In the same sense that brave individuals are said to “fight” stage four cancer, the American oil industry has spent a harrowing year fighting reality. Since oil prices tanked last summer, the industry has drawn down its strategic reserves of whitewash, pig lipstick, shinola and embalming fluid to keep things looking good even as they were decomposing. They did a pretty good job, but then they’ve had a lot of practice.Their theory, apparently; when you’re kicking the can down the road, a myth is as good as a mile. Consider a brief compendium of the lies, damned lies and statistics the oil guys have sold the country in the past few years.
Myth Sold: The Oil “Revolution.” Hydraulic fracturing was a technological breakthrough that was going to make America number one in world oil production again, restore American energy independence and guarantee American hegemony for (pretty much) ever.
Fact: Fracking is an extremely expensive and environmentally destructive way to wring the last few drops of oil out of source rock. While it temporarily increased US oil production, it never equalled our peak production of 1970, and while it temporarily decreased our oil imports (which are now on their way back up), it never threatened our status as the world’s largest importer of oil.
Myth Sold: Technology Will Save Us. When oil prices cratered, the frackers reassured their investors, lenders and us that they could handle it. They had improved the fracking technology so much they could continue to make a profit producing $50-a-barrel oil.
Fact: The much-hyped changes were just so much tinkering, and profits remained illusory. Virtually every company involved in the fracking patch had negative cash flows from the beginning. Operating profits from the wells were wiped out by the costs of replacing the wells every three or four years, because of their hideous depletion rates. Conventional wells produce for 20 years, five time longer than fracked well.
Myth Sold: Efficiency Will Save Us. Like the old line about balancing the federal budget by eliminating waste and fraud, this sounds reasonable but never happens. The frackers concentrated on the “sweet spots,” the small areas of their holdings with the best returns, and they started placing four drilling rigs, instead of one, on each pad.
Fact: Thus their production actually increased for a few months after the price crash. But, well productivity is flatlining now and with the rig count down by about half, new wells are not being brought on line and production has started to fall sharply.
Myth Sold: Hedging Will Save Us. For the first year or so of depressed prices, frackers benefited from hedges — contracts to sell their product at last year’s prevailing prices. The theory was, prices would be back up before the hedges ran out.
Fact: The hedges have run out. The people who used to take the other side of the hedges are not answering frackers’ phone calls. Maybe because their phones have been disconnected.
Myth Sold: Junk Bonds Will Save Us. And so they did, for a while. Infusions of cash — from, among others, vultures hoping to acquire cheap oil company assets and ride the resurgence to a new, new oil revolution — in the form of junk bonds, leveraged loans, sub-prime loans, covenant-lite loans, etc., kept the bubble inflated.
Fact: What resurgence? Banks and other lenders, reluctant to recognize the mounting losses, continued to pretend that the oil companies whose assets’ worth had been cut in half were still solvent. Nothing wrong here! Why do you ask?
New Fact: Right now, the banks are conducting a mandatory review of the worth of the assets pledged against their fracking loans, that is, the value of the oil the companies still have to extract. This spring, the banks assessed the oil at last year’s prices, and with fingers tightly crossed rolled over the loans.
It was a stretch then; can they do it again, eke out a few more months of myths? On the one hand, maybe so, denial is not just a river in Egypt. On the other hand, good as they have been, the sellers of the myths appear to be sold out.