch the big names with high yields like Chevron, ConocoPhillips, Exxon and the like. We accumulate those during the summer and fall perhaps. As fiscal spending picks up in the next couple years, oil is pushed higher while yields are still squeezed and these big players go back up in value.

    It’s hard to tell on the timing – in some ways it’s really most dependent on how far the Fed is willing to go expanding their balance sheet. I figure price-wise we could pick 10 year lows in the oil majors and buy them like crazy if they get close to those. If not, accumulate some whenever they turn up on volume.

    Anyone have some thoughts on this strategy?

    • Daedalus says:

      Once, John, the great whaling ships were backed by investors. When the Pequot sailed, the price of whale oil was high, but began dropping as a new source of energy began to replace it.

      Some continued to back the whaling ships as task of ‘fracking’ whales became more difficult. Others invested in petroleum (rock oil) instead.

      • Jagor says:

        A lot of people thought that fracking was the greatest thing since sliced bread: apparently, it’s not.

        Of course, I was against fracking from the very beginning because I learned how it was not only irreparably damaging and polluting the environment but ruining thousands of people’s lives by destroying the value of their homes and property, and even causing earthquakes, one of which wreaked tens of millions of dollars of damage to the Washington Monument and the National Cathedral, causing both of them to be closed to the public.

        The French and the Bulgarians were smart enough to ban fracking altogether, although the French have had a few conventional oil wells east of Paris for decades; I’ve passed by them on my day-hikes. [They also have a Strategic Petroleum Reserve, as we do, in Provence.] But France is not going to dethrone Saudi Arabia or join OPEC!

        I worked for TOTAL for seven years and have nothing against conventional methods of oil and gas production. I’m just against fracking, and I think I’ve been proved right–fracking is not only an environmental and sociological disaster, it’s proving to be an economic and financial disaster, too.

        • Frederick says:

          Thank you Jagor for saying what I’ve been thinking Fracking is ridiculous as it destroys the environment so badly But the people who profit from it couldn’t care less

        • Deanna Johnston Clark says:

          …the latest bad idea in the long, sad history of bad ideas

          “Jurassic park”

          That’s fracking. The old oil men would call it chicken-sh*t …and I knew several growing up in Texas.

        • Truckguy says:

          Fracking has been responsible for many earthquakes, but the 2011 Washington DC earthquake was not one of them.

      • MC01 says:

        There’s actually a very complicated and interesting story behind how dominance in the modern whaling industry shifted from Euskadi to New England and then to Norway.

        The great Yankee whaling families peaked in power and prosperity just before the Civil War but they suffered a crippling loss with the Disaster of 1871, when of their fleet of 40 ships 33 were crushed by ice due to freak weather conditions in the Bering Strait. The surviving ships had to dump their catch and equipment overboard to make room for the people.
        In 1876 history repeated itself, quite literally: a smaller Yankee whaling fleet of 20 ships was again caught by freak weather conditions in the Beaufort Sea and 12 more ships were lost in the ice. And since when it rains it pours, all the 8 surviving ships were lost at sea before 1880 in various accidents.

        Coupled with the economic failure of the new Humpback fishery in the North Atlantic this effectively crippled the Yankee whaling industry: some families moved West and opened a moderately successful fishery in San Francisco using steamers (I am sorry but… LOL) but this string of disasters was more or less the end for them, not the arrival of kerosene.
        A few owners managed to stay in operation and even to turn a profit until the late 20’s with single ship operations, but their business was strictly dependent on mink farming to which they provided feed: when it went into decline due to the Great Depression and changes in fashion it was really the end for them.

        History has a habit of being far more complicated than we think. ;-)

    • RD Blakeslee says:

      Sure. Forget it.

      Find a niche, invest in your own enterprise there and watch the gamblers elsewhere squirm.

    • IdahoPotato says:

      I would follow the 200-day Simple Moving Average of the whole Energy index and invest accordingly in a tax deferred account to avoid trading costs and taxes.

    • Bought puts on XES. Industry collapse seems likely, and a chance to buy this group at a generational discount, (exercise the options). New head of IMF thinks electricity prices could rise dramatically. Long term demand may be declining (see Wolfs article) while new 3rd world customers offset that trend.
      Read “Blowout”, and Putin’s Russia has not moved forward with new oil discoveries, needs the technology US energy majors (Exxon) provide. (New sanctions likely) Their government falls when oil prices collapse, mostly countries who represent adversarial regimes, Iran, Venezuela, Russia. Their demise dovetails with national foreign policy objectives, just as LNG is designed to save our allies from extortion by OPEC and Russia. Lots of moving parts, shut down E&P and prices spike. Blow back on corporate debt blocks the cycle of rinse and repeat Wolf alludes too. Market turmoil, recession. Energy prices collapse again, Wall st applauds, submits to deflationary hari kari knife. Fed can’t handle market vol, kiss donkey and market goodbye.

