The fracking boom over the last decade led to the biggest land grab since the gold rush in the 1800s as oil companies and speculators bought up land in states rich in oil shale reserves. There are signs the boom is slowing. North American oil and gas deals, including shale assets, plunged 52% to $26 billion in the first six months of 2013 down from $54 billion in the same period a year-ago according to Bloomberg.
Shell executives told investors this month that it expects its North American oil and gas exploration to remain unprofitable until at least next year. “The major acreage deals are behind us now,” Shell Chief Executive Officer Peter Voser said in a conference call with analysts.
The shale land boom began more than a decade ago when improved drilling methods and fracking opened up new production in previously untapped shale fields. The rush accelerated in 2004 as more shale fields in North Dakota, Pennsylvania and Ohio were identified, opening new supplies of petroleum and gas. Other states like Colorado, Wyoming, Arkansas, and Oklahoma have gotten in on the boom as well.
During the drilling frenzy between 2009 through 2012, energy companies spent more than $461 billion buying North American oil and gas properties. Prior to this year, oil and gas transactions ranked among the top two in total deal values every year since 2005, except 2008 when they were fourth. So far this year, oil and gas isn't among the top five according to Bloomberg.
Over supply dropping gas and oil prices
As overseas buyers moved in, booming production soon led to oversupplies, and gas prices plunged to a 10-year low in 2012, forcing companies to write-down the value of some of their assets. Companies were also hurt when some fields thought to be rich in oil proved to contain less than anticipated. Shell wrote down the value of its North American holdings by more than $2 billion last quarter
Firms depending on asset sales to help finance drilling may not have enough money to pay for higher oil and gas production, said Eric Nuttall, who oversees C$70 million ($68 million) at Sprott Asset Management LP in Toronto. That could slow output growth, especially as companies try to avoid taking on more debt. “A lot of companies have let leverage get out of hand,” he said.
Perhaps it's ploy to increase oil company profits
There is a possibility that the oil companies are writing down assets to show losses to decrease their tax liabilities on record profits. This would not be the first time clever accounts resorted to these tactics to allow profitable companies to avoid paying their fair share in taxes. There is also a possibility it is genuine. If so, it raises red flags.
It is also possible that oil and gas companies are slowing production to reduce supply in order to get prices up. This is great for shareholders, better for the billionaire executives, but bad for consumers and the economy. High oil and gas prices take money out of the economy reducing consumer spending and investment. Most corporate profits and executive windfalls are held in offshore tax havens, not invested in the United States.
Fracking leaves local governments on the hook
Our economy is deeply dependent on oil and gas in particular, and fracking specifically. To accommodate the fracking boom, state and local governments have invested in transportation, water infrastructure, even schools to entice fracking in their communities. They did this with an eye to the long haul. It is disconcerting to hear news that wells are not as productive as projected, and oil companies are cutting back. The words “over-leveraged” are not happy talk given the events of 2007 and 2008.
This news may assist those opposed to the Keystone XL pipeline. If our domestic production is slowing down, why do we need Canadian tar sand oil brought into the US by a pipeline?
The American West is littered with ruins of ghost towns that whisper caution from the grave. In almost every case, boom is followed by bust. Many tycoons got obscenely wealthy in the booms, but most people suffered badly in the busts.