Shale's Future | Russell T. Rudy Energy LLC
Innovation and creativity have typified the shale revolution since its inception. Conceived in the union of horizontal drilling and advances in hydraulic fracturing, a new industry was born. Consequently, previously known, but uneconomic, reserves were finally productive. With prices over $100 per barrel the boom was on.
When prices dropped to $50 per barrel, shale operators used hedges, DUC’s (Drilled but Uncompleted wells), retreating to the core, refracking, cost cutting, layoffs, and innovative management techniques to remain profitable and still increase production. Even now, “World Oil” reports that U. S. oil output is within 4% of a 43 year high.
However, many industry observers feel that shale operators have already played their best cards, and oil is dropping to $35 per barrel. No one was prepared for this, and there are already casualties. Samson Resources Corp. and Magnum Hunter Resources Corp. have already filed for bankruptcy. More are inevitable.
Jeff Jones, managing director of Blackhill Partners, a Dallas-based investment banking firm observes, “You are going to see a pickup in bankruptcy filings, a pickup in distressed asset sales and a pickup in distressed debt exchanges, and $35 oil will clearly accelerate the distress.”
The very resilience which enabled shale operators to maintain, and even increase, production as prices fell to half their 2014 levels, merely exacerbated an oil surplus, thereby exerting further downward pressure on prices. Concurrently, OPEC, fearing loss of market share, increased its output as well, hoping to drive prices down to levels that shale operators could not tolerate.
Now with prices in the $35 range, shale production might be about to decline. The U. S. Energy Information Administration (EIA) predicts that domestic production will finally drop by a record 570,000 barrels of oil per day (bopd) in 2016. Nevertheless, some analysts predict that the world market will still be oversupplied by about 1 million bopd through the first half of 2016.
The negative effects of the price collapse are not confined to U. S. shale operators however. Saudi Arabia is cutting back on domestic spending and looking to sell its interest in state-owned enterprises in order to reduce a budget deficit that has reached 20% of GDP. Venezuelan Oil Minister, Eulogio Del Pino has said that “the industry is at the door of a catastrophe.”
The question now is who can last longest, shale operators or OPEC. As Raoul LeBlanc, an analyst with consulting firm, HIS, in Houston, observed, “Most companies have gone into shrinkage mode, saying their goal is to stay flat and make it through this market. The current price is unsustainable. Unfortunately, we have to sustain it for a while longer.”
This post is based largely on information contained in a recent article in “World Oil”. To read the article in its entirety, please go to http://www.worldoil.com/news/2015/12/28/shale-s-running-out-of-survival-tricks-as-opec-ramps-up-pressure .
