World to Oil Producers — We Don’t Want Your Fracking Crude

World oil prices routed to 49 dollars per barrel today amidst weak global demand. It’s a sea change in the oil and energy markets that is now in the process of rattling many previously well established oil ventures to their foundations. A shot across the bow that may well signal the beginning of the end of crude due to a combination of expensive production, competition by renewables and efficiencies, and a widespread recognition of ramping hazards from human-caused climate change.

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During the summer of 2014, amidst geopolitical crisis after geopolitical crisis in oil producing regions of the globe, world crude oil prices spiked to near 115 dollars per barrel. Ever since the mid 2000s, global producers had struggled to keep up with demand or to even keep crude + condensate production flat. But as of 2012, deregulated US fracking technology had ruptured large sections of the Dakotas, Texas and a strand from the Virginias through Pennsylvania.

US Fracking Ascendant

US oil production rose by 1 million barrels per day for three years running. By end 2014 US crude production had hit 9.13 million barrels per day. US liquids production, including 1 million barrels per day of biofuel, had spiked to 14.3 million barrels per day — making it the largest liquid fuels producer in the world.

But the US wasn’t the only region benefiting from gains. Russia and Iraq also saw oil production rise even as Saudi Arabia completed construction on a surge production capacity of 2 million barrels per day. And in the oil project pipeline more than 55 million barrels per day of new production was planned through the mid 2020s. All projects banking on continued oil price support in excess of 100 dollars per barrel.

Fracking Pads

(Fracking Pads stretch as far as the eye can see in North Dakota’s Bakken Formation. Image source: Greenpeace.)

It was an oil faerie tale come true. High prices and surging production combined to push oil asset valuations to levels never before seen. The oil majors, the world’s most profitable companies in the history of humankind, could rest safe in the assurance that this wealth and power base would continue to extend their reign for decades to come.

But, for the oil producers, the drilling and the service companies, and yes, even for the oil majors themselves, there happened to be more than one serpent in this otherwise rather lovely and gratuitous garden.

Declining Demand

From the control rooms of various corporate Death Stars, oil company executives must have felt quite comfortable with their positions. Even to those with fracking, tar sands, and deep offshore production exposure, 115 dollars per barrel was still quite profitable. And, conventional thinking was that the extra fire-water would, even at this price, support global economic growth which would, in turn, bring about more demand.

Past years experience supported this notion with demand rising by more than 1 million barrels per day each year even during times when the price of oil charged to $120 or higher. The 150 dollar price of economic harm set in 2008 was still a ways off and the forecasts called for demand to grow by 1.3 million barrels per day through 2015.

But demand did not perform as expected. Throughout the world economic weakness reigned. In Russia, sanctions imposed by the US bit deep into economic activity. In Europe, austerity measures resulted in stagnating growth. In China, an unwinding housing bubble did its own damage to demand for oil.

In addition, rapid and widespread increases in vehicle fuel efficiency were also drawing down marginal demand for oil. In the US, corporate average fuel efficiency was rising by 2-3 mpg per year. Worldwide, fuel efficiency standards were also rising. Furthermore, an entirely new animal began to appear on the international stage — the zero oil consuming electric vehicle.

By end 2014, more than 250,000 electric vehicles had been sold in the US with 600,000 EV sales worldwide. Compared to hundreds of millions of ICE vehicles roaming the world’s streets, this initial surge in EV adoption seemed small. Yet it was more than enough to instill a nagging worry among oil company supporters and investors. A worry reinforced by China’s late 2014 pledge to put 5 million EVs on its roads before 2020. So it seemed the tiny EV sprig could well grow into a tree that may later topple most of the oil demand base through the next couple of decades.

First Municipality-owned Solar Powered EV Charging Station in the USA

(Oil corporations’ worst nightmare. Solar charging station with EVs. Image source: Technology Tell.)

And oil companies didn’t need to look to just EVs to find instances of alternative technology drawing down oil demand. Throughout the world island and Middle Eastern nations, for so long dependent on oil-based electricity generation, began to adopt distributed solar systems that were far cheaper than their fossil fuel rivals. Though just 5 percent of global electricity demand still runs on oil, that 5 percent represents upward of 5 million barrels per day of global oil consumption. And eroding that demand in a marginal and sensitive market was beginning to show its impacts.

Throughout the latter half of 2014 demand faltered with growth forecasts winnowed down to 1.1 million, 900,000 and finally 700,000 barrels per day. A near halving of the previous forecast.

