Peak Shale Oil

This confirms that even the world’s biggest miner doesn’t know what it is doing with oil assets.  BHP Billiton bought up these shale assets in 2011, when prices were high, but a surge in drilling produced a glut and the price dropped and now BHP is hoping to sell, having lost $40 billion (and they don’t have a buyer yet). This has been exacerbated by Saudi Arabia’s refusal to be the “swing producer” any more – adjusting production to keep the price stable.  The US should now be the swing producer, but is caught up in the frantic “Drill, baby, drill!” boom.

Shale oil is altogether a less profitable business than conventional oil.  Drilling the wells is more complex and expensive, and involves fracking the well to increase the exposed surface area.  Then the production of the well drops off very quickly – 90% in the first 4 years, so the drilling frenzy must be maintained. And finally the oil doesn’t match the hydrocarbon profile of conventional crude (like WTI) so must be sold at reduced prices and blended with heavier oils to produce the same product mix after refining.

Clearly the ERoEI of the complete process is going to be worse than for conventional oil, and hardly worth the effort.  Nobody would be doing it at all if it wasn’t for a lack of good oilfields to develop. There are no giant oilfields left to discover, and the only big ones involve drilling under deep seas and in polar regions, where the additional costs are obvious.

Peak Oil is alive and kicking, and the life-blood of Industrial Civilisation is becoming more scarce by the year.  It is only a matter of time before investors realise this, and take a hard look at the projections of Ultimately Recoverable Resources of the oil majors’ fields.  Then they will be seen as liars about their bankable “assets” and their share price will tumble, causing the next Great Crash which will see the end of Industrial Civilisation for good.  This will at least solve the Climate Change problem, but will be far more serious for humanity.

When it happens, people will say how could we have been so blind?  But people always want to see the most optimistic side of things, especially when the alternative is so pessimistic, so Cognitive Dissonance helps maintain the fiction.  Plus, of course, those with all the wealth tell such lies to hide the truth, even though they know they will be exposed sooner or later.

http://www.zerohedge.com/news/2017-08-22/more-peak-shale-worlds-largest-miner-selling-its-shale-assets

More Peak Shale: World’s Largest Miner Is Selling Its Shale Assets

Over the past several months, we have wondered if despite new all time high shale production, whether the US shale sector in the has peaked. Some of our recent thoughts can be found in the following articles:

The “peak shale” narrative got a boost in late July when one of the world’s most bearish hedge funds, Horseman Global, announced it was aggressively shorting shale companies on the thesis that funding is about to “run dry”, resulting in a sharp drop in production and with the lack of capex, would lead to another round of industry defaults (while sending the price of oil higher).

More evidence was revealed in the latest Baker Hughes data, which showed that both active Horizontal and Permian oil rigs had finally peaked and were now declining, while the number of oil rigs funded by Public junk bond deals had plateaued, suggesting little interest in future funding:

Fast forward to today when overnight, we got the clearest indication yet that the US shale sector may have indeed have peaked, when BHP Billiton – the world’s largest miner – said it was in talks with potential buyers of its U.S. shale assets, purchased during a frenzied $20 billion buying spree in 2011, just as the price of oil peaked.

“We’re talking to many parties and we’re hopeful” of completing a small number of trade sales to divest the onshore oil and gas division, Chief Executive Officer Andrew Mackenzie told Bloomberg Television Tuesday in an interview, adding that the moves on shale and potash aren’t the result of shareholder pressure. “We have been moving in this direction for some time” on shale.

As Bloomberg adds, BHP’s strategic pull-back by comes after new Chairman Ken MacKenzie, who starts his job next month, met more than a hundred investors in recent weeks in Australia, the U.S. and the U.K. in the wake of the campaign by some shareholders calling for reform.

BHP’s admission that there is no more upside for its shale assets, in their current form, is a victory for Elliott Singer’s ongoing activist campaign, which has been pushing for a disposition of these assets in a vocal activist campaign. According to Singer’s Elliott Management, strategic missteps by BHP’s leadership, including in the shale unit, have destroyed $40 billion in value; Elliott launched its public campaign seeking a range of reforms in April.

