> Over the last decade, the US shale industry had become a byword for capital destruction. Shale investors recovered about 50 cents for each dollar they invested during the 2010-2020 period.
Oil business is not that easy to analyze. There is no such thing as "recovered about 50 cents for each dollar invested". People think the oil business is all about drilling. In reality it's first about reserves and then about drilling. "Each dollar invested" goes first towards acquiring new reserves and upgrading existing ones (from possible to probable, from probable to proven). A bit of "each dollar invested" goes into the actual drilling. The sale price of the oil certainly exceeds the actual cost of drilling (oil producers are very, very elastic in shutting down drills). But how exactly do you measure the return on investment for the money that does not go into the actual drilling?
Au contraire, it's simple math. If I invest 1 dollar in 2010, and get back 50 cents in 2020, I have in fact lost 50% of my money over that time period. It's the same as any other asset class.For example, If you're a portfolio manager and you invest in a biotech startup index and only 5% of them produce drugs, you would likely lose 50% or more of your money over 10 years, and there's no accounting for "maybe they'll have a breakthrough later", as you need your capital back due to capital calls or redemptions or whatever.
Investors would consider $0.50 return on $1 over 10 years to be a loss. Money isn't free and that same dollar invested in an sp 500 index fund would have yielded $2.50 for that same time period.
You are misusing the terms yield and return, and seem to have a misunderstanding of how a muni bond works.
A muni bond would have yielded $.50, but you still have the underlying asset, so it isn't a loss, its a guaranteed return of 50% every 10 yrs, until the bond matures (you get your $1 back) or is defaulted on.
The SP500 doesn't guarantee anything, and there are 10 yr periods where it has negative growth.
No, I used the term yield correctly. $1 in the sp 500 over that time period would have increased to $3.50. Or a yield of $2.50 while maintaining the underlying asset of $1.
As for it being a muni bond, the risk is low but still there. Municipalities do in fact default sometimes.
It depends on the investors. Yes, the s&p returned more in this period, it usually does, but not always.
There’s reasons why other investments exist and one is the risk of the investment. Municipal bonds are really stable and some investors just want predictable returns and will sacrifice overall returns for stability and lower risk.
Oil investments aren’t municipal bonds, but I expect most oil investors want stable returns.
In your example that's assuming it's a coupon bond, but many (especially the tax free ones) are zero coupon.
So if you buy a $1M bond for $850k, but then interest rates go up and the value of the bond drops to $650k, then you've lost money through opportunity cost, but you'll still get your $1M at maturity.
Not that different with oil fields. If you assume it will produce X barrels, but only produces 20%*X barrels, not only is the money you're making lower, but the value of the oil field also drops (since its value is dependent upon production potential).
But that’s not what happened with these oil investments. The coupon paid out 50% over 10 years which is what like a 4% annual return, not very good.
But this info isn’t enough to decide anything without the current value of the investment. If the investment is $0 then that’s horrible. If it’s $1 then it’s paid out 50% over ten years so not that great. But if it’s $2, then that’s a good investment.
The fact that this crucial information is missing from the article makes me think the author is an idiot or excluding it because it doesn’t support his position.
I don't think it is that simple as claiming a 50% loss for the business you have things like inflation and depreciation of the business assets (such as the drilling equipment) which makes it a lot more murky.
The short form of this is "some people make money drilling for oil, and some people make money by NOT drilling for oil, and some people make money inbetween the two states, depending"
"Making money" is complicated. If you hold rights to shale oil, they may be worth more or less, depending on external conditions. You might sell on those rights, or leverage those rights, and it might go on a long, long time and never be actually invoked to process the shale. It was the act of being ABLE to, which drove the money cycle. It put a bottom over supply chain risk.
That's an average of essentially a lot of different bets. Shale oil was a bet on very high oil prices, this didn't eventuate and they still managed some kind of returns above the interest rates.
Oil business is about small margins being created at each step of production leading to a large margin at the end. The way BP structures itself to do so is amazing.
The BP company that owns the exploration rights pays BP to determine the feasibility, then BP pays BP to extract the oil, then BP pays BP to ship the oil, then BP pays BP to refine the oil, then BP pays BP to distribute the refined products, then BP pays BP to fill the tanks at the bowsers, then we pay BP to fill our car, and every one of those BP segments makes a margin.
So yeah, I agree, just because a drilling operation looks like a loss in isolation, unless you view it in context of that entire vertical integration, you're missing the woods for the trees.
