Creative financing keeps shale wells pumping

U.S. shale producers survived an oil price crash and confounded OPEC's efforts to drain a global glut by employing innovative drilling and production techniques. Now, some of these producers are turning to creative investments to pump more oil.

Drilling joint ventures, called "DrillCos" for short, combine cash from investors like Carlyle Group LP (CG.O) with drillable-but-idle land already owned by producers. Investors get a pledge of double-digit returns within a few years, while producers can raise productivity without spending more of their own money.

The total raised by these ventures - at least $2 billion in the last 24 months - is a small part of overall shale financing. But they represent another way for Wall Street and shale producers to increase the flow of oil, and frustrate plans by the Organization of the Petroleum Exporting Countries to prop up prices.

Private equity this year has showered more than $20 billion on U.S. energy ventures. Driven by shale expansion, U.S. oil production this year is forecast to increase by 570,000 barrels per day (bpd) to 9.9 million bpd, the U.S. Energy Information Administration estimates.

Drillcos take control of drillable land and generally turn over 100 percent of the cash flow from oil and gas production to investors until they earn a 15 percent return. At that point, control reverts to the producer, with the investor's stake shrinking to about 10 percent of remaining production.
There is more.

This is creative capitalism and risk management.  It is something that OPEC producers probably never conceived of.


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