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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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The Shale Basins That Have Been Hit Hardest By The Oil Price Crash

It might sound like a headline about Canada’s oil industry or Venezuela’s, but even the most prolific basins in the U.S. shale patch are crumbling under the weight of low oil prices and limited storage space.

So what is the current situation in the Permian, Bakken, and Eagle Ford basins?

Output in the three largest onshore oil-producing basins has now started to decline. U.S. shale producers were quicker to react to this price slump than they were in the 2015-2016 crash, and all evidence suggests that the 2020 oil price collapse will knock off a large volume of U.S. production from a record-breaking 13 million bpd.  Most of this will come from those three basins.

The distress in the U.S. oil patch is already evident in production figures for the three largest shale basins, and in forward-looking estimates for them. It’s also shown in expectations of increased financial defaults in the U.S. energy sector, and in the expectation that banks will slash the borrowing base of the shale industry in this spring’s re-evaluation of companies’ reserves and the loans that they can take against those reserves. The first filings for bankruptcy protection started to trickle in last month and more are on the way, analysts say.

It's also shown in the major U.S. oil companies. Producers of all ranks—from ExxonMobil to the smallest players—continue to announce further curtailments as oil prices are lower than the production costs even for existing wells, let alone for drilling new wells.

Production Curtailments Are Accelerating 

U.S. shale firms don’t need any OPEC++ or Texas Railroad Commission to mandate widespread production cuts—output is being slashed and rigs are being idled simply because WTI Crude prices at $20 a barrel or lower don’t cover average operating expenses for existing wells, as per the latest Dallas Fed Energy Survey. Related: The Crucial Oil Pipeline That Could Help Iran Skirt Sanctions

Survey question: What WTI price does your firm need to cover operating expenses for existing wells?

For drilling new wells, firms need oil prices at $46 a barrel on average in the Midland in the Permian and the Eagle Ford, and $51 on average in the Bakken.

Considering the price of U.S. oil in recent weeks, shale oil production in May is set to drop compared to April in the main basins, especially in the three biggest producing regions, according to EIA’s latest Drilling Productivity Report

Permian output is set to decline by 76,000 bpd month on month in May, production in the Bakken should be down 28,000 bpd, and Eagle Ford’s oil output is expected to decline by 35,000 bpd, EIA’s estimates showed in mid-April.  

For June, the reality on the ground looks even bleaker as producers announce fresh production curtailments and frac holidays by the day.

ExxonMobil will curtail worldwide 400,000 bpd in Q2, two-thirds of which because of economics, chairman and CEO Darren Woods said on the earnings call last week. Of the production cuts for economic reasons, half would be in the Permian, “which is really around preserving value,” he said.  

ConocoPhillips estimates voluntary curtailments in June at 260,000 boepd gross in the Lower 48. Diamondback Energy halted in March all completion operations for a minimum of one month, and announced plans to voluntarily curtail 10- 15 percent of its expected May oil production. 

Permian-focused producer Centennial Resource Development said on Monday that it expects to curtail up to 40 percent of production this month in response to weak realized prices.  Related: This Could Be The Beginning Of A Tremendous Oil Rally

Parsley Energy expects to voluntarily curtail up to 23,000 bpd of net oil production volumes in May based on near-term regional pricing dynamics. Parsley Energy was one of the few producers in favor of the Texas Railroad Commission ordering a pro-rationing of production, which, Commissioner Ryan Sitton said on Monday, “will not be happening.”

Rig Count Collapses 

In North Dakota – where Continental Resources and Oasis Petroleum have already significantly scaled back activities in the Bakken – the active drilling rigs as of May 4 numbered just 27, more than half the number of rigs at the same time last year, and even lower than the 28 active rigs during the 2016 price collapse, according to the North Dakota Department of Mineral Resources.

The department’s estimate as of May 4 is that 6,800 wells have been shut-in, leading to a loss of 450,000 bpd of production. North Dakota’s oil production could drop to as low as 500,000 bpd in the worst-case scenario, according to Justin Kringstad, director of the ND Pipeline Authority, as per the Western Dakota Energy Association.

Across the United States, the number of oil rigs decreased for the week to May 1 by 53 rigs, according to Baker Hughes data, bringing the total to 325—a 482-rig loss year over year. This is the fewest number of active oil rigs in America since June 2016. 

The EIA estimates that oil production in the United States fell to 12.1 million bpd on average for the week ending April 24, which was 1 million bpd off the all-time high, 100,000 bpd lower than the week prior, and the fourth straight weekly production decline. 

Financial Stress Mounts

Production curtailments across the board is one side of the impact of the oil price crash on the U.S. shale industry. The other side is increased financial distress for many companies, especially smaller ones that have relied on borrowings to boost production in recent years.

Respondents in the spring survey of borrowing base redeterminations of law firm Haynes and Boone expect banks to make deep borrowing base cuts in response to the crash in commodity prices. Most respondents expect producers to see downward adjustments of 20 percent or more in their upcoming redeterminations, according to the survey carried out in March after the start of the Saudi-Russian oil price war and acceleration of COVID-19 concerns in the United States.

Record volatility in the oil markets and low oil prices will likely accelerate energy-sector defaults in the United States, Fitch Ratings said last week.

“Prolonged weakness in industry fundamentals combined with highly levered capital structures will not be sustainable for many US energy companies,” Fitch said. Imminent defaults on bonds could come from Chesapeake Energy, Ultra Resources, Vine Oil and Gas, Jonah Energy, California Resources, Denbury Resources, Unit, Bruin E&P Partners, and Chaparral Energy, according to the rating agency.

By Tsvetana Paraskova for Oilprice.com

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Leave a comment
  • Iron Oxide on June 02 2020 said:
    What exactly is a shale basin? All basins have shale. I have never seen a basin comprised only of shale formations. Some of the operators mentioned aren't even working "shale" plays. What is this author even referencing? And presumably the "Shale patch" refers to all the operators who are actually working specifically in a shale play? Is the author aware a number of companies don't work "shale" reservoirs and not everything in oil and gas is a shale play?

    It would be refreshing if folks writing about oil and gas took some time to actually understand some of the key characteristics of the industry, would lend a lot more credence to their reporting.

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