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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Shale Pioneer: Fracking Is An “Unmitigated Disaster”

Fracking has been an “unmitigated disaster” for shale companies themselves, according to a prominent former shale executive.

“The shale gas revolution has frankly been an unmitigated disaster for any buy-and-hold investor in the shale gas industry with very few limited exceptions,” Steve Schlotterbeck, former chief executive of EQT, a shale gas giant, said at a petrochemicals conference in Pittsburgh. “In fact, I'm not aware of another case of a disruptive technological change that has done so much harm to the industry that created the change.”

He did not pull any punches. “While hundreds of billions of dollars of benefits have accrued to hundreds of millions of people, the amount of shareholder value destruction registers in the hundreds of billions of dollars,” he said. “The industry is self-destructive.”

The message is not a new one. The shale industry has been burning through capital for years, posting mountains of red ink. One estimate from the Wall Street Journal found that over the past decade, the top 40 independent U.S. shale companies burned through $200 billion more than they earned. A 2017 estimate from the WSJ found $280 billion in negative cash flow between 2010 and 2017. It’s incredible when you think about it – despite the record levels of oil and gas production, the industry is in the hole by roughly a quarter of a trillion dollars.

The red ink has continued right up to the present, and the most recent downturn in oil prices could lead to more losses in the second quarter.

So, questionable economics is not exactly breaking news when it comes to shale. But the fact that a prominent former shale executive – who presided over one of the largest shale gas companies in the country – called out the industry face-to-face, raised some eyebrows, to say the least. “In a little more than a decade, most of these companies just destroyed a very large percentage of their companies' value that they had at the beginning of the shale revolution,” Schlotterbeck said. “It's frankly hard to imagine the scope of the value destruction that has occurred. And it continues.”

“Nearly every American has benefited from shale gas, with one big exception,” he said, “the shale gas investors.”’ Related: China Launches World’s First Smart Oil Tanker

The industry is at a bit of a crossroads with Wall Street losing faith and interest, finally recognizing the failed dreams of fracking. The Wall Street Journal reports that Pioneer Natural Resources, often cited as one of the strongest shale drillers in Texas, is largely giving up on growth and instead aiming to be a modest-sized driller that can hand money back to shareholders. “We lost the growth investors,” Pioneer’s CEO Scott Sheffield said in a WSJ interview. “Now we’ve got to attract a whole other set of investors.”

Sheffield has decided to slash Pioneer’s workforce and slow down on the pace of drilling. Pioneer has been bedeviled by disappointing production from some of its wells and higher-than-expected costs.

But, as Schlotterbeck told the industry conference in Pittsburgh, the problem with fracking runs deep. While shale E&Ps have succeeded in boosting oil and gas production to levels that were unthinkable only a few years ago, prices have crashed precisely because of the surge of supply. And, because wells decline at a precipitous rate, capital-intensive drilling ultimately leaves companies on a spending treadmill.

Meanwhile, as the financial scrutiny increases on the industry, so does the public health impact. A new report that studied over 1,700 articles from peer-reviewed journals found harmful impacts on health and the environment. Specifically, 69 percent of the studies found potential or actual evidence of water contamination associated with fracking; 87 percent found air quality problems; and 84 percent found harm or potential harm on human health.

The health impacts have been a point of controversy for years, pitting the industry against local communities. The industry largely won the tug-of-war over fracking, beating back federal and state efforts to regulate it. However, the story is not over. Related: Philadelphia Refinery Explosion To Boost Gasoline Prices

In many cases, there is an abundance of anecdotal evidence pointing to serious health impacts, but peer-reviewed research takes time and has lagged behind the incredible rate of drilling. Now, the public health research is starting to catch up. Of the more than 1,700 peer-reviewed studies looking at these issues, more than half have been published since 2016.

One need not be an opponent of fracking to recognize that this presents a threat to the industry. For instance, a spike of a rare form of cancer has cropped up in southwestern Pennsylvania recently. The causes are unclear, but some public health advocates and environmental groups are pointing the finger at shale gas drilling, and have called on the governor to stop issuing new drilling permits. The Marcellus Shale Coalition, an industry group, said the request was “ridiculous.” The region is right at the heart of high levels of shale drilling, so any regulatory action coming in response the public health outcry could impact drilling operations. Time will tell.

In the meantime, poor financials are the largest drag on the shale sector. “And at $2 even the mighty Marcellus does not make economic sense,” Steve Schlotterbeck, the former EQT executive said at the conference. “There will be a reckoning and the only questions is whether it happens in a controlled manner or whether it comes as an unexpected shock to the system.”

