Will American shale oil resurface?

US, WASHINGTON (ORDO NEWS) — Trump’s concept of “American energy domination” did not include OPEC’s request to save the US oil sector. The American president decided to mediate between Saudi Arabia and Russia, and persuade them to end the devastating price war in order to support oil production.

However, the deal failed miserably, because its participants were unable to overcome the drop in global demand caused by the coronavirus, and with it the shale revolution, which turned the United States into the world’s number one oil producing country, also perished. The crash happened, as traders called it, on Black Monday, when US oil prices first fell below zero. And even seasoned bosses of the oil industry began to scratch their heads, thinking about how to restore oil production, which, in essence, was forced to pay buyers themselves, if only they took oil.

Thanks to the growth of the oil industry, Trump got the opportunity to boast that he has eliminated the US dependence on Middle Eastern oil and is now free to sanction and knock down energy exporters, starting from Iran and ending with Russia. American oil companies, whose production costs are higher than those of foreign competitors, were in distress and began to beg Washington to reduce the heavy burden by reducing oil imports from abroad and including them in the list of recipients of aid due to coronavirus, because otherwise In case of bankruptcy and loss of jobs will inevitably await them.

“If I go out of business and block the wells, I’m not the only one to suffer,” said the head of a small oil company. – Five guys who are servicing wells, transporting oil, and leasing their oil tankers will suffer. And a society that depends on their tax dollars will suffer. ”

Oil senators, including Texan Ted Cruz, have been begging the U.S. government to provide loans to upstream companies. On Tuesday, they wrote a letter stating that if the US does not preserve domestic energy production, this would “mean the loss of additional jobs and a return to dependence on foreign sources of oil supply.”

Now support in one form or another seems inevitable. But no matter what form it takes, the retreat of the American oil sector today seems no less overwhelming than its rise in recent years.

At the end of 2019, US production reached nearly 13 million barrels. For three consecutive years, growth has allowed America to independently meet the additional oil needs of a growing global economy. Since 2008, US oil production has more than doubled.

But by 2021, it will decrease to 11 million barrels per day, the US Energy Information Administration predicts. Scott Sheffield, head of one of the largest US oil shale companies Pioneer Natural Resources, told the Financial Times on the eve of a deal between Saudi Arabia and Russia through the United States, at a price of $ 10 per barrel production will drop to seven million barrels per day. Thus, the volume of reduction in production will be greater than the amount that Iraq, which ranks second in OPEC, produces. According to Sheffield, even at a price of $ 35 per barrel, production will be three million barrels per day less.

This will cause a serious blow to the oil industry, about which Trump in his January message on the situation in the country said that she made America “non-volatile”. By April, when a collapse in prices began, the Energy Information Administration predicted that “in the third quarter of 2020, the United States will again become a net importer of oil and petroleum products.”

Meghan O’Sullivan, head of the geopolitics program at the School of Public Administration. Kennedy of Harvard University, said that the shale revolution strengthened the US’s international position by “changing the global strategic situation so that it became more in line with American interests.” “The global abundance of energy, largely provided by the American shale, helped America’s allies, and generally harmed US opponents, from Iran and Russia to Venezuela,” she said.

The economic impact of a collapse in oil prices could harm Trump in an election year. The American Petroleum Institute, a lobbying organization acting in the interests of large oil companies, claims that oil accounts for 10% of US GDP, although there are more modest estimates. Recently, the Congressional Research Service prepared its own analysis, which states that the share of oil in the trade deficit decreased from almost half in December 2010 to minus 0.1% in December 2019.

These successes are now in great doubt, as large companies, starting with ExxonMobil and ending with Continental Resources, which specializes in shale production, are sharply cutting capital investment or promise to reduce production. According to the consulting firm Rystad Energy, this sector has already cut about $ 53 billion out of $ 130 billion planned for the current year. Over the past four weeks, the number of drilling rigs in US shale deposits has declined by 40%, as evidenced by the Enverus data collection company. According to the Energy Information Administration, production over the same period has declined by 900,000 barrels per day.

In recent days, oil prices have grown to almost $ 20 per barrel, but this is still more than two times less than what shale producers need to break even. Therefore, even more serious losses are inevitable. Ryan Duman, an analyst with Wood Mackenzie, a consulting firm, notes that by the end of 2020, US production could decrease by 2-3 million barrels per day, which is much more than the industry suffered in 2015 -2016 during a fall in prices. “But companies have entered the current recession in a much more vulnerable state,” he says.

Whiting Petroleum was the first major oil shale company during the crisis, which filed a petition for protection against creditors on April 1 under Chapter 11 of the United States Bankruptcy Code. But the number of bankruptcies increased even before the prices fell, say lawyers at Haynes and Boone, which specializes in restructuring. Rapid growth is now likely.

