By Andy Rowell
According to a new analysis, the U.S. now holds more oil reserves than Saudi Arabia and Russia, the first time this has happened. And more than half of the U.S.'s remaining oil reserves are in shale oil.
The analysis, by Rystad Energy, has concluded that recoverable oil in the U.S. from existing fields, discoveries and yet undiscovered areas is equivalent to 264 billion barrels, which easily beats Saudi Arabia's 212 billion barrels and just squeezes past Russia's 256 billion.
Photo credit: Paul Lowry
The crux though will be whether the U.S. shale industry can access the finance to carry on exploiting shale. And that remains to be seen.
The mini-revival in the oil price may be over. Having rallied since its low point earlier in the year of $27, oil had reached the $60 a mark, but has slipped back to below $50 a barrel on concerns about a slowdown in the global economy has increased.
And those looking for a rapid increase in the next few months look set to be disappointed. The CEO of the world's largest oil trader, Vitol, which trades about 6 million barrels a day, has told Bloomberg that oil prices will not rise much further over the coming months.
Vitol's boss, Ian Taylor said: "I cannot see the market really roaring ahead. We have a lot of oil in the system and it will take us considerable time to work that off."
The international benchmark will probably end the year "not too far away from where we are today" and rise to about $60 by the end of 2017, Taylor said.
According to Bloomberg: "The wild card for next year is U.S. shale supply, which appears to have reached a bottom, but it's too early to say whether growth will resume."
But shale growth is not looking certain, with the industry still struggling with a low oil price and access to financing. And one of the key way to access financing is via bond sales.
As the Financial Times reported: "Bond sales by U.S. independent oil and gas companies have fallen to their slowest rate for more than a decade, in a warning sign of financing constraints that could hold back the industry's recovery."
In the second quarter of this year, the U.S. shale sector sold a paltry $280m of bonds in the second quarter, making it a slower period than any since the financial crisis of 2008-09.
In contrast, the paper points out, the industry raised almost $860bn from bond sales and bank loans during the boom years of 2007-2014. It is an industry still sitting on a crumbling pile of debt.
And the bottom line is that the industry is still spending more than it is earning. According to the FT, the leading U.S. exploration and production companies cut their capital spending to $14.9 billion in the first quarter of this year, which is a whopping $10 billion more than they earned.
This is totally unsustainable and will constrict the smaller players from accessing bonds and finance. Gary Ross of Pira Energy told the FT: "It's not going to be easy to reconstruct this industry."
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By Sharon Kelly
America is in the midst of the biggest onshore oil and gas rush in recent history, with excitement spreading across the U.S. Oil and gas companies have cashed in on this frenzied excitement by courting huge investments domestically and abroad.
But a growing chorus of independent analysts and law enforcement agencies have their doubts and have questioned whether shale drillers are over-hyping their financial prospects and overestimating how much oil or gas they can profitably pull from the ground. Just this week, one of America's biggest agricultural lenders, the Netherlands-based Rabobank, announced that it would no longer lend money to companies that invest in shale gas extraction (nor to farmers worldwide who lease their land to these drillers).
The way that oil and gas companies describe their prospects in their financial statements matters because investors—and not just the uber-wealthy ones but also pension funds, university endowments, average folks with retirement savings or 401(k)s—can lose catastrophically if the information they rely on is faulty.
This matters to taxpayers too, since lawmakers need accurate information when making long-term decisions about the industry subsidies and tax breaks granted to encourage the drilling boom. The shale fracking rush could prove to be an expensive bust for taxpayers if oil and gas wells do not perform as promised.
Concern that companies have been over-exuberant about shale led Wall Street's two top cops, the Securities and Exchange Commission (SEC) and the New York Attorney General to investigate whether oil and gas companies have been "overbooking" their reserves (translation: inflating their appeal by promising investors more fossil fuels than their wells can actually deliver).
In the drilling industry, Chesapeake is known for being more aggressive than many of its competitors in its "land grab" strategies, its use of book-keeping methods to obscure costs, even in its legal and public relations posture toward local communities that try to block drilling.
Last year, Chesapeake came under renewed heavy scrutiny after then-CEO Aubrey McClendon’s $1.1 billion in personal loans, an undisclosed private hedge fund and extensive perks were revealed by an award-winning Reuters investigation.
Little has leaked out about the SEC and New York Attorney General probes. One company, Goodrich Energy, announced in September 2012 that the SEC probe into their reserves was over, but no other companies made similar announcements.
Recently, with little fanfare, Chesapeake announced a move that underscores the importance of these concerns and also offers another example of the revolving door that has characterized relations between the oil and gas industry and the regulatory agencies that are supposed to police them.
The SEC's Revolving Door Problem
On June 17, Chesapeake Energy announced it had appointed a new chief Compliance Officer, Patrick K. Craine. Craine is an accomplished attorney—he was a partner at a major law firm, Bracewell & Guiliani, where he specialized in white collar criminal defense, regulatory enforcement and internal investigations.