Admitting that Elliott is right, during a call with analysts, CEO Mackenzie said BHP’s 2011 shale deals had been too costly, poorly timed and the eighth-largest producer in U.S. shale didn’t deliver the expected returns. That said, if the company expected oil prices to rebound, or if the shale assets to become sufficient productive where they would generate positive returns, he would hardly have sold them. Which is why in the current configuration of prices and technology, at least one major player in the space has confirmed that shale’s euphoric days may be over.

This was confirmed by Macquarie Wealth Management Division Director Martin Lakos who said that BHP likely concluded the shale and Jansen assets were “not going to generate the returns that is going to make the grade,” although he added that “it’s most likely the Elliott activity has accelerated the shale sales process.”

BHP’s disposition of shale has been a long time coming:

Discussions among BHP shareholders have been dominated by concerns over shale and potash, according to Craig Evans, a portfolio manager at Tribeca Investments Partners Pty, which holds the producer’s shares. Tribeca and other investors have also pressed the case with BHP directly, he said.

 

“Elliott put the first balls in motion on this in calling them to task,” Evans said. “It’s no coincidence that we’re talking about those issues now.”

 

Investors including AMP Capital, Schroders Plc, Escala Partners and Sydney-based Tribeca have added to criticism of BHP, or offered support for some of Elliott’s proposals, in recent weeks. Elliott didn’t immediately respond to a request for comment on BHP’s decisions on shale and potash

Some believe that BHP timed its asset sale at just the right time: “BHP are going to get better value than they would have two years ago after the surge in crude oil price from last year’s 12-year low,” David Lennox, an analyst at Fat Prophets, said on Bloomberg TV. The company has “probably picked an opportune time because we’ve seen the oil price come up from a bottom,” he said.

Of course, a much bigger question is whether the potential buyer will agree, as any acquiror will be purchasing not on current or historical prices, but where they expect oil prices to go in the future. As such, the big wildcard is shale’s access to cheap funding, which for the past 3 years has been the only factor that mattered not only for the US oil industry, but also for OPEC, whose repeated attempts to push the price of oil higher has been foiled every single time thanks to record low junk debt yields and an investor base that will oversubscribe every single shale offering. Well, as we showed last month, that is now ending as bond investors have suddenly turned quite skittish, and the result is that US shale production has not only peaked but is once again declining. While it remains to be seen how the overall industry will respond, if indeed we have hit “peak shale”, OPEC’s long awaited moment of redemption may finally be here.

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$2-Billion Private Equity Fund Collapses to almost Zero

Nobody has ever made any profit from shale oil. The “oil” is different in profile to regular crude, having a much bigger proportion of lighter hydrocarbons, and only sells at a reduced price. Moreover the wells run low on pressure more quickly, so have a shorter productive lifetime, which means more expensive drilling and fracking more often.

While the oil majors knew this and stood back from developing fields, the brash minor players charged in, took out huge loans, and started drilling like mad.

But how could banks be so short-sighted – surely they know how to read a business plan and recognise a crock when they see one? Why indeed. It could only be because they were given the green light from above to lend. The bill for imported oil was threatening to bankrupt the nation, so it made sense to throw money at shale oil and kick the can down the road a while longer. And it worked for the time Obama was in office.

Talk of “energy independence” is all pure myth – the US imports over 7 million barrels of oil PER DAY. Now they are caught owing billions of dollars and struggling to pay off their massive loans, and have to drill to get the money to make the payments.

The fund managers, who happily took money off pension funds and the like, have played some clever tricks on the creditors, and when they go bust everybody will be hurting. So be it.

http://wolfstreet.com/2017/07/17/2-billion-private-equity-fund-collapses-to-almost-zero/
$2-Billion Private Equity Fund Collapses to almost Zero
by Wolf Richter
July 17, 2017

Investors who’d plowed $2 billion four years ago into a private equity fund that had also borrowed $1.3 billion to lever up may receive “at most, pennies for every dollar they invested,” people familiar with the matter told the Wall Street Journal.

Fund raising and investing started in 2013. Houston-based EnerVest manages the fund. This could be the first time ever that a PE fund larger than $1 billion lost nearly all of its value.

The lenders to the fund are now negotiating to take control of the fund’s assets, these “people familiar with the matter” told the Journal. Wells Fargo is leading the negotiations.