Drilling rigs are canned, and in these conditions, the entire production and service chain will take the brunt of the battle, starting with the crew of drillers and ending with supply companies. Nearly 90% of the manufacturers ’capital expenditures are paid to fishing service companies that do all the work. And now they are drastically cutting costs, especially the three of the world’s largest service firms Schlumberger, Baker Hughes and Halliburton.

According to Ristad analyst Matthew Fitzsimmons, this sector could lose 220,000 jobs.

This will have a painful effect not only on transnational corporations, but also on local operators. Whiting Petroleum, in a statement, lists 25 contractors that it has not yet paid. Schlumberger, with a market value of $ 37 billion, Whiting owes nine million. CS Welding, a North Dakota-based family business, owed $ 1.5 million to it.

There is no consensus in the industry on how to respond. The American Petroleum Institute, representing the interests of leading companies, insists that free-market rules must apply. The directors of small shale mining companies disagree with him, who say that their large competitors are happy to watch the suffering of small firms in the hope of seizing distressed assets.

Some still blame foreign oil suppliers, pointing to tankers coming from the Saudi Arabia to the American shores, while storage facilities in the US are about to overflow.

A close friend of Trump and the head of Continental Risors, Harold Hamm, wants to introduce import duties. Other producers require tax breaks and government purchases of their oil. Texas regulators are debating whether to introduce an old mechanism to limit production.

“It will be a lasting structural change,” says Matt Portillo of Tudor, Pickering, Holt & Co., an investment bank. According to him, out of dozens of operators involved in shale mining today, only 10-15 will survive.

But in connection with this, another question arises. Will this business be able to grow and develop again when consolidation occurs in the shale sector and weak companies are eliminated.

In 2015-2016, shale producers survived the previous price war with Saudi Arabia, reducing their costs by almost 50% and forcing investors to support a new and very bright growth stage. When OPEC again began to cut supplies, US production jumped by almost four million barrels per day in just three and a half years.

However, behind this success was Wall Street’s growing disappointment in the shale sector, which did not put profit in the first place, but an increase in production. The leaders of shale companies can blame the pandemic and Saudi Arabia for their misfortunes, but investors have already disliked this industry. This time, cutting costs will be a lot harder. “They no longer cut fat, but meat and bones,” said Buddy Clark of Haines & Boone figuratively.

Some investors believe that the shale industry needs yet another tight consolidation. Bankruptcies and takeovers will lead to fewer shale oil owners but deeper pockets: Exxon Mobile, Chevron and some other independent and large mining corporations that can survive the recession.

“Now Wall Street has focused on those manufacturers who can survive the crisis and restore order if the price of raw materials rises due to the shutdown of a large number of wells,” says Andrew Gillick of Ar-Energy Energy Group ”(RS Energy Group).

There are people who believe that if the shale industry is reduced and production is reduced, a new era will come with oil for $ 100. But they will be very disappointed.

Riyadh and Moscow will closely monitor the troubles and struggles of the oil shale industry, trying to capture a more solid market share, and ultimately achieve higher prices. The paradox of Trump’s mediation efforts, which this month contributed to the conclusion of a cartel deal, is that he delighted the leaders of the Russian oil industry, urging the Kremlin to push back American oil.

US mediation in this transaction is in line with Saudi interests. Anas Alhajji, an adviser to a number of oil-producing countries, said Trump’s initiative “killed” the NOPEC bill (the “Law against Cartels for the Production and Export of Oil”), which was considered in Congress. If adopted, the United States could consider claims of violation of antitrust laws by OPEC members. “In fact, support for the OPEC + agreement by the US president was the last nail in the lid of the NOPEC coffin,” says Alhaji.

American leaders blame not the trump, but Saudi Arabia for the collapse of oil prices. The longer low oil prices remain, the more likely the US will take action against this kingdom. “I do not see big changes in America’s attitude to oil supplies from abroad. I see that Americans, starting with the president and further down, want to keep these supplies to a minimum, ”says O’Sullivan from Harvard. Senators from the oil states are threatening to deny the Saudis military assistance. Moscow, which is very dissatisfied with US energy sanctions, may find it easier to take additional sanctions in the face of lower prices.

But neither country succeeded in completely eliminating shale oil from the equation. The state budget in Russia and Saudi Arabia is much more dependent on oil revenues than in the United States.

If prices begin to rise, Wall Street will have less desire to invest in shale mining. But if they rise to $ 80 (this is the level that Riyadh needs to create a balance in the budget), it will be a completely different matter. The shale industry may revive if prices are appropriate.

“If Russia and Saudi Arabia believe that they will be able to close the shale industry, then they are wrong,” says Amy Myers Jaffe of the Council on Foreign Relations. “All they can do is get a change of ownership.”

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