    • HowNow says:

      John,
      It turns out that both Exxon and Chevron have had declining revenue for the last 8 years (not in a straight line, but still…). So, with revenue dropping over that fairly long stretch, you have to wonder whether it’s about fracking or cheap credit alone.
      And to blame the Fed, as everyone on this site does, for ALL problems in commerce, you may want to consider that, regardless of how cheap the borrowing of money gets, if people are borrowing to invest in money-losing enterprises, it’s hardly the fault of the Fed’s. How about the investors and speculators?

      • Petunia says:

        Wars are big energy consumers. When peace breaks out a lot of people go nuts over declining revenues. They may even want to overthrow their own govt.

      • Cas127 says:

        “How about the investors and speculators?”

        There is plenty of blame to go around…

        But, no entity has the power to f up (and unconstitutionally redistribute income) the way the F does.

        No entity is even close.

    • I’m still thinking about Kitty’s Weinstein blog post, which inspires me to ask whether top dog’s position of power is secure, and if so, for how long? I think we’re all so used to oil being top dog it’s hard to stay objective about how strong it’s position is. If you look at how much effort is going into maintaining petro power, with diminishing returns, I can believe the rotation will happen soon and rather quickly. But soon in societal time, not in Wall Street time.

      So there’s your answer. I don’t have any f’n clue. :-). Personally, I say invest in something you actually give a sh!t about.

  7. WES says:

    Everyone is missing this represent’s the Fed’s success at turning Fiat dollars into oil and gas!

    Want more oil and gas? Just print more money! It is so easy!

    • Adam says:

      I agree, I used to say that “you can’t print oil and gas”, but in a sense the US did!!

      • RagnarD says:

        Yep
        And imagine ur Saudi Arabia or any other hard asset producer, how long are u going to allow this to go on? That is, how long till u start swapping the $USD at point of oil sale for Gold? What does that do for the price of gold?

        • Frederick says:

          I already know what it does and I’m on board to profit from it Without destroying the environment A big plus is that I sleep very well at night

    • Saltcreep says:

      I don’t think everyone is missing that, though, WES. My contention, which I suppose I’ve mostly derived from listening to and reading the arguments of others, is that when the debt bubble we’re in finally deflates, then oil and gas production will drop pretty sharply, and we’ll find out that our so far charmed lives suddenly will get considerably more difficult.

      • rhodium says:

        Usually that’s how it happens because of supply and demand for energy, however, when oil producing companies are already producing cheap oil only because it’s subsidized by debt, then one has to wonder just how much supply will contract if credit markets suddenly seize up and these oil companies can’t get financed. If supply drops more than demand, the price should theoretically go up. It’s probably impossible to know which will be larger though.

      • timbers says:

        Thing is, I just don’t see when/how “when the debt bubble we’re in finally deflates…” I want to, but I don’t see it. Nothing at all whatsover.

        For a brief time it appeared we would leave rate suppression and QE because the Fed seemed to be normalizing rates and balance sheet.

        And then, that suddenly stopped when Mr Market thru a hissy fit and the Fed Rich Friends told them to cut-it-out.

        So, back to the same old same old, Bernanke/Yellen/Greenspan
        QE4-ever and rate suppression.

        Logic dictates that far from normalizing, the Fed isn’t done cutting rates yet, and it won’t be until they are zero. And they will stay zero or suppressed for ever and ever and ever.

        Then, when the Fed goes to zero, the Media meme will become “what comes next? NIRP” or what ever else the our overlords decide will keep their asset values inflating.

        This will go on forever until in can’t. I see no indication, none whatsoever, that there exists any movement away form Forever Rate Suppression and QE.

        Make no mistake:

        The elites, or overlords, will never NEVER EVER give up rate suppression and QE, unless they are forced to.

        That’s my opinion.

        • c1ue says:

          Consider this then:
          The US national debt is over 40% of the entire world’s GDP.
          The dollar being a reserve currency is what has enabled the US to take on far more debt than anyone else, but there is a limit to this gravy train.
          This US national debt has been averaging over $1T annual increase since Obama and GFC.

        • Saltcreep says:

          My claim in that respect is, Timbers, that it will have to either deflate or go bananas in inflation terms at some point, as financial assets get converted at an increasing rate into things like pensions and social security payouts, that subsequently go out and compete for a limited amount of commodities, goods and services, instead of staying bottled up in financial markets like today.

