More Peak Oil bad news…..

15 06 2017

There have been no end of new articles on the demise of the oil industry lately. I’ve been so busy building that it’s only now I can catch up with some blogging, so here’s your lot for the time being.

From the srsroccoreport.com website comes this unbelievable analysis…:

While the Mainstream media continues to put out hype that technology will bring on abundant energy supplies for the foreseeable future, the global oil and gas industry is actually cannibalizing itself just to stay alive.   Increased finance costs, falling capital expenditures and the downgrade of oil reserves are the factors, like flesh-eating bacteria, that are decimating the once great oil and gas industry.

This is all due to the falling EROI – Energy Returned On Investment in oil and gas industry.  Unfortunately, most of the public and energy analysts still don’t understand how the Falling EROI is gutting the entire system.  They don’t see it because the world has become so complex, they are unable to connect-the-dots.  However, if we look past all the over-specialized data and analysis, we can see how bad things are getting in the global oil and gas industry.

Let me start by republishing this chart from my article, Future World Economic Growth In Big Trouble As Oil Discoveries Fall To Historic Lows:

The global oil industry only found 2.4 billion barrels of conventional oil in 2016, less than 10% of what it consumed (25.1 billion barrels).  Conventional oil is the highly profitable, high EROI oil that should not be confused with low quality “unconventional” oil sources such as OIL SANDS or SHALE OIL.  There is a good reason why we have just recently tapped in to oil sands and shale oil…. it wasn’t profitable for the past 100 years to extract it.  Basically, it’s all we have left…. the bottom of the barrel, so to speak.

Now, to put the above chart into perspective, here are the annual global conventional oil discoveries since 1947:

You will notice the amount of new oil discoveries (2.4 billion barrels) for 2016 is just a mere smudge when we compare it to the precious years.  Furthermore, the world has been consuming about an average of 70 million barrels per day of conventional oil production since 2000 (the total liquid production is higher, but includes oil sands, deep water, shale oil, natural gas liquids, biofuels and etc).  Conventional oil production has averaged about 25 billion barrels per year.

As we can see in the chart above… we haven’t been replacing what we have been consuming for quite a long time.  Except for the large orange bar in 2000 of approximately 35 billion barrels, all the years after were lower than 25 billion barrels.  Thus, the global oil industry has been surviving on its past discoveries.

That being said, if we include ALL liquid oil reserves, the situation is even more alarming.

Global Oil Liquid Reserves Fall In 2015 & 2016

According to the newest data put out by the U.S. EIA, Energy Information Agency, total global oil liquid reserves fell for the past two years.  The majority of negative oil reserve revisions came from the Canadian oil sands sector:

Of the 68 public traded energy companies used in this graph, total liquid oil reserves fell from 116 billion barrels in 2014 to 100 billion barrels in 2016.  That’s a 14% decline in liquid oil reserves in just two years.  So, not only are conventional oil discoveries falling the lowest since 1947, companies are now forced to downgrade their total liquid oil reserves due to lower oil prices.

This can be seen more clearly in the EIA chart below:

The “net proved reserves change” is shown as the black line in the chart.  It takes the difference between the additions-revisions, (BLUE) and the production (BROWN).  These 68 public companies have been producing between 8-9 billion barrels of oil per year.

Because of the downward revisions in 2015 and 2016, net oil reserves have fallen approximately 16 billion barrels, or nearly two years worth of these 68 companies total liquid oil production.  If these oil companies don’t suffer anymore reserve downgrades, they have approximately 12 years worth of oil reserves remaining.

But… what happens if the oil price continues to decline as the global economy starts to really contract from the massive amount of debt over-hanging the system?  Thus, the oil industry could likely cut more reserves, which means… the 12 years worth of reserves will fall below 10, or even lower.  My intuition tells me that global liquid oil reserves will fall even lower due to the next two charts in the following section.

