Our translation from RIA Novosti of a report on how cheap oil is affecting US shale drillers shows that, in the end, when all the bluffing and bluster of politicians has run its course and their bag of cheap tricks is empty, the market still rules in the real world.
Commentary by Vince Dhimos.
We have warned for some time now that the shale oil industry is on the rocks, pardon the pun, and we weren’t alone. Specialists and commentators have long reported that US oil companies with large shale portfolios were not making money and in 2017, lawmakers in desperation passed a tax reform that gave oil companies tax credits as a reward for making bad investments based on a temporary high oil price environment.
Back in the bad old days, reckless investors had nowhere to go when their companies started to go bust, but now only the little people have to fend for themselves. The big boys can lean on the government, which in turn leans on us. But the agony is only forestalled, not remedied.
Of course, oil is patriotic. Every red blooded American must do his part to prop up Big Oil and make America great, either again or the first time around, depending on how well you know your history.
Trump is unflappable when it comes to oil prices. He has invested a lot of energy in promoting fracking and always has an optimistic tweet for whatever happens. In December 2018 when the US Senate unanimously condemned Saudi Crown Prince MBS for his supposed role in the Kashoggi murder, there was a general apprehension that Saudi might pull some of its mighty economic strings and punish the US for their cheek.
Sure enough, the Saudis started pumping oil like crazy to bring down the oil price, knowing full well that the US oil companies need higher prices. The damage had been done in 1973 when Nixon sold America’s soul to the Saudis in a deal with King Faisal that made the US military a mercenary force at the disposal of the cruellest, most barbaric dictatorship in the world. (Story here for those who missed it: http://www.newsilkstrategies.com/news--analysis/the-us-military-is-a-mercenary-force-in-the-hire-of-the-saudi-dictatorship).
But Trump immediately rose to the occasion and pretended – rather unconvincingly – that they had done the world a favour. He tweeted:
“Oil prices getting lower. Great! Like a big Tax Cut for America and the World. Enjoy! $54, was just $82. Thank you to Saudi Arabia, but let’s go lower!”
Up to 60: American shale drillers are terrified of cheap oil
MOSCOW, Jan. 28 - RIA Novosti, Natalia Dembinskaya. The current oil prices absolutely do not suit American shale producers. The cost of WTI (West Texas Intermediate) needs to be stable at about $60 per barrel, or otherwise investments in this sector will have to be curtailed, said the head of Hess, one of the leading shale oil companies in the United States. Analysts and market participants realize that cheap oil threatens shale drillers with a repetition of the price crisis of 2015 and a new wave of bankruptcies.
The peak of the oil rally came at the end of September and the beginning of October last year: the market was promised $100 per barrel and higher, but in less than a month not a trace of optimism was left. Prices fell by a quarter: the Brent benchmark, which was quoted at $85 per barrel, today is trading at $60.
One of the main reasons for this development is oversupply: by the end of the year, production exceeded demand by 0.4 million barrels per day. Now prices have once again collapsed. Quotes lowered the IMF's forecast for the growth of the global economy to its three year low.
London Brent costs about $61 per barrel, and oil of another benchmark - Western Texas WTI - is priced at $52 (during the series of collapses in November and December, the price went down to $42).
It shouldn’t drop any lower
The current "fragile recovery" and the proximity of the cost of American oil to the critical $50 per barrel is particularly unnerving to shale producers. Most of their projects are unprofitable at this price.
In late November, Trump welcomed the drop in oil prices, thanked Saudi Arabia for this, and urged them to “go lower.”
“Oil prices getting lower. Great! Like a big Tax Cut for America and the World. Enjoy! $54, was just $82. Thank you to Saudi Arabia, but let’s go lower!” he tweeted.
Even then, it was clear that there was nothing particularly heartening for American oil drillers: low prices threaten to stifle the development of the shale business, forcing them to reduce capital expenditures and investments in infrastructure.
Since December, shale producers have been in austerity mode, cutting budgets for 2019, for the first time in the last three years. Centennial Resource Development, Diamondback Energy, and Parsley Energy, major shale producers, cut annual costs by about 15 percent.
"To launch new projects, the price of WTI should be stable at around $60 per barrel," said John Hess, head of one of the largest US shale oil companies, at the World Economic Forum in Davos.
That is exactly how muck shale drillers need to launch new projects. If the quotes fall below this limit, the investment is impractical.
However, even with a favourable pricing environment, the potential of shale drilling is severely limited. According to Hess's forecast, in the coming years, shale drillers have every chance to increase the share in the global supply to ten percent, but then the growth will stop - due to the development of reserves.
Meanwhile, according to a study by The Wall Street Journal, shale drillers are still lagging in productivity. After analysing about 16,000 wells in Texas and North Dakota, the publication came to the conclusion: the largest American companies produce significantly less shale oil and gas than they promised investors. Thus, the profitability of developing hydrocarbon reserves using the method of hydraulic fracturing was very much in question.
Wells are depleted
One of the largest players in the global oil market, oilfield service Schlumberger, is also pessimistic. Head of the company Paal Kibsgaard warned: today's reduction in investment will result in a decrease in the volume of drilling operations.
In addition, a feature of this industry is the rapid depletion of wells. Soon after the completion of drilling, production at shale deposits drops sharply, and initial performance becomes a distant memory.
To compensate for this, companies must increase the number of new wells, which is unrealistic at no additional cost, Kibsgaard notes. And investors are selling stocks of companies that have increased drilling budgets, because there is no reason to expect growth in the prices of such securities. As a result, the reduction of investment programs in the industry is increasingly accelerating.
Analysts warn that if the price of WTI does not rise above $60 per barrel, the shale drillers will soon face a new wave of bankruptcies like the one that swept through the market in 2015-2017.