The Saudi Gambit

As demand expectations began to fall, so did prices. By September, oil was trading in the 90s and many around the world were looking to OPEC for support. The last time oil went into free-fall OPEC, lead by Saudi Arabia, cut production and prices rocketed back to 100 + dollars per barrel levels. However, this year Saudi Arabia was faced with an upstart US and a resurgent Russia and Iraq. Media outlets in the US were bragging about how North America had unseated the Sauds as the kings of oil production. But these outlets didn’t take into account the essential difference between the cost of North American oil production, which tends to run quite high, and the cost of Saudi production, which is still less than $20 per barrel.

Saudi Arabia must have seen this coming for quite some time as the Kingdom had banked more than 750 billion dollars in oil profits for a rainy day. By late fall, and sitting on this mountain of cash, Saudi Arabia made the then surprising decision to keep pumping oil and to urge its fellows in OPEC to do the same. And so, by November, OPEC’s 30 million barrels per day continued to be delivered.

Combined and surging US, Russian and Iraqi production formed a tsunami of ever cheaper oil competing for a host of unenthusiastic customers. Prices plunged to 65 dollars per barrel by mid December. By today, the price of a barrel in West Texas was 49 dollars, at Brent it was 53 dollars, in the geographically isolated and environmentalist blockaded regions near Alberta barrels traded for less than 37 dollars.

Extraordinarily High Price Production

If oil valuations, due to prices consumers appeared willing to pay, were high earlier this year, so were the costs of producing the new oil. Though there was quite a lot of new, unconventional oil out there to replace the slowly winnowing supplies of traditional fuel, that new oil was tough to reach. It required a great expense in broken and poisoned earth. In regions the size of a small country laid waste. Under skies that ever more frequently disgorged extreme droughts and deluges, after a proceeding series of years that have brought ever higher global temperatures, inexorably rising seas, and ever more rapid glacial melt, the environmental and human cost of extracting that unconventional fuel seemed very high indeed. A price that appeared to be rising to the point of an impending mass extinction event for the Earth due to a wrecked climate. A ghastly sacrifice in the name of oil profiteers. One that would include a growing number of human beings together with countless animal species.

Tar Pit #3

(Tar Sands’ hellish landscape of ruined Earth and toxic tailing ponds. Image source Occupy.)

In the North, in Canada, a vast strip mine wasteland reminiscent of Tolkien’s Mordor hosted colossal machinery devouring gigatons of earth and spitting out sun-blocking plumes of smoke, vomiting massive lakes of poisonous water (lethal to any poor bird who happened to land upon its surface and to fish and Canadians down-stream alike), and spitting out billions of tons of corrosive bitumen. In the US, fracking required the near-constant injection of water and chemicals into the earth, wrecking water sources and farmlands, to produce an equally caustic fracked crude. And far off shore, deep ocean drilling leveraged technology equivalent to lunar landers and the most advanced remote operated vehicles all launched from gigantic sea-based platforms.

The cost to continue to expand these ventures ranged between 50 and 110 dollars per barrel of oil extracted. An observation that shows more than a trillion dollars and 40 million barrels per day of planned oil developments through 2025 unprofitable at today’s price of 49 dollars per barrel. An observation that lead a recent Bloomberg analyst to appropriately term the projects ‘Zombies’ during a December assessment of a Goldman Sachs’ report on the matter:

Oil Zombies 70 dollars

(OMG, Zombies! Goldman Sachs’ report from December showing more than 1 trillion dollars of oil projects at risk under a $50 per barrel oil price regime. Image source: Goldman Sachs and Tom Randall at Bloomberg.)

Putting this investment at risk results in severe instability for global energy markets. The reason is that current oil field decline rates are so extreme that 9 million barrels per day of new production or enhanced recovery from existing wells must come on line every four years just to keep current production flat. Wholesale de-funding of these investments would lead to a rapid drop-off in global oil production in the coming years as rapidly depleting new sources such as fracking and faltering old wells fail en masse.

Notably, almost all new major oil projects are now on indefinite hold pending a return to higher prices. Prices that will almost certainly come at some point due to that raging depletion rate. But the question many are asking is will it come soon enough to prevent massive failures of numerous companies within the unconventional fuels industry?

Even the cost of just maintaining current unconventional production ranges from 35 to 95 dollars per barrel. Far more than the 10-20 dollars per barrel cost of extracting oil from a traditional pressurized oil well. And with current massive price falls to 49 dollars per barrel or less, many companies are now in jeopardy.

Of course, we should probably include trillions and trillions more at risk due to the fact that current oil producers simply must leave most of their caustic product in the ground in order to prevent catastrophic climate change. As a result, the entire oil industry is a zombie at this time.