> then BP pays BP to fill the tanks at the bowsers, then we pay BP to fill our car, and every one of those BP segments makes a margin.
In the US, this last step is not BP. The gas station is almost certainly not owned by BP, but rather pays BP royalties as a franchisor, and also does not buy oil from BP directly, I believe a gas station operator buys from separate trucking businesses that contract with refineries (that may or may not be owned or operated by BP) to deliver the oil to the gas station.
>The way BP structures itself to do so is amazing.
That's just vertical integration, a lot of companies do it to varying degrees. For example there is a long history of power plants owning coal mines. Bell, at one point in history owned the mines that produced the resources they used to make their telephones!
Sure, but splitting up BP into different companies that do each part of the process doesn't increase the margins. What it does is segment out capital costs, risk and debt, so that the financial statements look better than they otherwise would.
Presumably the point of that is ensure each individual, mostly separate step is completed efficiently, rather than inefficient refineries or drilling being papered over by efficiencies elsewhere.
Of course not. A better-tuned engine would have made zero improvement on the transport efficiency of the Titanic.
The point is to ensure that all of the "unprofitable" but necessary precursors to the small fraction of the business that makes all the money, spooling up established and productive wells during favorable market conditions, are coordinated to maximize those conditions in the face of the uncertainty of industrial prospecting, rather than the interests a contractor might have. In such a skewed-return field, other strategies risk over-fitting; it'd be like if you saw the housing collapse coming in 06 or so and responded by trying to target your retirement investments against a granularity level of individual regional banks. Just shorting an index will pay out far more on average, even if it's more "inefficient".
If a particular segment is unprofitable, then it seems that a) you could outsource it or b) the accounting for that segment is wrong "bp isn't paying bp enough"
It’s also like real estate where tax strategy drives the bus. Oil is a capital intensive business but by isolating each layer or spinning off the layers alot of the margin is essentially a transfer from the government.
Oil is one of the original businesses that developed these strategies. John Rockefeller was surprised to have made money post Standard Oil!
It sounds complicated, but it's actually very simple. Each of those stages is a saleable product, and you can cash out at any time by selling it to someone who works on the next step in the chain. It's just like selling bonds before their maturity, and it works according to the same NPV calculus.
Sure, it is a saleable asset. But you find the price only when you actually sell. You can estimate in principle how much your oil fields are worth, but that does not go into your accounting books, just like if you are a landlord you don't mark to market the price of your rental properties. And if your accounting does not reflect the current market value of your reserves, numbers like "50 cents on the dollar" are plucked out of thin air by journalists who want to shock readers.
> People think the oil business is all about drilling. In reality it's first about reserves
While this is true traditionally, shale is a different ballgame. A lot of the money spent in these shale plays is gone forever.
If you spend $8 million to drill a well and expect to make a 20% ROR at $70 oil, you're going to have a bad time when the price of WTI collapses to $40. And these shale wells have such fast decline rates that 10 years later they'll be making 1/100th of their initial rates. You either make your money fast, or take a big loss on the chin.
The major price decline beginning in 2014 and the huge hit during the pandemic (oil prices went negative, remember!) has made shale a major loser for investors. And plenty of the reserves companies booked had to be written off, either because of overly optimistic price requirements or inflated production estimates. Just look at Apache's Alpine High fiasco.
I am frankly kind of shocked that “credit_guy” is kind of glossing over the tremendous amounts of high-yield debt that were deployed to fund the shale drilling program between 2010-2020 that creditors took an absolute bath on.
This isn't really news, see this from June 17 2022:
> "According to the U.S. Energy Information Administration’s (EIA) latest Drilling Productivity Report, oil output in the Permian Basin will surpass 5.3 million barrels per day in July. The agency forecasts that crude volumes from the western part of Texas and the south-eastern part of New Mexico will go up from a record 5,232 thousand barrels per day (Mbbl/d) in June to 5,316 Mbbl/d next month. The projected production figure for July would be a new high for America’s biggest oil field and reflects the steady addition of rigs. As proof of improvement in activity, the rig count in the Permian Basin has risen to 344 from an all-time low of 116 in August 2020.... As crude prices hover around the $120-barrel level, production is expected to increase in six of the seven unconventional plays, with the largest gain of 84,000 barrels per day seen in the Permian Basin."
Now, what factor above all other led to the steep increase in global oil prices? The Ukraine war, and the resulting sanctions on Russian oil exports. Why did the Ukraine war break out, and why was a diplomatic solution not pursued? Maybe this is all just part of a plan: war creates scarcity, scarity increases prices, and higher prices means more profits.