By Nick Cunningham, Oilprice.com

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Leave a comment
  • Lee James on June 24 2019 said:
    Lots for "energy" investors to think about. "Energy" needs to be beyond petroleum. It needs to include how to burn less fossil fuel and how quickly should we develop alternatives to burning fossil fuel.
  • ricardo2000 NoName on June 25 2019 said:
    The ugly truth is that fracked oil and gas created a glut that cut the throats of those companies.
    Demand for oil and gas has flat-lined but no one wants to talk about it as they line up the 'last fools' to invest in this dying sector.
    Don't believe me: the world doesn't need oil from Venezuela, Libya, Syria, Iran, Iraq, or Canada.
    The price of crude would be much higher if the world did need any one of these producers, but it continues to hover around break-even prices, or lower.
    This is the reason DumbTrump is picking a fight with Iran and destroying so much of the Middle East: he needs to prop up Saudi and US oil by removing as much competitive crude from the market as he can.
  • One Second on June 25 2019 said:
    The rude awakening can't come soon enough. Destroying hundreds of billions of value just to poison people and ruin the environment is the most stupid disaster ever.
    Granted, it was one of the only ways actual people could get their hands on Wall Street money since taxes are only for the poor to pay in the US, but the price still to pay really is not worth it.
  • Jeffrey Pickett on June 25 2019 said:
    The EXXON purchase of XTO has cost the shareholders plenty. Should have been fired not retired. The South Texas Shell-Harrison Ranch billion dollar project big loss. The Barnett Shale most over sold area since the EU we have put all our eggs in one basket to let this latest repackaged Co2 scam die. Why do you think they keep changing the name for the "useful idiots". They are everywhere and with the highest university pedigree and IQ but only a few get the big bucks aka crony capitalism. Greed and ego seem to always rule the day and they stand in line in the rain for more of please, sir Oliver Twist. Bet this one sailed right over their heads.
  • One Second on June 26 2019 said:
    So billions of dollars were invested in creating no value at all and destroying human health and the environment in the process. Just imagine the amount of valuable renewable assets that could have been created with that kind of money.
  • Brian C on June 26 2019 said:
    While true, this is more a function of what the market demanded in previous years. At the beginning of the shale revolution, the market paid for growth. That’s why we famously saw examples like Anadarko running 10 rigs in the Marcellus at ~$2/mcf pricing. And the market at that time valued the BOE growth. Companies were not destroying, but prolonging, value because every time the we’re close to cash flow positive, they bought something. The market at the time rewarded that behavior.

    Today, and really since the ‘14 price reset, the market pays for value. Companies that are cash flow positive and generating free cash flow are rewarded by the market for demonstrating they can live within their means. Acquisitions today must be more strategic, and are heavily scrutinized, rather than immediately rewarded.

    In some companies, boards are still grappling with this new paradigm, as they all came up in a growth era. But the economics of shale are unquestionably there - its the strategic management of the assets that is changing today to deliver value. The industry is adapting.

    It’s a good thing too, because out of all the signers of the Kyoto Protocol, the US (which didn’t sign) is the only country that met those targets. It could only be accomplished by natural gas, and the shale revolution is solely to thank for that.

    Despite marketing efforts, it is generally understood in the utilities sector that renewables are still decades away from the holy trinity: scalable to metro areas, truly economic and technologically feasible. Nat gas is the only thing today and in the foreseeable future that gets us there.
  • Mark Bickford on June 26 2019 said:
    Rare cancer found, cause uknown. LOL
    The only thing they left out was the children. You get much more hysteria by claiming children are dying. What a missed opportunity. Better put it in the next anti-carbon, anti-human article.
  • Stephen Harris on June 29 2019 said:
    I do not think Nick Cunningham is seeing the situation clearly as he spends most of his writing documented the struggles a new part of industry is dealing with and not looking at the true big picture. That is probably to be expected as this comes from a freelance writer needing headlines in his job. However, simple numbers tell a different story - like ROR. If you got two well that will give you the same EUR, yet one will take 15 years to reach a depletion bottom and the other depletes rapidly (front loaded) then you will have a significant better ROR with the faster decline but vastly higher initial rates than the long term conventional wells. In addition, long term achievement of desired results will invariably run through multiple price swings while the faster recovery periods can avoid a lot of future uncertainty obviously. I can cite charts and studies all day long but the central focus of Nick's post really should be the true perils of debt. Here again, a long history supports never getting into debt in the oil business and living within your cash flow. Most of the early shale folks and banks, funds and all sorts of leverage entities make a living preying on debt suckers all day long. The lessons of 1986are still relevant (lower lifting costs below what the Arabs can flood the market (that was $8/bbl back then); increase volume if you can and most importantly never go into debt). The early shale folks violated two of these lessons regularly but did indeed increase the volume spectacularly. Those that today are lowering their lifting costs, improving completions (far cry from the early mistakes in the Barnett) will make a fortune in this relatively low risk process. I well remember all the dry holes we had to endure and shale offers a way out of such risk adversity, which is quite an accomplishment. Nick needs to get out behind his keyboard and go visit the Patch and find out what is really going on in my humble opinion.
  • Sean Ryan on June 30 2019 said:
    This isn't the whole story.
    The rest of the story outlines how to make profits from losses, and shows how the markets are completely gamed.

    Let's use the example of Pioneer Natural Resources.
    PNR is owned by Propetro Holding Corp.

    The largest shareholders of Propetro include money management/investment giants such as Vanguard, BlackRock, State Street (the "Big Three"), Wellington Management, and others.

    These largest shareholders are similarly the largest shareholders of the largest corps that are benefitting from Pioneer's spendind/losses...such as on heavy equipment, transportation, software, tech, pipelines, and so on.


    It's money kept in the same cartel family of investment firms, transferred from one owned corporate asset to another.

    The only shareholders that truly lose out are those not similarly invested in the corps on the receiving end of that spending.

    The entire stock market is gamed this way.

    Those largest shareholders have the holdings, thus power, to determine operational control of their held corporate assets.

    This is all publicly available info using fintel, or by viewing SEC 13f filings.

    These largest institutional shareholders even exist as the largest shareholders/investors of each other.

    One huge cartel controlling the markets, and economy.
  • Seth D on July 01 2019 said:
    Shale is an unmitigated disaster for only one party - OPEC.

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