Currently, the world produces a lot more oil than it uses, and the oil prices per barrel have plummeted. With inexpensive black gold, stocks are filling up, and barrels are not finding buyers.
According to Matt Gallagher, the boss of Parsley Energy, one of the most prominent shale oil players in Texas, the US will probably not return to producing 13 million barrels a day. “When the barrel was $ 50 a barrel, the United States was moving towards production of 15 million barrels a day, which ensured energy independence. Now we’re going to have to import for years, “said Matt Gallagher.
By 2018, the United States had become the largest oil-producing country, overtaking Russia, and Saudi Arabia. In 2020, they had just reached 13 million barrels per day and expected to become net exporters over the year. This tremendous return of the Americans in the oil game had shaken the market and allowed Donald Trump to claim “energy domination”, thanks to shale gas and oil.
The Covid-19 and its aftermath brought this trend to a screeching halt. In the shale sector, some twenty companies have already gone bankrupt. Several tens of thousands of layoffs have been announced. US production in June has already fallen to less than 12 million barrels a day. It is expected to be around 11 million by the end of the year, according to the Energy Information Agency (EIA).
The sharp drop in oil prices
The sharp drop in oil prices from the start of March has called into question US oil companies’ outlook. The crisis first started with the rapid price war launched by the Saudis and the Russians in early March. It has been reinforced by containment measures, which have reduced demand like never before. At the end of April, prices collapsed to less than 16 dollars for brent. An even stronger impact on the American market experienced, during the same period, an episode of negative oil prices.
Twenty companies in the shale sector gone bankrupt
An example of this adverse situation is Chesapeake Energy. The Oklahoma-based group was one of the most aggressive and innovative producers in the American oil revolution. On June 29, the company filed for Chapter 11 bankruptcy protection. In that way, it could begin restructuring without pressure from his creditors.
Why is the American shale more affected by this adversity? Because the shale is a more expensive oil to extract, which requires mobilizing significant capital to maintain production level. For years, industry observers have worried about this rush for investments. It has certainly boosted US production but hid fragile economic models. The boom in drilling, particularly in Texas, was largely financed by debt. At the beginning of 2020, North American players accumulated $ 200 billion in debt to be repaid within four years – including $ 41 billion this year.
The bad image for the shale industry
The revelations of colossal remunerations the leaders of these companies amid collapse have granted themselves contributed to the bad image of the sector. A few weeks before its bankruptcy, Chesapeake paid $ 25 million in bonuses to its directors. Furthermore, Whiting Petroleum Corporation from Dacota paid $ 15 million in bonuses to its six leading directors just a few days before declaring bankruptcy in April.
During June, the gradual rise in oil prices to around $ 40 had given hope for a potential rebound, despite the difficulties. But this perspective is moving away. “The more the COVID cases, the higher the price of a barrel.
And we mustn’t forget the ecological impact of this situation. Since the oil and gas installations left abandoned for long months continue to emit methane, it contributes actively to global warming. Cleaning and maintaining these abandoned wells would cost tens of millions of dollars that neither the bankrupt companies nor the federal government intends to commit.