The Coming Energy Debt Wall & Surging Finance Cost In The Energy Industry

Over the next several years, the amount of debt that comes due in the U.S. oil industry literally skyrockets higher.  In my article, THE GREAT U.S. ENERGY DEBT WALL: It’s Going To Get Very Ugly…., I posted the following chart:

The amount of debt (as outstanding bonds) that comes due in the U.S. energy industry jumps from $27 billion in 2016 to $110 billion in 2018.  Furthermore, this continues higher to $260 billion in 2022.  The reason the amount of debt has increased so much in the U.S. oil and gas industry is due to the HIGH COST of producing Shale oil and gas.  While many companies are bragging that they can produce oil in the new Permian Region for $30-$40 a barrel, they forget to include the massive amount of debt they now have on their balance sheets.

This is quite hilarious because a lot of this debt was added when the price of oil was over $100 from 2011 to mid 2014.  So, these companies actually believe they can be sustainable at $30 or $40 a barrel?  This is pure nonsense.  Again… most energy analysts are just looking at how a company could producing a barrel of oil that year, without regard of all other external costs and debts.

Moreover, to give the ILLUSION that shale oil and gas production is a commercially viable enterprise, these energy companies have to pay its bond (debt) holders dearly.  How much?  I will show you all that in a minute, however, this is called their DEBT FINANCING.  Some of us may be familiar with this concept when we have maxed out our credit cards and are paying a minimum interest payment just to keep the bankers happy.  And happy they are as they are making a monthly income on money that we created out of thin air… LOL.

According to the EIA, these 68 public energy companies are now spending 75% of their operating cash flow to service their debt compared to 25% just a few years ago:

We must remember, debt financing does not mean PAYING DOWN DEBT, it just means the companies are now spending 75% of their operating cash flow (as of Q3 2016) just to pay the interest on the debt.  I would imagine as the oil price increased in the fourth quarter of 2016 and first quarter of 2017, this 75% debt servicing ratio has declined a bit.  However, people who believe the Fed will raise interest rates, do not realize that this would totally destroy the economic and financial system that NEEDS SUPER-LOW INTEREST RATES just to service the massive amount of debt they have on the balance sheets.

As an example of rising debt service, here is a table showing Continental Resources Interest expense:

Continental Resources is one of the larger energy players in the Bakken oil shale field in North Dakota.  Before tapping into that supposed “high-quality” Bakken shale oil, Continental Resources was only paying $13 million a year to finance its debt, which was only $165 million.  However, we can plainly see that producing this shale oil came at a big cost.  As of December 2016, Continental Resources paid $321 million that year to finance its debt…. which ballooned to $6.5 billion.  In relative terms, that is one hell of a huge credit card interest payment.

The folks that are receiving a nice 4.8% interest payment (again… just a simple average) for providing Continental Resources with funds to produce this oil at a very small profit or loss… would like to receive their initial investment back at some point.  However….. THERE LIES THE RUB.

With that ENERGY DEBT WALL to reach $260 billion by 2022, I highly doubt many of these energy companies will be able to repay that majority of that debt.  Thus, interest rates CANNOT RISE, and will likely continue to fall or the entire financial system would collapse.

Lastly…. the global oil and gas industry is now cannibalizing itself just to stay alive.  It has added a massive amount of debt to produce very low-quality Shale Oil-Gas and Oil Sands just to keep the world economies from collapsing.  The falling oil price, due to a consumer unable to afford higher energy costs, is gutting the liquid oil reserves of many of the publicly trading energy companies.

At some point… the massive amount of debt will take down this system, and with it, the global oil industry.  This will have an extremely negative impact on the values of most STOCKS, BONDS & REAL ESTATE.  If you have well balanced portfolio in these three asset classes, then you are in serious financial trouble in the future.

Then…….  on ABC TV’s lateline (I’m rarely up late enough to watch it, so this was an omen…) this interview came up. I have to say, I found the whole Qatar thing rather bizarre, but this commentator thinks that Saudi Arabia is already in trouble

http://www.abc.net.au/lateline/content/2016/s4682983.htm

And now Zero Hedge has this to say as well….

