Years Not Decades: Proven Reserves and the Shale ... · 2/23/2015 · Labyrinth&Consul4ng&Services,&Inc.& artberman.com& Slide1& Years Not Decades: Proven Reserves and the Shale

Slide 1 Labyrinth Consul4ng Services, Inc. artberman.com

Years Not Decades: Proven Reserves and the Shale Revolution

The Apparent End of The Beautiful Story Art Berman Labyrinth Consulting Services, Inc.

Ray Leonard Hyperdynamics

Houston Geological Society Houston, Texas February 23, 2015


•  Shale plays have added years, not decades, to domes4c oil and gas supply. •  Oil and gas from shale is called unconven4onal, a euphemism for expensive: neither is

commercial at current prices. •  There is no revolu4on: it is a final, desperate effort to squeeze the last remaining

petroleum from the worst possible rock. •  8 years of shale gas proven plus proven-‐undeveloped reserves. •  3 years of 4ght oil proven plus proven-‐undeveloped reserves. •  Both will peak in the next 10 years. •  Current policy favors export of both oil and gas based on a belief in abundance. •  This will both hasten and accentuate the difficult energy and economic circumstances of

the next decade.

The Reality of Years, Not Decades, of Shale Gas and Tight Oil

Technology*&**Opera0ons*(Engineers)*

Profitability*(Economists)*

Poli0cs*(Sociologists)*

Resources*(Geoscien0sts)*


The Beau4ful Story: Energy Independence & American Global Dominance •  Produc4on from shale is a revolu4on that has changed everything. •  The U.S. is now the largest producer of natural gas and petroleum liquids in the world. •  There are at least 100 years of natural gas supply and decades of 4ght oil supply. •  The U.S. will use its endless oil and gas resources to re-‐assert dominance in the world. •  It will challenge Russian power and aggression by expor4ng natural gas to Europe and

Ukraine, and export natural gas to Asia. •  U.S. 4ght oil produc4on has transformed the U.S. economy and makes us less dependent

on Saudi Arabia and other Middle Eastern countries. •  Discussions with Iran may alienate other allies in the region but, since we no longer need

their oil, it doesn’t ma[er. •  Shale gas has re-‐invigorated American manufacturing and petrochemical produc4on.


•  Energy is the economy. •  Currency is a call on work-‐energy. •  Energy resources are the capital account behind currency. •  The economy can grow as long as there is surplus energy in that account. •  The economy will stop growing when there is only enough energy to meet

basic needs.

A Framework for U.S. Shale Gas and Tight Oil & The Current Oil Price Crisis

$0#

$20#

$40#

$60#

$80#

$100#

$120#

$140#

)1%#

0%#

1%#

2%#

3%#

4%#

5%#

6%#

7%#

Jan)70#

Jan)72#

Jan)74#

Jan)76#

Jan)78#

Jan)80#

Jan)82#

Jan)84#

Jan)86#

Jan)88#

Jan)90#

Jan)92#

Jan)94#

Jan)96#

Jan)98#

Jan)00#

Jan)02#

Jan)04#

Jan)06#

Jan)08#

Jan)10#

Jan)12#

Jan)14#

Bren

t&Oil&Price&in&Con

stan

t&2013&US&Do

llars&

Real&GDP

&Growth&Rate&

U.S.&Real&GDP&and&Oil&Price&Real#GDP#Growth# Brent#Oil#Price#$2013#

Source: EIA, mtpl.com


•  The American success story is based on a unique period from 1945-‐1970: Ø  Aaer WWII, the U.S. had no rivals for manufacturing and world export, Ø  The U.S. dominated world power, naval and air transport, Ø  The U.S. was energy self-‐sufficient with spare produc4on capacity and controlled

world oil price through the Texas Railroad Commission’s system of allowable produc4on.

•  By the mid-‐1960s, Germany and Japan recovered and challenged U.S. manufacturing. •  U.S. oil produc4on peaked in 1970 and price control was ceded to OPEC. •  In 1971, Nixon took the U.S. off of the gold standard by abroga4ng the Bre[on Woods

Accord. The rest of the members of the Accord followed and a massive devalua4on of global currency increased oil prices 2.5 x in one year and 5.5 x in 5 years.

