Oil price war sends US shale producers into survival mode

Saudi oil price war unleashed a shock wave through North American producers that had already been cutting costs.

Shale production has soared over the past eight years, pushing United States output and exports to record highs, but that has come courtesy of strict production limits that the Saudis rolled back after the collapse of talks between OPEC and its allies last week [File: Nick Oxford/Reuters]
Shale production has soared over the past eight years, pushing United States output and exports to record highs, but that has come courtesy of strict production limits that the Saudis rolled back after the collapse of talks between OPEC and its allies last week [File: Nick Oxford/Reuters]

Already hard-pressed North American shale oil producers are contemplating a new round of spending and drilling cuts on Tuesday as they try to quell investor concerns about profitability in the wake of the oil price war unleashed by Saudi Arabia over the weekend.

Oil prices tanked by around a third on Monday after Saudi Arabia over the weekend slashed the price it charges for oil, sending a shock wave through an industry that had already been cutting costs since the 2014-2016 oil price collapse.

In response, Chevron Corp, the second-largest United States producer, joined Marathon Oil Corp, EOG Resources Inc, Canada’s Cenovus Energy Inc and several smaller oil producers in revisiting their spending and production plans in light of the decision by the Organization of the Petroleum Exporting Countries (OPEC) to start pumping full bore beginning next month.

A source close to Chevron told Reuters News Agency that while it would not be easy to cut capital spending in an already tight budget, bosses would probably look to cut drilling rigs in the Permian Basin in Texas, North America’s largest oilfield.

Research firm Rystad Energy predicted total industry spending on oil exploration and production would be cut by $100bn this year and another $150bn in 2021 if oil prices remained around $30 a barrel. The global benchmark was trading about $36.50 on Tuesday, up nearly six percent from Monday.

“[Companies] will turn every stone and cancel every single non-revenue-generating activity,” Audun Martinsen at Rystad Energy said.

To cut costs, the US shale industry would likely more than halve the number of wells it had originally planned to drill this year.

Marathon Oil and oil-sands provider Cenovus Energy joined shale firms Diamondback Energy Inc and Parsley Energy Inc to unveil spending cuts that will reduce output.

EOG Resources said it was evaluating its drilling activity and that it is in the process of finalising specific plans. Marathon and Cenovus also promised to cut spending by about 30 percent from a year earlier.

At the heart of the collapse in oil prices is the breakdown in the alliance between the Saudi-Arabia led OPEC and Russia, its most important ally.

The Saudis have reportedly been pushing for a deep production cut to offset ebbing demand as the coronavirus outbreak idles business activity around the globe. But the kingdom failed to gain Russia’s support for that course of action, setting the stage for a new price war in which both countries are betting they can supply the market at lower costs than US shale rivals.

Shale production has soared over the past eight years, pushing US output and exports to record highs, but that has come courtesy of strict production limits that the Saudis rolled back after the collapse of talks between OPEC and its allies last week.

Analysts from the Royal Bank of Canada said they expect a slowdown in drilling activity by Devon Energy Corp, Concho Resources and Matador Resources. Concho declined to comment, while Devon and Matador did not immediately respond to Reuters’s requests for comment.

The cost-cutting will put more pressure on service companies like Halliburton Co, Schlumberger and smaller players like Packers Plus Energy Services that provide equipment as well as drilling and completion services to oil companies.

“If these oil prices persist, the only real discussion is whether or not to continue operations in North American land,” said Ian Bryant, Chief Executive Officer of Packers Plus Energy.

“We had already given price concessions to protect market share, so we’re running close to breakeven in North America before the oil price crash.”

Source : Reuters

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