Oil Prices Suffer First ‘Death Cross’ Since 2014 Collapse

For the first time since September 2014, after which oil prices collapsed almost 75%, Brent and WTI Crude futures both just flashed a ‘death cross’ signal as the 50-day moving-average crossed below the 200-day moving-average.

The crossover is typically seen a loss of short-term momentum and last occurred in the second half of 2014, when prices collapsed due to oversupply amid surging U.S. shale oil production.

 

As Bloomberg notes, OPEC and its partners will be hoping their efforts to curb output will be enough to support prices and counteract any fears of growing downside risk.

 

However, this morning’s news of “real” OPEC production may raise more doubts about the cartel’s commitment (and going forward, the Qatar debacle won’t help).

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22 responses

15 06 2017
Barry KIRKWOOD

Excellent article. Would be interested in your opinion of Duncan’s Olduvai Theory which suggests that electric power generation may be the most critical measure of peak energy rather than peak oil.

15 06 2017
mikestasse

Well I’ve been saying for years that without cheap and abundant oil, the mainteneance of the grid will quickly go downhill….. which is why I’ve gone off grid!

15 06 2017
ejhr2015

Bugger the debt, we need the actual oil. The debt is just numbers in accounts and can be paid out by monetary sovereign operations just as they did during the GFC. It’s not that debt doesn’t matter but in the pecking order of importance compared to not have oil, it is trivial.

15 06 2017
Barry KIRKWOOD

Thanks for that! Yes, you are very much on the ball. Best wishes.

15 06 2017
Chris Harries

A formular for sinking the world economy, EJ.

Meanwhile, from the horses mouth:
http://www.worldoil.com/news/2017/6/14/shale-drillers-may-be-digging-own-hole-as-oil-flirts-with-40

At the end of the day oil barons and investors in the industry can’t ignore debt. They don’t invest in oil altruistically.

15 06 2017
ejhr2015

You missed my point. The government will bail out the drillers.

15 06 2017
mikestasse

Sure……. with more debt!

besides, YOU missed the point…. the oil industry is now consuming 25% of the oil they extract just to keep drilling and producing….. the ERoEI is already so bad, it’s tanking the economy, and once that’s over, NOBODY will be buying oil, and any price….

15 06 2017
ejhr2015

No, wrong!.WRONG!
Why do that when the government bailed out the GFC banks without causing debt? They just marked up the accounts the banks held in the fed with numbers. Suddenly no more debt. It’s a net credit operation, without liability.

I repeat, please understand, the debts are wiped out and the oil drillers can carry on. No way will debt stop the drilling unless the whole economy goes belly up.

The government will see to it. They can do it any time. Just in case you don’t know, the Fed spent 29 TRILLION dollars bailing out the GFC banks 2008-2010. They can do it again any time and as often as necessary, and they WILL. It buys time and every extra moment counts. The oil will be virtually free, courtesy of the government paying the drillers. The government will also pay us so we can buy bread etc.

16 06 2017
mikestasse

Errrr sorry but, when the banks were bailed out, heaps more debt was created.

And how do you think everyone involved in the fracking gets paid? DEBT! If you stop/can’t print more debt to pay the workers, they will stop working. Money is the lubricant of the economy.

Unless ABSOLUTELY EVERYONE in the world decides to work for nothing (ie no money) and merely keeps doing what they are doing right now only without a single cent being exchanged – something I suggested years ago – then everything will grind to a halt. It’s what happened in the last great depression. We had virgin continents full of resources back then – unlike now – and still everything ground to a halt from lack of money.

