Here Is the Case that Oil Spikes in the Coming Years - Huge Implications for Russia (Audiocast)
Oil prices have been rising lately, and this is reviving the discussion of peak oil and where this is all heading.
Chris Martenson over at Peak Prosperity is one of the smartest people arguing that prices are going to go up a lot, and soon, like within the coming years.
Recently he had Art Berman on his podcast to discuss all this. Berman is a perma-bull, and has been dramatically wrong since the crash in prices in 2014, but he might be right in the long haul.
We published an article last week from Pepe Escobar: An Oil Storm Is Coming, and Russia, the Saudis and Iran Hold All the Cards, which generated a lot of interest. It discusses how central Iranian oil production is to current (relatively) low prices.
Reflecting again why the RI comments section is a treasure trove, commentor Hisham Saber, had the following to say:
I have been saying this for a long time. Iran holds something more devastating than nuclear weapons. It literally holds the global Jewish financial scheme hostage.
Should anyone, U.S., and/or Israel miscalculate and push Iran to the limit, Iran can easily, swiftly, and devastatingly destroy all oil and natural gas infrastructure in a 2000 km radius (officially reported) of place of launch. That puts all the GCC oil and gas subject to massive missile bombardment and utter destruction, that would take years to rebuild.
I would venture to say that GCC oil is more like 40% of the world's oil supply. Without this 40% oil, the financial house of cards would fall down.
Martenson and Berman do not discuss the implications for Russia, and I would love to ask them what they think they are. Comments on this anyone?
Here's the discussion. It is very interesting. Full transcript below.
Chris Martenson: Welcome everybody to this Peak Prosperity podcast. I am your host, Chris Martenson. It is Wednesday, May 23, 2018. Today we are going to be talking about energy again. Why? It is because energy is everything. You know my view. If you have been following me, you know I think there is an oil price shock coming. I think there is an oil supply problem in the future. Today, we are going to be talking with one of the leading experts on oil and gas production in the US. One of my favorite guests, and a person I really trust a lot and I like as well. Here is why you personally should care a lot about this subject.
Listen; there is simply no question that economic growth requires energy. Maybe you have heard about how the US economy is decoupling from energy and all of that. It is pure bunk. If you chart – this is one of the best charts I have. It is a very robust chart because the line is so linear. If you chart world economic growth and you chart world energy consumption – why world? Because if the United States is exporting its energy use to another country, and then importing the finished product, and then pretending it is energy decoupling. It hides the truth of the nature of the matter, which is this. World energy consumption has been going up steadily for a very long time. So, has the world economy. If you want one more unit of economy, you are going to have another unit of energy consumption – whatever those units are. It matters.
Here is the thing. We are in a world awash with debt right now. There is $233 trillion of actual debt. There is probably five times that amount of unfunded liabilities – call them IOUs. Put it together. It is just an astonishing pile. The whole world, including 7.5 billion people, are all counting on us having more energy in the future. Maybe we should take a close look at that. That is what we are going to do today.
We are welcoming back to the program Art Berman. Let me introduce him. Art is a geological consultant with nearly 40 years of experience in petroleum exploration and production. Twenty of those were at Amoco, now known as BP. He has published more than 100 articles on geology, technology, and the petroleum industry during the past five years. He has got the chops. He is published in more than 20 articles and reports on shale gas plays. That is important in the US, including the Barnett, Haynesville, Fayetteville, Marcellus, Bakken, and Eagle Ford shales. I follow him really closely at his blog at artberman.com, and on Twitter which is @aeberman12. You should follow him, too. Art, welcome to the program.
Art Berman: Thanks Chris. It is great to be here.
Chris Martenson: Let us start here. I put a little something incendiary upfront. I said I think there is an oil price shock coming. I based that on the idea that the last four years – 2014, 15, 16, and 17 – were really horrible years in terms of oil and gas discovery. Why? It is because the spending collapsed in terms of the FIDs that the upstream oil and gas exploration budgets just got slashed in all the big companies. I am of this view that you have to find it before you can pump it. The oil and gas industry has a lag from finding to being able to get it to market. It is a pretty long lag of five to seven years, depending on where we are at sort of on average. I think that the lack of finds translates into a lack of supply. I see that the IEA now agrees with that view, and some other houses are coming forward and saying that they agree with that view, too, possibly. What is your take on that?
Art Berman: Yeah. It is just a fact of nature. I mean you cannot dispute it. Back before the price collapse, forget about the slashed budgets. The size of the fields that was being discovered was getting smaller and smaller. Basically, the world has not been replacing what it uses since probably sometime back in the 1980s. If you think about our energy supply as a savings account, we have been hitting our savings to pay the bills. We have transferred it to checking now for nearly 40 years. At some point, you get a notice from the bank that says the savings account is getting really low. Pretty soon it is going to be gone. You better put something in it. My point is that before we stopped investing, we were having a really hard time keeping money in the account in an awful [unintelligible].
