Demise of Shale Gas

OIL at 40 USD a Barrel is best of Global Economy

The burst of oil was long overdue. This is very good for global economy.

The Fake Shale Gas

Many experts have touted $50 as a threshold, the minimum the shale industry needs to break even. But in reality, it is more complicated. $50 is an average, and although some wells, in certain areas of the Permian, can break even at prices between $32 and $47 per barrel, other wells, even in the same areas, need as much as $65 to break even. Outside of the Permian region, breakeven prices are even higher.

Bloomberg New Energy Finance’s breakeven prices in the Permian range from $46 per barrel in Loving County to $87 per barrel in Reagan County.

Potential environmental considerations associated with shale gas

Shale gas extraction raises environmental concerns in relation to:

·        carbon dioxide (CO₂) and methane (CH₄) emissions, particularly the potential for increased fugitive CH₄ emissions during drilling compared with drilling for conventional gas

·        the volumes of water and the chemicals used in fracking and their subsequent disposal

·        the possible risk of contaminating groundwater

·        the physical effects of fracking in the form of increased seismic activity

Shale gas 'worse than coal' for climate

Drawn from rock through a controversial "fracking" process, some hail the gas as a "stepping stone" to a low-carbon future and a route to energy security.

But US researchers found that shale gas wells leak substantial amounts of methane, a potent greenhouse gas. This makes its climate impact worse than conventional gas, they say - and probably worse than coal as well.

Oil price war sends US shale producers into survival mode

Already hard-pressed North American shale oil producers are contemplating a new round of spending and drilling cuts on Tuesday as they try to quell investor concerns about profitability in the wake of the oil price war unleashed by Saudi Arabia over the weekend.

Oil prices tanked by around a third on Monday after Saudi Arabia over the weekend slashed the price it charges for oil, sending a shock wave through an industry that had already been cutting costs since the 2014-2016 oil price collapse.

Research firm Rystad Energy predicted total industry spending on oil exploration and production would be cut by $100bn this year and another $150bn in 2021 if oil prices remained around $30 a barrel. The global benchmark was trading about $36.50 on Tuesday, up nearly six percent from Monday.

At the heart of the collapse in oil prices is the breakdown in the alliance between the Saudi-Arabia led OPEC and Russia, its most important ally.

Shale production has soared over the past eight years, pushing US output and exports to record highs, but that has come courtesy of strict production limits that the Saudis rolled back after the collapse of talks between OPEC and its allies last week.

"If these oil prices persist, the only real discussion is whether or not to continue operations in North American land," said Ian Bryant, Chief Executive Officer of Packers Plus Energy.

The Oil in the range of USD 30 is very bad news. That’s very bad news for Texas, North Dakota and anyone still left invested in oil and gas stocks. Shares of Chevron are down 20% in 2020, making it the best performing energy stock in America.  Most are down 30%, 40% or even 50% since January 1st.  The S&P Oil & Gas ETF (XOP) is down 33% this month.

The industry is facing a three-sided attack: falling prices, a move of institutional investors to divest from fossil fuel companies, and crushing debt loads.  

Debt is the problem. The U.S. oil and gas industry has about $86 billion of rated debt due in the next four years, according to Moody’s.  Nearly all of that debt is either junk rated, or rated just above junk. More simply put, if we fall to $25-$30 per barrel for an extended period of time, many traders and executives believe that stockholder pain will only get worse, and bankruptcy lawyers will be busy. 

What everyone does seem to agree on is that the shale industry, its employees and its remaining investors are going to experience very sharp pain in the near term.  A Capital IQ search shows that publicly traded oil and gas companies employ nearly 700,000 people.  That’s not including the millions more who work for private companies or in the halo of the industry.

 

The Shale Boom Is Becoming a Bust

The math is simple. If each new well drilled produces less than the earlier, and unprofitable, wells, then the peak is quickly approaching.

Negative cash flow

Bankruptcies are mounting across the sector, underlining a squeeze on funding. The money pipeline is running dry for large portions of the US shale oil sector, tipping drillers into bankruptcy and threatening the industry’s breathtaking growth in oil production.

As funding becomes scarce, bankruptcy filings are on the rise this year. Haynes and Boone, a law firm, counted 33 by the end of September, 27 of them since May, which is almost as many as in the whole of 2018. This month EP Energy filed for bankruptcy with $4.6bn in debt, citing “challenging dynamics as a result of depressed commodity prices.”

The story of indebted shale drilling is not a new one. For years, much of the shale industry was unprofitable and cash flow negative, but was able to finance aggressive drilling programs through a variety of means.

By some measures, this has led to some progress. After burning through around $200 billion in cash flow over the past decade, the top few dozen shale companies have come close to positive cash flow this year. In the second quarter, one study found that the top 29 shale companies posted slightly positive numbers, which was the best performance to date.

According to Rystad Energy, the top 40 companies spent $28 billion on capex in the first half of 2019, but only took in $23.7 billion in cash flow from operations

OPEC and Production Cut

Why Should OPEC Subsidize Shale Gas of US

By bringing down production or cutting production OPEC actually maintained Price tag so that, US Shale gas can keep producing. If OPEC kept their production, Shale can never survive the market competition

New Decade, New OPEC Oil Curbs. Same Mixed Results

OPEC+ reset the terms of its agreement as of Jan. 1. Half of the 10 OPEC countries now participating in supply cuts conformed last month, for a rate of 138%, according to Bloomberg calculations from the group’s secondary source data. Non-OPEC adherence was 76%, estimates from preliminary International Energy Agency data on crude supply show. Overall, the OPEC+ coalition had a compliance rate of 119%.

In recent years, OPEC+ has been forced to contend with rising American production and a trade war between the U.S. and China, both of which weighed on crude prices. Now there’s a third threat: the coronavirus outbreak, which has killed thousands in China while bringing the country to a halt. Chinese demand for oil products is likely to plunge by more than 35% year-on-year in the first quarter, Morgan Stanley said in a recent report, citing data from researchers at China oil giant CNPC.