U.S. shale is hurting. While the entire global energy industry has been hit hard by the novel coronavirus pandemic and its disastrous effect on oil prices and oil demand, West Texas shale takes the cake for the biggest economic collapse. While the international Brent crude benchmark did take a beating, the West Texas Intermediate crude benchmark stunned the world when it plunged below zero on April 20, closing out the day at nearly $40 in the hole. The results have been devastating. The Permian Basin has been swept by a tidal wave of bankruptcies, shut-in wells, and legions of fired and furloughed employees, converting untold numbers of Texan oil towns from boomtown to ghost town. Just this Sunday, Permian basin pioneer and industry titan Chesapeake Energy declared bankruptcy. It’s difficult not to read the shuttering of this shale golden child as a bad omen for the industry as a whole. Not that we didn’t see it coming.
“The collapse of Chesapeake Energy, one of the pioneers of the US shale industry, took few people by surprise,” the Guardian reported this week. “The embattled fracker slumped into bankruptcy weeks after the darkest month in oil market history, in a financial mess of missed interest payments, looming bond deadlines and crippling debts.”
Chesapeake Energy is not the first U.S. shale casualty of the COVID-19 pandemic, and it almost certainly won’t be the last. CNN reports that as much as 30 percent of all U.S. shale companies could go bankrupt if the price of crude doesn’t improve. “Broadly speaking, it all sounds like a near-term abyss for the sector, writes Rig Zone in a report this week. “What’s more data analysis by Deloitte suggests frackers have burned through $300 billion since 2010, and yet 30 percent of operators both large and small can barely break-even at $35 per barrel.”
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But it’s also almost certainly too soon to start writing a wholesale obituary for United States shale (not that plenty of headlines haven’t already taken that leap). And while it’s true that there is no quick fix for the United States shale industry’s myriad woes, a slow recovery is possible, and even likely. As Rig Zone reports, while the short-term outlook is grim, “at the same time, an agile group of shale players with viable acreages saw the approaching near-term abyss. These firms scaled back their respective operations down in such a way that it left room for a slow but sure footed bounce-back within the same tumultuous cycle.”
As Oilprice reported back in May, “U.S. shale needs to slow down to survive.” The kind of long-term strategy and measured decision-making described by Rig Zone is crucial to keeping shale alive. Panicked decisions to reopen shut-in wells all at once will destroy the industry’s chances of bouncing back. “With WTI futures now firmly above $30 and having even flirted with $40, it is these very companies who are leading a slow recovery,” the report continues. “Their ranks include Parsley Energy, a company which demanded a coordinated oil production cut in Texas, and having failed to get one voluntarily cut 20 percent of its 126,000 bpd output.”
The road to recovery in the Permian will be slow, but steady, and it certainly will not reward impatience. But for those companies who are able to hang on--and, crucially, are able to work together to build a coordinated recovery--there is still hope for the future. The permian of the future, however, will never reach the heights of the shale revolution, and will be a much more consolidated field than before.
By Haley Zaremba for Oilprice.com
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Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London