•  The world and its economy would never be the same.

A Framework for U.S. Shale Gas and Tight Oil & The Current Oil Price Crisis

The key drivers behind the (dependent) Cobb Douglas variables can be identified as 1. natural resources (including energy), 2. credit availability and, to a certain degree 3. technology progress

=

Reality is slightly more complex

TotalFactor

Produc-tivity

CapitalOutput HumanLabor

A group of aspects driving factor productivity (including efficiency, but also

substitutions between labor and mechanical energy, global outsourcing,

new resource uses)

Credit availability and cost

Energy and resource

availability and cost

>90%

Source: IIER


Source: EIA, Dow Jones, Infla4ondata.com

$0#

$20#

$40#

$60#

$80#

$100#

$120#

$140#

$160#

Jan,50#

Sep,51#

May,53#

Jan,55#

Sep,56#

May,58#

Jan,60#

Sep,61#

May,63#

Jan,65#

Sep,66#

May,68#

Jan,70#

Sep,71#

May,73#

Jan,75#

Sep,76#

May,78#

Jan,80#

Sep,81#

May,83#

Jan,85#

Sep,86#

May,88#

Jan,90#

Sep,91#

May,93#

Jan,95#

Sep,96#

May,98#

Jan,00#

Sep,01#

May,03#

Jan,05#

Sep,06#

May,08#

Jan,10#

Sep,11#

May,13#

Decembe

r'2014'U.S.'D

ollars'Per'Barrel'W

TI'

CPI9Adjusted'Crude'Oil'Price'195092015'

End of Bre*on Woods & Arab Oil Embargo

Iranian Revolu4on

Iran-‐Iraq War

Saudi Arabia Abandons Swing Producer Role

Iraq Invades Kuwait

Asian Financial Crisis

OPEC Cuts ProducBon 1.7 mmbpd

9-‐11 A*acks

Low OPEC Spare

Capacity

Global Financial Collapse

OPEC Cuts ProducBon 4.2

mmbpd

Arab Spring

U.S. dominated world manufacturing & world power. Period of export

surpluses & cheap, domesBc oil supply +

control of world oil price

The End of Normal: 1970

1974: Credit Alert. 1979: Credit Downgrade. 2008: Bankruptcy Proceedings Began.


!2.0%&

!1.5%&

!1.0%&

!0.5%&

0.0%&

0.5%&

1.0%&

1.5%&

0&

20&

40&

60&

80&

100&

120&

140&

Jan!08&

Feb!08&

Mar!08&

Apr!08&

May!08&

Jun!08&

Jul!0

8&Au

g!08&

Sep!08&

Oct!08&

Nov!08&

Dec!08

&Jan!09&

Feb!09&

Mar!09&

Apr!09&

May!09&

Jun!09&

Jul!0

9&Au

g!09&

Sep!09&

Oct!09&

Nov!09&

Dec!09

&Jan!10&

Feb!10&

Mar!10&

Apr!10&

May!10&

Jun!10&

Jul!1

0&Au

g!10&

Sep!10&

Oct!10&

Nov!10&

Dec!10

&Jan!11&

Feb!11&

Mar!11&

Apr!11&

May!11&

Jun!11&

Jul!1

1&Au

g!11&

Sep!11&

Oct!11&

Nov!11&

Dec!11

&Jan!12&

Feb!12&

Mar!12&

Apr!12&

May!12&

Jun!12&

Jul!1

2&Au

g!12&

Sep!12&

Oct!12&

Nov!12&

Dec!12

&Jan!13&

Feb!13&

Mar!13&

Apr!13&

May!13&

Jun!13&

Jul!1

3&Au

g!13&

Sep!13&

Oct!13&

Nov!13&

Dec!13

&Jan!14&

Feb!14&

Mar!14&

Apr!14&

May!14&

Jun!14&

Jul!1

4&Au

g!14&

Sep!14&

Oct!14&

Nov!14&

Dec!14

&

Percen

t'Cha

nge'in'Produ

c0on

'vs.'Con

sump0

on'

