Editor & Publisher, Marcellus Drilling News (MDN)
Art Berman has been wrong from the beginning, but he’s still out there projecting doom and gloom and trying to ignore a shale revolution he’s never grasped.
You know what magical thinking is? It’s what happens when an analyst/consultant repeatedly predicts the world has reached “peak oil” production and that oil production will soon decline, leading to insanely high prices for oil. It happened – the prediction, that is.
Then the shale revolution happened. Oops. So much for the discredited “peak oil” theory. But the same analyst, for a long time, kept repeating his discredited theory. We call that magical thinking, too, and if you want to understand it better click on the link to the right for an Amazon link to a whole book on the subject.
It’s what Art Berman, one the favorite academic hustlers of fractivists, does for a living.
This same analyst, of course, then predicted “peak natural gas” – that the shale revolution was a bubble and would soon end because shale wells peter out so quickly, don’tcha know. The analyst never factored new technology, and new shale layers, would be discovered. Oops. More magical thinking. Now that same analyst says cheap shale gas will end soon – the price is about to go insanely high. Yet more magical thinking.
Enthusiasts believe that shale gas is simultaneously cheap, abundant and profitable thus defying all rules of business and economics. That is magical thinking.
The recently released EIA Annual Energy Outlook 2016 sparkles with pixie dust as it forecasts almost unlimited gas supply at low prices out to 2040 and beyond. Exuberant press reports herald a new era of LNG exports that will change the geopolitical balance of the world and make America great again.
But U.S. shale gas production is declining because of low prices and shale gas companies are in deep financial trouble because in the real world, price and cost matter.
That is not magical.
First Quarter 2016 Financial Performance
The financial performance of shale gas-weighted E&P companies in the first quarter of 2016 was a disaster.
Chesapeake Energy, the biggest shale gas producer in the world, had negative cash from operations. That means that oil and gas sales didn’t even cover operating costs much less capital expenditures like drilling and completion.
Other shale gas-weighted companies including Anadarko, Comstock and Petroquest also had negative cash from operations. Goodrich and Sandridge are in bankruptcy and Exco and Halcon will soon follow. Ultra, Forest, Quicksilver, Swift and Talisman were lost in action last year.
On average, surviving companies out-spent cash flow by two-to-one both in 2015 and 2016 but many normally strong companies greatly increased negative cash flow this year.
Click the link below to keep reading. It may give you a good laugh. Heck, it may make you think.
Look, we’re not saying all is hunky dory and there’s no problems. Of course there are! What Berman always fails to do is factor in good old American ingenuity. You know what? Maybe THERE IS a way we can have really cheap natgas AND still make a profit! Companies like Cabot are figuring it out. Berman’s stilted view is that things in the future will always be what they have been in the past. Technology never changes. Strategies never change. New markets never develop. Berman lives in a static world–but that’s not the real world where things do change. Sometimes slowly, sometimes rapidly.
The only magical thinking going on is Berman’s.
Editor’s Note: I have been fascinated, ever since taking my first Resource Economics course course at Penn State some 45 years years ago or so, at how predictably otherwise supposedly intelligent people will always predict the exhaustion of natural resources. It’s been going on, I suppose, since the first cave man, realizing his supply of flint to make projectile points was running low, imagined there might be no way to hunt animals and supply himself with meat in the future. He couldn’t envision any other world, or bullets. It’s seemingly been going on ever since, as one “expert” after another over the centuries has predicted the end, unable to imagine the alternatives mothered by need combined with ingenuity.
Such has been the case with the shale revolution and, interestingly enough, a day after Jim put this post up on MDN, his favorite branch of government, the Energy Information Administration, came out with a great article explaining how low natural gas prices (which are a sign of surplus, not scarcity) are projected well into the future as a result of the shale revolution, providing inexpensive fuel for electricity generation while reducing carbon emissions. Here are the two revealing charts from the article, which are self-explanatory.
So much for Art Berman’s magical thinking.