Someday, the oil and gas resources trapped in shale formations will no longer be economical, and the production boom we have seen will fade into oblivion; it's all just a matter of time. According to some analysts, that time is sooner rather than later. A recent report from the Oxford Institute of Energy Studies has brought into question the long-term viability of shale production in the United States and whether companies like EOG Resources (NYSE:EOG) and Continental Resources (NYSE:CLR) can continue to drill at their current breakneck speed and generate profits for shareholders. Let's take a look at the case they make as well as two charts from the industry that may counter that argument.
The question of shale's sustainability
There have been several reports that have challenged the sustainability of shale oil and gas in the United States, and this recent one from the Oxford Institute is really no different. It challenges the long-term viability based on three main elements:
- Well economics show a weak business model: Unlike conventional drilling where no hydraulic fracturing takes place, shale wells require additional resources to bring oil or gas to the surface, which in turn translates to higher costs than what we are accustomed to paying for a well. According to this recent study, this means that in the event that oil prices were to decline, several shale formations would be uneconomical, especially since the most productive parts of these shale formations have already been tapped and companies will only get marginal gains from wells outside the prime acreage in each play.
- Asset writedowns: In the study, several of the nation's largest shale players varying from Big Oil to smaller independents have all made major asset writedowns since the beginning of the shale boom -- $35 billion to be exact. One of the biggest culprits that the study highlights is Royal Dutch Shell (NYSE:RDS-B). Since 2008, the company has made over $24 billion in shale oil and gas investments, and now it is contemplating exiting its entire shale portfolio because of weak performance.
- Financial performance cannot continue: The final aspect of the Oxford Institutes shakedown of the industry is that the financial performance of these companies will cause a rift between managers and shareholders because of the extremely high levels of capital expenditures required to just maintain current production, never mind continuing to grow it.