It’s been a brutal year for shale. While the sector was already faltering, spurring countless headlines about the death of shale over the past year or so, the novel coronavirus has dealt the sector what many see as its death blow. As the bottom fell out of oil demand, compounded by a spat between the OPEC+ members of Russia and Saudi Arabia resulting in a global oil glut, the West Texas Intermediate crude benchmark bore the brunt of the fallout, plunging to nearly 40 dollars below zero on April 20.
The impact has been devastating for the U.S. shale sector as companies fall like dominoes across the Permian Basin and Texas oil towns dry up and blow away as their economies have ground to a halt seemingly overnight. The shale patch’s woes have been redoubled as key players like Halliburton and other major oilfield services companies flee the Permian and leave the shale sector for dead.
But it’s not all doom and gloom. Last week, amidst the tide of headlines elaborating shale’s demise, the World Politics Review published a refreshingly optimistic article entitled “Why U.S. Shale Gas Could Emerge From the Pandemic Stronger Than Ever.” The article does not skirt around the issues, referencing an “industry under siege,” “insufficient returns” and souring investors, and the plummeting production of shale and associated natural gas.
But while this “all appears to add up to an existential crisis for America’s natural gas producers and exporters,” argues the World Politics Review piece, “the current difficult market conditions are likely to be short-lived. In the medium to long term, global demand for natural gas is projected to grow. As demand picks up, so will gas prices, especially in markets without sufficient domestic supply.”
The article repeatedly references Henry Hub prices, the key U.S. benchmark for natural gas, which have already increased from their low point earlier this year. “After bottoming out at around $1.50 per million British thermal units in June, Henry Hub prices have now recovered to around $2.30—about the same level as in August, 2019.” This is a great start, but it’s just not enough to make a significant difference for large scale U.S. shale outfits that need a more meteoric rise in prices to rebound from the pummeling the sector has taken this year. And the good news is that these Henry Hub prices are projected to increase even more, “while prices in overseas markets like Asia and Europe are likely to rebound even faster, restoring a healthier spread between American and foreign prices and allowing both gas producers and LNG exporters in the U.S. to profit. Meanwhile, American consumers and businesses will continue to enjoy much lower prices than those in overseas markets.”
In the short term, the worst is far from over for the shale sector. Even with a tidal wave of bankruptcies already come and gone, the field is still overcrowded. What’s more, the business model that the grand majority of these companies is based on is indisputably unsustainable. “A reckoning was inevitable; it has only been accelerated—not caused—by the pandemic.” But even this, says World Politics Review, is a good thing. Think of it as natural selection--only the strongest, most resourceful, and most resilient companies will survive. This is not necessarily a fringe belief either, Oilprice reported on similar projections for a bigger better post-corona shale back in March. Of course, the massive consolidation we will likely see in the coming months is a double-edged sword that may make for a lopsided market going forward.
But for those companies that are able to survive this low point, there is a significant amount of light at the end of the tunnel. “Over the next two decades, gas demand is projected to expand, mostly in emerging markets,” writes the Review. This projection, however, was published in September 2019, which might as well be a decade ago for all that’s changed in the past 6 months. The world is moving quicker than ever toward a green energy transition as the world of fossil fuels goes up in flames. Peak oil, many believe, is just around the corner. The future of U.S. shale, to a large degree, depends on how well it can insert itself into a greener future.
By Haley Zaremba for Oilprice.com
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The US shale industry was the most hit by the pandemic. It has lost so far 6.4 million barrels a day (mbd) from US oil production. As a result, US production will be struggling to even produce 6-7 mbd this year and the following years. There you have it.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London