Bren

t'Crude

'Oil'Price'(Dollars'Per'Barrel)'

World'Liquids'Produc0on?Consump0on'Balance'&'Brent'Crude'Oil'Price'PRODUCTION&SURPLUS& PRODUCTION&DEFICIT& BRENT&PRICE&

Source: EIA

The Choke-‐Chain: Net Energy Scarcity Characterized by ~ 12-‐Month Cycling

•  Supply DeficitàPrice increase to demand limitàIncen4ve to over-‐produceàDemand destruc4onàProduc4on surplusàPrice dropàProducers cut backàSupply deficitàPrice Increase.

•  Chronic scarcity: Ø  resource costs become significant and doubts about price cycling limit investment

spending, Ø  Net scarcity persists once established because of uncertainty.

•  Service costs increase faster than product price during high-‐price cycles. •  The choke chain is why neither price or technology is a solu4on to more energy: high

price and the cost of technology trigger the choke chain.


The End of Peak Oil?

Source: EIA

0"

2"

4"

6"

8"

10"

12"

1950

"

1952

"

1954

"

1956

"

1958

"

1960

"

1962

"

1964

"

1966

"

1968

"

1970

"

1972

"

1974

"

1976

"

1978

"

1980

"

1982

"

1984

"

1986

"

1988

"

1990

"

1992

"

1994

"

1996

"

1998

"

2000

"

2002

"

2004

"

2006

"

2008

"

2010

"

2012

"

2014

"

Millions'of'B

arrels'of'O

il'Pe

r'Day'

U.S.'Crude'Oil'Produc8on'Conven0onal"Oil" Tight"Oil"

1970%Peak%Oil%Produc2on%9.6%mmbpd%

Tight%Oil%Produc2on%+%Conven2onal%%%%%%%9.1%mmbpd%

Prudhoe%Bay%

•  The observa4on of Peak Oil: once conven4onal produc4on peaks, supply will become increasingly dependent on more expensive, lower quality sources of oil.

•  …Like shale, deep-‐water, and tar sands. •  It looks like Peak Oil is baing 1000!


Source: EIA

The End of Peak Oil?

•  World produc4on probably peaked in 2005. •  Tight oil and deep-‐water produc4on will con4nue for another decade.

0"

10000"

20000"

30000"

40000"

50000"

60000"

70000"

80000"

1980"1981"1982"1983"1984"1985"1986"1987"1988"1989"1990"1991"1992"1993"1994"1995"1996"1997"1998"1999"2000"2001"2002"2003"2004"2005"2006"2007"2008"2009"2010"2011"2012"2013"

Millions'of'B

arrels'of'C

rude

'Oil'Pe

r'Day'

World'Crude'Oil'Produc6on'1980;2013'Conven1onal"Oil" Tight"Oil" Peak%Produc+on%2005%


Net$EnergyOil$(Saudi$Arabia) 100:1Coal 50:1Hydroelectric 30:1Oil$(Global$Average) 30:1Wind 18:1Wave 15:1Natural$Gas 10:1Nuclear 10:1Geothermal 8:1Solar$PV 7:1Oil$Sands 6:1Shale$Gas$&$Tight$Oil 5:1Biofuels 3:1Solar$Thermal 2:1Source: Heinberg and Barna[

101%$ 100%$

92%$

76%$

65%$ 65%$60%$

36%$ 35%$

24%$

0.1%$ 0.1%$0%#

20%#

40%#

60%#

80%#

100%#

120%#

Diesel# Crude#Oil# Gasoline# Anthracite# NGL# Ethanol# LNG# Wood# Lignite# CNG# Methane# Natural#Gas#Pe

rcen

t$of$C

rude

$Oil$En

ergy$Con

tent$Per$Lite

r$

Energy$Content$of$Various$Fuels$Compared$To$Crude$Oil$

Source: EIA

Not All Energy Is Equal

•  Net energy from shale gas and 4ght oil is less than from solar PV. •  Net energy content of natural gas liquids is <65% of crude oil or

gasoline. •  Net energy content of natural gas is <1% of crude oil or gasoline on a

volume basis and only 24% as CNG and 60% as LNG.