We Don’t Want Your Fracking Crude!

Compounding the issue of high production cost is a stranding of assets caused by a little televised but widespread phenomena called Blockadia. Perhaps the most visible expression of Blockadia is the ongoing campaign against the Keystone Excel and Northern Gateway Pipelines that have left tar sands oil stranded and dependent upon rail transport in order to access international markets. Even tar sands truck routes and equipment deliveries have been hounded by rampant blockades.

The result is an isolation of Canada’s tar sands that has now driven local prices for a barrel of oil to less than 37 dollars. What this means for Alberta oil is very thin profit margins and no expansion of production whatsoever. If oil strikes below 35 dollars for any extended period, Alberta may be looking at shut-downs over the long haul.

For US fracking the story is similar. From outright bans to constant legal action on the part of communities and individuals, Blockadia has arisen both in the form of protests and in the form of litigation. Even Rex Tillerson, Exxon CEO and funder of some of the most virulent climate change denier hacks in the media sphere, donated money to an anti-fracking campaign aimed at preventing the construction of wells near his multi-million dollar Texas home. Hypocritically, Exxon has funded polluting industries in many disadvantaged and poorer neighborhoods for decades — forcing those without enough monetary muscle to hire troll berserker lawyers to suffer pollution, poisoning and displacement. But turn the tables and Rex likes the fracking crude about as much as the rest of us.

In the end, we are all in what Naomi Klein has called ‘the sacrifice zone.’ A region where the externalities of fossil fuel use become visible and an increasingly violent impediment to daily life and well being. It is for this reason alone that so many pipelines and oil ventures are now under threat of blockade. People are fed up and everyone from moms to scientists to cowboys to Native Americans to activists are willing to put themselves on the line to prevent the worst outcomes of fossil fuel burning. People don’t like being sacrificed or having their children sacrificed for company profits which is the primary reason we don’t want your fracking crude.

Under Threat of Bankruptcy

Sauds’ price war, declining demand, the extraordinary cost of unconventional extraction, and Blockadia now combine to put many oil companies under severe threat. Today, the blood-letting pushed the Dow down by 331 points. Fracking suppliers like United Rentals, which specializes in pumps for hydraulic fracturing, lost 10 percent of its value in just one day. Noble Energy, Diamond Offshore, TransOcean, Anadarko Petroleum, Denbury Resources — all involved in costly unconventional oil extraction — all fell by between 7.8 and 9.5 percent. Baytec, a tar sands player, lost 12.5 percent. Continental Resources, with a large exposure to the US fracking effort, lost 10.7 percent of its valuation. Even energy giants like Chevron and ConocoPhilips fell by more than 4 percent in today’s bloodletting.

Though the US industry has been opaque with regards to risk, given the assessed high costs for both fracking and tar sands and the extremely rapid well depletion rates for fracking, current risks for all US unconventional players are very high. North Sea producers have been more clear in their risks, however, with reports last week identifying 1/3 of oil firms in the offshore region at risk of bankruptcy with oil prices in the range of 55 dollars per barrel.

Even more established companies like Exxon, a company some analysts suspect may be able to prey on weakness in the shale patch, will feel the pinch if oil prices trade in the range of 40-50 dollars per barrel for an extended period with company profits essentially wiped out below 40 dollars.

In short, what we see is that in an over-supplied market high cost producers are very vulnerable to price competition from lower cost producers and from alternatives that can now also increasingly replace base oil consumption outright.

Renewables in the Wings

For it’s not just Saudi Arabia that unconventional oil producers have to take seriously. They are also under existential threat from a combination of rising efficiencies and increasingly cheaper and easy to access renewable energy and electric vehicles.

After this current price fall takes down the marginal producers of fossil fuels that can’t cut it, prices will again rise. Meanwhile, economies of scale will continue to reduce solar panel prices, increase battery storage capacity and economics, and provide electric vehicles at lower costs and ever-greater capabilities.

Within 5-10 years the next price war on marginal oil may well be spear headed by renewables themselves. And that is a good thing, because in order to prevent the very worst impacts of human caused climate change that geological firewater needs to remain where it belongs — in the ground. In other words, there’s good reason not to want that fracking crude.

Links:

Dow Plunges Below 331, Oil Falls Below 50

Bankers See 1 Trillion of Zombie Investments Stranded in Oil Fields

Tar Sands– The Most Destructive Project on Earth

Why My Next Garage Will Be Solar

Market Data

This Changes Everything

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