Oil exporting interests don't want to see an end to the war, I imagine - nor an escalation to nuclear conflict, which would be bad for business. A perpetual relatively slow burn is their ideal long-term goal.
The countries suffering the most economic drain as a result are the oil importers, Germany etc. - but, on the silver lining side, this situation is encouraging a more rapid adoption of renewable energy technology on a global scale.
By that argument, you'd also have to accept that Russian-speaking people in Crimea and the eastern Ukraine provinces were facing a war of aggression waged by Kyiv since the government was toppled in 2014, wouldn't you? The Russia propaganda is also that they intervened to protect the innocent and defenseless, isn't it?
My own view is that the various conflicts between Russian-aligned and US-aligned groups and nations since about 2003 all across the region (Georgia, Azerbijian-Armenia, etc.) are really just a consequence of Putin's failure to sign up with Wall Street on petrodollar recycling (similar to Syria and Assad in this respect).
If Russian oil money had been deposited with Wall Street since 2003, as Saudi oil money has mostly been, then US media would have treated the Russian war on Ukraine no differently then they've treated the Saudi war on Yemen - justified action against neo-Nazi militias vs. justified action against Iran-backed terrorist groups, etc. If you want more propaganda lines, Russia is just intervening in a Ukrainian civil war, just as the US intervened in a Syrian civil war.
I don't think any of these media-amplified claims have much to do with true motivations, however. My views might be somewhat influenced by excessive focus on commodities, but aren't modern wars largely waged for economic control over resouces, at least as a major factor? And in such situations, is one organized crime cartel really better than another when it comes to mafia conflicts, in the absence of some obviously grotesque evil like the Holocaust?
> is one organized crime cartel really better than another when it comes to mafia conflicts, in the absence of some obviously grotesque evil like the Holocaust
Do you actually pay any attention to the war crimes Russia commits?
i meant the shelling that continued in open violation of the minsk agreement per the UN and killed hundreds of civilians. sometimes this kind of thing is called terror bombing. there are no good guys here.
> i meant the shelling that continued in open violation of the minsk agreement per the UN and killed hundreds of civilians.
The entire invasion by Russia in 2014 was in violation of the Budapest memorandum in the first place.
More have been killed by the Russians by a large margin in this one year since the war started than had been killed during the entire 2014-2021 war in Donbas. Where are your tears for them?.
> there are no good guys here.
Between the country defending its existence and its people from extinction being perpetuated by a force that indiscriminately targets civilians with precision weapons and sexual violence, and the invading force thats trying to perpetuate a war of conquest.
There is a clear good side and bad side. There is the clearest war in a long time, it is like trying to both sides WW2.
In a topic which isn't centrally about the Russo-Ukrainian war, we should try to avoid as much as possible igniting the miserable arguments that ensue about it. Hopefully we can stick to the subject of oil prices, specifically.
Oil prices were briefly affected by the war, but Russia is now exporting just as much oil as it did in January 2022:
Overall, if this is an oil company plot, it failed. Demand mostly shifted around. Meanwhile, equipment has become more expensive, which isn't great for oil producers. Russian exports of metals are sanctioned, which isn't convenient for building stuff. Simply put, I don't think that a $700B industry would be so foolish.
According to the graph, LNG exports were 337B feet^3 in Jan 2023, the most recent date shown, and were 353B feet^3 in Jan 2022, the month before the invasion. So exports are lower now than before the invasion.
This article is paywalled after the first couple of paragraphs, but..."Finally"?
Nobody likes extracting and burning hydrocarbons, but let's be honest. Shale gas removed a lot of uncertainty around the US' ability to supply itself with energy in a pinch, and markets love stability.
Wall Street has already made plenty of money off of places like the Permian basin and Bakken fields.
I'm sure shale has lost money for some Wall Street investors during the last 10-15 years, but I'd say that in the great scheme of things the newly-acquired resilience provided to the US economy and especially to the US consumers by the US not having to fight wars in the Middle East in order to get its oil has a been a net benefit to the US economy, and hence to Wall Street as a whole. That is those Wall Street investors took one for the team.
Ditto for the current geo-political thing where European companies are actively divesting from their home-markets and investing instead in the US, partly because energy (including natural gas) is cheaper in the United States.