TCF$GAS PDP PDP$YRS PUD$ PUD$YRS PDP$+$PUD PDP$+$PUD$YRSTOTAL$SHALE$GAS 164 6.3 69 2.7 234 9.0MARCELLUS 65 2.5 29 1.1 94 3.6BARNETT 26 1.0 6 0.2 32 1.2EAGLE$FORD 17 0.7 9 0.3 26 1.0HAYNESVILLE 16 0.6 7 0.3 24 0.9WOODFORD 13 0.5 10 0.4 22 0.9FAYETTEVILLE 12 0.5 5 0.2 17 0.7BAKKEN 5 0.2 4 0.1 9 0.3OTHER 10 0.4 ? ? 10 0.4

MMBO$&$CONDENSATE PDP PDP$YRS PUD PUD$YRS PDP$+$PUD PDP$+$PUD$YRSTOTAL$TIGHT$OIL 9,560 1.7 7,976 1.4 18,019 3.3BAKKEN 4,844 0.9 3,382 0.6 8,226 1.5EAGLE$FORD 4,177 0.8 2,680 0.5 6,857 1.2PERMIAN 335 0.1 1,819 0.3 2,154 0.4MARCELLUS 129 0.0 51 0.0 180 0.0BARNETT 58 0.0 44 0.0 102 0.0NIOBRARA 17 0.0 ? ? 17 0.0OTHER 483 ? ? 483 0.1

SHALE$GAS

TIGHT$OIL

Source: EIA

Shale Gas and Tight Oil Proven Reserves

•  How can these volumes and years of supply be reconciled with the expecta4ons promoted by the oil and gas industry, poli4cians and press?

•  Reserves are volumes at a certain price—oil reserves will fall in 2015.


2013%SHALE%GAS%PROVEN%RESERVES BCF 2013%TIGHT%OIL%PROVEN%RESERVES MmboNew%Field%Discoveries% 16 New%Field%Discoveries 9

Marcellus)Utica-(KY)TN)OH) 16 Bakken 4New%Reservoir%Discoveries%in%Old%Fields 1113 Eagle-Ford 3

Woodford 424 Niobrara)Mancos 1Marcellus)Utica 312 Woodford 1

Permian 4 New%Reservoir%Discoveries%in%Old%Fields 170Barnett 338 Permian 75

Eagle-Ford 29 Woodford 34Bakken 3 Eagle-Ford 26

Niobrara 3 Niobrara)Mancos 18Bakken 13

Marcellus)Utica 3Barnett 1

New Reserve Addi4ons For Shale Gas & Tight Oil Were Insignificant in 2013

Source: EIA

Source: EIA

•  All changes for natural gas reserves were because of higher price only.


298$

266$

174$

157$150$

102$ 98$ 93$

48$ 44$37$

30$ 25$18$ 16$ 13$ 12$ 11$ 9$ 8$

0$

50$

100$

150$

200$

250$

300$

350$

Venezuela$

Saudi$Arabia$

Canada$

Iran$

Iraq$

Kuwait$

UAE$

Russia$

Libya$

US$

Nigeria$

Kazakhstan$

Qatar$

China$

Brazil$

Angola$

Algeria$

Mexico$

Norway$

Ecuador$

Billion

s'of'B

arrels'of'O

il'

Proven'Crude'Oil'Reserves'By'Country'

United''States'#10'

Source:((BP(

1,193%

1,104%

872%

617%

330%291%

215% 197% 179% 159%130% 127% 116% 103%

72% 71% 65% 63% 55% 54%

0%

200%

400%

600%

800%

1,000%

1,200%

1,400%

Iran%

Russia%

Qatar%

Turkm

enistan%

US%

Saudi%Arabia%

UAE%

Venezuela%

Nigeria%

Algeria%

Australia%

Iraq%

China%

Indonesia%

Norway%

Canada%

Egypt%

Kuwait%

Libya%

Kazakhstan%

Trillions(of(C

ubic(Feet(o

f(Gas(

Proven(Natural(Gas(Reserves(by(Country((

United''States'#5'