          I expect that our dear monetary and fiscal authorities will eventually go for much higher inflation (and be forced kicking and screaming into much higher rates) rather than asset price implosion and cascading defaults, but in the end the effect will be to take the air out of the bubble in real terms in a very painful manner, and we’ll have to pay the heavy price for decades of excess…

      • RD Blakeslee says:

        To some extent (not possible to be totally so, of course) some of aren’t living “charmed lives”. Ours are as self-sufficient as is reasonable and our difficulties will be manageable.

        • Saltcreep says:

          Yeah, RD Blakeslee, I guess it probably won’t be the same experience for everyone.

          Anyway, for large portions of the population, life has already steadily been getting tougher for a long time, as the policies implemented to maintain the illusion of continued prosperity have taken from their modest slice of pie and shoveled it increasingly into the mouths of the already replete.

          But I would still contend that what most people have today will look like charmed lives compared to what we are going to have when this sick, insanely leveraged system comes undone.

    • IdahoPotato says:

      “I am so afraid of a democracy getting the idea that you can just print money to solve all problems and eventually I know that will fail… All the politicians in Europe and America have learned to print money… Who knows when money printing runs out of control? At the end, if you print too much you end up with something like Venezuela.”

      – Charlie Munger

      • Jonas Grimm says:

        No socialism required! Except for the rich of course.

      • char says:

        What has Venezuela to do with good monetary policy? It has always been terrible corrupt and for the last 20 years in an economic war with Washington. The last 3 years under very heavy economic bombardments from the US.

  8. Cas127 says:

    It is very telling what DC considers too important to fail and what is not.

    Imploding oil industry, would seem important…but not to DC which has not even blinked…which is fine, the oil does not disappear – it just changes hands.

    But a big bank – DC has a friggin stroke and commits fraud on every dollar holder to prop the rotters up.

    Why?

    Because the banking system is really much more an extension of government than DC wishes to admit to – it is the crucial transmission mechanism for the gvt ability to redistribute wealth at will – using an ostensibly private sector as a front (business tax withholding has a similar taste to it…)

    But the truth is, it isn’t that different from the oil biz – it isn’t like some other entity can not simply replace a bk bank.

    But DC hates any “instability” that exposes or reduces their power – so we are getting cycle after cycle of banking idiocy.

    • Tyson Bryan says:

      Easier to understand when you recognize that government is just
      a subordinate extension of the banking system.
      US Inc. prints petro dollars. Oil production must keep up with dollar production, regardless of profitability. This is real Fed policy.

  9. Another Scott says:

    Does this include McDermott International, which has filed for bankruptcy in Houston this week? It doesn’t look like it based upon my reading of the report.

    McDermott is a construction firm focused on the energy industry, which has also been the largest source of its problems. If similar, but smaller firms, aren’t included in the reports (they’d be harder to track as they likely use different NAICS codes), then it could understate the number and size of bankruptcies in the oil and gas industry.

    • Wolf Richter says:

      Another Scott,

      No, this data here does not include McDermott. These bankruptcies here are those that occurred in 2019 and before. McDermott’s filing was in 2020, as you pointed out.

  10. John says:

    John Taylor,
    I’m right there with you. Holding BP. ADR or ADS, not sure, doesn’t matter. The dollar is strong, would think it weakens, someday. I know Potus wants it weaker. Trading my position. Alternative energies a big change now. Brexit and Johnson a relief. Was thinking strengthening British pound would help later, when dollar weakens with BP strengthening. A lot of two and three wheeled electric bikes in China now, 300 million compared to 5 million cars.

    • John Taylor says:

      It’s a tough game … You can go all cash and sit waiting for an opportunity for years as people comment on the new market highs, or you could buy in at the top and watch it plunge in value.

      I’m trying to think of any narrative that may have legs, and I’m skeptical about owning anything that hasn’t had it’s rotational pullback.

      Some people use margin, but I find myself doing the inverse … Leaving 50% uninvested cash on the sidelines in case of a correction or opportunity, while diversifying the rest into anything that looks like it has a decent floor as well as some upside to it. Once I look at the Fed balance sheet numbers and it stops climbing for more than 1 week straight I’ll probably start selling off.

  11. Willy Winky says:

    Higher oil prices crush the consumer and kill GDP, and if sustained, would cause a recession and reduce demand for oil, driving oil prices back down again.

    At least that’s what the IMF says:

    According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.

    http://www.iea.org/textbase/npsum/high_oil04sum.pdf

    There is no way in hell the fracking industry can survive. At some point the dumb money will smarten up and realize this, then we unplug 8M barrels a day from global production.

