There is light at the end of the tunnel for Nigeria and OPEC+ countries as the biggest independent shale oil groups in the United States (US) are bracing for a wave of bankruptcies.
The Financial Times of London reports that these firms reported a record combined loss of $26 billion in the first quarter as the collapse in the oil demand and crash in oil market brought about by coronavirus pandemic forced more than $38 billion in write-offs.
Analysts predict 250 companies could go bust before the end of next year unless oil prices rise fast enough to start generating cash for producers wilting under punishing debt loads.
According to Haynes and Boon in Houston Texas, 17 smaller US oil and gas producers with a total debt of $14 billion have filed for Chapter 11 bankruptcy this year.
Also, analysts at Rystad Energies estimate that the total could rise to 73 the year is out and another 170 would follow next year if prices remain around current levels.
“Shale growth will really never go back to a million barrels per day again,” Energy Aspects Chief Oil Analyst Amrita Sen tweeted.
Although a recent rally has taken the price of West Texas Intermediate, the US marker, back above $30 a barrel, having traded in negative territory last month, however, it remains down by half since January — and well beneath average break-even oil prices in the shale patch, leaving many more producers teetering on the brink of bankruptcy.
“Many of these shale companies won’t survive the next year or two, and Wall Street may not throw them a lifeline this time around,” said Exness’s market analyst Michael Stark in comments on the market situation.
A Paris-based autonomous intergovernmental organization, International Energy Agency (IEA) wrote in its new World Energy Investment 2020 report that some of the most dramatic cuts in the oil and gas sector – in many cases above 50percent – have been among highly leveraged shale players in the United States, for whom the outlook is now bleak.
“The fall in the oil price also means that companies that use reserve-based lending face a significant revision in their value of available debt. This will hit small and medium-sized companies particularly hard (not just in shale),” IEA said.
Immediately after the 2008 financial crisis, the shale oil producers caused a supply glut that sent the price of oil crashing to a historic low in mid-2014, plunging most OPEC countries into a recession, while contemporaneously making the US the largest producer of the commodity.
But these companies rely on debt or monies borrowed from financial institution to finance drilling activities, as the process of extraction is expensive since it involves blasting rocks.
“They were in trouble before Covid even happened,” said John Kempf, senior director at Fitch. “There are a couple of pretty big names that are probably going to file for bankruptcy pretty soon.”
Implication for Nigeria
If the shale boom or revolution ground to a halt, it will reduce supply in the global oil market, a development that will automatically lead to an increase in oil price which would lead to an improvement in Nigeria’s economy as the country relies on crude oil for over 90 percent of foreign exchange and two-third of government revenue.
More than any other country, Africa’s biggest oil-producing country needs the oil price to rise and in the worst case, remain steady at any price above its revised budget benchmark of $25 a barrel to feasibly implement its 2020 budget.
To achieve this, the country needs to avoid disruptions in crude production and also hope that the alliance under OPEC achieves its objective, even though many are yet to comply with the output cut, including Nigeria.
Implication for OPEC
The news about the decline in Shale oil production will be a welcome development for OPEC who will be hoping it translates to higher oil prices as demand for oil has begun recovering thanks to the easing of lockdowns across most of the world.
OPEC+ is meeting next month to discuss whether to increase the current cuts—9.7 million bpd—or ease this to 7.7 million bpd as initially agreed.
Two months ago, Russia said no to Saudi Arabia’s proposal for deeper oil production cuts. It was enough to start a price war that, coinciding with the Covid-19 pandemic, wiped out billions in oil revenues for both Russia and Saudi Arabia while forcing them to enact even deeper cuts of 9.7 million barrels per day (bpd) in May and June.
OPEC pumps about a third of the world’s crude and the biggest of its 15 members is Saudi Arabia, one of America’s closest friends in the Middle East. While the group doesn’t target a specific oil price, it adds or removes supplies in the market and therefore can affect the cost of crude