A lot of it in the late 2000s and early 2010s, it was liquified natural gas. It was stuff that was discovered a long time ago but was only allowed to be added as a reserve once we had the contract. The late 1990s and the beginning of this century, that was mostly what was being added. We ran out of that. That is when companies like Exxon, Chevron, and the like went into the tidal oil plays and the shale gas. They just knew we have to replace reserves. Even if it is funny money, which in some ways this is, that is what they did. That is where we were before we stopped spending on exploration and production. We’ve had pretty much four years of no money spent. I want to stress that exploration is important. That is what you are talking about. It is finding new stuff. But production – we have not been spending money to develop discovered, proved reserves in fields. BP, their CEO just recently said we think that oil prices are ultimately going to be much lower than the public thinks, so we are not spending a dime on that now, either. That is tough. It is really a problem.
Chris Martenson: If they are not spending money on either exploration or infield drilling and the other pieces to boost production in existing fields, I assume that is because economically they say this is not a worthwhile activity to do right now. By the way, if you look at the return on capital for all the major world oil companies – the Seven Sisters – it is abysmal. We are talking like grocery store sort of returns the last couple of years. It is 4%, 3%, 2%, and minus or negative 1%. Art, this is formerly the biggest cash flow industry that you could possibly get involved in. Widows and orphans would want to buy this stock and get the dividends. Of course, they have kept the dividends up. They have had to do that by taking on massive amounts of debt. What’s the other way to spin this? I look at this and I say wow, that is a really unpleasant scenario for these companies to be in. The way they have survived is by slashing their money spent on exploration and development. How long do you think before we start to feel that in the marketplace?
Art Berman: I think we are feeling it right now, Chris. The price of oil has gone up like 30 or more percent just here in the last year. Some of that – in fact a lot of that – is there are some very good reasons. In the United States, we have been drawing down our reserves, our inventory, and the amount of oil we have in storage consistently since February of 2017. We are going into the fifteenth month of almost every week taking oil out of what we have got in storage because we are not producing enough to meet the need. Of course, anybody that pays attention – I do not know how many people do, but some do – to what goes on on even a monthly basis in the oil industry. I mean, the United States is right now producing more oil than it ever has in its history. We are a million barrels a day higher than that peak in 1970 that King Hubbert and other people got in trouble for saying what happened. We are going up just for round numbers like 50,000 or so barrels per month of production. Yet, we are still sucking oil out of storage. What’s that tell you? There is only one way to interpret that. That is, we are using more than we are producing. If we are producing more than we ever have, what does that say about our supply? That is the United States. That is not the world. But we are the biggest consumer of oil by far in the world.
For better or for worse, the United States has the best data. We want to extrapolate to the rest of the world, the rest of the developed world, the so-called OECD. We got pretty good data, but not nearly as good through the International Energy Agency. Beyond that, we got no idea. We are guessing completely, particularly about the developing world. That is where something like 80% of the demand growth is coming from. We’ve got a big question mark. But I am saying I cannot give you a number, but I will fill in the question mark for you and tell you we are in deep trouble.
I mean countries like the United States and western Europe; our demand is pretty much stable. We are not a big growing economy anymore. These emerging markets – Asia, Latin America, and Africa – they are going full bore. I think we have seen oil. Brent has been up to $80 here recently. WTI, the US domestic oil, is up over 70 even on a bad news day like today. It’s still $71. There is only one explanation for that. That is that supply is perceived as tight, whether it actually is or not. I just told you it is, but perception is part of it. I think we are kind of in trouble for supply right now. That is the answer.
Chris Martenson: That is what we are seeing in the price data. Of course, oil is a really inelastic substance. - meaning that the price is going to move pretty aggressively depending on where the supply and demand is. The story through 2017 was, the world is awash in oil. I have these Forbes headlines even as recently as a month ago saying the United States has to avoid the abundance trap. We have that theme. But the rest of the data is starting to say as best as we have it. It says supply is now being exceeded by demand. We are starting to draw down on not just US reserves. But I have seen OECD data that says their reserves are coming down as much as you can trust all that data. The price clearly says that supply is tighter than it used to be, so the price went up. Is that too simplistic?
Art Berman: No. I mean I wrote a post probably six months ago. The title was something like the US oil oversupply has ended. It took me awhile to gather the data and then the courage to publish that. I waited longer than when I thought that was happening. So, it’s ironic that you got somebody weird like me saying that maybe I think it was in November. Here we have Forbes, who I sometimes write for by the way, just here in the last month or so saying we have too much oil. We cannot both be right. I do not know what data they are using, but I will show you what I have been using. It is not a matter of pride of ownership. It is just that there are certain things that you cannot be wrong about. For now, I mean I know I am not wrong about that.
Chris Martenson: That is fascinating. Talk to us about this. First, I just love to dispel these myths, because they are so deeply ingrained. I run into these all the time in front of audiences. One is that the United States is now a net energy exporter.
Art Berman: Totally bogus.
Chris Martenson: Totally bogus.