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[ 3.7 ms ] story [ 109 ms ] threadOil business is not that easy to analyze. There is no such thing as "recovered about 50 cents for each dollar invested". People think the oil business is all about drilling. In reality it's first about reserves and then about drilling. "Each dollar invested" goes first towards acquiring new reserves and upgrading existing ones (from possible to probable, from probable to proven). A bit of "each dollar invested" goes into the actual drilling. The sale price of the oil certainly exceeds the actual cost of drilling (oil producers are very, very elastic in shutting down drills). But how exactly do you measure the return on investment for the money that does not go into the actual drilling?
No one interested in investing looks at money so simplistically.
A muni bond would have yielded $.50, but you still have the underlying asset, so it isn't a loss, its a guaranteed return of 50% every 10 yrs, until the bond matures (you get your $1 back) or is defaulted on.
The SP500 doesn't guarantee anything, and there are 10 yr periods where it has negative growth.
As for it being a muni bond, the risk is low but still there. Municipalities do in fact default sometimes.
There’s reasons why other investments exist and one is the risk of the investment. Municipal bonds are really stable and some investors just want predictable returns and will sacrifice overall returns for stability and lower risk.
Oil investments aren’t municipal bonds, but I expect most oil investors want stable returns.
So if you buy a $1M bond for $850k, but then interest rates go up and the value of the bond drops to $650k, then you've lost money through opportunity cost, but you'll still get your $1M at maturity.
Not that different with oil fields. If you assume it will produce X barrels, but only produces 20%*X barrels, not only is the money you're making lower, but the value of the oil field also drops (since its value is dependent upon production potential).
But this info isn’t enough to decide anything without the current value of the investment. If the investment is $0 then that’s horrible. If it’s $1 then it’s paid out 50% over ten years so not that great. But if it’s $2, then that’s a good investment.
The fact that this crucial information is missing from the article makes me think the author is an idiot or excluding it because it doesn’t support his position.
You generate assets during that period and the potential to pump oil. Same way that you invest money to a startup with 0 revenues.
"Making money" is complicated. If you hold rights to shale oil, they may be worth more or less, depending on external conditions. You might sell on those rights, or leverage those rights, and it might go on a long, long time and never be actually invoked to process the shale. It was the act of being ABLE to, which drove the money cycle. It put a bottom over supply chain risk.
The BP company that owns the exploration rights pays BP to determine the feasibility, then BP pays BP to extract the oil, then BP pays BP to ship the oil, then BP pays BP to refine the oil, then BP pays BP to distribute the refined products, then BP pays BP to fill the tanks at the bowsers, then we pay BP to fill our car, and every one of those BP segments makes a margin.
So yeah, I agree, just because a drilling operation looks like a loss in isolation, unless you view it in context of that entire vertical integration, you're missing the woods for the trees.
In the US, this last step is not BP. The gas station is almost certainly not owned by BP, but rather pays BP royalties as a franchisor, and also does not buy oil from BP directly, I believe a gas station operator buys from separate trucking businesses that contract with refineries (that may or may not be owned or operated by BP) to deliver the oil to the gas station.
That's just vertical integration, a lot of companies do it to varying degrees. For example there is a long history of power plants owning coal mines. Bell, at one point in history owned the mines that produced the resources they used to make their telephones!
VAT is not a sales tax but a tax for the full chain of added value.
BP as a whole should be responsible for the cleanup cost, around wells and of the air.
The point is to ensure that all of the "unprofitable" but necessary precursors to the small fraction of the business that makes all the money, spooling up established and productive wells during favorable market conditions, are coordinated to maximize those conditions in the face of the uncertainty of industrial prospecting, rather than the interests a contractor might have. In such a skewed-return field, other strategies risk over-fitting; it'd be like if you saw the housing collapse coming in 06 or so and responded by trying to target your retirement investments against a granularity level of individual regional banks. Just shorting an index will pay out far more on average, even if it's more "inefficient".
Oil is one of the original businesses that developed these strategies. John Rockefeller was surprised to have made money post Standard Oil!
While this is true traditionally, shale is a different ballgame. A lot of the money spent in these shale plays is gone forever.
If you spend $8 million to drill a well and expect to make a 20% ROR at $70 oil, you're going to have a bad time when the price of WTI collapses to $40. And these shale wells have such fast decline rates that 10 years later they'll be making 1/100th of their initial rates. You either make your money fast, or take a big loss on the chin.
The major price decline beginning in 2014 and the huge hit during the pandemic (oil prices went negative, remember!) has made shale a major loser for investors. And plenty of the reserves companies booked had to be written off, either because of overly optimistic price requirements or inflated production estimates. Just look at Apache's Alpine High fiasco.
