A sharp plunge in demand for crude stemming from the coronavirus pandemic – and a subsequent oil price war initiated by Saudi Arabia – have seen prices for global benchmark Brent crude and US benchmark West Texas Intermediate (WTI) crude fall by more than 60 percent this year.
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On Monday, WTI dipped below $20 a barrel – far, far short what many shale producers need to cover their costs of production, let alone turn a profit.
The supply glut has grown so acute that Texas shale producers Pioneer Natural Resources and Parsley Energy have formally asked state regulators to place curbs on oil production for the first time in almost half a century.
US President Donald Trump had aimed for some form of shale oil industry bailout in the $2 trillion virus relief package signed into law last week. But a provision for $3bn in government funding to help out the shale patch by purchasing supplies to replenish US strategic oil reserves was jettisoned by Democrats.
While government financial aid for US oil producers could be included in subsequent federal stimulus packages, climate groups and their allies have so far succeeded in blocking any form of government bailout for an industry they believe slows a faster transition to sustainable energy.
And even the group representing the US and oil gas industry says weak companies should not be artificially propped up if they cannot remain competitive.
Shale in distress
Oil markets were already saturated before coronavirus disruptions and containment measures gravely damaged demand. The outlook went from bad to worse after Saudi Arabia – having failed to convince Russia to agree to deep output cuts – unleashed a price war and promised to pump crude with abandon.
Saudi Arabia can produce oil more cheaply than any other supplier.
The White House has turned to diplomacy to try and defuse the standoff between Riyadh and Moscow. On Monday, Trump and Russian President Vladimir Putin agreed to have their top energy officials discuss a way forward to try and bring stability to oil markets, after Trump called the price war between Moscow and Riyadh “crazy”. The White House is also planning to send a special energy envoy, Victoria Coates, to Saudi Arabia.
But with many Americans sheltering at home for weeks, businesses shuttered and airlines barely flying, the immediate outlook for US oil companies is extremely grim – especially heavily indebted shale firms that took out loans to fund the drilling of new wells.
US oil majors and petroleum services firms have already announced belt-tightening measures, including laying off workers and cutting capital spending on projects.
But without federal help, smaller, over-leveraged US shale firms could be facing bankruptcy.
“Shale producers are continually drilling new wells to maintain new production” Mike Coffin, an analyst at energy market think-tank Carbon Tracker, told Al Jazeera.
But even before the coronavirus demand shock and the price war, Coffin says US shale producers were poorly positioned against lower-cost rivals like Saudi Arabia because global climate targets are propelling a move away from fossil fuels in the longer term, and the lowest-cost producers will likely be the last ones standing.
“[Any] short-term bailout encourages them [shale oil producers] to further invest in projects, kicking the can down the line,” said Coffin.
May Boeve, the executive director of environmental action group 350.org, also disagrees with propping up struggling shale producers, saying it interferes with the “economy moving in a direction that accelerates the clean-energy transition”.
“Let’s not forget the [oil companies] are already heavily subsidised,” Boeve told Al Jazeera. “The price at the pump does not at all reflect the real cost of drilling for oil.”
The shale revolution made the US the world’s largest oil producer, and the economies in states such as Texas, Oklahoma and North Dakota are hugely reliant on the sector.
For the time being, shale producers are looking at market prices well below their cost of production.
Very few of the hundreds of US firms can currently turn profits from their newest investments, according to a Reuters analysis of field data provided by Rystad Energy.
Most of the companies had budgeted for oil prices around $60 per barrel – roughly three times the current price – the analysis said. So the present woes could push many into bankruptcy.
Just 16 shale producers operate in places where the average new well cost is under $35 per barrel, according to Rystad.
Exxon Mobil Corp, which is the largest US oil producer, and Occidental Petroleum Corp are among the firms that have costs below $30 per barrel. But barely covering costs leaves few dividends for shareholders.
As a consequence of producers facing budget woes, analysts say that new drilling will stop. Chevron announced it is cutting $4bn from its capital budget.
The carnage is already placing US jobs in peril. Halliburton has furloughed 3,500 workers in Houston. And upwards of 50,000 total jobs may be shed industry wide, according to PGIM Fixed Income economist Nathan Sheets.
Despite this pain, even the lobby group for US producers has spoken out against possible government moves to rescue endangered companies, saying big government should not interfere with market forces.
The American Petroleum Institute (API), which represents all segments of the US oil and gas industry, itself opposes any fresh intervention by Trump to save struggling firms.
“We are not advocating for any form of policy relief,” Bethany Aronhalt, an API spokesperson, told Al Jazeera.
API’s chief economist Dean Foreman said in a blog post that the group supports “competitive market outcomes”, including the likelihood that the strongest companies will scoop up fields that bankrupt producers leave behind.