Source:((BP(

The United States is Not an Oil or Gas Super Power

•  The U.S. is 10th in oil reserves including 4ght oil. •  It may produce more oil than Saudi Arabia for awhile but reserves are

only 17%. •  It is a long 5th in natural gas. •  U.S. gas reserves are 53% of #4 Turkmenistan & 38% of #3 Qatar.


0.00#

2.00#

4.00#

6.00#

8.00#

10.00#

12.00#

2011# 2012# 2013# 2014# 2015# 2016# 2017# 2018# 2019# 2020# 2021# 2022# 2023# 2024# 2025# 2026# 2027# 2028# 2029# 2030#

Millions'of'B

arrels'of'C

rude

'Oil'Pe

r'Day'

U.S.'Produc8on'&'Net'Imports'of'Crude'Oil'Produc3on# ###Net#Imports#

Produc'on)Peak)Import)Minimum)

Source: EIA

•  According to EIA, U.S. oil produc4on will peak in 2016 and decline thereaaer. •  2016 will also be the lowest point for U.S. imports that will increase in later

years.

U.S. Oil Produc4on Will Peak Soon and Imports Will Increase.


0"

2"

4"

6"

8"

10"

12"

14"

16"

Jan+05"

Jan+06"

Jan+07"

Jan+08"

Jan+09"

Jan+10"

Jan+11"

Jan+12"

Jan+13"

Jan+14"

Jan+15"

Jan+16"

Jan+17"

Jan+18"

Jan+19"

Jan+20"

Jan+21"

Jan+22"

Jan+23"

Jan+24"

Jan+25"

Jan+26"

Jan+27"

Jan+28"

Jan+29"

Jan+30"

Jan+31"

Jan+32"

Jan+33"

Jan+34"

Jan+35"

Jan+36"

Jan+37"

Jan+38"

Jan+39"

Billion

s'of'C

ubic'Feet'o

f'Gas'Per'Day'

U.S.'Shale'Gas'Produc;on'&'Forecast'

MARCELLUS"

HAYNESVILLE"

BARNETT"

FAYETTEVILLE"

WOODFORD"

Data$Forecast$

•  All shale gas plays except the Marcellus are in decline already. •  The future of U.S. gas supply is a single bet on the Marcellus Shale. •  Credible 3rd party forecasts predict a Marcellus peak around 2020.

Most Shale Gas in Decline

Source: Labyrinth Consul4ng Services, Inc.


The Fracking Fallacy Debate Casts Doubt on the EIA Natural Gas Forecast

0"

50"

100"

150"

200"

250"

300"

350"

EIA" Drilling"Deeper" UT/BEG" 2013"PDP+PTD+PUD" 2013"PDP"+"PTD"

Trillions(of(C

ubic(Feet(o

f(Gas(

Comparison(of(EIA,(Drilling(Deeper(&(UT/BEG(Shale(Gas(UlAmate(ProducAon(EsAmates(With(EIA(Proven(Reserves((PDP),(Drilling(Down(ProducAon(To(Date((PTD)(and(EIA(Proven(Undeveloped(Reserves((PUD)(

TOTAL"

Marcellus"

Haynesville"

BarneC"

FayeCeville"

Source: EIA, Drilling Deeper & BEG

•  Bureau of Economic Geology and David Hughes (Drilling Deeper) forecast total U.S. natural gas peaking in the early 2020s.