Investors span the spectrum of institutions managing other people’s money. Some of them might have sold their stakes to cut their losses. Among these investors are: the Orange County Employees Retirement System; Caisse de dépôt et placement du Québec, Canada’s second-largest pension fund; Florida’s largest pension fund manager; the Western Conference of Teamsters Pension Plan, covering union members in nearly 30 states; the J. Paul Getty Trust; the John D. and Catherine T. MacArthur Foundation; the Fletcher Jones Foundation; the Michigan State University; and a foundation supporting Arizona State University.

But it sounded good at the time…

EnerVest, which was started in 1992 and focuses on energy investments, kicked off the fund in 2013, raising $2 billion in equity from institutional investors and borrowing $1.3 billion. According to the Journal, it specializes in acquiring oil and gas fields with producing wells that are neglected by larger oil companies. It then makes improvements and drills additional wells to raise production.

The fund was started at the peak of the fracking boom, when West Texas Intermediate traded between $91 and $109 per barrel. Another fund EnerVest started in 2010 by raising $1.5 billion and borrowing $800 million is also in trouble. In the past, EnerVest’s funds had stellar returns and it had no trouble raising the funds.

These “resource funds” appeal to institutional investors due to the steady cash flow they normally generate starting with their first investments.

What the fund didn’t include in the calculus was that by early February 2016, WTI would be trading below $30 a barrel, and that it is currently trading at $46.62, less than half of where it was when the investments were being made.

And the fund added an unusual twist: it cross-collateralized the fund’s assets. Normally, PE funds debt-finance each investment separately so that if it fails, the debt will take down only the individual investment. The remaining investments in the fund would be untouched. But EnerVest’s funds encumbered all of the investments in the fund with fund-level debt, and so the fund’s good and bad assets alike are going to the lenders. Hence the total loss for investors.

EnerVest already tried to restructure the two funds – the one raised in 2010 and the one raised in 2013 – in order to meet repayment demands from the lenders. The lenders, in turn, have already written down the collateral value, according to public pension documents and people familiar with the efforts, cited by the Journal.

Until this collapse, it was “almost unheard of” for a PE fund with over $1 billion in assets to lose more than 25%, the Journal said, citing investment firm Cambridge Associates. But now, based on public pension records, several other energy-focused funds are “in danger of doing so.”

The renewed hype about shale oil – which is curiously similar to the prior hype about shale oil that ended in the oil bust – and the new drilling boom it has engendered, with tens of billions of dollars being once again thrown at it by institutional investors, has skillfully covered up the other reality: The damage from the oil bust is far from over, losses continue to percolate through portfolios and retirement savings, and in many cases – as with pensions funds – the ultimate losers, whose money this is, are blissfully unaware of it.

Andy Hall, The Oil Trader Known as ‘God’, Is Closing Down His Main Hedge Fund

God doesn’t know everything, apparently. It is surprising mistakes by experts, like this that could crash the world economy. When oil is priced below $50 /barrel, it means that either there is too much supply or too little demand. Whenever an “expert” tells you that it is the former, you can expect it is probably equally likely to be the latter.

Since oil is the life-blood of industry, (think transportation of raw materials, and finished goods), this means that industry is in a bad way. No one wants to say it because they never want to talk down expectations and be the one responsible for crashing the markets. So instead they say it is an over-supply problem and that prices will rise soon. Do that for long enough, two and a half years, and you go bust.

https://www.bloomberg.com/news/articles/2017-08-03/oil-trader-andy-hall-is-said-to-close-main-astenbeck-hedge-fund

The Oil Trader Known as ‘God’ Is Closing Down His Main Hedge Fund


By Nishant Kumar, Javier Blas, and Suzy Waite
4 August 2017

Andy Hall, the oil trader sometimes known in markets as “God,” is closing down his main hedge fund after big losses in the first half of the year, according to people with knowledge of the matter.

The capitulation of one of the best-known figures in the commodities industry comes after muted oil prices wrong-footed traders from Goldman Sachs Group Inc. to BP Plc’s in-house trading unit. Hall’s flagship Astenbeck Master Commodities Fund II lost almost 30 percent through June, a separate person with knowledge of the matter said, asking not to be identified because the details are private.

“I’m shocked,” said Danilo Onorino, a portfolio manager at Dogma Capital SA in Lugano, Switzerland. “This is the end of an era. He’s one of the top oil traders ever.”

