Once the global oil market emerges from the coronavirus crisis, it may be greeted by a surprising change; can the US shale energy ever get to its glory days again or will it ever challenge some of the world’s largest oil producers.
READ ALSO: Tough war ahead to stabilise oil prices as shale producers file bankruptcies
The narration of US shale oil producers has changed from being a price controller in the global oil market to piles of unpaid debt, unsympathetic banks and investors, slow oil demand, and looming bankruptcies.
Most forecasters, including Morgan Stanley, Rystad Energy, Wood Mackenzie, and IHS Markit, believe there is little chance that U.S. oil production will ever rival OPEC again or return to growth this year or next. But after that, there will be a rebound. By 2023, U.S. drillers will be producing more than 12 million bpd of crude again, if those forecasts pan out.
But not everyone agrees. According to shale oil expert with 36 years of oil and gas industry experience, Arthur Berman, the U.S. energy dominance agenda is dead.
Berman expects oil production to drop by as much as 50percent over the next 12 months, and not because of low oil prices but because of the number of idled drilling rigs.
“The U.S. tight oil or shale rig count has fallen 69percent this year from 539 in mid-March to 165 last week. Tight oil production will decline 50percent by this time next year. As a result, U.S. oil production will fall to less than 8 million bpd by mid-2021,” Berman wrote in an article for Oilprice.com, adding “What if rig count increases between now and then? It won’t make any difference because of the lag between contracting a drilling rig and first production.”
But to start returning drilling rigs to the field, shale drillers need to have the cash to pay the operators of the rigs. Moreover, they need to have the certainty they would be able to sell the new oil at a profit. Right now, they have neither.
“OPEC is dead. Long live OPEC,” one of the most powerful officials in the biggest U.S. oil Shale energy was quoted to have said in 2016.
How bad is Shale affected?
More than 230 North American oil and gas producers, owing at least $152 billion in debt, have filed for bankruptcy since the beginning of 2015, according to the latest report from US based law firm Haynes & Boone.
In the second quarter alone, companies that went bankrupt had total debts of $29 billion. The restructurings are showing no signs of letting up, as June tied for the busiest month on record with seven oil and gas bankruptcies, according to data compiled by Bloomberg.
That month, the shale bust marked a grim milestone by claiming the pioneer of America’s drilling renaissance, Chesapeake Energy Corp. For other parts of the shale supply chain, 2020 is also on pace to be the biggest year of bankruptcies in terms of debt owed.
Shale crises started before the pandemic
Even before the pandemic, investors were demanding like never before that companies spend no more than they earn which led to explorers slashing spending so fast in late 2019 that it forced an unprecedented, market-wide scrapping of idled fracking equipment throughout North America.
Halliburton Co., the world’s biggest provider of fracking services, wrote down the value of its fracking gear and other assets to the tune of $1.1 billion for the first three months of this year and another $2.1 billion for the second quarter.
That followed similar moves by larger rivals Schlumberger Ltd., which recorded an $8.5 billion pretax, first-quarter charge, and Baker Hughes Co., which wrote down $15 billion in value from two of its biggest businesses.
What happened in 2020
The pandemic and OPEC’s moves, which were driven by Russia and Saudi Arabia’s market-share war, pushed prices down steeply in March, with some oil futures prices falling into negative territory for the first time.
Even when oil is at $35 a barrel, almost a third of U.S. shale producers are technically insolvent, according to a recent study by Deloitte LLP.
Technical insolvency means a company’s discounted future value at a certain oil price is lower than its liabilities, though whether it actually files for Chapter 11 bankruptcy depends on other factors, including whether lenders will extend additional credit.
Meanwhile, banks have grown cold to the industry that they happily funded for more than a decade. One of the reasons is the oil price crash. Another is the fact that oil well yields have fallen short of expectations. A third is the cash burning.
As a result, banks are slashing credit lines, with Moody’s and JP Morgan estimating the average asset-backed loan cut for the industry at 30 percent, which translates into billions of dollars. And existing debt is maturing, with more billions due to be paid over the next five years.
What made shale so vulnerable?
Shale producers’ financial problems stem from a decade’s worth of huge production growth using new fracking technologies funded by massive borrowing and financing from Wall Street.
Producers wooed investors by touting rosy estimates of how much crude oil they could profitably drill. But those estimates have proved too optimistic.
One company, SandRidge Energy Inc., lowered its reserve estimates in eight of the last 10 years, according to data compiled by IHS Markit, even as the average oil price rose in four of those years, as extraction proved more difficult than originally thought.
After years of meagre returns, investors began demanding that shale companies stop marketing future barrels that would never earn a dollar. That led massive cutbacks in oilfield spending, which hurt the service companies, who had already seen their margins shrink after years of price cuts to win market share in a highly competitive field.
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.
READ ALSO: Explainer: What wave of bankruptcies in US shale industry means for Nigeria, OPEC
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.
