The Crisis No One Sees Coming
Jason Simpkins

Energy Independence is a Hoax

Everyone wants to talk about shale, about U.S. energy independence, about oil exports...

But there's a problem: We don't have as much oil as everyone thinks.

In fact, we're actually closer to an energy crisis than we are to energy independence.

Don't get me wrong — we have oil. It's just too expensive for us to extract.

Think about it. Two decades ago, oil cost just $20 per barrel. Now it costs nearly $100 per barrel.

Well, if we have more oil than ever before, how can that be?

It's because the oil we have is too costly to produce.

Here's what I mean...

The Cost of "Energy Independence"

According to Bernstein Research, it now costs $104.5 per barrel to produce non-OPEC crude. Furthermore, there was an "unprecedented" jump in the cost of oil from U.S. fields, which rose from $89 a barrel in 2011 to $114 a barrel in 2012.

That's an absurd leap in price. And the main reason for it is that all of the low-hanging fruit has been picked.

We're out of cheap oil. Period.

Sure, in some places, oil is still relatively cheap to produce — the American Southwest, for example, and the Gulf of Mexico. In those places, the oil is pooled close to the surface. It's also lighter, which means it's easier to pump out and refine.

But shale oil — which is what everyone is worked up about — is different. It's heavier and harder to refine. It's also tougher to reach. After all, cracking rock formations hundreds of miles below the surface is a laborious, technology-intensive, and — most of all — expensive process.

Take the Begonia 1-30H well, operated by Slawson Exploration, for example...

The cost of a traditional, vertical well ranges from $400,000 to $600,000. But when all is said and done, the Begonia well will cost close to $4 million.

The initial fracking, which entails drilling and blasting the limestone formation with explosives, costs about $1.2 million by itself.

Then there's everything else:

• Some 50,000 gallons of hydrochloric acid to dissolve the limestone: $80,000.
• Another 1,000 gallons of antibacterial solution to kill corrosive microorganisms: $68,000.
• The soapy surfactant to reduce friction: $110,000.
• A scale inhibitor to prevent lime buildup: $10,000.
• Two million pounds of sand to prop the fractures open so the oil and gas can flow into the well: $230,000.
• Pumping charges, equipment rental, pipes, and water: $300,000.

Add all of that up, and you've got about $2 million in costs. Human labor, permits, and other site expenditures bring the total to about $3.7 million. And that doesn't even include the cost of buying and exploring the land.

The Bakken is even worse. It costs more than $9 million to drill for oil there.

Not only that, but once these wells are drilled, they see huge declines in production...

Production from shale wells falls by 60% to 70% in the first year alone. Again, compare that to traditional wells, which take two years to slide 50% and typically keep pumping for 20 years or more.

Chesapeake Energy’s Serenity 1-3H well is the perfect example. It came in as a gusher in 2009, pumping more than 1,200 barrels of oil a day. Now, the well produces fewer than 100 barrels a day.

Experiences like that are all too common in shale oil drilling, and it's taking a heavy toll on oil majors.

Oil Majors Getting Burned

Oil majors have invested billions of dollars to acquire and develop shale resources, and now disappointing returns are burning them badly.

Exxon, Chevron, and Shell spent more than $120 billion to boost their oil and gas output in 2013 — that's about the same amount as the cost of putting a man on the moon.

And what do they have to show for it?

Declining production and flagging profits.

Last week, Exxon reported a 27% drop in fourth-quarter profits and a 1.8% drop in oil and gas production. That same day, Royal Dutch Shell, Europe's biggest oil company, reported a 48% drop in profit and a 2% drop in production.

Both companies cited soaring expenses as a major factor. Exxon said such costs hit about $41 billion last year, up 51% from $27.1 billion in 2009.

They're not alone. Chevron, BP, and others are all facing the same dilemma.

And that's why we're in trouble...

The 2030 Energy Crisis?

The fact is, all the world's easy oil has been spoken for. And shale isn't going to save us.

On the contrary, it's going to ruin us.

Some oil majors are rethinking their investment strategies and are looking to sell off assets. But others are doubling down, investing in even more expensive fields in even less reliable parts of the planet. That includes the Arctic and politically unstable countries in the Middle East and Africa.

Their belief is that they must grow production at all costs. But for that production growth to be sustained, oil prices are going to have to rise. Even then, there's no guarantee the energy market won't implode.

After all, if a company like Exxon keeps spending more and more and keeps producing less and less, it's bound to go under.

Imagine the impact that would have on the world's oil supply — not to mention the stock market.

If you thought the housing crisis was bad, wait until you see the energy crisis.

Get paid,

Jason Simpkins

@OCSimpkins on Twitter

www.outsiderclub.com