Monday, September 26, 2016

The Real Reason Oil Companies Are Going Bankrupt

The real reason energy companies are going bankrupt is more technical.

Reserve base lending for unconventional reservoir projects became a ponzi scheme. This is how it works.

Step 1) An oil company borrows money or issues equity to drill a well.

Step 2) The well “discovers” oil. The reason I put discover in quotations is that the resource (not reserve, there is a difference) potential of shale source rocks has been known for decades.

Step 3) Estimate the resource and reserve potential.
NB: Resource is properly defined as uneconomic at the current price. Reserve is properly defined as economic at the current price.

Step 4) Book the reserve as an asset on the balance sheet as per SEC legislation.

Step 5) Borrow money against the reserve.

Step 6) Drill more wells and book more reserves and borrow more money.

Step 7) Repeat until you cannot repeat again.

This process was not always a Ponzi scheme. Before the mantra of peak oil and the fear the world as running out of oil this practice was done conservatively. But when the idea that world was short of crude supply the thinking became that oil was a one way trade. This gave Wall Street the confidence that lending money against high cost reserves to develop more high cost reserves was a sound practice. On the other side of the transaction little thought by producers was given to the scenarios that would cause these reserves revert to resources and be treated differently on their balance sheet.

You can read the rest @

Lies, damned lies, and accounting tricks.

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