Art Berman: I mean there is no statistical sleight of hand that could be used to make that a true statement. Now, is the United States net import or net export, whichever you want to do, crude oil and petroleum products? Has it gone down a lot over the last ten years? Absolutely yes. It absolutely has. Is it anywhere close to zero? It is nowhere close to zero. I hesitate to say never, but it is extremely unlikely that it was ever be never. Now Michael Levy, who is an energy analyst who I kind of like, made a great analogy a couple of years ago. He said regarding this exact point. If a country like the United States imports millions of cars, let us say from Italy, paints them green and then sends them overseas to be sold; is the United States a net exporter of green cars? It depends on the sleight of hand you use. You can make the statistical argument. But the fact is all we did was put paint on cars that were made somewhere else. That is the deal with this whole net exporter thing.
Never ever lose sight of the fact that the United States imports a ton of oil. I mean, we are importing, on average, seven million barrels of crude oil a day. I mean that is more than many continents use a day. Why are we importing all that when we are also producing 11 million barrels a day? It is because we are a factory. That is a good thing, I think, for the economic machine. We import a ton of crude oil, so we can put it into our refineries along with our own oil, turn it around, add value, and make profit by selling gasoline, diesel, and God knows what else overseas. That is a business model that works. But it is not our oil. It is those Italian cars that we are painting green. It is somebody else’s oil that we are running through our refineries, making into diesel and gasoline. We are turning around to ship them back overseas. Be careful about that. Again, I do not want to diminish the fact that if you net it all out, we have improved considerably. But we are nowhere near energy self-sufficiency, nor do I think we will ever get there.
Chris Martenson: To get there, of course, we would need another four or five million barrels a day just to get to zero in terms of oil imports at this point in time. I am looking now at a Goldman Sachs’ top project report that you sent to me here. It is a really good report. I think I am going to make it available to people who are listening to this by a link. They have a few things on here that really caught my eye. The first is that speaking back to the thing we already talked about, they are talking about the amount of oil that has already been taken out of expected production by 2025. It is owing to “delays in the FIDs” that were the first investment decisions – the FIDs – since 2014. They are saying that approximately six million barrels a day is missing from this equation.
As well, what we know is that the decline rates for existing fields is very, very high. There is probably a lot of hand waving around this number. But somewhere around four or five million barrels per day per year has to be replaced because of depletion and decline rates from existing fields. When we put all of that together, it looks like this Goldman review is saying yeah, we are missing a lot of oil. Where does that amount of oil come from in this story? You said shale is throwing on 50,000 barrels per day per month. That is fine. I carry that forward and we are adding – I will be generous – a million barrels per day or two? Let us be real generous at two. Where do you find this missing six, plus the other four or five that is missing every year? Where does that come from?
Art Berman: That is the secret ingredient. Isn’t it? The answer is you can be optimistic. You can add up all the planned and probable projects that are out there. If you assume that all of those things happen on time and that they actually meet the expectation that has been provided, here is the big one. There are no unplanned interruptions in supply. You can make a case that says do not worry. The reality is that those projects never go according to plan. They always have problems. More importantly or as importantly, we live in a world full of unrest, chaos, war, and all sorts of bad things. Just as soon as you think we are on track for something working right for a change, we end up with a Libya, a big civil war that is still going on. Here is a country that was producing a million and a half barrels a day consistently. There have been times since 2011 when all that really got started, where they produced zero. Even in a good day or a good week, if they are up to half a million barrels a day that is cause for celebration. There is a negative million right there in Libya.
I do not want to read a litany of lists, but everybody just about knows that Venezuela is in very serious political/economic trouble. Their production is going down and down and down. I do not see where there is a resolution. Ironically, the United States is making it worse by putting sanctions on them because we do not like their politics. I do not want to get into that. We are putting sanctions on Iran, which is one of the biggest oil producers in the world. It is a whack-a-mole deal. There is always a problem. Even in a stable country like Canada, they end up with a big forest fire up in the oil sands area, which has nothing to do with oil production. Suddenly we get a big interruption. Okay, they fix that. Then they have a problem with their Keystone. It is not Keystone XL pipeline. For two months, that is operating at 80% capacity.
There is always some problem. The world does not work perfectly. I do not want to be pessimistic, because I am not. Eventually we have to learn some calibration. The calibration of history tells us do not count on 100%. Certainly, do not count on 120%. If you count on 80%, you might be closer to right. Even then you will be disappointed. That is the reality. We simply cannot expect to take all the best-case scenarios and imagine that they are going to work out.
Chris Martenson: Let us talk about some of that best case, coming back to the US where of course the story is about the shale plays and just how extraordinary they are. Let us set aside shale gas for a minute because I want to talk about that in a second. It is just the oil and the near oil, which would be the Eagle Ford, which is mostly heavy natural gas liquids. Let us call it oil for the moment. The shale oil story is that this can just grow for a very, very long time. The Energy Information Administration in the United States – the EIA – says hey, this might peak somewhere around 2022 or 2025. Then it is just a very slow tail out to 2050. Do you agree with those particular assessments? Do you have a view on when we will see a peak in the shale oil plays?
