The short form of this is "some people make money drilling for oil, and some people make money by NOT drilling for oil, and some people make money inbetween the two states, depending"

"Making money" is complicated. If you hold rights to shale oil, they may be worth more or less, depending on external conditions. You might sell on those rights, or leverage those rights, and it might go on a long, long time and never be actually invoked to process the shale. It was the act of being ABLE to, which drove the money cycle. It put a bottom over supply chain risk.

Au contraire, it's simple math. If I invest 1 dollar in 2010, and get back 50 cents in 2020, I have in fact lost 50% of my money over that time period. It's the same as any other asset class.For example, If you're a portfolio manager and you invest in a biotech startup index and only 5% of them produce drugs, you would likely lose 50% or more of your money over 10 years, and there's no accounting for "maybe they'll have a breakthrough later", as you need your capital back due to capital calls or redemptions or whatever.

So if you buy a municipal bond for $1 on 2010 and it’s only yielded $.50 by 2020 have you in fact lost 50% of your money? Of course not.

No one interested in investing looks at money so simplistically.

Investors would consider $0.50 return on $1 over 10 years to be a loss. Money isn't free and that same dollar invested in an sp 500 index fund would have yielded $2.50 for that same time period.

You are misusing the terms yield and return, and seem to have a misunderstanding of how a muni bond works.

A muni bond would have yielded $.50, but you still have the underlying asset, so it isn't a loss, its a guaranteed return of 50% every 10 yrs, until the bond matures (you get your $1 back) or is defaulted on.

The SP500 doesn't guarantee anything, and there are 10 yr periods where it has negative growth.

No, I used the term yield correctly. $1 in the sp 500 over that time period would have increased to $3.50. Or a yield of $2.50 while maintaining the underlying asset of $1.

As for it being a muni bond, the risk is low but still there. Municipalities do in fact default sometimes.

It depends on the investors. Yes, the s&p returned more in this period, it usually does, but not always.

There’s reasons why other investments exist and one is the risk of the investment. Municipal bonds are really stable and some investors just want predictable returns and will sacrifice overall returns for stability and lower risk.

Oil investments aren’t municipal bonds, but I expect most oil investors want stable returns.

In your example that's assuming it's a coupon bond, but many (especially the tax free ones) are zero coupon.

So if you buy a $1M bond for $850k, but then interest rates go up and the value of the bond drops to $650k, then you've lost money through opportunity cost, but you'll still get your $1M at maturity.

Not that different with oil fields. If you assume it will produce X barrels, but only produces 20%*X barrels, not only is the money you're making lower, but the value of the oil field also drops (since its value is dependent upon production potential).

But that’s not what happened with these oil investments. The coupon paid out 50% over 10 years which is what like a 4% annual return, not very good.

But this info isn’t enough to decide anything without the current value of the investment. If the investment is $0 then that’s horrible. If it’s $1 then it’s paid out 50% over ten years so not that great. But if it’s $2, then that’s a good investment.

The fact that this crucial information is missing from the article makes me think the author is an idiot or excluding it because it doesn’t support his position.

But if there's an expected value from the rest of your investment that you're not counting, then it's not an honest way of looking at things.

Expected is not realised

Sure, but it's also not a loss.

You realize that a typical oilfield project takes 10 years to start producing the first barrel of oil right?

You generate assets during that period and the potential to pump oil. Same way that you invest money to a startup with 0 revenues.

Not in shale. That’s measured in as little as months.

I don't think it is that simple as claiming a 50% loss for the business you have things like inflation and depreciation of the business assets (such as the drilling equipment) which makes it a lot more murky.

2010-2020 period is on average 8 years ago. Was there really an expectation of >6% capital recovery?

Aswath Damodaran has estimated the implied equity risk premium on the S&P 500 to hover in the range from 3.5% to 6.5% over the last decade: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/home.htm . So it's in the ballpark of how an average stock is expected to perform. (And as a sibling comment says, actual realized performance was even better over the last decade.)

If only, say, 3% annual returns above the interest rate were projected on a project, it would be clearly below the line of viability. There would be no reason to bother with the hassle and risk: just park your money in an index fund.

The markets did more than 12% annual returns for that decade.

That's an average of essentially a lot of different bets. Shale oil was a bet on very high oil prices, this didn't eventuate and they still managed some kind of returns above the interest rates.

