Federal government assistance for the U.S. shale industry emerged as a strong possibility last week, after falling demand due to the coronavirus pandemic and an oil price war between Saudi Arabia and Russia had some of the Trump administration’s closest allies demanding a bailout.
“I think I heard a collective scream on my Twitter feed when this story dropped,” tweeted Bloomberg Green writer Akshat Rathi.
Donald Trump “has touted the growth of oil and natural gas production under his administration, celebrating their rise in politically crucial swing states such as Pennsylvania,” the Washington Post reports. But now, “White House officials are alarmed at the prospect that numerous shale companies, many of them deep in debt, could be driven out of business if the downturn in oil prices turns into a prolonged crisis for the industry. The federal assistance is likely to take the form of low-interest government loans to the shale companies, whose lines of credit to major financial institutions have been choked off, three people said.”
The incoming calls from Trump’s fossil industry donors puppeteers golfing buddies contacts began last Monday and included an approach by shale industry giant and avid Trump supporter Harold Hamm, founder of Oklahoma City-based Continental Resources. The Post says Continental lost half of its market value last Monday, before bouncing back about 8% by mid-Tuesday, and Hamm’s personal fortune dropped by a cool US$2 billion as a result.
“Trump said at a news conference Monday that the administration will seek to provide help for parts of the economy hard hit by the coronavirus, including the hospitality, cruise, and travel industries,” the Post writes. “A senior administration official said Tuesday the shale industry would probably be included for help but may not be at the top of the list for assistance.”
But Hamm had other ideas, telling the Post in an interview last Tuesday that Trump should consider measures to prevent Saudi Arabia and Russia from cutting prices on oil they sell in the U.S. “I don’t want to prescribe what the president would or shouldn’t do. He’s very capable of handling this situation,” he said. [As we’ve seen throughout this crisis? Just asking.—Ed.] The question, Hamm added, is “how this could jeopardize those jobs and the economies in producing states and communities across America, from Pennsylvania to California and Texas to North Dakota.”
While the talk of a bailout drove oil prices up by about 8%, fossil lobbyists in Washington maintained they weren’t looking for one. Hamm told the Post his own company was in solid financial shape, but said a government funding program “could be helpful” for others in the sector. Bloomberg writes that shale producers were already facing a profitability problem that just got a lot worse, while an analyst says the fallout from coronavirus could be the “nail in the coffin” for smaller U.S. fossils.
“At a stroke, Saudi Arabia and Russia and their battle for market share have made almost all U.S. shale drilling unprofitable,” Bloomberg states, citing data from Oslo-based Rystad Energy. “Only five companies in two areas of the country have breakeven costs lower than the current oil price,” meaning that more than 100 shale operators in a dozen fields across the U.S. are losing money on every barrel they produce.
The Telegraph says most U.S. producers end up producing at a loss when oil falls below $50 per barrel. Last week, benchmark Brent crude oil hit a low of $31.02, with some analysts predicting it could approach $20.
Many of those companies already faced mounting investor skepticism before the coronavirus cut into global oil demand and the price war drove down prices. “Shale projects are heralded for their ability to be quickly ramped up and down,” Bloomberg explains, in a post republished by the Institute for Energy Economics and Financial Analysis. “But because output from these wells declines much faster than from their old-school, conventional cousins, companies have to drill more of them just to keep output flat. That has meant sluggish investor returns, one of the main reasons oil and gas represents less than 4% of the S&P 500 Index.”
“Even the best operators will have to reduce activity,” said Artem Abramov, Rystad’s head of shale research. “It’s not only about commerciality of the wells. It’s a lot about corporate cash flow balances. It’s almost impossible to be fully cash flow neutral this year with this price decline.”
Abramov’s colleague, Rystad’s head of oilfield service research Audun Martinsen, went a step further in an interview with Grist, warning that “if this price war continues for a year or more, it can really be the nail in the coffin for many companies.” He added that fossils around the world could cut their costs this year by US$100 billion, and about half of the 10,900 wells they had planned for 2020 might not be drilled.
While the scaled-back production might be good news for greenhouse gas emissions, the infrastructure left behind will pose serious problems. “With prices cratering, oil and gas market analysts expect a slate of bankruptcies, job cuts, and slashes in expenditures across the globe and especially in the supposedly ‘independent’ U.S.,” Grist writes. “This could well result in operators idling or abandoning wells, which can have detrimental effects on the environment. Unplugged wells leak methane, a potent greenhouse gas that contributes to climate change, and can contaminate groundwater.”
Grist lays out some of the details of an orphan well epidemic in the U.S. that will sound familiar to anyone following the same issue in Canada.
While U.S. colossal fossils like Exxon and Chevron can likely weather a stretch of low prices, Martinsen said smaller producers were already hurting from a price crash that started in 2014, and only began to level off two years later when OPEC scaled back production. “That was basically a bloodbath,” he said. “Big service companies were laying off big time and many remaining [companies] went under Chapter 11 [bankruptcy].”
Yet “U.S. oil production has continued to balloon since 2016, pushing prices down further,” Grist writes. “According to Haynes and Boone, a corporate law firm, nearly 200 oil and gas producers have filed for bankruptcies since 2015. As a result, many shale drillers facing this week’s drop in prices are already in a financially precarious situation.”