Natural gas flares from a flare-head at the Orvis State oil well in McKenzie County, North Dakota, east of Arnegard and west of Watford City. Photo: Tim Evanson via Flickr (CC BY-SA).
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Are the fracking vampires going bust? That's how it looks
26th October 2015
The high oil prices that turned North Dakota into a boom state have turned, writes Joshua Frank. Now high-cost oil and gas are in the doldrums everywhere, production is falling - and even if prices do pick up one day, risk aversion and the relentless advance of renewables will leave lakes of oil and caverns of gas underground where they belong. Folks, the oil party really is over!
Oil frackers, and natural gas frackers too, could now be at in the beginning stages of a collapse on the scale of what happened in 1986 when production slowed and oil prices hit a low of $9.85 a barrel.
Oil is crashing, and gas prices at the pump keep sliding lower and lower.
As of October 2015, a barrel of Brent crude (the global standard) is selling for less than $50, that's nearly half of what a barrel cost last year at this time.
What does all of this mean? You wouldn't likely think that a significant drop in oil prices could actually be a good thing for the environment and a bad thing for Big Oil and dirty frackers, yet it may well be.
It's long been presumed that expensive oil makes alternative fuels much more viable. As this line of reasoning goes, cheaper oil will ensure that more of it will be pumped out of the ground and consumed. Gas guzzlers will replace smaller, more efficient vehicles, and more people will fly because plane fares will reflect lower fuel prices.
Seems logical enough. That's if, of course, you aren't looking at Big Oil's profit margins. Since 2008, oil production in the United States has increased 80% - from 5 billion barrels a day to over 9 million and the oil barons would very much like to keep it that way. Most of this increase comes as a result of North Dakota's nearly overnight oil fracking frenzy.
But now prices are freefalling, and profits aren't what they used to be. The real question is: how long will these circumstances last? One thing is for sure, the longer the prices decline, the more impact they will have on the entire industry.
The North Dakota fracking boom goes flat
Let's start with the fracking boom (oil, not natural gas) in North Dakota's once lucrative Bakken region. In May 2012, North Dakota leap-frogged Alaska to became the No. 2 oil-producing state in the country, trailing only Texas. More than $2 billion a month is spent in the state to frack oil out of the Bakken Shale Formation.
As of June 2014, North Dakota was producing 1 million barrels of oil per day. This, while oil prices were well over $100 a barrel. To put it bluntly, it's been a mad rush to frack every last bit of North Dakota's oil. The environment be damned, it's all about the money.
But here's the caveat and it's a big one: at below $80 a barrel, nearly all of the major fracking operators in the Bakken start losing cash. The longer oil sits at around $50 a barrel, where it's at today, the less oil will be fracked out of the frigid North Dakota tundra.
Investment bank Evercore Partners recently noted if this downward trend continues, companies in Asia, Europe and North America will be forced to dramatically cut capital spending. Evercore estimates that exploration and production in North America could be cut by as much as 25-30% and globally by 10-15% this year alone.
If true, this means a serious recession will smack the oil producers in the very near future. If investments are indeed scaled back, it will mean that hard to reach oil reserves, those that cost a lot of money to access, will most likely remain in the ground.
The signs are already showing up. ExxonMobile, Royal Dutch Shell and other major extraction outfits have recently announced lay offs and cuts in investment spending. In a nutshell, lower oil prices mean less oil production in the US - not the other way around.
Could it be caused by something so simple as market forces?
What's the cause of this drop in prices? Some are taking conspiratorial jabs at the OPEC 'cartel', while others are laying blame at the feet of Vladimir Putin, but in reality the reason is much more benign: oil prices are simply reacting to the market and dropping to the average cost of global production, largely because oil prices have been overly inflated for the past two decades.
Global commodity futures, not just oil, dropped throughout 2014, and strategic investors are now scaling back. In short, the world's economy is slowing. This means, expensive oil-producing operations, like those in North Dakota, won't remain profitable if the price of oil stays low.