Art Berman: Right, Chris. I do not know what kind of drugs they have over at the Energy Information Administration.
Chris Martenson: Good ones.
Art Berman: Yeah, I want them. I want them badly, whatever they are. I put out some slides just here in the last couple of weeks, where I took the Department of Energy and the EIA. I took their proved reserve numbers for the Eagle Ford and the Bakken. I said okay, I am going to believe those because they have been kind of stable for a while. Then I took the charts and the data behind them that they have put out for those long-term production forecasts. I said okay, let us accumulate this stuff. What I found was that for the Bakken and the Eagle Ford, that at present production rates we run out of all those proved reserves in the next five years. Yet the EIA shows them producing like gangbusters out into 2040 and 2045, and then barely declining out to 2050 which is when their projection ends. Okay, well that does not really make sense to me. Okay, fine the reserves are kind of fluid. They are based on a price. If price goes up, then you get more reserves. But I look at their price assumptions, and most of the price increase that they show in their model happens between now and when we run out of all the proved reserves we have booked. What is the economic incentive for companies to go out and find new reserves if the price is flat? That is the Eagle Ford and the Bakken. Before I go on, I have studied both of those. The Eagle Ford has declined a million barrels a day. I hate to make predictions that I will be wrong about, but I will make a prediction that I do not think I am going to be wrong about. I do not think it is coming back.
Chris Martenson: Really?
Art Berman: I have talked to CEOs of companies that are in the Eagle Ford. They say geez, you are right. I mean, if you do not believe Art Berman, I mean Tudor, Pickering, & Holt just put out a report this month on the Eagle Ford. They are saying the same thing that I am. On the Bakken, a year ago, we talked about this in one of our last conversations.
Chris Martenson: Right.
Art Berman: I said the Bakken has peaked. It may come up again close to what it did. It has not even worked. It has declined every month in 2018. Let us get to the big kahuna. Let us get to the Permian Basin. Permian Basin, the EIA has always underestimated their reserve. I did it myself. I just added up all the numbers that companies list in their annual reports. Then I did a conscientious extrapolation between the 50% of production those guys represent, and the other 50. I came up with six billion barrels, okay. Six billion barrels is a lot of oil. Run it through the same scenario. What you find is that we run out of that six billion barrels in about 2025. That is assuming production rates do not increase, and they are increasing all the time. Then the EIA has another 40 billion barrels coming from where? I guess it is the same place that banks come up with money. Let us be fair. The world has always lived on like a ten-year cushion between reserves and production. In the past, when we could still go out and discover 20, 30, or 40 billion-barrel fields with some frequency, we never actually got to the end of that road. I do not see where it is coming from, now. That is kind of a long or comprehensive answer. But my take is if you are counting on US shale oil to carry the US, much less the world; I would say you are in big trouble by about 2025.
Chris Martenson: Let us talk about some of that trouble. I am not asking you to necessarily comment on the auto industry, but it really struck me that Ford Motor Company must have been looking at this data. They came up with this idea and said yeah let us just scrap the sedans in the United States and small cars. We are going to just exclusively focus on SUVs and pickups. Of course, that is where they make their money. But they must have known about what happened to SUV and truck sales in 2008 when oil spiked. Here is a major company with presumably a lot of very good talent and strategic thinking people, who looked at all of this same data and came to a very different conclusion than the one you just drew. Did they just fall for a bad narrative? Or is there another way to look at this that I have to go find?
Art Berman: As I told you before, I am a geologist and not an abnormal psychologist, although I do think about human behavior and why we do what we do. I cannot possibly explain to you a decision like that. Let us go back to what I was talking about before. I mean the EIA is not made up of a bunch of dummies. I have great respect for the people who work there. Yet, I mean this is groupthink. It is a case, since I heard what you said, I agree with it, and I tell the guy in the next office that I heard it from Chris and I think the same thing. Eventually it comes back to Chris. He hears from somebody he does not know that they think what he thinks. We all decide we are holding hands in a circle. We must all be right.
Did anybody do the work? I do not know. I just cannot answer that question. All I can tell you, Chris, is I do the work. I crunch the numbers. I do not sell anything other than my services as a geologist. I do not have anything to gain. I am not selling stock. I am not doing anything like that. If I come up with an optimistic conclusion, I publish it. If I come up with a negative one, I publish it. The only thing that I sell is me and my integrity. I do not have a stake in this thing. I do not even have investments in the energy business. I own two stocks that I inherited from my dad. I have not sold them yet. I cannot tell you how those guys do it, but I know how I do it. I have been doing this a long time. I think I know what I am doing. I cannot explain it to you. The burden of proof I guess is on them. We will see if they are right, but I think they are wrong. I think they are dead wrong.
