Wood McKenzie VP On Fracking Sector: "I Completely Believe The Current Model Is Unsustainable"
The booming shale industry could be headed off a financial cliff, experts say, and environmental groups are asking who will clean up thousands of wells drilled miles beneath the surface if businesses go bust. The meteoric rise of U.S. shale, driven by hydraulic fracturing, continues at a fast pace. Each year, operators bring in more barrels, pushing the United States further ahead of other nations for production.
But many observers say the shale business is overheating, as frackers try to keep up the pace of production at high costs and low oil prices. They are warning that Wall Street money is drying up, and that the rate of bankruptcies could climb dramatically. "I talk to those guys, all the fracking companies, on a daily basis. I'm very engaged in what they are doing with their business, and I completely believe that the current model is unsustainable," said Scott Forbes, vice president of the Lower 48 for Wood Mackenzie. Some consulting firms forecast production will soon climax. Rystad Energy said in a recent report that a shale peak may be on the horizon in 2030, with most of the 14.5 million barrels per day by then coming out of West Texas' Permian Basin.
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Alex Beeker, principal analyst for the Lower 48 at Wood Mackenzie, outlined what many say is a looming challenge facing the industry. A single well may be profitable, Beeker said. In the first years of production, there is a rush of oil and gas that declines rapidly. The return on investment is good, and it's quick. But these companies have to grow, and to grow, they need to punch more holes in the ground, and to punch holes, you have to spend more money, he said.
For every dollar they make, frackers have to make a "tough decision," he said "Do they return it to shareholders, or do they put it into the ground?" he said. There are a few companies that seem to be surviving the cash crunch better, but some investors are growing doubtful, and it's depressing share prices. "The market is assigning very little upside to these companies beyond what they have flowing — which is very reminiscent of the dark times," Beeker said, referring to the dramatic downturn of 2014 to 2015, when the price of crude fell by half.
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