1. Shale bust is here
- Shale wells decline somewhere between 70 and 90 percent from their initial peak within 3 years, with the bulk of that decline coming within the first 12 months.
- As a result, the pause in drilling quickly translates into U.S. oil production declines.
- "We just have no new drilling and these decline curves are going to catch up," Mark Rossano, founder and chief executive officer of private-equity firm C6 Capital Holdings LLC, told Bloomberg. "That hits really fast when you're not looking at new production."
- With no drilling at all, U.S. shale oil production would theoretically fall by more than a third to less than 5 mb/d by the end of the year.
2. Bankruptcies to spike
- Between 2015 and 2019, there were roughly 200 bankruptcies in the North American oil and gas sector.
- Through April of this year, there have been another 7 bankruptcies, according to Haynes and Boone, although the value of the debt involved is 2.8 times larger compared to the first quarter bankruptcies in 2019.
- Around 70 companies are on track for bankruptcy by the end of the year with WTI averaging $30 per barrel, according to Rystad Energy. If WTI remains stuck at $30, that total would rise to 150 to 200 by the end of 2021.
- "In our view, we will need WTI prices of $40 to $45 per barrel to eliminate the upcoming explosion in the number of financially distressed US E&Ps, while the most efficient and least leveraged…
1. Shale bust is here
- Shale wells decline somewhere between 70 and 90 percent from their initial peak within 3 years, with the bulk of that decline coming within the first 12 months.
- As a result, the pause in drilling quickly translates into U.S. oil production declines.
- "We just have no new drilling and these decline curves are going to catch up," Mark Rossano, founder and chief executive officer of private-equity firm C6 Capital Holdings LLC, told Bloomberg. "That hits really fast when you're not looking at new production."
- With no drilling at all, U.S. shale oil production would theoretically fall by more than a third to less than 5 mb/d by the end of the year.
2. Bankruptcies to spike
- Between 2015 and 2019, there were roughly 200 bankruptcies in the North American oil and gas sector.
- Through April of this year, there have been another 7 bankruptcies, according to Haynes and Boone, although the value of the debt involved is 2.8 times larger compared to the first quarter bankruptcies in 2019.
- Around 70 companies are on track for bankruptcy by the end of the year with WTI averaging $30 per barrel, according to Rystad Energy. If WTI remains stuck at $30, that total would rise to 150 to 200 by the end of 2021.
- "In our view, we will need WTI prices of $40 to $45 per barrel to eliminate the upcoming explosion in the number of financially distressed US E&Ps, while the most efficient and least leveraged players will still be able to survive with oil prices below $20 per barrel WTI," Rystad said last month.
3. LNG investment plunges
- The LNG market has plunged into a painful downturn. Landing LNG prices in Asia are only slightly higher than upstream natural gas prices in the U.S., negating the logic of exports.
- Almost 100 bcm/y of new LNG capacity came online in 2019, more than the previous 4 years combined. That helped push the market into a slump even before the pandemic.
- The IEA warned that the "opportunities for the next wave of planned LNG projects are now much less clear." A slew of projects have been delayed or canceled.
- "This disconnect between LNG investment decisions and firmly committed demand has taken place against an emerging backdrop of oversupply and downward pressure on gas prices," the IEA said. "It now coincides with a profound shock to gas consumption resulting from the global health and economic crisis in 2020."
4. Refining capacity surged in recent years, now some might get shut down
- Investment on new refineries hit $52 billion in 2019, and a record 2.2 mb/d of new capacity came online last year.
- That capacity surge came as demand only grew by 0.2 mb/d. Another 6 mb/d of new refining capacity is in the works for the next five years. "Even before the health and economic crisis of 2020, it was clear that these new refinery additions would be likely to outpace the rise in demand," the IEA said.
- Some regions hold advantages. Refineries in the Middle East have cheap feedstock; facilities in Asia are close to demand growth. Other areas won't fare as well. Oversupply will mean weaker refineries shut down.
- "The COVID situation has accelerated the rationalization process that was always coming," Spencer Welch, vice president of oil markets and downstream consulting at IHS Markit, told Bloomberg. "It will hit Europe hardest and first. But it will also hit North America, particularly the East Coast."
5. Metals see improvement
- Copper prices slumped badly in early May on poor economic data from China, but have since climbed to around $2.40 per pound, an increase of nearly 15 percent.
- "Zinc and nickel have also moved generally higher with industrial activity," Scotiabank wrote in a report.
- Iron ore prices jumped close to their highest price levels since August 2019 because of the uncontrolled spread of Covid-19 in Brazil, a big iron ore supplier.
- "[I]ron ore inventories are clearly trending downward-alongside those of other metals (chart 5)-with one report indicating that seaborne iron ore stocks at Chinese ports had fallen to their lowest reading in roughly three years," Scotiabank said.
6. Renewables surpass coal
- Renewable energy surpassed coal in 2019 for the first time "since before 1885," the EIA said.
- Coal consumption declined by 15 percent in 2019, year-on-year. Renewable energy grew by 1 percent. Coal use fell to its lowest level since 1964.
- The trend has been underway for a long time, but there is something of an epochal change with the milestone achieved by renewables.
- Also, wind surpassed hydro last year as the largest source of renewable energy.
7. Petrochemical boom faces a test
- Since 2014, around $120 billion has been funneled into petrochemical facilities around the world. More than 70 percent was concentrated in China and the United States, according to the IEA.
- Prior to 2015, much of the investment went to coal-to-olefin (CTO) and methanol-to-olefin (MTO) facilities in China. That eventually declined as methanol became too expensive.
- Global petrochemical investment then shifted to steam crackers, largely an outgrowth of cheap feedstock from the U.S. shale boom.
- The U.S. added more than 7 Mt of ethane crackers since 2015, with even more capacity coming online in the next few years.
- From the oil producers' perspective, shifting into petrochemicals is a hedge against weak demand for transportation fuels.
- But margins have shrunk due to overbuilding.