It’s time to transform America's energy trajectory from waste and value destruction to sustainability and security
Frontispiece: America’s energy transition is transformational and needs to start now in this time of crisis. “Black box” thinking and leadership is required to not only deal with the current challenges, but find new solutions, strategies and policies to provide for a more sustainable energy economy.
Figure 1: Growth in US crude production in the last decade, including gross operated production from 36 US Shale companies in analysis (Data: EIA, DrillingInfo; Graphic: Capriole Energy)
I am one of many spectators, most brighter and more knowledgeable than me, who have been predicting a day of reckoning for US oil shale and the US “energy” industry. Looking at the full cycle returns of companies listed on an exchange reveals even to the layman like me that for the most part, the trumpeting by US shale such as driving the economy or delivering the holy grail of independence was false. Contrary to the advertorials and propaganda, US oil shale has produced all that oil growth on credit and wasted a lot of money and resource (Figure 1). The financial integrity of the remaining assets on the books and still physically in the ground, probably over the $0.5 trillion valued at year-end 2019 prices, has to be questioned. If the 40 billion barrels of oil produced in the last decade could not be produced economically, why should the next 40 billion barrels? Typically new oil fields start with the most profitable barrels first and then get more expensive to extract with time because of the mounting pressures of physics and therefore economics. This is the crux of the peak of affordable oil.
Figure 2: A decade of waste and value destruction. (Data: Yahoo Finance; Graphic: Capriole Energy)
The current oil crisis is unique, we currently live in a world of increasing supply, and reducing demand. Supply is increasing as Saudi Arabia and Russia, at the end of their patient funding of US shale oil increasing its market share with $50+ prices, have opened up the spigots. Demand is diminishing as coronavirus, or rather the response to it is freezing countries into economic inaction and hence recession. This indeed is a day of days of reckoning for US shale oil. And yet in some quarters, the trumpeting goes on. “If it wasn’t for those ‘thugs’ Saudi Arabia and Russia manipulating the market”. “The industry has been through this before and will come back stronger”. I have my doubts that asking (pretty please) the KSA to reduce its supply will do no good even if KSA complied. Instead, US shale needs to face the music, repurpose and transform itself as an important but not dominant player in America’s energy transition.
Figure 3: Only a handful of companies have delivered any kind of financial performance in the last decade and deserve to be around in this decade. (Data: Yahoo Finance; Graphics: Capriole Energy)
This repurposing starts with dealing with the current crisis, to prevent as much debt default as possible and preserving as many jobs as practical. The only route is drastic consolidation, dramatic capital expenditure reduction, and commencement of a free cash flow and profit drive that leans on opportunities for efficiency through quality through choice (EOG’s premium well strategy), technology, and operational excellence. Of the 36 companies depicted in Figure 2, I suggest that in 2 years time there needs to be only 6, plus probably two big supermajor players likely to be XOM and CVX, in today’s terms on average the remaining 6 independents would have a market cap of about $20 billion on average, but hopefully much more than that because of the financial performance reforms that are delivered by the transformation.
State and federal regulators can support the transformation in several ways and at the same time commence a new energy policy that really delivers energy independence for America, removing the need for foreign oil. Actions like re-instating the oil export ban (American oil for American demand), imposing tariffs on foreign oil to make indigenous oil equitable, re-tooling US refineries so that can accommodate ultra-light crude, stopping continuous flaring, putting new regulations in place for road and other transport to drastically reduce oil demand in the future, are some of the many options to be considered. American needs a bipartisan, innovative, authoritative and visionary coalition of leaders from business (all sectors), government, and community to develop these policies and plans, with the unifying purpose of sustainable energy for a flourishing US economy for all.