But hands down his greatest value to Chesapeake will be the role Craine played at the SEC. A former prosecutor, Craine handled many oil and gas cases at the SEC and, according to his law firm bio page, "prosecuted the largest oil and gas reserves restatement case in history."
Companies that hire former regulators often dismiss concerns about revolving doors, arguing that no one knows the rules better than the people who used to administer them. Their specialized knowledge and experience in interpreting rules is invaluable to companies who want to follow the rules in good faith and navigate complicated regulations, they say.
But since the financial collapse in 2008, watchdogs have honed in on the problems that can result when former prosecutor go to work for the industries they once investigated – especially at the SEC.
"Former employees of the Securities and Exchange Commission routinely help corporations try to influence S.E.C. rule-making, counter the agency’s investigations of suspected wrongdoing, soften the blow of S.E.C. enforcement actions, block shareholder proposals and win exemptions from federal law," the Project on Government Oversight (POGO) wrote in a report released earlier this year.
When the people who are supposed to police an industry are too cozy with the people representing that industry, they can pick up their world view. They can come to identify strongly with the people they are supposed to be overseeing, undermining their ability to take tough measures. And current regulators can unconsciously give former colleagues who now work for the industry greater deference or leeway because of their shared past.
That's why many federal agencies have ethics rules that attempt to guard against regulatory capture. But last year, the SEC's own Inspector General investigated how the SEC guards against conflicts of interest caused by revolving doors and concluded that the agency's ethics rules on these matters were riddled with loopholes.
And when it comes to policing the colossally wealthy and politically powerful oil and gas industry, the SEC is especially outgunned as its staff of enforcement specialists consists of little more than a handful of experts.
A Little-Noticed SEC Rule Change
In some ways, the SEC has helped create some of the very problems it is now investigating at Chesapeake and other drilling companies.
At the end of 2008, the SEC loosened rules that govern how oil and gas companies can calculate their reserves. The new rules from the SEC allowed more leeway in predicting how much oil and gas their wells, particularly unconventional oil and gas wells like shale or coal bed methane, could produce. This was a boon for drilling companies like Chesapeake in their effort to attract investment.
This little-noticed SEC rule change—one of the Bush Administration’s last moves before leaving office—allowed companies license to more optimistically book unconventional oil and gas, including shale gas and shale oil.
The impact of this rule change on the shale gas industry was enormous and immediate.
"The final SEC rules have demonstrably created a situation where there is room for interpretations" that allow unconventional oil and gas companies to book larger reserves, a July 2012 Society of Petroleum Engineers paper by Ruud Weijemars concluded, adding that "a difference in reserves reporting ‘culture’ has emerged between U.S. independents—engaged in unconventional-gas developments—and the oil majors."
After the SEC changed its rules, a huge gulf emerged between the ways that these independents booked their reserves and how conventional oil and gas companies applied the rules.
"Digging deeper into company reports reveals some additional cause for concern about the certainty of economic production from shale gas reserves," Weijemars wrote in his peer-reviewed paper.
A company-by-company review led to a damning conclusion for the unconventional gas industry. Weijemars found that "throughout 2009, companies such as Petrohawk, Devon, Chesapeake and EOG could not produce gas with an operational profit. The 51 percent increase of 2009 proved reserves from U.S. shale producers therefore cannot be explained by economic fundamentals."
He said instead, that companies appeared to be making money through financial engineering and the use of creative financing. Forty percent of Chesapeake’s 2009 operational income didn’t come from selling gas, but instead came from derivative trading. (Weijemars is not alone in having doubts about Chesapeake’s prospects—last year a report by ITG Investment Research calculated that Chesapeake could only deliver 70 percent of the oil and gas it was promising.)
"Today’s reality is that nearly all North American shale-gas projects are losing money faster than can be generated from operational income," Weijermar and Joost van der Linden wrote in First Break, a journal that covers applied geophysics, petroleum geoscience and reservoir engineering, "which means losses must be compensated" using various financing techniques and selling off acreage.
The SEC is the federal agency that should be asking hard questions, uncovering information like this and making sure the numbers provided to investors add up. And indeed, Chesapeake has found itself under numerous inquiries that will keep former-SEC prosecutor Patrick Craine’s hands full. But so far it's not clear how aggressively the SEC will police Chesapeake's reserve claims —or similar claims by the rest of the shale oil and gas industry—or whether any results will simply be buried.
Meanwhile, market analysts are increasingly finding red flags in the industry’s publicly-disclosed data. These concerns have even drawn the attention of Congress.
"Shale wells deplete alarmingly," testified energy analyst Deborah Rogers in May before the Senate Committee on Energy and Natural Resources. Rogers, who was recently appointed an adviser to the U.S. Department of the Interior's Extractive Industries Transparency Initiative which is looking into some of these issues, described a pattern where companies like Chesapeake need to drill more wells just to keep gas flowing out and cash flowing in.
She also explained why this pattern is not just financially worrisome.
"The collateral damage in the form of air toxics, ground water depletion, encroachment, road damages and potential aquifer ruination in the United States could be immense," she said, "and will only continue to rise as more and more wells need to be drilled."
Visit EcoWatch’s FRACKING page for more related news on this topic.