    And think of the tens of thousands of well-paid jobs that will disappear.

    Uh-oh.

    • wkevinw says:

      Fracking, as any industry, will survive to the level that the market will bear.

      Speculation is a feature of free markets.

      Think creative destruction. If you try to control that out of the system, you get even more corruption, income inequality, etc.

      However, these are slow processes. People can see the speculative excesses long before they roll over.

      The free market model economy is a bad system, except for all the others.

    • Wolf Richter says:

      Willy Winky,

      But don’t forget the other side of the equation: if fracking slows down, the price of oil will surge, and it will draw new money to fracking, and then fracking will rise from the ashes.

      Fracking, as we have seen, can ramp up production on a massive scale very quickly, if there is enough money to do it. And when the price of oil is high enough, there will be enough money. Think of all the jobs this renewed surge in fracking will produce! And then of course, the price of oil will head back down.

      That’s precisely why OPEC was created: a cartel that can prevent overproduction and artificially push up the price of oil. Fracking blew up OPEC’s strategy.

      • RD Blakeslee says:

        “Fracking, as we have seen, can ramp up production on a massive scale very quickly.”

        Right. And overlooked in some discussions of the industry’s fortunes is something aside from monetary and financial aspects of it.

        Think what would happen if gasoline suddenly plunged in availability ? Sociopolitical possibilities in oil producing regions of the world do not preclude that. OPEC did it deliberately, in a limited and controlled way. Future events may not be so controlled.

        Our fracking potential can be thought of as insurance against long-term delay in reestablishing availability.

      • Willy Winky says:

        Yes that is possible.

        There is always stupid money willing to believe silly stories (see WeWork Tesla etc…) Perhaps Softbank will fund the next iteration of the money losing disaster that is shale.

        However there are limits to this madness.

        The reality is that shale needs an oil price that is beyond what the economy can support.

        The price can see-saw back and forth as it has been doing since it went to $147 in the months just before the GFC.

        The main reason that the economy has not crashed into recession with oil over $50 is stimulus. Normally if oil prices were at that level or higher, over a significant period of time, consumers would get crushed by inflation and they’d buy less.

        But low interest, easy credit, and other forms of stimulus have offset the pernicious effects of expensive oil.

        But stimulus has its limits. At some point 40 buck oil will be too high because millions are servicing too much debt. You get a Roberto Duran ‘no mas’ situation.

        And meanwhile, we are not finding much conventional (cheap) oil, and we are running down the remaining legacy fields of cheap oil.

        http://www.321energy.com/editorials/mckenziebrown/Light+oil+discoveries.jpg

        At some point the train is going to derail.

        The stone on the track will almost certainly financial in nature – the medicine keeping the patient alive will kill him (stimulus)

        But make no mistake here, the root cause is unaffordable oil (and other resources)

  12. Sammy Iyer says:

    India imports approximate 4.5+ million barrels / day of Middle East Brent crude & but a net exporter of Diesel/Petrol /other derivatives from oil refining to the surrounding Asia regions due to India’s Reliance Industies massive global scale oil refining capacity .
    India produces internally only 700,000 barrels of crude oil a day.
    India has to import more than 80% of its crude oil needs.(all mostly from middle east)
    In comparison China imports 9 millions barrels of crude a day .
    India is hostage to Middle east politics /Trump Iran sanctions as Iran supplies 40% of India’s oil imports . Iraq/Saudi/Libya are other oil supplier sources. US exemption to India for buying from Iran was terminated recently. Indin govt is talking to Iranian mullahs for accepting ₹ /barter as India can no longer make $ payment via SWIFT due to US sanctions.
    Electric cars are yet to come in to India in any major way. Great Wall Motors of china is launching electric cars in India soon & many New EV launches expected in 2020.
    But entry level budget 1000 cc petrol sedan car sells < $6000 ,& budget electric may cost more than 12-15k . so EV demand will be muted.
    electric Tuk TUK sold more than 700,000 units in 2019 .
    CNG tuk tuks sell equally.
    Compared to china's 5 million ,India sold only 3 million ICE petrol/diesel passenger cars in 2019 + around 1.8 million commercial vehicles .
    But geared motor cycles (100-250 cc )& scooters (gearless 110cc) combines sold 21 million units . (pales in comparison to china still)
    (Entry level 100 cc yamaha/suzuki/Honda commuter scooter are $1000 on the road .but electric scooter are avialble costs double ! so not getting traction.
    90% of cooking by 1.2 billion population is done by 17kg LPG bottles.
    Piped cooking gas only in very few areas in big cities like Delhi/Bombay.
    95% of Indian homes have no ovens(electric or gas) . Electric Induction cooking has taken off only recently in cities in smaller apartments.
    If only US has processing capacity & terminals to liquify & export gas as LPG/CNG !?

