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The Binge

From 2009 to the Fall of 2014 the US tight oil industry put 4.8 MM BPD of highly leveraged light, tight oil on an otherwise balanced world oil market. The ensuing results led to a three month crash in oil prices, from the $80's, to the high $30's. OPEC got the blame for the price collapse in 2014, naturally, because it would not reduce its production in 2015, after the crash, to help US shale oil in its time of need.

Hess attributed those poor returns and lower oil prices to investors and oil companies investing too much in shale too quickly, Hess said. "Shale was the major culprit why prices went down."

John Hess; CEO, Hess Corporation

With oil prices in the $40's the US tight oil sector was in a pickle in 2015; the interest meter on long term debt was still running wide open and it had no place to go, no market, for its high gravity, high naphtha-based, sweet oil. American refineries can only absorb about 4.5 MM BOPD of HZ tight oil. The US Congress, swayed by a powerful shale oil lobby, saved its bacon in 2015 with the repeal of the 1975 export ban on crude oil and condensate.

Chart courtesy; that big hump of HZ drilling rigs, above, was to facilitate oil exports to foreign countries.

Beginning 1Q16 the US tight oil sector then went on a drilling binge. It borrowed over $287 billion of additional CAPEX and ramped up the rig count in the Permian Basin, for instance, from 190 to nearly 600, all with the express intent of exporting additional light tight oil to foreign countries. COVID put the breaks on tight oil's drilling binge in 2020.

According to the Government Accounting Office in a report dated October 2020, the price of oil went up, evidenced in the chart, above, because of exports, and profit margins went down for US refineries, because of exports. These oil exports did absolutely nothing to reduce imports from OPEC after 2015. The rhetoric about the US becoming hydrocarbon independent was a dangerous lie that to this day has left many Americans with a false sense of oil security.

Fast forward to the end of 2021 and most of that $287 billion of borrowed CAPEX has not been paid back yet and exports of LTO have been consistent at 3.15 MM BOPD for the past 2 1/2 years. Since 2015 approximately 6.5 billion barrels of tight oil has been exported to foreign countries. never to be seen again.

"That’s the dirty secret about shale. What we’ve done for the last five years is we’ve drilled the heart out of the watermelon."

To facilitate this 2016 drilling binge the tight oil sector hammered its core areas, its sweet spots with pad drilling, rig walking and zipper frac'ing. According the Journal of Petroleum Technology (SPE) it is likely that thousands of wells were drilled unnecessarily, simply to increase extraction rate of proven, developed reserves. In a feeding frenzy, wells were drilled 330 feet apart, lateral to lateral, and interfered with each other during the frac'ing process thereby reducing, not increasing, recovery rates of oil in place. Ensuing pressure depletion occurred, gas to oil ratios increased, well productivity has declined since 2016, even with longer laterals and more proppant loading, decline rates of shale oil wells appears to be accelerating and billions of cubic feet of associated gas has been wasted up flare stacks. All for the sake of exports.

Sweet spots, or core areas in America's major shale oil basins comprise less than 20% of the total areal extent of the basin itself (Hughes 2021) Those sweet spots now have wells crammed into them like sardines in a can. Shale oil operators now face moving onto the flanks of core areas, where the best rock is, and drilling inferior wells, with higher costs, higher decline rates and worse IRR's and ROI's.

“It has been an economic disaster, especially the last 10 years,” Sheffield said in testimony before Texas’s oil regulators. “Nobody wants to give us capital because we have all destroyed capital and created economic waste.”

Scott Sheffield, CEO, Pioneer Natural Resources; October 2020

In a panic to grow production as fast as possible, proper well spacing standards were abandoned, reservoir pressure was allowed to be flared off and literally the sweet spots in all of America's shale basins have been over drilled. The poor financial performance of the tight oil industry the past decade is now hastening the call for renewables and the transition to EV's. The issue of oil exports has become little more than a political football in a very polarized America; Republicans want to drill it all up, on borrowed money, until there is nothing affordable left to drill, liberal Democrats want to leave it all in the ground in the name of climate change and renewables, also on borrowed money. In the middle is the average, middle income American consumer worried about his kids future.

The lifting of the crude oil export ban in 2015 will likely prove to be the worse energy policy blunder in history. Essentially unregulated, the US shale oil industry rushed to gain market share for its light tight oil and in the process is draining the last of America's vital oil resources, first. The 'Drill Baby Drill' battle cry does nothing but send our country's remaining, sovereign resource wealth overseas, to others, and threatens our nation's long term energy security.

The Heart Of the Watermelon In Each Of American's Major Shale Oil Basins Are Now Drilled Up. Gone. For Exports.


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