0"

2"

4"

6"

8"

10"

12"

14"

16"

2012" 2013" 2014" 2015" 2016" 2017" 2018" 2019" 2020" 2021" 2022" 2023" 2024" 2025" 2026" 2027"

Billion

s'of'C

ubic'Feet'o

f'Gas'Per'Day'

U.S.'Natural'Gas'Export'Forecast'Pipeline"Exports"to"Mexico"(SENER)" LNG"Exports"(EIA)"

Source: EIA & SENER

Source: GAO

Natural Gas Exports and Increased Demand From Coal Plant Re4rements

•  More than 10 Bcf/d of pipeline and LNG exports are sanc4oned by 2020. •  EPA regula4ons will reduce coal’s percent of electric power genera4on

beginning this year. •  Long-‐term natural gas demand from coal-‐plant re4rements will increase

by 4-‐5 Bcf/d.


The Power Of Siberia Pipeline Changes Everything

•  Russia’s gas deal with China is largest in history: 1.4 Tcf over 30 years for $400 billion.

•  Sets a $10/MMBtu benchmark price for Asia without oil linkage. •  Gas agreement has far-‐reaching implica4ons for global LNG markets. •  Russia plans to be the leading supplier to Asian gas markets. •  Russia’s East Siberia proven reserves: 196 Tcf & 7 billion barrels of oil , 3-‐4mes

Canadian reserves and more than U.S. shale gas resources. •  This is only the beginning: pipelines to Korea & Japan are planned.

Source: Gazprom


$7.00%

$4.70% $4.80% $4.30%

$2.50%

$2.31%$3.26%

$2.33%

$5.00%

$4.82% $2.88%

$3.50%

$0%

$2%

$4%

$6%

$8%

$10%

$12%

$14%

$16%

Horn%River%Ki6mat%(Greenfield)%

Montney%(Greenfield)% Haynesville%(Brownfield)% U.S.%Gulf%Coast%(Brownfield)%

Land

ed&Costs&in&Ja

pan&

Break1Even&North&American&LNG&Project&Costs&

Liquefac6on%

Processing%&%Transporta6on%

Upstream%Cost%

•  Lowest break-‐even price for Gulf Coast brownfield projects will struggle to compete with Russian price threshold.

•  When natural gas prices increase as produc4on peaks in the next 5 years, LNG export will seem like a bad idea because of higher margin from domes4c sales.

•  Ironically, LNG import beginning in the 2020s is likely.

LNG Exports Will Follow the Ill-‐Conceived History of LNG Import in the U.S.

Source: RBC


0"

5"

10"

15"

20"

25"

Jan)11"

Feb)11"

Mar)11"

Apr)11"

May)11"

Jun)11"

Jul)1

1"Au

g)11"

Sep)11"

Oct)11"

Nov)11"

Dec)11

"Jan)12"

Feb)12"

Mar)12"

Apr)12"

May)12"

Jun)12"

Jul)1

2"Au

g)12"

Sep)12"

Oct)12"

Nov)12"

Dec)12

"Jan)13"

Feb)13"

Mar)13"

Apr)13"

May)13"

Jun)13"

Jul)1

3"Au

g)13"

Sep)13"

Oct)13"

Nov)13"

Dec)13

"Jan)14"

Feb)14"

Mar)14"

Apr)14"

May)14"

Jun)14"

Jul)1

4"Au

g)14"

Sep)14"

Oct)14"

Nov)14"

Dec)14

"

Millions'of'B

arrels'of'LIquids'Per'Day'

EIA'Top'15'Liquids;Producing'Countries'

US"&"Canada"

United"States"

Russia"

Saudi"Arabia"

China"

Canada"

Iraq"

Mexico"

Iran"

UAE"

Brazil"

Kuwait"

Venezuela"

Nigeria"

Norway"

Angola"

U.S.'&'Canada'Oil'ProducEon'

Source: EIA

Current Oil Price Crisis Because of Supply Surplus & Demand Destruc4on

•  Classic over-‐produc4on during high-‐price half-‐cycle. •  Choke chain effect ended the cycle in mid-‐2014. •  Current slump will slow produc4on & increase demand due to low prices.


