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NeoGreen

(4,030 posts)
Mon Jul 20, 2020, 12:01 PM Jul 2020

Bankers and Investors Finding Fracking Industry's Underlying Models Prove Overly Optimistic

https://www.desmogblog.com/2020/07/17/fracking-models-reserve-based-lending-overly-optimistic


Image: May 27, 2020, dozens of drilling rigs are stacked at the Patterson-UTI yard in Midland, Texas, after the oil price went negative on April 20, 2020. Credit: © Justin Hamel 2020


Bankers and Investors Finding Fracking Industry's Underlying Models Prove Overly Optimistic
By Justin Mikulka, Friday, July 17, 2020

Warren Buffet has a famous quote about investing: “Only when the tide goes out do you discover who's been swimming naked.”

When it comes to his $10 billion investment in Occidental Petroleum, Buffett will need to take that one to heart now that other investors have sued Occidental for the merger financed in part by Buffet’s stake, alleging that the amount of debt required for Occidental to merge with Anadarko left the company “precariously exposed” if oil prices went lower. They cited the billions that Buffett invested in the deal as compounding this risk.

The fracking industry doesn’t care that you’re a world-famous investment sage: It destroys all capital.

Even in 2019, when Buffett was investing in Occidental, we knew that the fracking industry had been losing hundreds of billions of dollars the past decade. However, with the industry’s staggering debt load, lack of ability to continue borrowing, and drops in oil demand due to the pandemic, the tide is now truly going out to reveal the fracking industry’s failing financial performance. That receding cover has also revealed that the industry has broken one of the most basic tenets of financing for oil and gas production: reserve based lending.

Reserve based lending involves a firm estimating how much oil it has in the ground, and then assigning those reserves a value based on the most recent price of oil. A bank then lends the company money based on a percentage of this value. For lenders this has historically been a low-risk arrangement, because if a firm defaults on the loan, the bank can simply take possession of its oil field. So it has long been among the most reliable methods for smaller oil and gas companies to get financing.


Worth repeating:
"The fracking industry doesn’t care... (who you are) ...It destroys all capital."
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Bankers and Investors Finding Fracking Industry's Underlying Models Prove Overly Optimistic (Original Post) NeoGreen Jul 2020 OP
This message was self-deleted by its author CatLady78 Jul 2020 #1
Maybe he needed... NeoGreen Jul 2020 #2
This message was self-deleted by its author CatLady78 Jul 2020 #7
Yes...yes I was attempting to be... NeoGreen Jul 2020 #8
Not at all.. CatLady78 Jul 2020 #9
Agreed.... NeoGreen Jul 2020 #12
And he refuses to invest in EVs Miguelito Loveless Jul 2020 #4
Wow... CatLady78 Jul 2020 #6
That's not true - He bought into BYD in 2008 Finishline42 Jul 2020 #15
I stand corrected Miguelito Loveless Jul 2020 #16
No Problem, I've heard Buffett say that Finishline42 Jul 2020 #17
Tesla is a very odd company, Miguelito Loveless Jul 2020 #18
The carbon bubble is to the mortgage bubble Miguelito Loveless Jul 2020 #3
Ouch.... NeoGreen Jul 2020 #5
If you look at the coal industry, you see the oil/gas industry's future in 12-36 months Miguelito Loveless Jul 2020 #10
It was a false bubble that played into the hands of the... NeoGreen Jul 2020 #11
I am having a hard time finding very many companies that Miguelito Loveless Jul 2020 #13
To clarify my (poorly made) point... NeoGreen Jul 2020 #14
There's a phrase for this ... eppur_se_muova Jul 2020 #19
It was always a big ponzi scheme Champion Jack Jul 2020 #20

Response to NeoGreen (Original post)

Response to NeoGreen (Reply #2)

CatLady78

(1,041 posts)
9. Not at all..
Mon Jul 20, 2020, 12:48 PM
Jul 2020

It isn't you! We have killed satire as a society..
I routinely see headlines that should not exist outside the comic pages.

Miguelito Loveless

(4,438 posts)
4. And he refuses to invest in EVs
Mon Jul 20, 2020, 12:28 PM
Jul 2020

because he "doesn't understand them". He also apparently doesn't understand the imminent collapse of the fossil fuels market in transportation.

CatLady78

(1,041 posts)
6. Wow...
Mon Jul 20, 2020, 12:41 PM
Jul 2020

Thanks..I did not know that. And apparently Bjorn Lomborg's fraudulent narratives worked on Bill Gates...

Finishline42

(1,091 posts)
15. That's not true - He bought into BYD in 2008
Mon Jul 20, 2020, 03:24 PM
Jul 2020

This story is almost 2 yrs old but I am guessing that it's still true today.

On Sept. 26, 2008, Berkshire Hathaway Inc. (BRK-B) agreed to buy what is now equivalent to 24.59% of BYD Co.’s Hong Kong-traded stock. Those shares in what is now China’s biggest maker of alternative-energy vehicles have soared more than 500% since then, turning a $232 million investment into a stake worth roughly $1.6 billion at current prices. Berkshire shares have rallied just 146% in the same 10-year period as of Tuesday’s close.

https://fortune.com/2018/09/26/warren-buffett-berkshire-hathaway-byd-china-electric-cars/

Miguelito Loveless

(4,438 posts)
16. I stand corrected
Mon Jul 20, 2020, 03:27 PM
Jul 2020

was going off an interview where he said he wouldn't invest in Tesla, which is the only domestic dedicated EV maker.

