If prices stayed around $ 30, production could drop by 2 million barrels a day from the end of this year to the end of 2021. The effects of the oil war between Saudi Arabia and Russia
There is a relationship that gives reason to Russia: to put American shale producers out of play, the price of oil had to drop to these levels, $ 30 a barrel. In Vienna, Russian Energy Minister Alexander Novak tried to explain it to former OPEC partners last week without great results. Saudi Arabia did not take well the refusal to sign the agreement by Moscow and decided to increase production. The rest is known history with crude oil prices plummeting yesterday in what may be called black oil Monday.
Well, according to data collected by the Norwegian consultancy Rystad Energy, American shale oil producers already have liquidity problems . Things get worse every day, hand in hand with crude oil prices. In one fell swoop, Saudi Arabia and Russia and their battle for market share made almost all US shale companies unprofitable. Only five companies in two areas of the country have a breakeven at lower prices than the current one, the report reveals.
Wells drilled by Exxon Mobil, Occidental Petroleum, Chevron and Crownquest Operating LLC in the Permian basin, which spans western Texas and southeastern New Mexico, can generate profits of $ 31 a barrel, as shown by Rystad’s data. Occidental’s wells in Colorado’s DJ Basin are also up for that price, the same as Monday’s close. But this is not the case for the rest of the shale industry, more than 100 operators in a dozen fields. For them, drilling new wells will almost certainly mean going red .
Shale projects have the characteristic of being able to be activated or closed quickly. But as the production of these wells decreases much faster than that of traditional wells, companies need to drill more of them just to keep production flat. This means modest investment returns , one of the main reasons why oil & gas represents less than 4% of the S&P 500 index.
At this point, “companies shouldn’t burn capital to keep their production base at an unsustainable level,” said Tom Loughrey, a former hedge fund manager who founded his shale-data company, Friezo Loughrey Oil Well Partners. LLC in Bloomberg. There are already manufacturers like Diamondback Energy and Parsley Energy who have announced that they are cutting their budget for drilling and wells. Others, such as Apache Corp. and Occidental, have announced that they will reduce the business . According to many analysts, a well requires a price of $ 68 for investors to get an adequate return within 24 months.
The boom in shale production has made the USA the largest oil producers in the world as well as exporters of crude oil. But if prices stayed around $ 30 they would be forced to cut many businesses and production could drop by 2 million barrels a day from the end of this year to the end of 2021, a drop of about 20%. “Even the best traders will have to cut back on their business,” explained Artem Abramov, Rystad’s head of shale research at Bloomberg, adding that “it is almost impossible to have total cash neutrality this year with prices going down.”
On the other hand, the oil ‘war’ provoked them, the American shale producers who, while Opec and Russia cut production, not only compensated for it with their increases but exceeded it. Since November 2016, Goldman Sachs has highlighted, production of OPEC and Russia has been reduced by 4.4 million barrels per day while the rest of the world has increased it by 5.7 million barrels. And a large chunk of these barrels are all American Shale companies.