> "According to the U.S. Energy Information Administration’s (EIA) latest Drilling Productivity Report, oil output in the Permian Basin will surpass 5.3 million barrels per day in July. The agency forecasts that crude volumes from the western part of Texas and the south-eastern part of New Mexico will go up from a record 5,232 thousand barrels per day (Mbbl/d) in June to 5,316 Mbbl/d next month. The projected production figure for July would be a new high for America’s biggest oil field and reflects the steady addition of rigs. As proof of improvement in activity, the rig count in the Permian Basin has risen to 344 from an all-time low of 116 in August 2020.... As crude prices hover around the $120-barrel level, production is expected to increase in six of the seven unconventional plays, with the largest gain of 84,000 barrels per day seen in the Permian Basin."
https://money.yahoo.com/surging-oil-prices-push-permian-1157...
Now, what factor above all other led to the steep increase in global oil prices? The Ukraine war, and the resulting sanctions on Russian oil exports. Why did the Ukraine war break out, and why was a diplomatic solution not pursued? Maybe this is all just part of a plan: war creates scarcity, scarity increases prices, and higher prices means more profits.
Oil exporting interests don't want to see an end to the war, I imagine - nor an escalation to nuclear conflict, which would be bad for business. A perpetual relatively slow burn is their ideal long-term goal.
The countries suffering the most economic drain as a result are the oil importers, Germany etc. - but, on the silver lining side, this situation is encouraging a more rapid adoption of renewable energy technology on a global scale.
My own view is that the various conflicts between Russian-aligned and US-aligned groups and nations since about 2003 all across the region (Georgia, Azerbijian-Armenia, etc.) are really just a consequence of Putin's failure to sign up with Wall Street on petrodollar recycling (similar to Syria and Assad in this respect).
If Russian oil money had been deposited with Wall Street since 2003, as Saudi oil money has mostly been, then US media would have treated the Russian war on Ukraine no differently then they've treated the Saudi war on Yemen - justified action against neo-Nazi militias vs. justified action against Iran-backed terrorist groups, etc. If you want more propaganda lines, Russia is just intervening in a Ukrainian civil war, just as the US intervened in a Syrian civil war.
I don't think any of these media-amplified claims have much to do with true motivations, however. My views might be somewhat influenced by excessive focus on commodities, but aren't modern wars largely waged for economic control over resouces, at least as a major factor? And in such situations, is one organized crime cartel really better than another when it comes to mafia conflicts, in the absence of some obviously grotesque evil like the Holocaust?
Do you actually pay any attention to the war crimes Russia commits?
You mean the shelling that only exists because of a Russian started conflict with Russian soldiers?.
I feel sorry for those dead civilians but I fail to see how it justifies raping Ukrainian children.
The entire invasion by Russia in 2014 was in violation of the Budapest memorandum in the first place.
More have been killed by the Russians by a large margin in this one year since the war started than had been killed during the entire 2014-2021 war in Donbas. Where are your tears for them?.
> there are no good guys here.
Between the country defending its existence and its people from extinction being perpetuated by a force that indiscriminately targets civilians with precision weapons and sexual violence, and the invading force thats trying to perpetuate a war of conquest.
There is a clear good side and bad side. There is the clearest war in a long time, it is like trying to both sides WW2.
In a topic which isn't centrally about the Russo-Ukrainian war, we should try to avoid as much as possible igniting the miserable arguments that ensue about it. Hopefully we can stick to the subject of oil prices, specifically.
Oil prices were briefly affected by the war, but Russia is now exporting just as much oil as it did in January 2022:
https://www.iea.org/data-and-statistics/charts/russian-total...
Overall, if this is an oil company plot, it failed. Demand mostly shifted around. Meanwhile, equipment has become more expensive, which isn't great for oil producers. Russian exports of metals are sanctioned, which isn't convenient for building stuff. Simply put, I don't think that a $700B industry would be so foolish.
https://www.youtube.com/watch?v=QDdmbPni6BI
Nobody likes extracting and burning hydrocarbons, but let's be honest. Shale gas removed a lot of uncertainty around the US' ability to supply itself with energy in a pinch, and markets love stability.
Wall Street has already made plenty of money off of places like the Permian basin and Bakken fields.
Ditto for the current geo-political thing where European companies are actively divesting from their home-markets and investing instead in the US, partly because energy (including natural gas) is cheaper in the United States.