    • char says:

      5 million? That does not sound like the Chinese market.

      Cooking gas is not a big demand. Not even in India with more than 1 Bn

  13. hidflect says:

    I don’t care about the fate of Ponzi frackers and their stupid lenders but they’re destroying other, legitimate businesses with their debt-financed production. Companies that are well run and deserve to survive and grow but are being pushed to the wall.

    • Paulo says:

      But but but, that debt financed production is the absolute foundation of the much ballyhooed ‘Energy Independence’ meme. It kind of reminds me of countries that sell to their citizens gas and diesel at 25 cents a gallon, but as they gradually go broke they see a need for prices to rise and…… In this case, it isn’t Govt coffers shouldering the loss, it is unwary or uniformed investors.

      (I wouldn’t run out and buy a Lincoln SUV)

      “hey, (psssst) we’re losing money on every barrel, so let’s make it up in volume”. And that is the story of Shale. Producers didn’t do well at $100 per barrel either, as over investment pushed up final production costs as service providers charged more in the rush. Remember, these new losses are occurring after shakeouts and efficiencies have been in place for years, and as a result of them. The model doesn’t work, the geology doesn’t work, and the physics doesn’t work. Bankruptcies illustrates the end result of trying to square a drilled hole.

      Tell it to politicians, though. And promoters. And the blind hopeful looking for some kind of return.

      Does this sound familiar? “Of the estimated 30,000 to 40,000 people who reached Dawson City during the gold rush, only around 15,000 to 20,000 finally became prospectors. Of these, no more than 4,000 struck gold and only a few hundred became rich.”

    • Willy Winky says:

      I think we all should care about the shale situation. In terms of oil production, it is really the only source of oil that is increasing.

      Let’s not forget what happened in the 2000’s. Oil prices started to take off around 2002 and peaked months before the GFC at $147.

      If shale collapses, prices will go through the roof very quickly. Again, recall $147 oil just prior to the GFC….

      The Beginning of the End (my headline)

      JUNE 13, 2003 – There is increasing evidence that massive economic stimulus — monetary, courtesy of the Federal Reserve, and fiscal, thanks to the president and supply-side minded lawmakers — is taking hold. The magnitude of the policy turnaround, which caps a constructive, multi-year reflation process, should overwhelm the economic negatives — including the drag from expensive oil and poor finances at the state- and local-government levels.

      Expensive oil and its impact on other energy costs remains a concern.

      The current level of U.S. monetary stimulus is massive. Real interest rates have fallen 5.2 percent from December 2000 to March 2003, reaching -1.2 percent. A swing of this magnitude may be historical.

      Read more at: http://www.nationalreview.com/article/207227/reversal-fortune-david-malpass

  14. Enginer01 says:

    Low Hanging Fruit

    Back when shale oil was being investigated, fracking was not mentioned. The high cost of pumping oxygen down in the shale beds to warm the oil and get it to flow, the potential for “small” nuclear explosions to fracture or loosen the oil beds, mining, etch were discussed.
    And abandoned.
    Now were are facing the fact that $50 oil will not pay for the cost of picking this particular oil. But as the Saudi fields require more and more sea water to extract the declining reserves, oil prices will rise.
    I favor US Government subsidies to maintain fuel oil independence until LENR processes like the E-Cat are commercialized. However, this would be subjected to unfavorable international examination, so perhaps zero-interest loans should be considered.

  15. A says:

    Curious what happens to CPI inflation when this unwinds and Nat gas gains 50% in price.

    • wkevinw says:

      What happens when Nat Gas gains 50% in price is what happened in ~2005 and 2008. The world didn’t end.

    • Wolf Richter says:

      A,

      Not much would happen to CPI. The current plunge hasn’t even been fully reflected in CPI yet. It takes a while… much of it seeps into CPI via electricity rates, and they don’t change that quickly.

      In terms of NatGas going back to $2.85 mmBtu (your 50% increase)– that would still be historically low and too cheap to frack for it economically. NatGas needs to go back up 100% to 200% — into the $4-$6 range, where it had been for a long time.

      • I assume NG will rise in price to be on BTU parity with gasoline when it achieves economy of scale, and when they end counterproductive fracking. Those two seem be contradictory. During this process NG infrastructure has been put in place, and CNG is in wide use for urban government and public agencies, just not retail. However if gasoline becomes half as expensive ( will not happen even if crude loses half its value due to refinery issues) then NG prices are not moving. NG meets CAFE standards out of the ground, Co2 is another issue and reason to end flareoffs. Feel like its going to be easier to transport (L)NG rather than build a bigger grid system, (and take those losses – fire danger) if power plants are clean then what is the problem? Then if you have an NG plant next to a Tesla station, why not just pump the CNG into your old ICE??