Just the market rate of return. If your money could have done better in an index fund, you've lost.

Oil business is about small margins being created at each step of production leading to a large margin at the end. The way BP structures itself to do so is amazing.

The BP company that owns the exploration rights pays BP to determine the feasibility, then BP pays BP to extract the oil, then BP pays BP to ship the oil, then BP pays BP to refine the oil, then BP pays BP to distribute the refined products, then BP pays BP to fill the tanks at the bowsers, then we pay BP to fill our car, and every one of those BP segments makes a margin.

So yeah, I agree, just because a drilling operation looks like a loss in isolation, unless you view it in context of that entire vertical integration, you're missing the woods for the trees.

> then BP pays BP to fill the tanks at the bowsers, then we pay BP to fill our car, and every one of those BP segments makes a margin.

In the US, this last step is not BP. The gas station is almost certainly not owned by BP, but rather pays BP royalties as a franchisor, and also does not buy oil from BP directly, I believe a gas station operator buys from separate trucking businesses that contract with refineries (that may or may not be owned or operated by BP) to deliver the oil to the gas station.

>The way BP structures itself to do so is amazing.

That's just vertical integration, a lot of companies do it to varying degrees. For example there is a long history of power plants owning coal mines. Bell, at one point in history owned the mines that produced the resources they used to make their telephones!

Sure, but splitting up BP into different companies that do each part of the process doesn't increase the margins. What it does is segment out capital costs, risk and debt, so that the financial statements look better than they otherwise would.

What if VAT or some sort of carbon-based border adjustment tax ever got imposed

It would be applied to the end-user, so it would change nothing up to you paying the extra at the end of the line.

VAT is not a sales tax but a tax for the full chain of added value.

Laundering responsibility.

BP as a whole should be responsible for the cleanup cost, around wells and of the air.

Presumably the point of that is ensure each individual, mostly separate step is completed efficiently, rather than inefficient refineries or drilling being papered over by efficiencies elsewhere.

Of course not. A better-tuned engine would have made zero improvement on the transport efficiency of the Titanic.

The point is to ensure that all of the "unprofitable" but necessary precursors to the small fraction of the business that makes all the money, spooling up established and productive wells during favorable market conditions, are coordinated to maximize those conditions in the face of the uncertainty of industrial prospecting, rather than the interests a contractor might have. In such a skewed-return field, other strategies risk over-fitting; it'd be like if you saw the housing collapse coming in 06 or so and responded by trying to target your retirement investments against a granularity level of individual regional banks. Just shorting an index will pay out far more on average, even if it's more "inefficient".

If a particular segment is unprofitable, then it seems that a) you could outsource it or b) the accounting for that segment is wrong "bp isn't paying bp enough"

It’s also like real estate where tax strategy drives the bus. Oil is a capital intensive business but by isolating each layer or spinning off the layers alot of the margin is essentially a transfer from the government.

It sounds complicated, but it's actually very simple. Each of those stages is a saleable product, and you can cash out at any time by selling it to someone who works on the next step in the chain. It's just like selling bonds before their maturity, and it works according to the same NPV calculus.

Sure, it is a saleable asset. But you find the price only when you actually sell. You can estimate in principle how much your oil fields are worth, but that does not go into your accounting books, just like if you are a landlord you don't mark to market the price of your rental properties. And if your accounting does not reflect the current market value of your reserves, numbers like "50 cents on the dollar" are plucked out of thin air by journalists who want to shock readers.

> People think the oil business is all about drilling. In reality it's first about reserves

While this is true traditionally, shale is a different ballgame. A lot of the money spent in these shale plays is gone forever.

If you spend $8 million to drill a well and expect to make a 20% ROR at $70 oil, you're going to have a bad time when the price of WTI collapses to $40. And these shale wells have such fast decline rates that 10 years later they'll be making 1/100th of their initial rates. You either make your money fast, or take a big loss on the chin.

The major price decline beginning in 2014 and the huge hit during the pandemic (oil prices went negative, remember!) has made shale a major loser for investors. And plenty of the reserves companies booked had to be written off, either because of overly optimistic price requirements or inflated production estimates. Just look at Apache's Alpine High fiasco.

I am frankly kind of shocked that “credit_guy” is kind of glossing over the tremendous amounts of high-yield debt that were deployed to fund the shale drilling program between 2010-2020 that creditors took an absolute bath on.