US shale bust wrecks hopes for energy independence

The shale revolution that made the United States the world’s largest producer of oil and gas and offered the prospect of energy self-sufficiency has run out of steam as drillers reduced their spending and production in response to the price war and the collapse in demand for crude oil by coronaviruses.

US oil production, which is now at a record high of 13 million barrels per day, will begin to fall sharply in the second half of this year and could fall by 2.5 million barrels per day by the end of 2021, have calculated analysts.

Even a further modest drop in oil prices could cut US output by almost 4 million barrels a day, completely canceling three years of increases.

“Shale growth helped the United States emerge from the Great Recession, but could fall victim to the recession fueled by Covid-19,” said Jamie Webster, director of the BCG’s Center for Energy Impact.

Capex cuts have become thick and swift since the collapse of the Saudi-Russian oil pact on March 6 sparked a market rout that more than halved the price of West Texas Intermediate, the US benchmark, to around $ 23. the barrel.

Occidental, Apache, Diamondback Energy, Continental Resources, ConocoPhillips, Concho Resources, Pioneer Natural Resources, Parsley Energy and Cimarex are among the major producers of the shale patch to have collectively eliminated billions of planned expenses.

On Tuesday, super-major Chevron joined them, saying it would cut investment in the Permian shale this year by $ 2 billion. The number of its operating platforms in the region would soon decrease by more than half and production by the end of the year would be a fifth less than expected.

In total, investments in the shale sector will drop from $ 107 billion last year to $ 64 billion this year, said Rystad Energy, a consulting firm – and the decline could be much more pronounced unless the Oil prices do not increase significantly.

The collapse of activity will cause widespread economic suffering in the oil-producing regions of the United States, where large service sectors – from hotels to fracking teams – have emerged in three years. sustained activity.

It will also end the production boom that has reduced the United States’s dependence on foreign oil supplies – much to the delight of the country’s leaders – and has led to a steady increase in crude oil exports.

Rystad said it expects a drop of 1 million bpd this year and an additional loss of 1.6 million in 2021 if the WTI was trading at $ 30 a barrel. At $ 20 a barrel – an unthinkable price a few weeks ago but now forecast by Goldman Sachs for the second quarter of this year – production would drop 3.6 million bpd.

These declines are only slightly larger than those predicted by others. Production will drop 1.4 million bpd in the third quarter of next year, Goldman predicted this week. RS Energy Group, a consulting company, said 700,000 b / d would be lost this year and 1.1 million in 2021.

“With WTI at $ 30 or Henry at $ 2, nothing works on a large scale in North America,” said Dane Gregoris, director at RSEG, also referring to the record low prices currently paid for Henry Hub, the benchmark for gas natural. RSEG estimates the WTI equilibrium price for production in the Permian, the most privileged area of ​​shale, at $ 43 per barrel.

In the profit season earlier this year, shale producers sought to assure shareholders that they were improving, curbing extravagant growth plans in order to bring cash back to investors and focus on life. with a price of $ 55 per barrel. Then the market and the producers’ models collapsed.

The number of oil rigs in the United States, a good indicator of future activity, fell from 19 last week to 664, according to service company Baker Hughes, a division of General Electric. Rystad said it expects the number to drop by 60% by the end of the year.

US producers face not only collapse in global demand for oil in the aftermath of the coronavirus pandemic, but a next wave of new supplies from Saudi Arabia and Russia, including the alliance to suspend production turned into a price war earlier this month.

Russia saw declining demand and deteriorating market as an opportunity to exclude American producers.

Equity valuations in the US oil and gas sector have dropped on average by almost half since just before the collapse of the Saudi-Russian deal, about 20 percentage points lower than the S&P 500.

Credit rating agencies have spent weeks reevaluating the credit worthiness of U.S. producers, and many debt issuers have moved into high yield, or unwanted, categories. This will make refinancing much more difficult for a sector which, thanks to a model requiring constant liquidity injections to keep production stable, had already lost favor with investors.

Some producers, like Concho, will be relatively isolated for some time because they hedged part of their production at a higher price, said Gregoris. But others face a crippling deterioration in their ability to maintain funding for drilling in order to continue to generate money.

Hopes in the sector – and among those still counting on the US energy independence revolution – are now based on a rapid recovery in oil prices.

“Shale thrives at $ 100 a barrel, survives at $ 50 and dies at $ 25,” said Mr. Webster.

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