Chris Martenson: All right. If you cannot talk about specific companies, just let me know. I was shocked when I saw that Concho had bought RSP for a land price of $79,000 an acre. For the people listening, that means that for every acre, they had to pay $79,000 to gain access to that. I am just rounding wildly here, and this is not even remotely appropriate. Let us say you can put a well every 100 acres because they have multiple benches, and blah, blah, blah. It gets complex but let us say 100 acres. That means the first $7.9 million went out the door before they even drilled a well. That means that these wells have to be just huge and enormous. How do I make sense of that particular deal? Or did that catch your eyes?
Art Berman: Yeah, it is not the first one. It happens to be the most outrageous one. I mean, Permian deals have been going for $30,000 or $40,000 an acre for well over a year. I mean, it is a bubble. Okay? The psychology, as I see it, is this. Concho happens to be a fairly good company. They are one of the very few pure Permian players that actually makes, or I should say made more money than they spent. That is going to change. It is like any other business. You get successful, and then you decide to let us leverage up and shoot for the moon. That is what they have done. What is their goal? It is the goal of every oil and gas independent in the world. It is to prove enough value. Get bought. Be rich. That is what it is all about. Again, I have no insight into Concho. I have no vested interest in whether they succeed or fail. I have told you that they are a pretty good company, so unless they screw it up, at least so far, they have been good. My guess is they are betting big. Everybody in the world wants to be in this play. If we can maximize our position and the perception of us as a really great company, maybe Chevron will come in and pay way too much for us. Do you know what? They are probably right. Maybe Exxon will. That is the name of the game.
Chris Martenson: Interesting.
Art Berman: It is not insane. I could be wrong, but it will probably work.
Chris Martenson: That would be interesting. I get the game. It is just from an analytical standpoint. When I punch in the numbers in terms of what is coming out of these wells, this was interesting. At this last summit we had just down in Austin which just happened this past weekend on May 20, there was a gentleman there who I was able to put a question to. I just love gathering more and more data. Art, you and I went back and forth. I found this piece that was written in oil and gas journals by Rystad. They said wow, look the break even cost for Bakken wells have just plummeted. That is a function of several components. A big one is what you think the barrel of oil equivalents are that are coming out of a well. They said wow, look. They used to get 400,000 barrels out of a well in the Bakken. Now they are getting 700,000. Of course, yeah, the economics get awesome when you have almost doubled your oil production per well. The problem is when I run over to Sarah Peters site and I look at the actual well data from drilling info, you plot them out. You do not have to be a genius to see that these things are not going to yield anywhere even close to 700,000 barrels. It is going to be closer to maybe 330, 335, or maybe 350, depending on the vintage. That is at a maximum. We had this conversation by email. But for people out there, just help them understand what is going on here with these very hugely dissimilar estimates out of how much oil is going to come out of a given well. I know you are indisputably probably the expert at this.
Art Berman: Yeah, there are a couple of ways to look at this. The Bakken is a great example. One of the classic accounting tricks is in a play that has a lot of gas. It is how you convert the gas to what we call barrels of oil equivalent. But in the Bakken, there is not a lot of gas, so you do not have that way of cheating your way around it. What happens is that – by the way, I think Rystad is generally a pretty good outfit, too. I am not in any way criticizing them. The easiest way to estimate what wells are going to make, the short way, is to say okay we know that wells drill – let us say in 2015 or ’16, somebody like Art has done the decline curve analysis. The average well for Company X is going to make, let us say, 300,000 barrels of oil. Okay, now what we do is, we do not have enough data on 2017 and much less 2018 wells to be able to do that. Nobody does.
What we can look at is the initial rates. We will look at the first five or six months of production, because that is all we have. Say, oh my God, the initial rates are 70% or 60% higher than they were in the last good year we could make an estimate on. Art said, or somebody said that was 300,000 barrels. We are going to say double it or almost double it. Let us say 500 or 550 or whatever. That seems to be a reasonable way to do it, particularly if that initial rate is not a very short rate. That was the way that the companies used to mislead people. They would run a 24-hour test or a 72-hour test. They would extrapolate that out to infinity. A Rystad is saying no. We are prudent. We are looking at three months or six months. That is a stable number.
When you actually do the work and you plot it out, what you find is that yeah you can boost that initial couple of months rate by spending millions of dollars on a gigantic frack. Drill two-mile-long laterals. The decline rates are twice as steep. You get out there maybe eight or nine months, and your cumulative is already less than that really good year that Art or somebody else said was going to get you 300,000. Basically, what you are doing is you are putting the well on steroids. Then it has an apoplexy and it dies, or it becomes like an old person. That is the problem with that. You cannot take an initial rate and assume that it is going to go on forever. If I thought that I was going to grow as big as I might be based on the first ten years of my life growth rate, I would be 100 feet tall. That is not going to happen because that is not the way things work in the world. That is the best. Again, I am not saying that they are lying, or they are being misleading. It is just a shortcut that people use. They look at it and say, oh my God. These guys are just getting better and better. The earth physics does not work that way.
