Headlines have been pronouncing the impending death of the shale industry since long before the spread of the novel coronavirus. “Even when oil was priced at $30 a barrel,” writes industry rag RigZone, “hundreds of small producers across Texas and the Midwest were laden with debt, sweet spots already taken and forcing well operators to tap higher-cost locations.” Now, however, the situation in the United States shale patch is infinitely worse. The region that brought us the shale revolution and allowed the United States to surpass even Saudi Arabia as the largest oil producer in the world has been pummeled by the last months’ oil price crash. The United States’ oil empire is facing its downfall.
When the COVID-19 pandemic began to ravage the global economy and shut down industries around the world a few months ago, global oil demand took an immediate hit. When the leading OPEC+ members of Russia and Saudi Arabia met to strategize, their talks quickly devolved into a dispute and then an all-out oil price war, which led to a massive crude glut and oil storage shortage that continues to stifle the international oil market.
On Monday, April 20, the West Texas Intermediate (WTI) crude benchmark did the unthinkable--it plunged below zero. And not just a little bit below zero. The WTI closed at nearly -$40 per barrel that day. While U.S. shale prices have since bounced back above zero, they are still not nearly high enough to save the domestic shale industry from sweeping bankruptcies and tens of thousands of fired and furloughed employees. “WTI crude at under $20 a barrel, is less than half the $40-plus-a-barrel breakeven needed by the shale industry,” says RigZone. “The slump in crude prices and a supply glut lasting into the foreseeable future leaves the shale industry with stark choices: to limit production, cut costs and increase productivity.”
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This sobering reality has caused massive speculation and untold numbers of think pieces about the future of U.S. and international oil markets. Stories have ranged from “How Oil Prices Could Go To $100,” to “U.S. Shale Needs To Slow Down To Survive” and, if it doesn’t, “U.S. Shale Could Crush The Oil Market Recovery.” Now, this new report by RigZone poses a new burning question: “Can US Shale Producers Innovate Themselves Out of Trouble?”
Industry leaders across the West Texas permian basin are using every method in their arsenal to stay afloat. “Cutting exploration budgets, rigs, well drilling, laying off frack crews and closing old wells are tried and tested methods to weather a downturn in prices,” lists RigZone. “After these measures, Chapter 11 Bankruptcy is available and gives companies space to restructure and restart operations when oil prices recover. But the gap between the oil price and breakeven price of shale which, according to the latest Dallas Federal Energy survey, averages $48 to $54 per barrel, demands drastic action to bring costs down and productivity up.”
The traditional methods of overcoming an economic slump just won’t be enough in the face of the recession-causing juggernaut that is the novel coronavirus pandemic. The only possible answer is out-of-the-box thinking and industry innovation that will allow the industry to cut costs at the same time that it increases productivity, according to RigZone. But even this may be a short-sighted response, as fossil fuels were already on a downward trend as the world’s most developed countries move toward decarbonization and renewable energies.
While some industry leaders work toward technical improvements like bettering hydraulic fracturing, deep imaging, smart microchip proppants, and speedier drilling methods and technologies, others are moving away from fossil fuels altogether. Long before coronavirus, the Permian Basin was already in severe decline, and even Saudi Aramco had admitted that they expect peak oil by midcentury. Oil will continue to be a massive economic sector for decades to come--but not forever.
By Haley Zaremba for Oilprice.com
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