  16. gorbachev says:

    Money flows to growth . Renewables are more efficient

    and growing.Oil and gas and coal are old school. Eg .Saudi cannot

    compete with free sun and wind and are selling their heirloom while they

    can.We will always have a place for old school. They just won’t be

    leading the way and they won’t be worth as much.

    • VintageVNvet says:

      Right Arm gorby: And as soon as the new generation of engineers figures out how to harness gravity, based on the work of thenew generation of theoretical physicists currently extending the unfinished concepts of old Albert, off we go to a world of SO much energy abundance that it will make the current situation look to be a very sad joke.
      At that point, the oil will become extremely valuable again as permanent products rather than consumables.
      So let’s all do our best to support real STEM education for any who are willing to pursue it.

  17. Michael Engel says:

    What will happen next, when WTI fall from 55.38 to 44 – 46 range,
    with an option : WTI < 40.
    What will happen to Houston oil jobs and RE.

    • unit472 says:

      If you follow Gail Tverberg’s blog ( Our Finite World) when oil prices reach the ‘disequilibrium point’ where prices are too low for producers and too high for consumers Houston real estate values are the least of our problems. Total economic collapse of industrial society is the outcome.

      • Wolf Richter says:

        unit472,

        Her everything-collapses-when-oil-reaches-a-certain-price theories are just a bland joke, when you actually think about them.

        • unit472 says:

          The biggest joke is the current system that believes paper profits produced from trading fiat money and its derivatives produces real wealth.

          I just saw an ad for a company that advances cash to people with pending ( contingency fee based) lawsuits. When you’ve reached the point where companies are trying to monetize putative settlements of ambulance chasing lawyers you’ve hit rock bottom.

        • unit472 says:

          Wolf, I fascinated why you do not believe there is a ‘disequilibrium point’ on that old Econ 101 supply demand curve.

          That, to me seems the riddle of our times.

          Central Banks can, so far, create demand by lowering interest rates and providing ‘money’. What they cannot do it create ‘supply’. You’ve touched on it yourself. Toyota can’t build $10,000 cars but Americans are finding hard, outside of extended credit and low interest rates to buy new Camry’s.

          In your world there does exist the second hand car market but there is no second hand market for basic commodities. Yesterday’s oil is gone forever so every new BTU has to be a new one. If the producer price does not meet his cost his production ceases. If that happens the owner of 10 year old Camry is as out of gas as is the owner of a new Lexus.

      • nicko2 says:

        Our Finite World…..another doomer. Emerging markets are growing at 5-6%. No collapse this century.

    • Wolf Richter says:

      Houston’s office vacancy rate is around 24% — catastrophically high. But because of cheap money, everyone just keeps carrying the vacant space hoping for better days. What is happening is that companies are upgrading to nicer and new office space since so much of it is available. So there is movement and leasing activity, but it’s just a game of musical chairs.

      Auto sales have plunged starting in 2015, and have not recovered much and remain low. Commercial construction in the office sector has practically collapsed, though other construction segments are doing well (housing, industrial, etc.)

      Houston has a huge diversified, but the energy-related segments are hurting.

    • Frederick says:

      Houston is used to having a boom and bust economy Anyone who hasn’t learned that and over extended themselves will get a rude awakening Nothing new here

  18. Dave Mac says:

    What does Great Thunberg say about this? Or perhaps I should ask:

    What does her speechwriter think of it?

    • Frederick says:

      Nobody gives a rats a…. what the not so great Thunberg thinks
      Or is that too politically incorrect for this venue

  19. unit472 says:

    Recalling the US ‘strategic stockpiles’ of many commodities during the cold war I looked into what is going on today in this field.

    Did you know that Canada maintains a Maple Syrup Strategic Stockpile? It does as Maple Syrup is a vital commodity for Quebec. India still maintains a ‘strategic cotton stockpile’ to protect its textile industry. So did China until recently. Still does maintain a ‘strategic pork reserve’ to guard against soaring pork prices but its not big enough!

    Interesting that the US even had a National raisin reserve as raisins were a popular food item families could send to soldiers overseas in WW2 so demand soared but upon wars end prices fell and the National Raisin Reserve was established to prop up raisin prices. It still lingers around even being brought before the SCOTUS twice this century.

