Bloomberg – The American shale industry shocked the world with its rebound after the 2014-2016 bust, setting records for output that pushed the U.S. to the top spot among oil-producing countries. A handful of experts is saying that will happen again.
The comeback trail would be steep and long. The spread of coronavirus is crushing demand while Saudi Arabia and Russia are creating a glut. Everybody agrees U.S. production will take a bigger hit than last time, when it dipped before soaring. As many as 70% of the 6,000 shale drillers may go bankrupt, and one-third of shale-patch workers are expected to lose their jobs. Wall Street, which financed the last boom, has cut off the cash spigot.
Oil rigs stand in the Permian Basin area of Odessa, Texas, U.S., on Saturday, Jan. 19, 2019. In the Permian, America’s busiest oil patch, a producer needs to blast as much as 60,000 barrels of water into a well every day, along with sand and chemicals, to complete the fracking that cracks open the tight, oil-bearing rock about a mile underground.
But some experts are saying the future, however far off, will be better. They’re looking past the dire forecasts and vertical chart lines and cautioning against despair. They’re echoing a widespread view that’s mostly unspoken during the market meltdown: Yes, America can shock the world again. The boom-and-bust cycle will shift, and shale is in a position, with its infrastructure, its ability to ramp-up quickly and its plentiful reserves, to rise from the ashes stronger than ever.
When the dust settles in the Permian Basin and other American shale fields, the survivors will be leaner and more tech savvy, according to Daniel Yergin, a Pulitzer Prize-winning oil historian and vice chairman of IHS Markit Ltd. That means lower production costs and a greater ability to respond to the next price rebound with the last thing Moscow and Riyadh want — another boom.
“Companies go bankrupt, but rocks don’t go bankrupt,” Yergin said in an interview. “When this all shakes out, there will be other people to develop shale.”
Noah Barrett also believes the growth engine of U.S. crude production will be humbled, but won’t flicker out. That’s because shale has extensive infrastructure that isn’t going anywhere.
“The resource is still there, the pipeline capacity, the processing capacity,” said Barrett, a Denver-based energy analyst at Janus Henderson Investors. “Those are still there.”
Even if predictions are correct, that overall American oil output will slide to 8 million or 9 million barrels a day, down about one-third from the current 13 million, the U.S. would still count among the world’s very top producers, Barrett said.
Bloomberg Intelligence is forecasting a more-modest production falloff of about 1.5 million barrels a day.
The weakest companies “will go into stronger hands,” said Vincent G. Piazza, BI’s senior oil analyst. “The industry is going to be in a lot better shape than in 2014-2016. The balance sheet is in a lot better shape. I wouldn’t underestimate the ability of this industry to re-create itself.”
Fereidun Fesharaki is a shale believer, too. The chairman of global energy consultant FGE said he also expects the price squeeze to force explorers to become more efficient and cost-competitive.
Still, any rays of optimism must penetrate a very dense, dark cloud. In the market cataclysm that’s still unfolding, crude and fuel prices around the world have sunk to levels not seen in nearly two decades.
As if by evil magic, the Covid-19 outbreak has chased tens of millions of people from streets, stores, factories and travel hubs, suddenly degrading demand for gasoline, jet fuel and diesel across the world’s largest economies.