SAMPLED(E&P(FREE(CASH(FLOW(&(DEBT(COMPARISON((2014(FCF(ANNUALIZED)2014(FCF 2013(FCF FCF(DIFFERENCE 2014(DEBT 2013(DEBT DEBT(DIFFERENCE

GAS>WEIGHTED >6,637 >7,901 1,264 84,748 81,403 3,345OIL>WEIGHTED >7,619 >5,621 >1,999 87,786 83,407 4,378ALL >14,257 >13,522 >735 172,534 164,810 7,724

Tight Oil and Shale Gas Plays Funded by Debt, Bonds,Stock Offerings & Asset Sales

•  Companies are chronically cash-‐flow nega4ve.

•  Unmanageable debt that can never be paid from cash flow.

•  Debt must be con4nually re-‐financed on increasingly poorer terms.

•  Diminishing returns on investment.

•  The E&P business has become financialized—the only measure is produc4on-‐reserve growth.

•  The appeal is the rela4vely short-‐term basis compared with deep-‐water, etc.

Source: crudeoilpeak.info

Source: Labyrinth Consul4ng Services, Inc.


The Current Oil Price Crisis

88"

89"

90"

91"

92"

93"

94"

95"

Jan-14" Feb-14" Mar-14" Apr-14" May-14" Jun-14" Jul-14" Aug-14" Sep-14" Oct-14" Nov-14" Dec-14" Jan-15"

Millions'of'B

arrels'of'Liquids'Per'Day'

EIA'World'Liquids'Produc9on'&'Consump9on'ProducCon" ConsumpCon"

Source: EIA

•  The current oil price crisis really began in January 2014 when world supply went into a surplus.

•  The price signal lagged ~6 months.

•  The supply surplus is approximately 1-‐1.5 mmbpd.

Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14Supply 91.79 91.56 91.01 91.22 91.65 91.51 91.47 92.14 91.57 92.14 92.07 92.98Demand 92.39 91.98 91.51 92.14 92.82 92.08 90.70 91.88 90.64 91.51 90.85 91.87Supply Surplus -0.61 -0.42 -0.50 -0.92 -1.17 -0.57 0.77 0.26 0.93 0.64 1.22 1.11Brent Price $107.93 $111.28 $111.60 $109.08 $107.79 $110.76 $108.12 $108.90 $107.48 $107.76 $109.54 $111.80

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15Supply 93.15 93.41 93.98 94.57 94.08 93.68 92.86Demand 93.14 92.45 92.98 93.38 93.20 93.00 91.90Supply Surplus 0.02 0.96 1.01 1.19 0.87 0.68 0.97Brent Price 106.77 101.61 97.09 87.43 79.44 62.34 47.76

Source: EIA


The Financializa4on of the Explora4on & Produc4on Business

$0#

$20#

$40#

$60#

$80#

$100#

$120#

$140#

$160#

0%#

1%#

2%#

3%#

4%#

5%#

6%#

7%#Jan000#

Jun000#

Nov000#

Apr001#

Sep001#

Feb002#

Jul00

2#De

c002

#May003#

Oct003#

Mar004#

Aug004#

Jan005#

Jun005#

Nov005#

Apr006#

Sep006#

Feb007#

Jul00

7#De

c007

#May008#

Oct008#

Mar009#

Aug009#

Jan010#

Jun010#

Nov010#

Apr011#

Sep011#

Feb012#

Jul01

2#De

c012

#May013#

Oct013#

Mar014#

Aug014#

Jan015#

WTI$Oil$Price$Janu

ary$2015$US$Do

llars$

Interest$Rate$

Federal$Funds$Interest$Rates$January$2000>January$2015$

Source: EIA and Federal Reserve Board

•  In a zero-‐interest world, where could reasonably secure yields be found? •  Investment banks iden4fied the U.S. E&P business as the solu4on. •  Yields for corporate junk bonds, preferred stock and other capital instruments in the

range of 6-‐10% interest. •  In the United States and “backed” by a hard asset in the ground. •  E&P companies became the sub-‐prime deriva4ve of the post-‐Financial Crisis period. •  Shale gas and later, 4ght oil companies had access to almost infinite capital with no

performance requirement other than to avoid debt covenants.