Finishline42

(1,091 posts)
17. No Problem, I've heard Buffett say that
Mon Jul 20, 2020, 04:14 PM
Jul 2020

Couldn't remember what he said it about.

Tesla would certainly confound ole Warren, no way to correlate that company with a valuation that makes sense in a traditional way.

Miguelito Loveless

(4,438 posts)
18. Tesla is a very odd company,
Mon Jul 20, 2020, 05:12 PM
Jul 2020

run by a very odd man who is one white cat short of a Bond villain, but undeniably visionary and brilliant. He has managed to piss off oil companies, utilities, cable companies, car companies, auto dealers, aerospace companies, telecomms, railroads, prosthetic makers, Uber, Lyft, and a few dozen Wall Street "analysts".

Miguelito Loveless

(4,438 posts)
10. If you look at the coal industry, you see the oil/gas industry's future in 12-36 months
Mon Jul 20, 2020, 12:51 PM
Jul 2020

Mines close/go bankrupt. Jobs vanish, pension funds collapse, then the insurance companies who wrote clean up bonds to insure mines don't become abandoned toxic sites, begin to warn off their imminent insolvency, leaving the states on the hook for cleaning up hundreds of abandoned mines.

More and more fracking rigs are being take out of service, loans to drill are drying up, companies that were "high flyers" 5 years are bleeding cash, and THOUSANDS of wells will be abandoned, leaving the states on the hook to clean up and cap wells, then monitor them for decades to come.

Current CEOs don't care, since they just pull the ripcord on their platinum parachute and walk away with millions.

NeoGreen

(4,030 posts)
11. It was a false bubble that played into the hands of the...
Mon Jul 20, 2020, 01:11 PM
Jul 2020

... Fossil Fuel naysayers to discounted the reality of Peak (economic) Oil.

They deliberately disconnected the differences in the economies of natural gas and oil and lumped them together as one.

Deliberately mis-understanding the 'economic' aspect of Peak Oil, is like the white supremacists who deliberately fail to acknowledge the implied 'too' in the statement 'Black Lives Matter'.

BLM isn't saying Black Live Matter 'more', they're just saying (pleading, really) that Black Lives Matter Too (please stop killing us) and 'Peak Oil' doesn't mean the peak of All oil, since there will always be more oil in the ground then humans are ever able to (economically) extract, but it inherently means 'Peak Economic Oil'.

The fake economics of fracked gas/oil, allowed them their false narrative.

Now, the real question is: How do we convert a global economy that is wholly dependent on oil & gas to operate on...?

Nukes, won't do (they are their own fossil fuel and have the same transport issue as renewable energy below), and renewable energy hasn't been able to scale up, and quite frankly, does not have all the advantages of liquid oil (energy density, ease of transport). Try doing the economic math on a nuclear-powered commercial airline industry...who is going to be able to afford that?

My guess is that Efficiency will rule the day, or more to the point, forced-efficiency and rationing (which is a euphemism for, doing-without).

Miguelito Loveless

(4,438 posts)
13. I am having a hard time finding very many companies that
Mon Jul 20, 2020, 02:49 PM
Jul 2020

actually ever made a profit in fracking. They just kept borrowing more and more money, on the promise of massive future profits, which would happen once oil went back to $100/bbl. This was either willful dishonesty, or delusional thinking.

As to how we convert from FF to something else, you are correct that nukes won't do it. Aside from the issues you bring up, the time and expense are beyond the pale. So, that leaves renewables, which I do believe can scale up, if governments just find the political will. We know how to make the machines that make the machines that make electricity from solar and wind. The more we make, the cheaper and more efficient they become. Battery tech is increasing in energy density, while prices are falling.

I've been following this since 2005 and have both solar and EVs.


In 2010

Solar installation was $7-$8 per watt installed.
Li-Ion batteries were $1200 per kWh
Average panel output was 185w.
Best EV range under $50K was 73 miles
No used EVs

In 2020

Solar installation is $2-$2.50 per watt installed.
Li-Ion batteries are <$100 per kWh
Average panel output is 335w.
Best EV range under $40K is 230 miles
A lot of used EVs under $10K.

Oh, and yes, efficiency is still a major helper. We need to change our building codes to mandate self-generation, efficiency, passive heating/cooling, and lower carbon footprint materials. New power infrastructure that takes advantage of decentralized power generation (roof tops solar/battery-based peaker plants), and new city planning that plans for bikes, e-bikes, mass transit, and pedestrians.

The energy problem is solvable, it just takes getting greedy utilities out of the way.

NeoGreen

(4,030 posts)
14. To clarify my (poorly made) point...
Mon Jul 20, 2020, 03:10 PM
Jul 2020

...I agree that renewables could scale up, for the most part, with a hefty dose of efficiency but currently they are not being allowed to scale up (or are at least are being actively resisted), since that would interfere with a lot of existing built-in investment in FFs.

The problem I see, currently, is fuel for transportation (under the current 'optimal' life-style paradigm of suburbia with 2-cars).

Hydrogen is just stealth FF, or a highly inefficient means of storing renewable excess (what there will be of it).

Nukes (current) are great for static use, and a necessary component for the transition (I acknowledge that despite the renewable nay-saying from pro-nukes who act as if their fuel source is god's-gift, or something), just not a long term (i.e.>100-year) solution and one that has a LOT of downside risk/issues.

So, I see diversification, decentralization, higher efficiency (i.e. reduced transmission losses) as the future coupled with a necessary de-suburbaniztion.

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