Chris Martenson: That is interesting. The gentlemen who came to the Austin one ran all of these calculations. He just basically said that in many cases, what is happening is they are using calculations that were designed for conventional reservoirs. They are applying them to these unconventional shale rock plays, which have these hyperbolic decline curves and all the things that you do. He basically said that he has seen it done over and over again, even in his own industry. People are using what is called an ARP calculation, which is inappropriate. It just creates; it assumes a big giant long tail that may not be there. What you are also noting is that when you actually do the work and you actually bother to take a look at what is happening here, yeah you get more at the beginning. But it declines faster. That seems like an easy concept to get out there. Boy, a lot of people are interested in that concept not getting out there. How successful have you been in bringing that detail to investors or to anybody who might really care?
Art Berman: The choir standing behind me cheers every time. The people that pay attention to data and that already kind of have a hint of the truth, they say that is great. Buty let’s be honest. People want to believe a good story, especially if they have heard it on Kramer and they read it in the New York Times or the Wall Street Journal. The president says so. Their congressman says so. The CEO of an oil company does. They want to believe that things are getting better. To tell them that in fact they are not, they do not want to hear it. This is classic cognitive dissonance. What happens is we say that is just Berman. He is a chronic skeptic and a kvetch. Anything he says, he has already been proven wrong 1,000 times. I always ask people when they say that or Tweet it. I say, can you be specific? What did I get wrong? They say, you said this. Can you tell me exactly where I said this? I do not remember ever saying that. They do not care. It is the same thing. If they can find a reason to disbelieve what they do not want to believe, then they will. It is just the way people are. I am not going to change that.
Chris Martenson: You say you are not an abnormal psychologist, but actually it would just be a normal psychologist. It is actually quite normal for people to tune out information that they do not want to hear because it conflicts with a belief system they hold. I have been over and over again. I just released a video last week and people were commenting under YouTube. YouTube comments, quite often, is an ignorant swap meet showing up at your doorstep. There I am. People are saying, are you not the guy that was wrong about peak oil? I just do not know where to begin with that one. I am like, gosh how many individual fields or reservoirs would you like to look at? It is just a thing. It is not a theory I have. It is just a thing. It is like saying gravity exists. Hey, there are people out there who are promoting the idea of a flat earth. Who knows? For people like us who really do like the data, Art, where do you think we really are in terms of possibly an oil production peak in the United States?
Art Berman: The answer to that is how much capital is available to these guys.
Chris Martenson: Sure, yeah.
Art Berman: Of course, that is painful for me to say because I am a technical guy. I like to talk about production rates, EURs, reserves, economics, and all that kind of detail stuff. The hard truth is that the reason we are producing 11 plus million barrels a day today is not because of technology and not because of efficiency. It is because of money. It is because there is a ton of capital in the world that is poured into US exploration and production for a whole lot of reasons, none of which have that much to do with what a great business it is, except these guys can make a return. It is usually a coupon kind of return. I will not get into the details. If the money persists, and it will not persist forever for a variety of reasons, yeah, I mean we can easily get to 12 million a day. But at some point, I think there is always a fulcrum or a threshold. You get to a point with oil price where people decide I am not going to drive as much because the cost at the pump is killing me. As soon as that happens and as soon as demand starts to feel the effects of higher price, it takes a while to feed back through the system. Then price goes down. When price starts going south, the investors go away. They are looking to buy low and sell high or buy high and sell higher. They are not looking to buy high and sell low.
Chris Martenson: Right.
Art Berman: Once that happens, the whole thing goes into some sort of devaluation or deflation process. The game is over. All of that assumes that we have business as usual, and that the world economy and the US economy is okay or more or less okay for some period of time. You started this conversation talking about the absolutely unmanageable levels of debt that world governments, consumers, and corporations have. I mean at some point; the world economy is not only going to grow slowly. It is going to stop growing. When that happens, the game at the very least changes radically, if not is kind of over. Business as usual with 2% or 3% growth per year. This is as long as oil price does not get too high to cause demand to pull back, which it already is in my book. That is good on you. There are feedback loops and we are way beyond what I think is the sensitivity of the American consumer to high oil price right now. A large part of the growth in the US economy over the last year was a lag effect for very low energy prices. Now that has changed. How long will that take before that feeds back through the system and we see a movement the other way? I cannot say. But it will happen.
Chris Martenson: Well, with the Federal Reserve and its animatable wisdom suddenly discovering that half of all households roughly cannot afford $400, it does not take much of a gas price hike to really crimp the average family out there. I am noticing even the Wall Street Journal a few weeks ago dug into the shale space and noted. I am loving how they phrased this. I am doing this from memory. It was close. They said the shale industry in the last ten years has spent $280 billion more than it has earned from operations. I like to shorten that sentence up. I call that losses. The Wall Street Journal could not quite bring itself to call them losses at this stage. That is a huge number. Art, here is a question. Do you have any sense? We get the sense that they are on this treadmill with these shale companies. They have to spend money. Of course, they want to keep their production up. They are just throwing all the drill rigs going crazy, and the frack crews are out there. All that is happening. What if you took one of these companies? If you took the average industry and said stop, no more money? You cannot. That is it. We are just going to run right out. We are just going to take all the stuff that you are producing and just basically turn off this red queen drill program they have going, could they pay back that $280 billion at this point in time from existing wells?