Concluding Observa4ons

$0#

$20#

$40#

$60#

$80#

$100#

$120#

$140#

$160#

0#

2#

4#

6#

8#

10#

12#

14#

16#

18#

20#

Jul,5

4#Feb,56#

Sep,57#

Apr,59#

Nov,60#

Jun,62#

Jan,64#

Aug,65#

Mar,67#

Oct,68#

May,70#

Dec,71

#Jul,7

3#Feb,75#

Sep,76#

Apr,78#

Nov,79#

Jun,81#

Jan,83#

Aug,84#

Mar,86#

Oct,87#

May,89#

Dec,90

#Jul,9

2#Feb,94#

Sep,95#

Apr,97#

Nov,98#

Jun,00#

Jan,02#

Aug,03#

Mar,05#

Oct,06#

May,08#

Dec,09

#Jul,1

1#Feb,13#

Sep,14#

Oil$Price$2015$U.S.$D

ollars$

Interest$Rates$

U.S.$Federal$Funds$Rate$&$CPI=Adjusted$Oil$Price$Interest#Rate# Oil#Price#

Source: EIA and Federal Reserve Board

•  The beau4ful story of shale plays was the inevitable result of increasing resource scarcity and a monetary policy that permi[ed the distor4on of zero interest rates since 2008.

•  The financializa4on of the U.S. E&P business created a boom in produc4on and economic ac4vity with no reference or calibra4on to its lack of commercial substance.

•  Energy is the economy and just as energy prices reacted to the ar4ficial low oil price un4l 1974, energy prices are now reac4ng to the ar4ficially low cost of capital since 2008.

•  The beau4ful story of shale plays was part truth and part fic4on as any story must be to be believed. •  The reserves added were important but not revolu4onary & added years and not decades to supply. •  The United States is major oil and gas producer but not a reserve heavyweight. •  Neither crude oil or natural gas exports make good sense from a resource security perspec4ve. •  The current oil-‐price crisis is normal from the standpoint of supply surplus and is part of a predictable

pa[ern of price cycling that comes from resource scarcity. •  Its severity and dura4on are uncertain because it represents the culmina4on of almost a decade of

monetary meddling and unprecedented capital availability.


8.0$ 8.1$ 8.2$ 8.5$ 8.6$ 8.6$ 8.7$ 8.7$ 8.9$ 9.1$ 9.0$ 9.1$ 9.2$

7.3$ 7.0$ 7.0$7.3$

6.9$ 6.7$7.2$ 7.1$ 7.2$ 6.8$ 6.8$ 7.0$ 6.9$

0$

2$

4$

6$

8$

10$

12$

14$

16$

18$

Jan014$ Feb014$ Mar014$ Apr014$ May014$ Jun014$ Jul014$ Aug014$ Sep014$ Oct014$ Nov014$ Dec014$ Jan015$

Millions'of'B

arrels'Per'Day'

U.S.'Crude'Oil'Produc8on'&'Net'Imports'

Net$Imports$

ProducIon$

Source: EIA

The Anthem of Energy Independence is Not Supported by Facts

•  U.S. net imports of 7 mmbpd out of 16 mmbpd of total consump4on. •  Michael Levi’s Ques4ons:

Ø  If the U.S. were impor4ng 44% of its workers, would that represent abundance?

Ø  If the U.S. were impor4ng cars, pain4ng them green and expor4ng them for sale, would that represent a growing car manufacturing industry?


Slide 27 Labyrinth Consul4ng Services, Inc. artberman.com Eagle Ford Shale EUR Map: green areas are commercial at $95/barrel WTI oil price Eagle Ford Shale EUR Map: green areas are commercial at $70/barrel WTI oil price Eagle Ford Shale EUR Map: green areas are commercial at $45/barrel WTI oil price

Documents

Years Not Decades: Proven Reserves and the Shale ... · 2/23/2015 · Labyrinth&Consul4ng&Services,&Inc.& artberman.com& Slide1& Years Not Decades: Proven Reserves and the Shale