    Something like the National Raisin Reserve or the NEHHOS ( Heating oil for New England) might be set up to stabilize oil prices. Since oil ( Greta Thunebergs deranged teen wishes not withstanding) is a vital commodity upon which modern civilization rests, keeping prices and output stable is a legitimate government concern although you wouldn’t know it from the collection of climate cassandras now in charge of public opinion and policy.

  20. Michael Engel says:

    1) If oil drop, whales will eat guppies. Oil wells will need Dr SLB to keep them running.
    2) If oil cont to drop, well below extraction cost, the gov will subsidize
    the whales and partner with them, dominating the oil sector, so u can drive your cars and heat your houses during the winter time.
    3) Adnan Khashoggi, while in China, was the only one who agree with me.
    4) More gov printing for oil, higher debt, less for other entitlements : NO MONEY for …….
    5) If Yemen could blind fortified Aramco, every deep rig in the ocean can become a standing target.
    6) When there will be blood in the street, when oil will blowup in flames
    ==> inflation will start and the energy sector will rise from the ashes.
    7) Not before !

  21. Michael Engel says:

    DOW down BA up : good for sandwich money.

  22. DR DOOM says:

    Relax, fiat paper thrown down-hole will keep working until de-dollarization is complete. Buy yourself a Big Ride and let’er idle with the heat on while you are in the grocery store buying plastic packaged food. Feeling guilty?, no problem , Virtue Signaling with a Greta T. decal on the window with a recycling logo will absolve you of guilt. As for myself I am waiting to get into an IPO for methane infused water due to its health benefits. Ridiculous you say? I think not. People who would let a CB de-base their money to ZERO can be sold anything including methane infused water.

  23. L says:

    Wolf – Site is ever so slowly morphing into a ZH-like alarmist/ clickbait read.

    It’s OIL. It’s a boom/bust, capital intensive, debt dependent, risk taking, international, technical & innovative, strategic, political business. Always has been. Up, down, ever in motion. Its complex but (weirdly) has a low barrier to low-end entry. It’s PURE CAPITALISIM and that’s what makes it great. Any expectation of stability is naive.

    • Iamafan says:

      Nah. Actually the S&P agrees with Wolf.
      https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/leveraged-loan-news/us-distress-ratio-climbs-to-85-led-by-surging-oil-gas-segment

      Quote:
      The U.S. distress ratio widened to 8.5% as of Oct. 15, 2019, from 7.6% on Sept. 16, with the oil & gas sector seeing the sharpest rise since last year, according to an S&P Global Ratings report on Monday.

      Eight sectors’ distress ratios widened in this period. The oil & gas sector leads with 54 distressed credits and a distress ratio of 35%, more than double the ratio at this point last year (8.7%) and four times that of the overall U.S. level of distress.

    • Wolf Richter says:

      L,

      Look, investors have lost hundreds of billions of dollars on these companies in this industry. If you don’t get this, it’s your problem.

      If you think that a harsh downturn in this industry leaves the rest of the US economy unscathed — the US being the largest oil and gas producer in the world — then this is also your problem.

      You want me to analyze how sunny and warm it is today after the rain we had yesterday? I have news for you: you’re on the wrong site. This site is about “The Stories behind Business, Finance and Money,” as the logo informs you.

    • You callin’ Jerome naive?

  24. Given that so much natural gas was going to be produced as a byproduct of oil drilling, why did anyone think it was a good idea to focus on drilling where the primary product is natural gas? There has been so much substitution of coal with natural gas by the utility companies, it probably would have been unreasonable to hope for any more, so what were they thinking?

    • Cas127 says:

      OI,

      The amount of gas produced relative to the more valuable oil is fairly unpredictable.

      Nobody likes wasting (flaring) the gas, but it takes time (and a lot of money) to build pipelines to take the gas to market.

      One thought – is it economic to have local gas compression and takeaway via rail?

      ND did it with oil until the pipelines got built.

      Gas is a lot more complicated to handle (being, well, a gas…) And it is worth a lot less right now – but the takeaway issue is going to repeat and repeat as more frontier oil fields are employed.

      Rail-then-pipeline seems the way to go if the numbers can be made to work (or if better gas handling/conversion tech can be developed).

    • Low NG prices are a subsidy to government, and public trans. LNG is a subsidy to allies Europe, strategic, and Japan, economic. I don’t know if that is what they had in mind, rolling out CNG cars would have jumped the price and spoiled the game, cheap gas for a few, but not everybody.

  25. No mention of renewables, while they violate the laws of physics, they can levitate this sector financially. Every new technology designed to offset an old technology results in new economic growth (even if it doesn’t really add up), like clean EVs charged with coal fired electric power. Should energy prices rise, renewables provide counter lift, like small cars did in the 70s when everyone drove a gas guzzler. Should oil prices fall, bankruptcies will cascade, across the industry. Volatility in prices is the worst of both worlds: oil prices fall into the 30s then we have a war with Iran.