Art Berman: No, absolutely not, Chris. I mean I do these calculations every quarter. Economists and all these people that are much more sophisticated than I am about finance, they will tell you or they will tell me. They will say oh, you know cash flow over capital expenditures is not the way we do it. We look at net income. There are a million caveats as to how we can show that even though they are spending more than they are making, some sophisticated analyst is going to say they made a profit. I say no guys. I am simplistic. The other calculation I do is I take the total debt – whatever it is. I divide it by their cash from operations. You cannot argue with that. Okay?
Chris Martenson: Right.
Art Berman: What I find is that of all the companies that are in this tight oil space, if that is the right word, that there are none of them that could pay off their debt in less than two years. I am talking about spending absolutely nothing on anything, including salaries and including keeping the lights on. It is just taking all the money from the well and putting it into debt. Put it into debt service. Most of those companies, that ratio is four to one or four years. There are companies, a lot of them, that get up to eight, ten, or 12 years. None of those things are ever going to happen. That is like saying if I took all of my income and every penny that I get in a paycheck, and solely use it to pay off my mortgage; how long would it take before I paid the mortgage off? It would be an awful long time. No. There is no realistic way that that is going to happen. That is like a physics experiment. This is if we assume there is no friction -- big assumption. Of course, the other piece of that is if you stop growing production and you stop showing any kind of cash flow, what happens to your stock price? Everybody runs away from it and you go bankrupt. You do not have any; you have no investors. All the executives whose compensation was based on stock options, they are out the door looking for another job. The reality is there is friction. There is gravity. That is not going to happen. Even in a perfect world, you are talking years and years and years to ever get back to some sort of sanity.
Chris Martenson: Even that, let me put some color on that. This is to continue this metaphor. You said you had to pay your mortgage off right away. How long would it take? But your income would be declining very rapidly.
Art Berman: Yes.
Chris Martenson: If we said, wow this company could pay back its debts in four years. But if its wells full stop have declined by an average across the whole mess of them 50% in that period of time, that four years turns into a much longer period of time. That was my question. Given their current run rate if you just stop, now you have to take all the money you spent and give it back in terms of debt and I hope also equity with some returns; we are saying just the debt alone. There is no possible way if you just took these companies and turned them into just a residual glide path take this down to zero. There is no way they could just stop and have this work out.
Art Berman: No; and the bigger picture, Chris, is the base decline rate. If you took Bakken or the Eagle Ford and you just stopped drilling any new wells, you just have 10,000 or 12,000 wells or more. In the Bakken, I think you have close to 15,000. The Eagle Ford has maybe 12. You have a gazillion wells that are producing. You just said okay, we are not drilling any new wells. Those entire fields would decline 30% a year. It is 30%. It does not mean that a new well is going to decline at 30%. The base production and the field itself is. Basically, in three and a half years it is producing nothing.
Chris Martenson: Wow.
Art Berman: Wow, that is sobering. That is the part of the shale story that we do not want to think about. That is that the decline rates are four or five times higher than a conventional well. We kind of all know that. We even acknowledge it. But we do not really feel it because they are drilling so many wells all the time. I mean the Bakken has 60 rigs working in it right now. Here is a play that I am telling you is not going to grow anymore. Yet, there are 60 drill rigs running all the time in that play. There are always new wells. I showed a graph just recently. The North Dakota agency that reports on production, they release their data every month. There is a record number of wells in the Bakken. Yet, every month, the production declines. Today, production is 5% less than it was in December 2014, which was the peak. There are 4000 wells more now than there were then. There is a really good measure of what that decline rate looks like. You have to drill. You have to have a quarter more or 4000 wells more than you did three and a half years ago, and you still cannot get to the same level of output.
Chris Martenson: Let us talk about just a single one of those wells for people who have not been on site. In the Bakken, I assume they are drilling down about 10,000 feet. Then they tip it sideways maybe another you said two miles. We will call it 10,000 feet sideways. Then they have to frack it. What is it like to be on site for a frack job?
Art Berman: It is a spectacle. It is like one of the best episodes of Game of Thrones you have ever seen. I mean, there are hordes of white walkers. There are just thousands of people. There are thousands of trucks. I mean my God; the noise is unbelievable. Nobody can drive on country roads because there are so many trucks hauling sand and hauling water. I mean it is, to call it an industrial scale operation is to miss the point. I mean it is epic. It is absolutely massive. That is one well. That is one well.
Chris Martenson: That is one well. I have heard more than a 1000 truckloads, particularly on these big ones where they are pushing millions of pounds of sand and equivalent gallons of water down that hole. Just think about it. How do you get a million pounds of sand on site – just one million pounds? I do not know. If there are 50,000 pounds in a truck, that is a lot of trucks you have to drive.
