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February 8, 2015

China Coming for the U.S. Shale Patch After Oil Crash

By Tyler Durden at ZeroHedge 
Whether it is to cripple the will of Putin and end his support of the Syria regime (thus handing the much desired gas-pipeline traversing territory over to Qatari and/or Saudi interests), a hypothesis first presented in September and subsequently validated by the NYT, or much more simply, just to destroy any and all marginal producers so that Saudi Arabia is once again the world's most important and price-setting producer and exporter of oil, one thing is clear: the Saudis will not relent from pumping more oil into the market than there is (declining) demand for, until its biggest threat and competitor - the US shale patch - which recently had become the marginal oil producer, as well as its investors - mostly junk bond holders gambling with other people's money - are crushed, driven before the Saudi royal family, and the lamentation of their women is heard across the globe.
That much is known.
But what neither the Saudis, nor the US shale companies, and certainly not their investors who lately seem to get their investment advice from the no longer Nielsen-rated Financial Comedy Channel, know is even if every last US shale company is Friendo'ed, there is an even more insidious group of drillers and oil extractors behind them, backed by an even greater monetary bubble and an even more clueless group of sources of cash, just waiting to step in and become the next marginal oil producer.
China.
According to Global Times, the slump in oil prices "has triggered a flurry of Chinese investment in oil wells, in a bid to get a high return from the black gold."
Cutting to the chase: once the US funding for local shale runs out, as companies - some already levered 5x, 6x, or more can no longer even remotely service their debt and not even Fed's ZIRP is enough of an impetus for yield chasers to throw more good (other people's) money after bad - start filing for bankruptcy en masse, who will step in continue the extraction? Why China of course: Global House Buyer, a Beijing-based services provider to Chinese overseas investors, said on Saturday that the company now has presented an investment opportunity in oil wells in Texas, US, to Chinese investors.
According to the company, the project, involving six oil wells in an area of 2,240 acres, is located in Crockett County in Texas. Cooperating with local developers, the project is expected to attract a total of $4 million investment at the first stage, with the minimum investment of $100,000 each.  
The annual return could reach more than 12 percent, the company said.
Or, if Chinese sources of funding rush in to maintain oil supply at its current levels, or even boost it, into a world where demand is plunging (and, poetically, driven by a plunge in demand out of China itself), that annual return could reach 0, -12% or, most likely -100% as yet another series of investors with hot central bank money is wiped out.
Of course, nobody ever anticipates lower prices: "The return is based on our prediction of future oil prices," Liu Bin, general manager responsible for the US investment at Global House Buyer, told the Global Times on Saturday. Liu predicts that the current oil price still has room to rise, which will generate higher profits for the project.
What Liu seems to be unaware is that the current low price of oil which enables him to find investment opportunities in the Texas shale is precisely due to supply and demand being where they are, and unless supply collapses to keep up with dropping demand, oil prices will never go up.
But why bother with the details. For now Liu, and many of his competitors, is merely eager to demonstrate his ability to generate 12% returns on the back of a surging price driven by... his incremental pumping?
According to Liu, the oil wells have been in operation since 2012. Currently, the total output per day is about 170,000 barrels, and they still have more than 10 years of drilling capacity with a stable output.  
"Investing in the oil wells could be read as another sort of real estate investment," Shi Ruixue, CEO of Global House Buyer, said.
Because the Chinese clearly have a tremendous sense for undervalued real estate investments. "Investing in oil well is a market-oriented activity, and it is understandable why investors are flocking to the oil sector, as the oil prices are still at a low level, Han Xiaoping, chief information officer at energy portal china5e.com, told the Global Times on Sunday."
And now comes the Friday humor:
"Chinese investors have gained more experience about risks after the financial crisis in 2009. It is a good timing to invest in oil projects as the prices are still low. But if the prices move further down, it will pose risks to oil investment," Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, told the Global Times on Sunday.  
He Shaohua, a potential investor who has invested in housing projects in the US, told the Global Times that he planned to invest $100,000 in the oil wells, as it is good to diversify his investment.
In other words, just as US junk bond investors in energy companies swear to never repeat their mistake again, at least those who still have "other people's money" to invest, here comes the next patsy, one who has just as deep pockets if not deeper, and who will assure that the US pumping action does not stop for a very, very long time.
We hope we don't need to explain happens to the price of oil as China storms in to restart the deserted US shale rigs.
However, one thing we can't wait to find out, is just how will China react when it learns that just as it was preparing to celebrate, that it will need to deal with yet another marginal source of production (and funding), one who will surely engage in output competition for the next 12-24 months, until the latest batch of hot money, just off the central bank printer, runs out.
Courtesy Tyler Durden, founder of ZeorHedge (EconMatters author archive here

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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