16 06 2017
ejhr2015

Dedt works as a part of the economy, like you say, in NORMAL times. We are no now talking about normal times. Ever heard of the Debt jubilee? Debts are forgiven so the economy can reset.
Your problem is that you are in thrall to mainstream economics ideas. They notoriously don’t work. The economy motors along with their input, which is basically trying to forecast the future of tomorrows trading etc.
Where did you get the idea that heaps more debt was created when the banks were bailed out? The debt was Already There. The bail out wiped it out as the government can spend to pay debts. It does not create debt. It buys debt. It does not create liabilities, unlike banks. The government ‘spends’ into existence, the banks ‘lend’ into existence.

Please try to understand!

15 06 2017
lemmiwinks

I’m guilty of just skimming over the article, but it’s worth noting that without having the exploration figures (i.e. how much were they actually *looking* for oil) to compare with the rate of new discoveries, it’s hard to know how bad availability really is.

Don’t get me wrong, I’m not disputing that the whole thing is a giant shitshow that surely must be circling the drain to some extent or other, but there’s economic reasons (pushing up the price for example) other than EROEI which can explain falling new discoveries.

15 06 2017
Lloyd

Nice to see your foundations settling in tassie. I’m intrigued watching such a narrow house develop, guess I haven’t studied passive solar design nearly enough. I’ve just finished installing an esse tied into a solar hot water system and bathroom radiator on our little old house on the button grass in Strahan, very happy with the results too. Hope one day to get down to check out your finished house, maybe on sustainable house day. Anyway good luck with it all, and the weather, even though you don’t seem to get much rain (just spent the last 2 weeks down that way- family in blackmans bay).

16 06 2017
mikestasse

Thanks Lloyd…. the narrow footprint is inspired by the Earthship. The idea of a one room wide house isn’t new. This way, every single room in the house gets access to the sun (and light) without having to resort to glazing facing every which way. It also allows for the rear (southern wall) to be bermed, thus increasing the thermal mass of the building to otherwise impossible levels….

15 06 2017
Glenn

Mike … we are also offgriders AND IMO when the black gold runs dry we will go down together for any number of reasons.

One thing for sure …. maybe not yet .. but one day the Fanny Farms of the world will become the new black gold and a great attraction for the sheeple.

On a brighter note…. there are mixed orchards popping up everywhere in the Huon.

16 06 2017
mikestasse

I’m of the opinion that Fanny Farms of this world should become community centres where people can learn how to make many more Fanny Farms…… this concept needs spreading, in a big way!

16 06 2017
rabiddoomsayer

The problem has been kicked down the road again and again, I really do not see how it can be kicked any further. Negative interest rates and banning cash transactions and no large denominations will probably all happen very soon.

None of which solves the fundamental problem that oil expensive enough to be produced, is too dear for the economy to work. Might hide the problem for a very short time longer.

What is a bitcoin worth without an internet? What is a pipeline wort without customers at the other end? What use a can of beans without a can opener? Soon we will know the answers to these questions.

17 06 2017
Yif

Very curious to hear how your off-grid electricity generation is going now that its the depths of winter & southern Tassy sunlight will be every weaker than in Victoria for Chris @ http://ferngladefarm.blogspot.com.au/ ?

20 06 2017
mikestasse

It’s generally going well enough to supply our design demand of 2kWh/day. Most days the system generates 1.8 to 2.4 kWh/day, though we had one day that was so dark we only got 0.1kWh! I could not believe it go so low…. of course that’s what the batteries are for, the very next day was so sunny we got 3.6.

The trick is to design for the conditions…..

19 06 2017
dolph

Jewbucks can be printed to infinity. Resources and gold cannot.
Outcome: terminal global hyperinflation.

19 06 2017
ejhr2015

What’s a jewbuck? It can’t be dollars as dollars can only be created to pay for a debt!. No debt = no dollars. Simple as that. It goes for the government and it goes for the banks.

23 06 2017
Chris Harries

This guy normally talks sense. But not today.

View story at Medium.com

23 06 2017
Blue.Peter

G’day all, Chris, What’s the plan for Trucks, Shipping,Trains. By my reasoning we can do with out cars and planes, but transport of goods how that going to be achieved?
Blue.Peter………………

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