Art Berman: Each truck has to drive that sand from wherever they pick it up to wherever they deliver it. They are using diesel to run the trucks. You start accumulating all this energy that is being expended for the purpose of the frack, and it is pretty considerable. I am not saying that it is wrong to frack. We can have that argument another time, and I do have strong feelings about that. On the assumption that there is no harm done to the environment and that it is all good because it keeps all these guys driving trucks, earning money, and everything like that; you just cannot hardly believe it. I mean, I go out to a location that I had something to do with getting it drilled. I made the maps and I said drill here. Forty years I have been doing this business. It never fails to not only astonish me, but kind of scare the crap out of me. I go out there and I say look at all this stuff. I mean, I did this. That is kind of scary.
Chris Martenson: Yeah.
Art Berman: You know there are trailers, guys, and equipment. There are big noises. It is expensive. Again, I am not saying it is good or bad. I am just saying it is a big operation.
Chris Martenson: Yeah, it is just huge. Of course, I think that gets lost in this idea of like thousands of wells. We need 4000 more wells just to sort of hold production steadyish in the Bakken. Really, it is just a massive industrial scale thing. This is what people need to understand. You put it best years ago. This is a retirement party. Here we are blasting basically chalkboard level slate into pieces in order to get the last few remnants of oily goodness out. It is such a mystery to me that you can have a company like Ford saying we will just depend on that for the rest of our corporate careers here. That should work out fine for the next 100 years. It just is such a mystery. In the last few minutes we have left, I know I did not leave nearly enough time for this. But I was really caught by the idea that the United States is pressuring Germany to ditch the Nord Stream 2 gas pipeline, which is going to come from Russia under the Baltic Sea and put gas into Germany. The Germans have said the United States is pretty clear. They want us to use their L&G exports. Art, please quickly for our people. Can the United States ever be a world-class L&G exporter? I did the numbers really quick. They would get the equivalent of 18 billion cubic feet per day out of the Nord Stream 2. Once you factor in the losses from turning a gas into a liquid, that would be the equivalent to the United States exporting I think let us call it 22 or 23 billion cubic feet of natural gas a day. Could we do that?
Art Berman: No.
Chris Martenson: That is it?
Art Berman: No. It is just a simple no. I mean, I know I am being very black and white today, Chris. I am usually much more gray than that. When you put it that way, no. The US produces something like 75 to 80 billion cubic feet of gas a day. When you start talking about – what if you guys just took a third of that and sent it to Germany? That would push the price of natural gas to $10 or $15 a thousand cubic feet. We would suddenly have this gigantic deficit. As soon as you are getting $10 or $15 per unit in the US, why send it to Germany? Why go through all of the trouble of all that liquefaction and forget about the fact that it is going to cost you at least $2 per unit to get it from wherever it leaves the US to wherever it lands in Germany. It has to be re-gasified over there. That is a cost. No. It is a totally. That scale is just plain dumb and is never going to happen. The scale that we are talking about is 2.5 or three BCF a day, which is what it is today, of net exports. You take everything we import and everything we export. We are exporting more. We are a net exporter of natural gas for the first time in our history. Well, already the analysts and the commodity traders just look at production.
If you look at production and you add net imports to it, which in this case is subtraction, you look at the actual available supply. That supply in the United States, I am just using EIA forecast. We are going to peak in August of this year, a couple of months. Production keeps on going for a while. But the available supply because of the increasing exports, forget Germany. Forget 20 BCF a day. Just the natural state of affairs right now, we are going to be back in a deficit in no time at all. It is a year or maybe a year and a half. I have never understood. I have absolutely never understood the economics of L&G. Again, we are into the world of either normal or abnormal psychology. The answer is that people have bet their professions and their investments on these things. As long as the United States increased production seven BCF a day as we did in 2017, they say see? With technology all things are possible. We did seven. We can get to 22 no problem. This is except that we can’t.
Just to leave this where it needs to be, a quarter of US gas production today comes from the Marcellus from one play. It is a quarter. I mean that is huge. That field is going to peak. Then it is going to decline like all other things on earth, including me and you. We grow. Then we do not grow. Then we get old and we die. The Marcellus is going to peak in the next couple of years. Where are we going to go to replace the Marcellus? The answer is nowhere. There is all this associated gas from the Permian, and blah, blah, blah. There is always a new narrative to pick up where the cracks form in the last one. But at some point, all the narratives are played out. Then everybody flips around and says now we are in the L&G import business again. We have done that several times in our history. No, I think the whole proposition of supplying the world with natural gas is completely phony or delusional. I do not know which it is.
Chris Martenson: All right, Art, very well said. I am going to leave it there for today. We have been talking with Art Berman. It is just always a pleasure. Of course, his website is artberman.com. You can follow him at Twitter at @aeberman12. With that, Art, thank you so much for your time today.
Art Berman: Thanks, Chris. It is always a pleasure.