Way back in January (it’s been a long year) Hallburton was already souring on shale. Way before the novel coronavirus put the final nail in the coffin of the West Texas shale revolution, the multinational corporation and one of the largest oil field service companies in the world had very publicly been going through a rough patch with shale oil. January 2020 marked the posting of Halliburon’s third straight quarterly loss during the national shale slump that also caused the corporation to take a $2.2 billion charge to its earnings. As a result of this massive shale slump, Halliburton laid off a whopping eight percent of its North American staff in the middle of last year, before dismissing even more employees in the Western U.S. “The charge for asset impairments was centered on hydraulic fracturing and legacy drilling equipment units, and employee severance costs,” Reuters reported that the company had said in late January.
Shale profitability was already under pressure in 2019, and, in 2020, nothing could have prepared the U.S. shale sector for the COVID-19 pandemic. As the novel coronavirus was spreading across the world and key international industries were hitting the pause button, global oil demand took a huge hit. This was then exacerbated (to say the least) by a dispute between the leading OPEC+ members of Saudi Arabia and Russia, which soon escalated into an all-out oil price war resulting in a massive oil glut that international markets still have not come close to bouncing back from. But while the Brent international crude benchmark took a big hit from the plunging oil demand, skyrocketing supply, and dire deficit of oil storage space around the world, the West Texas Intermediate crude benchmark took the heaviest blow, making history when it plunged below zero, ending April 20 at nearly negative 40 dollars per barrel.
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This was, quite possibly, the coup de grace for the U.S. shale sector. It certainly was as far as Halliburton is concerned. This week Bloomberg reported that “Halliburton Co. is looking away from its traditional North American heartland for sales growth as the fracking behemoth works its way through an historic oil bust.” The report suggests that Halliburton is pursuing a course going forward that may not include U.S. shale, once a major cash cow for the company, to a large degree, if at all. “Shares for one of the world’s biggest oilfield service providers surged more than 8% on Monday after it posted $456 million in second-quarter free cash flow -- more than double expectations. Halliburton also told investors it’s charting a ‘fundamentally different course’ after slashing jobs and the dividend in recent months,” reported Bloomberg on Tuesday.
With oil and gas markets as they are, many shale companies have essentially taken a “frac holiday” throughout this year’s second quarter, and while U.S. shale prices have now recovered to a level hovering around their breakeven price of $40 per barrel, that may not be enough to pay off a mountain of debt that’s coming due in the next couple of years. “With U.S. oil prices hovering around $40 a barrel, shale explorers are starting to open up idled wells and chewing into a backlog of partially finished wells that were halted before they were fracked,” writes Bloomberg, but a company the size of Halliburton’s decision to pivot away from shale could certainly be seen as a harbinger of doom.
“As oil demand recovers, I expect the international business will continue to be a more meaningful contributor to our revenue going forward,” Chief Executive Officer Jeff Millerwas quoted this week. “North America production is likely to remain structurally lower in the foreseeable future and has slower growth going forward.”
By Haley Zaremba for Oilprice.com
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From the first day of production everyone not only Haliburton knew that the shale industry is doomed to fail in the long term. Its Achilles heel has always been the steep depletion of reserves in the first year of production to the tune of 70%-90% necessitating the drilling of an estimated 10,000 new wells every year at a cost of $50 bn annually. Nothing can change this geological fact now or tomorrow.
Furthermore, it is an industry that has always been torn apart by geopolitics and economics. The geopolitics has seen the United States talking of energy dominance and oil self-sufficiency and having a say in the global oil market along with Saudi Arabia and Russia. Such an agenda is dead though the US will have some influence in the global oil market through the rising volumes of its crude oil imports in coming years.
The industry could have been relatively less unprofitable if only it put aside dreams of energy dominance. But this was never to be with the industry producing recklessly and excessively to achieve geopolitical gains at the expense of economics. In so doing, it has burned through a collective $300 billion in cash without making a profit. What's more, the industry also wrote down as much as $450 billion in invested capital in the last 15 years. And the only thing to show for it is a rising number of bankruptcies.
As a result, US oil production will be struggling this year and coming years to even produce 6-7 million barrels a day (mbd) leading to a rise of US crude oil imports from 9 mbd in 2019 to 12-13 mbd this year and the coming years.
Banks, investors and US taxpayers can’t continue to provide a life-support machine to a sinking shale industry for ever. That is why the industry will be no more in 4-9 years from now.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London