For example, it costs far more to produce a barrel of oil from fracking in North Dakota (around $70-$80 per barrel) than it does to pump out a barrel of crude in Saudi Arabia ($4-$5 a barrel). The Saudis, one OPEC partner, certainly are not upset that prices are dipping even though they aren't solely responsible (Venezuela, another member of OPEC, is taking a big hit as prices drop).
The Saudis are now waiting for investors to turn their backs on expensive Arctic drilling in Russia, tar sands in Canada, and yes, oil fracking in the United States.
Oil frackers (and natural gas frackers too, we'll get to that below) could now be at in the beginning stages of a collapse on the scale of what happened in 1986 when production slowed and oil prices hit a low of $9.85 a barrel. As a result, many high-cost oil wells in the US became unprofitable and had to be shut down. That's just the kind of news fracking's foes would like to see happen across the country today.
Oil production outlook negative - even if prices do pick up
There's also another elephant in the room for the oil frackers: supplies are being depleted so fast that production is likely to flat-line and then dip in the years ahead, regardless of whether or not the price per barrel increases. Based on conservative estimates of shale oil reserves, the US Energy Information Agency predicts that by 2020 US oil production will plateau.
"I look at shale as more of a retirement party than a revolution", Art Berman, a petroleum geologist who spent 20 years with Amoco, recently told Bloomberg. "It's the [industry's] last gasp."
While others may challenge Berman's assessment, there is no denying that dropping prices, coupled with expensive extraction methods, will eventually have a very real impact on Big Oil. It's already happening. As of November 2014, permits to drill for oil and natural gas were down 40% from October.
Truth be told, the oil market is, and has always been, finicky, Yet renewables, like decentralized solar, are not. UN climate chief negotiator Christiana Figueres recently stated that oil price volatility "is exactly one of the main reasons why we must move to renewable energy which has a completely predictable cost of zero for fuel ... We are seeing more and more the realization that investment in fossil fuel is actually a high risk, is getting more and more risky."
As oil prices have slumped, so too have natural gas prices. Renewables on the other hand, have remained extremely steady. Deborah Rogers of Energy Policy Forum reports that frackers have overproduced natural gas, largely to meet financial analysts' lofty, unrealistic targets in order to keep the cash flowing in. It was all by design of course - Wall Street's design, writes Rogers:
"Wall Street promoted the shale gas drilling frenzy, which resulted in prices lower than the cost of production and thereby profited [enormously] from mergers & acquisitions and other transactional fees. US shale gas and shale oil reserves have been overestimated by a minimum of 100% and by as much as 400-500% by operators according to actual well production data filed in various states."
If they can't afford to frack, they won't do it
If true, coupled with the dropping global oil prices, fracking in the United States may be on the skids and that's a good thing for the environment, at least for the near future. The more fossil fuels that stay where they are the better, contends a new study in the January issue of the science journal Nature.
Christophe McGlade and Paul Ekins at University College London contend that "globally, a third of oil reserves, half of gas reserves and over 80 percent of current coal reserves should remain unused from 2010 to 2050 in order" to fend of catastrophic climate change.
Even if fracking begins to slow in the US, this does not mean other countries might not start to frack their own expansive oil and gas reserves - such as Russia, China, Argentina, Libya and Venezuela. Even so, fracking isn't cheap, and depreciating prices don't leave much room for profitability.
Simply put, if they can't afford to frack, they won't do it. Over this past summer, fracking across the country took a dip. Industry consultant Drillinfo, which has access to proprietary information, recently told Reuters that well productivity in the top three US shale fields, including the Bakken, have either fallen or remained stagnant from July to August.
One thing is certain, the frackers across the United States aren't pleased with the steady decline of oil prices. If the slide continues or remains right where it is, you can safely bet that fewer and fewer permits will be issued for fracking operations, and more fossil fuels will remain in the ground, right where they should be.
Joshua Frank is managing editor of CounterPunch. He is author of Left Out! How Liberals Helped Reelect George W. Bush (Common Courage Press, 2005), and along with Jeffrey St. Clair, the editor of Red State Rebels: Tales of Grassroots Resistance in the Heartland and Hopeless: Barack Obama and the Politics of Illusion, both published by AK Press. He can be reached at email@example.com. You can follow him on Twitter @brickburner.
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