US, WASHINGTON (ORDO NEWS) — US shale companies are in a very difficult situation – the industry has overtaken a series of bankruptcies. American investors go out of business, but other countries may find these projects interesting, especially to China.
In China, eyeing the American shale projects. Their assets fell significantly – demand fell, energy prices are low, and debt is very deep. As a result, the average price of mining companies has halved since a barrel cost $ 60.
All this, as well as overcrowded oil storage facilities and a lack of investment, turned into a series of bankruptcies even among relatively large market players. And two developers of shale deposits – California Resources and Chesapeake – warned investors about a possible cessation of activity. And if this does happen, the era when the shale revolution was done by relatively medium-sized business projects could even end.
“Legendary companies such as Chesapeake, which launched the very shale revolution in the early 2000s, extracting gas and oil – if they go bankrupt, this will be a landmark event, an era in a period when small and medium-sized companies made the shale revolution. Rather all in all, large companies will buy them and wait for the price to recover, ”said Igor Yushkov, a leading analyst at the National Energy Security Fund.
The remaining afloat are trying to get out of the crisis. Some increase plans to reduce production, while others preserve wells. So, the 15 largest oil companies in North America cut their spending on drilling new wells by almost half by the end of the year. According to various forecasts, the industry may lose up to 40 percent of mining projects.
At Fitch Ratings, the default rate this year is estimated at 15-20 percent – this is about $ 40 billion of debt, which includes bonds and loans. For example, California Resources has about 5 billion dollars. Chesapeake owes twice as much. And, according to experts, in order to restore the balance, it will be necessary to keep part of the production facilities closed almost until the end of the year.
“To achieve a balance in the market, oil prices need to remain below $ 30 per barrel during the third quarter,” says Jeff Curry, head of Goldman Sachs. “The United States needs to use the oil reserves that have been accumulated in storage over the past two months,” and there are about 1.1 billion barrels! The production facilities that were closed earlier should also not be opened for at least another three and possibly four quarters.”
And in such a situation, cheaper American assets look attractive to Chinese investors. Their possible purchase is explained only by financial interests. The economy and demand in China are gradually recovering from the pandemic. True, oil regulators have already called the prospect of such deals a “threat to national security,” and they will come under the scrutiny of the US government. Therefore, massive buying is unlikely to be possible.
“Buyers can be either American companies or foreign ones. Chinese companies can be among foreign companies, but expecting this will be widespread, given that there are political differences between the US and China, this is probably a bold scenario “Says Dmitry Marinchenko, Fitch Ratings senior director of oil and gas companies.
Of course, China will not be able to directly absorb American shale projects. But Beijing has repeatedly made billions in transactions in the American and European markets. And the Chinese are not new to the energy market either. For example, five years ago, a financial group from the Middle Kingdom received permission to purchase oil assets through American companies. The transaction amount then exceeded a billion dollars. So China may well acquire part of non-strategic assets or create joint US-Chinese enterprises.
“If we see the consolidation of a large number of assets with the help of Chinese funds, then they will be cut off in rights or these transactions will be given to large American companies,” said Andrei Syrchin, managing director of Cresco Finance.
Now the production of shale oil has fallen by about two million barrels a day and could be reduced even more. And if you do not allow interested investors into the industry, you can only rely on an increase in oil prices, since at a price of black gold of about $ 30 per barrel, a shale oil project becomes unprofitable. And the longer low prices remain, the more companies will go bankrupt. In general, a decrease in US production capacity corresponds to a reduction in production in Saudi Arabia and Russia and helps to balance the global market. In May, prices have already begun to rise.
However, according to a forecast by the US Energy Information Administration, in 2020 a barrel of Brent brand will be trading at about $ 34. And WTI will not exceed $ 30 per barrel this year and 43 in the next, which is also not enough for cost-effective production of shale oil.
With these oil prices, analysts are giving the shale oil industry several years to recover. The process can be accelerated only by state support or investments of interested investors who can cover multi billion losses. Provided that they are allowed on the American market.
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