Hall shot to fame during the global financial crisis when Citigroup Inc. revealed that, in a single year, he pocketed $100 million trading oil for the U.S. bank. His career stretches back to the 1970s and includes stints at BP and legendary trading house Phibro Energy Inc., where he was chief executive officer.

“Andy Hall is one of the grandees of oil trading,” said Jorge Montepeque, a senior vice president of trading at Italian energy major Eni SpA.

A representative of Astenbeck Capital Management LLC declined to comment. The Southport, Connecticut-based company managed $1.4 billion at the end of last year, according to a Securities and Exchange Commission filing.

Hall is the latest high-profile commodity hedge-fund manager to succumb to the industry’s low volatility and lack of trending markets. At least 10 asset managers in natural resources have closed since 2012, including Clive Capital LLP and Centaurus Energy LP. Goldman Sachs reported its worst-ever result trading commodities in the second quarter.

Oil hedge funds such as Astenbeck wagered earlier this year that production cuts led by Saudi Arabia and Russia would send prices climbing. Yet, their bets backfired as U.S. shale producers boosted output and Libya and Nigeria recovered from outages caused by domestic disturbances and civil war.

New generation nuclear power project scrapped in SC amid soaring costs

Hi-tech energy infrastructure is rarely more expensive than the construction of nuclear power stations, and the successful decommissioning of them has never been achieved. Thus it makes sense to abandon the 40% complete project and the $9 billion it has cost so far. Mind-boggling.

https://www.rt.com/usa/398134-nuclear-project-sc-scrapped/

New generation nuclear power project scrapped in SC amid soaring costs


31 Jul, 2017

Two South Carolina utilities have abandoned a pair of next generation nuclear reactors that would have been America’s first new atomic reactors in almost 40 years. The facilities were expected to be safer and cheaper.

SCANA Corp and state-owned utility Santee Cooper, the two utilities which own the VC Summer twin-reactor project, announced Monday that they were scrapping the multi-billion dollar project due to construction problems and cost overruns.

“We arrived at this very difficult but necessary decision following months of evaluating the project from all perspectives to determine the most prudent path forward,” said the head of SCANA Corp, Kevin Marsh.

The designer and primary contractor of the new generation reactors, Westinghouse Electric Co., was expected to deliver last year, but the project is now less than 40 percent complete. In addition, costs have soared 75 percent and the reactors would not begin to produce power until 2023, Reuters reported.

In March, Westinghouse filed for bankruptcy. However, the company was mentioned in a June White House fact sheet which stated: “The United States and India are committed to realizing commercial civil nuclear cooperation, in particular through a contract for six Westinghouse Electric AP-1000 nuclear reactors to be built in Andhra Pradesh, India.”

Nine billion dollars has been spent on the now-abandoned South Carolina project and the state’s utility customers have already been billed for some of the reactors’ early costs. They could also be forced to pay for the rest of the failed project, the Charlotte Business Journal reported.

The US has not built new nuclear reactors since the 1979 Three Mile Island accident in Pennsylvania which saw a partial meltdown of a reactor, Reuters reported.

The new generation reactors were expected to be safer and less costly. With the project now scrapped, the future of large-scale nuclear power plant construction in the US is uncertain.

Many nuclear power plants across the country have struggled financially in the past few years amid falling oil and gas prices, making nuclear energy less competitive.

A number of states, including New York and Illinois, threw lifelines to their nuclear power plants in the form of subsidies, referred to as zero-emission credits. Nuclear energy is recognized as having a very low carbon-emission footprint.

A bill in Ohio would provide the zero-emission credit to its nuclear power plants that have described their financial situation as “urgent.”

Opponents of the subsidy, many of whom are the industry’s competitors, claim these schemes illegally interfere with power markets.

On June 29, President Donald Trump announced that nuclear energy should be “revived” and become part of America’s “global energy dominance.”

“A complete review of US nuclear energy policy will help us find new ways to revitalize this crucial energy resource,” Trump said.

Earlier, US Energy Secretary Rick Perry claimed the field was “strangled all too often because of government regulations.” However, Perry did not specifically say how the government was going to help nuclear energy producers.

A recent study by researchers from Princeton University and the Union of Concerned Scientists cautioned the US against underestimating the risks to nuclear safety, saying a single nuclear fuel fire could lead to fallout “much greater than Fukushima,” referring to the Japanese nuclear disaster caused by the massive tsunami in 2011.