  26. GrassRanger says:

    All this discussion of the current oil business travail reminds me of a bumper sticker popular during an oil bust decades ago: “Please Lord, give us one more oil boom and I promise not to blow it this time.” Oil booms and busts have continued at irregular intervals since SpindleTop, usually because of some fluke of economics or politics or when production technology outran the economy’s ability to utilize the increased productivity. This era of cheap money will continue to have negative effects in various parts of the economy until the Fed is forced into a reversal of their policies. When that happens, viewer discretion will be advised.

  27. Rcohn says:

    Those companies who produce natural gas via fracking or otherwise are DOA , at anywhere near current prices . This includes all companies involved in Marcellus.
    Permian is a different story . Forgetting about the problems with glaring and venting natural gas, the more efficient operators like OXY, can easily make money at current oil prices . Considerably lower prices are another issue .
    Those less efficient companies are and will continue to be at the epicenter of financial problems, unless oil prices rise considerably. So the larger and more efficient operators will gradually absorb the operations of these companies
    My guess is that given the current outlook for future prices as shown via futures, very little investor money will flow into the Permian this year.

  28. NY Geezer says:

    Gail Tverberg’s ‘disequilibrium point’ where prices are too low for producers and too high for consumers is rational but only for a market that is not manipulated. The oil market is manipulated. Fracking has become a means of manipulating the oil market which is necessary to prevent the chaos that would ensue if 80%-90% of the US public could not afford the amount of gas for their cars that the US economy requires to be a healthy economy.

    Fracking has never been profitable. It has always been a terrible investment for anyone who expects to make money not lose it. I doubt that any wall street firm still owns the frackers’ stocks or bonds. They originate those securities only to unload it. Those who would manipulate the oil market have discovered the painless way to do so.

  29. Anthony Aluknavich says:

    Thanks for the link and a great paper.

  30. Michael Engel says:

    1) Wolfstreet value to his readers, old and new, is rising.
    2) Houston vacancy around 24% after landlords offer tenants
    to expand, takeover vacant spaces at the same floor, or somewhere in the building, for very little additional cost, but at lower average per sq/feet cost, with new LT leases.
    That’s the easiest way for landlords “dress” an empty building.
    3) Paper oil volume is x3 times larger than real oil volume.
    Supply/ demand don’t really matter, trading matter.

  31. Michael Engel says:

    Something have changed. Never seen commercials like that for decades :
    A positive light on men. One is funny, the other as the authority figure of the family, both loving men. The first one loving his wife. The second loving his daughter.
    1) Allstate : a man barking, and licking his wife like a dog, because he is a baby.
    2) Xfinity : a father intercept a boyfriend OUTSIDE his daughter bedroom
    window : u must be….and he reading from his phone, while the boyfriend disappearing.

  32. Mars says:

    The bankruptcies do affect many investors adversely but the information is out there and creates opportunities to trade the trend in natural gas downward. I’m moving out of several 30-45 day old gas short trades and back into oil/energy long.

    OklAhoma – ftfy

  33. Jdog says:

    Another problem in the Oil and Gas industry is law suits from radioactive brine and sludge from the drilling and fracking. The problem is huge and being covered up by sealed legal suits. https://www.rollingstone.com/politics/politics-features/oil-gas-fracking-radioactive-investigation-937389/

  34. DV says:

    What is interesting about shale is how investors were pushed into the loss-making sector. It is pretty much in the same way as with dotcoms.

    The hope right now is that the bigger guys will take over. It is not clear why this foray should be any better for them than the previous one and at much higher prices.

    There is an interesting article on Reuters today (https://uk.reuters.com/article/us-exxon-mobil-turnaround-downstream-ana/at-exxon-ceos-promised-turnaround-sapped-by-chemicals-refining-idUSKBN1ZR0M4). Exxon is having problems, but those problems are attributed in the article to lower margins in chemicals and refining (not clear why, as Exxon should be processing its own “cheap” shale production). As to shale, the article has nothing to say, but that it helped to return to upstream production growth… What it does not say that shale, accounting to 10% of the capex budget, contributes just a few percent in output. Exxon executives, of course, say that it is a “long-term story” and go one and sell assets elsewhere to pay dividend.

    The question is: how long it is going to be, before the very same executives start saying that shale investment “underperformed” and should be cut. Or, in other words, how long are shareholder and investors willing to take negative returns in pursuit of a big national goal of “energy independence” or “energy dominance” (whatever it means).

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